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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)[ x ]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


OR

[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


Commission file number: 0-26802

CHECKFREE CORPORATION(Exact name of registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    58-2360335
(I.R.S. Employer
Identification No.)


4411 East Jones Bridge Road, Norcross, Georgia 30092
(Address of Principal Executive Offices, Including Zip Code)

(678) 375-3000
(Registrants Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YESX NO ___

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YESX NO  ___

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 89,624,324 shares of
Common Stock, $.01 par value, were outstanding at November 7, 2003.





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FORM 10-Q

CHECKFREE CORPORATION

Table of Contents


TABLE OF CONTENTS



|                              |                                                                                               |                                                                        |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Unaudited Consolidated Balance Sheets                                 
|                              |                                                                                               | Unaudited Condensed Consolidated Statements of Operations             
|                              |                                                                                               | Unaudited Consolidated Statements of Cash Flows                       
|                              |                                                                                               | Notes to Interim Unaudited Condensed Consolidated Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|Part II. Other Information   
|                              | Item 6. Exhibits and Reports on Form 8-K.                                                    
|                              | Signatures                                                                                   
|Exhibit 31A                  
|Exhibit 31B                  
|Exhibit 32A                  
|Exhibit 32B                  



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##### Table of Contents



Page No.PART I.    FINANCIAL INFORMATIONItem 1.   Financial Statements.Unaudited Consolidated Balance Sheets
September 30, 2003 and June 30, 2003
    
    
    3Unaudited Condensed Consolidated Statements of Operations
For the Three Months Ended
September 30, 2003 and 2002
    
    
    4Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended
September 30, 2003 and 2002
    
    
    5Notes to Interim Unaudited Condensed Consolidated
Financial Statements For the Three Months Ended
September 30, 2003 and 2002
    
    
    6Item 2.   Managements Discussion and Analysis of Financial
Condition and Results of Operations.
    
    
    13Item 3.   Quantitative and Qualitative Disclosures About Market Risk.
    
    
    23Item 4.   Controls and Procedures.
    
    
    23PART II.    OTHER INFORMATIONItem 1.   Legal Proceedings.
    
    
    N/AItem 2.   Changes in Securities and Use of Proceeds.
    
    
    N/AItem 3.   Defaults Upon Senior Securities.
    
    
    N/AItem 4.   Submission of Matters to a Vote of Security Holders.
    
    
    N/AItem 5.   Other Information.
    
    
    N/AItem 6.   Exhibits and Reports on Form 8-K.
    
    
    24Signatures.
    
    
    25


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##### Table of Contents






Part I.  Financial Information




Item 1.  Financial Statements




CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets

September 30,
    
    June 30,2003
    
    2003(In thousands, except share data)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    187,536
    
    
    $
    209,358Investments
    
    
    121,855
    
    
    
    69,674Restricted investments
    
    
    3,000
    
    
    
    3,000Accounts receivable, net
    
    
    86,592
    
    
    
    81,626Prepaid expenses and other assets
    
    
    9,995
    
    
    
    9,708Deferred income taxes
    
    
    41,657
    
    
    
    41,202Total current assets
    
    
    450,635
    
    
    
    414,568PROPERTY AND EQUIPMENT, NET
    
    
    91,569
    
    
    
    94,853OTHER ASSETS:Capitalized software, net
    
    
    15,473
    
    
    
    23,612Goodwill
    
    
    523,231
    
    
    
    523,231Strategic agreements, net
    
    
    364,347
    
    
    
    395,332Other intangible assets, net
    
    
    2,975
    
    
    
    4,801Investments
    
    
    112,036
    
    
    
    121,615Other noncurrent assets
    
    
    8,721
    
    
    
    9,258Total other assets
    
    
    1,026,783
    
    
    
    1,077,849Total assets
    
    $
    1,568,987
    
    
    $
    1,587,270LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    10,465
    
    
    $
    9,705Accrued liabilities
    
    
    49,461
    
    
    
    59,140Current portion of long-term obligations
    
    
    4,063
    
    
    
    4,894Deferred revenue
    
    
    37,744
    
    
    
    36,543Total current liabilities
    
    
    101,733
    
    
    
    110,282ACCRUED RENT AND OTHER
    
    
    3,354
    
    
    
    3,419DEFERRED INCOME TAXES
    
    
    21,011
    
    
    
    28,728LONG-TERM OBLIGATIONS  LESS CURRENT PORTION
    
    
    3,774
    
    
    
    4,192CONVERTIBLE SUBORDINATED NOTES
    
    
    172,500
    
    
    
    172,500COMMITMENTS
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:Preferred stock  50,000,000 authorized shares, $0.01 par value;
no amounts issued or outstanding
    
    
    
    
    
    
    Common stock  500,000,000 authorized shares, $0.01 par value;
issued and outstanding 89,569,940 and 89,266,370 shares, respectively
    
    
    896
    
    
    
    893Additional paid-in-capital
    
    
    2,454,733
    
    
    
    2,449,374Accumulated other comprehensive income
    
    
    244
    
    
    
    471Accumulated deficit
    
    
    (1,189,258
    )
    
    
    (1,182,589
    )Total stockholders equity
    
    
    1,266,615
    
    
    
    1,268,149Total liabilities and stockholders equity
    
    $
    1,568,987
    
    
    $
    1,587,270


See Notes to Interim Unaudited Condensed Consolidated Financial Statements.

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CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations

Three Months EndedSeptember 30,2003
    
    2002(In thousands, except per share data)REVENUES:Processing and servicing
    
    $
    124,245
    
    
    $
    114,491License fees
    
    
    4,962
    
    
    
    4,209Maintenance fees
    
    
    6,701
    
    
    
    6,186Other
    
    
    5,356
    
    
    
    5,349Total revenues
    
    
    141,264
    
    
    
    130,235EXPENSES:Cost of processing, servicing and support
    
    
    59,288
    
    
    
    58,767Research and development
    
    
    14,903
    
    
    
    12,235Sales and marketing
    
    
    12,325
    
    
    
    13,206General and administrative
    
    
    11,523
    
    
    
    10,300Depreciation and amortization
    
    
    50,613
    
    
    
    56,878Total expenses
    
    
    148,652
    
    
    
    151,386LOSS FROM OPERATIONS
    
    
    (7,388
    )
    
    
    (21,151
    )INTEREST, NET
    
    
    (1,624
    )
    
    
    (1,216
    )LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE
    
    
    (9,012
    )
    
    
    (22,367
    )INCOME TAX BENEFIT
    
    
    (2,343
    )
    
    
    (9,085
    )LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    (6,669
    )
    
    
    (13,282
    )CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    
    
    
    
    (2,894
    )NET LOSS
    
    $
    (6,669
    )
    
    $
    (16,176
    )BASIC AND DILUTED LOSS PER SHARE:Loss per share before cumulative effect of accounting change
    
    $
    (0.07
    )
    
    $
    (0.15
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.03
    )Net loss per common share
    
    $
    (0.07
    )
    
    $
    (0.18
    )Equivalent number of shares
    
    
    89,463
    
    
    
    88,378


See Notes to Interim Unaudited Condensed Consolidated Financial Statements

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CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows

Three Months EndedSeptember 30,2003
    
    2002(In thousands)OPERATING ACTIVITIES:Net loss
    
    $
    (6,669
    )
    
    $
    (16,176
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    50,613
    
    
    
    56,878Deferred income tax benefit
    
    
    (7,985
    )
    
    
    (9,085
    )Impact of warrants
    
    
    
    
    
    
    (644
    )Cumulative effect of accounting change
    
    
    
    
    
    
    2,894Change in certain assets and liabilities:Accounts receivable
    
    
    (4,966
    )
    
    
    4,476Prepaid expenses and other
    
    
    278
    
    
    
    (2,546
    )Accounts payable
    
    
    760
    
    
    
    (1,676
    )Accrued liabilities and other
    
    
    (6,230
    )
    
    
    (8,063
    )Deferred revenue
    
    
    1,201
    
    
    
    (2,011
    )Net cash provided by operating activities
    
    
    27,002
    
    
    
    24,047INVESTING ACTIVITIES:Purchase of property and software
    
    
    (5,426
    )
    
    
    (9,695
    )Capitalization of software development costs
    
    
    (922
    )
    
    
    (523
    )Purchases of investments  Held-to-maturity
    
    
    
    
    
    
    (35,506
    )Proceeds from maturities of investments  Held-to-maturity
    
    
    12,783
    
    
    
    38,690Purchases of investments  Available-for-sale
    
    
    (91,204
    )
    
    
    (11,389
    )Proceeds from sales and maturities of investments  Available-for-sale
    
    
    35,542
    
    
    
    91Purchase of other investments
    
    
    (10
    )
    
    
    Net cash used in investing activities
    
    
    (49,237
    )
    
    
    (18,332
    )FINANCING ACTIVITIES:Principal payments under capital lease and other long-term obligations
    
    
    (1,308
    )
    
    
    (6,102
    )Proceeds from stock options exercised
    
    
    644
    
    
    
    17Proceeds from employee stock purchase plan
    
    
    1,077
    
    
    
    942Net cash provided by (used in) financing activities
    
    
    413
    
    
    
    (5,143
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    (21,822
    )
    
    
    572CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    209,358
    
    
    
    115,009End of period
    
    $
    187,536
    
    
    $
    115,581


See Notes to Interim Unaudited Condensed Consolidated Financial Statements

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CHECKFREE CORPORATION AND SUBSIDIARIES
Notes to Interim Unaudited Condensed Consolidated Financial Statements
for the Three Months Ended September 30, 2003 and 2002

1.  Basis of Presentation and Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements and
notes thereto have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted accounting
principles for interim financial reporting. The results of operations for the
three months ended September 30, 2003 and 2002, are not necessarily indicative
of the results for the full year.

These financial statements should be read in conjunction with the
financial statements, accounting policies and financial notes thereto included
in the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2003, as filed with the Securities and Exchange Commission on September 15,
2003. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments), which are necessary for a fair representation of
financial results for the interim periods presented.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Accordingly,
compensation expense is not required to be recorded when stock options are
granted to employees as long as the exercise price is not less than the fair
market value of the stock when the option is granted, and in connection with
our Associate Stock Purchase Plan as long as the purchase price is not less
than 85% of the lower of the fair market value at the beginning or end of each
offer period. In October 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) 123,
Accounting for Stock-Based Compensation. SFAS 123 allows the Company to
continue to follow the present APB Opinion 25 guidelines, but requires
pro-forma disclosures of net income and earnings per share as if the Company
had adopted the provisions of the Statement. In December 2002, the FASB
issued SFAS 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an Amendment of FASB Statement No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation.
SFAS 148 requires prominent disclosure about the effects on reported net income
of an entitys accounting policy decisions with respect to stock-based employee
compensation and amends APB Opinion 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial information. These
disclosure requirements became effective for the Companys third quarter of
fiscal 2003. The Company has continued to account for stock-based compensation
under the provisions of APB Opinion 25 using the intrinsic value method.

Had compensation cost for the Companys stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans in accordance with the provisions of SFAS 123, the Companys net loss and
net loss per share would have been as follows (in thousands, except per share
data):

Three Months EndedSeptember 30,2003
    
    2002Net loss, as reported
    
    $
    (6,669
    )
    
    $
    (16,176
    )Stock-based compensation included in net loss
    
    
    1,143
    
    
    
    15Stock-based compensation under SFAS 123
    
    
    (5,589
    )
    
    
    (7,689
    )Pro forma net loss
    
    $
    (11,115
    )
    
    $
    (23,850
    )Pro forma net loss per share:Basic and diluted
    
    $
    (0.12
    )
    
    $
    (0.27
    )


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2.  Strategic Agreement

As a result of the strategic agreement signed with Bank of America in
October 2000, Bank of America owned less than 10% of the Company as of
September 30, 2003, and owned 11% as of September 30, 2002. Bank of America
was considered a related party until January 2003. At that time, Bank of
America sold a portion of its holdings in the Companys common stock, and the
total amount of common stock held by Bank of America fell below 10% of the
Companys total common stock outstanding. The following amounts related to
Bank of America are included in the Companys consolidated financial statements
for the periods indicated (in thousands):

September 30,
    
    June 30,2003
    
    2003Current assets:Accounts receivable, net
    
    $
    22,312
    
    
    $
    19,341Total current assets
    
    $
    22,312
    
    
    $
    19,341Current liabilities:Accrued liabilities
    
    $
    1,370
    
    
    $
    3,595Deferred revenues
    
    
    381
    
    
    
    499Total current liabilities
    
    $
    1,751
    
    
    $
    4,094


Three Months EndedSeptember 30,2003
    
    2002Revenues from Bank of America:Processing and servicing
    
    $
    27,553
    
    
    $
    18,294License fees
    
    
    87
    
    
    
    Maintenance fees
    
    
    197
    
    
    
    83Other
    
    
    789
    
    
    
    Total revenues
    
    $
    28,626
    
    
    $
    18,377Expenses paid to Bank of America:Cost of processing, servicing and support
    
    $
    17
    
    
    $
    4Total expenses
    
    $
    17
    
    
    $
    4


Revenues and accounts receivable relate to all segments of the Company,
but primarily to electronic billing and payment services provided to Bank of
America. Accrued liabilities relate to payments to be made to Bank of America
under contractual obligations. Please refer to Managements Discussion and
Analysis of Financial Condition and Results of Operations included in this Form
10-Q for additional information regarding our transactions with Bank of
America.

3.  Goodwill and Other Intangible Assets

On July 1, 2002, the Company adopted SFAS 142, Goodwill and Other
Intangible Assets. SFAS 142 changes the accounting for goodwill and other
intangible assets. Goodwill is no longer subject to amortization over its
estimated useful life. Rather, goodwill is subject to at least an annual
assessment for impairment by applying a fair-value-based test.

Upon adoption of SFAS 142, the Company transferred $1,350,000 of
unamortized workforce in place intangible assets, net of the associated
deferred income taxes, into goodwill, discontinued the amortization of goodwill
and was required to perform a transitional impairment test. This impairment
test required the Company to (1) identify its reporting units, (2) determine
the carrying value of each reporting unit by assigning assets and liabilities,
including existing goodwill and intangible assets, to those reporting units,
and (3) determine the fair value of each reporting unit. If the carrying value
of any reporting unit exceeded its fair value, then additional testing was
required to see if the goodwill carried on the balance sheet was impaired.
After completing step one of the transitional impairment test, the Company
determined that goodwill associated with its i-Solutions reporting unit, a unit
within the Companys Software segment, was potentially impaired.

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The amount of goodwill impairment was then determined through an analysis
similar to that of a purchase price allocation, where the fair value of the
individual tangible and intangible assets (excluding goodwill) and liabilities
of the i-Solutions reporting unit was compared to the fair value of the
reporting unit, with the residual amount being the fair value assigned to
goodwill. The fair value of the i-Solutions reporting unit was estimated using
a combination of the cost, market, and income approaches. Specifically, the
discounted cash flow and market multiples methodologies were utilized to
determine the fair value of the reporting unit by estimating the present value
of the future cash flows of the reporting unit along with reviewing revenue and
earnings multiples for comparable publicly traded companies and applying these
to the reporting units projected cash flows. Fair value of each of the
assigned assets and liabilities was determined using either a cost, market, or
income approach, as appropriate, for each individual asset or liability. The
resulting impairment charge of $2,894,000 was recorded and is reflected as a
cumulative effect of a change in accounting principle in the unaudited
Condensed Consolidated Statement of Operations for the three months ended
September 30, 2002.

As of September 30, 2003, the Companys only non-amortizing intangible
asset is goodwill of $523,231,000. There were no changes in the carrying value
of goodwill for the three months ended September 30, 2003.

The components of the Companys various amortized intangible assets are as
follows (in thousands):

September 30,
    
    June 30,2003
    
    2003Capitalized software:Product technology from acquisitions and strategic agreement
    
    $
    166,578
    
    
    $
    166,578Internal development costs
    
    
    30,092
    
    
    
    29,170Total
    
    
    196,670
    
    
    
    195,748Less: accumulated amortization
    
    
    181,197
    
    
    
    172,136Capitalized software, net
    
    $
    15,473
    
    
    $
    23,612Strategic agreements:Strategic agreements
    
    $
    744,424
    
    
    $
    744,424Less: accumulated amortization
    
    
    380,077
    
    
    
    349,092Strategic agreements, net
    
    $
    364,347
    
    
    $
    395,332Other intangible assets:Tradenames
    
    $
    47,968
    
    
    $
    47,968Customer base
    
    
    34,758
    
    
    
    34,758Covenants not to compete
    
    
    1,200
    
    
    
    1,200Total
    
    
    83,926
    
    
    
    83,926Less: accumulated amortization
    
    
    80,951
    
    
    
    79,125Other intangible assets, net
    
    $
    2,975
    
    
    $
    4,801


Amortization of intangible assets totaled $41,872,000 and $47,863,000 for
the three months ended September 30, 2003 and 2002, respectively. Amortization
expense for the year ended June 30, 2004 and the next four fiscal years is
estimated to be as follows (in thousands):

Fiscal Year Ending June 30,2004
    
    $
    136,1122005
    
    
    125,8502006
    
    
    42,5262007
    
    
    25,4352008
    
    
    25,309


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4. Common Stock

In the three months ended September 30, 2003, the Company issued stock for
various employee benefit programs. The Company issued 149,844 shares to fund
its 401(k) match, the cost of which was accrued in the year ended June 30,
2003, and 98,741 shares of common stock in conjunction with its employee stock
purchase plan, which was funded through employee payroll deductions in the
immediately preceding six-month period.

In June 2003, the Company made an offer (the Tender Offer) to certain
employees to exchange options with exercise prices greater than or equal to
$44.00 per share currently outstanding under the Companys 1983 Incentive Stock
Option Plan, 1983 Non-Statutory Stock Option Plan, 1993 Stock Option Plan,
Third Amended and Restated 1995 Stock Option Plan, BlueGill Technologies, Inc.
1997 Stock Option Plan, BlueGill Technologies, Inc. 1998 Incentive and
Non-Qualified Stock Option Plan, and 2002 Stock Incentive Plan, for restricted
stock units of the Companys common stock, and in certain cases, cash payments.
Restricted stock units issued under the Tender Offer will vest ratably over a
three-year period. The offer period closed on July 17, 2003, and employees
holding 1,163,668 options participated in the Tender Offer. The Company made
cash payments totaling $586,000 in July 2003 representing the cash
consideration portion of the Tender Offer and will issue approximately 252,000
shares of restricted stock under the 2002 Stock Incentive Plan over the next
three years. The Company recorded an expense of $1,143,000 for the three
months ended September 30, 2003, for cash payments incurred and restricted
shares to be issued.

5.  Stock-Related Transactions with Third Parties

In October 1999, the Company entered into an agreement with one of its
customers. Under the terms of the agreement, the customer purchased 250,000
shares of the Companys stock, was issued warrants for up to one million
shares, and had the ability to earn warrants for up to an additional two
million shares. All warrants contain a strike price of $39.25 and were
exercisable beginning on September 15, 2002, contingent upon achievement of
various annual revenue targets and maintaining the continued existence of the
agreement through that date. During the quarter ended June 30, 2002, vesting of
the warrants for one million shares became probable. As such, the Company
recorded a non-cash charge of $2,748,000 for the fair value of the portion of
the warrants earned through June 30, 2002. In the quarter ended September 30,
2002, the warrants vested. On the date of vesting, however, the fair value of
our common stock was lower than at June 30, 2002, when we calculated the
initial charge. As a result, a true up of the value of the warrants resulted
in an addition to revenue of $644,000 in the quarter ended September 30, 2002.
Fair value was determined based on a Black-Scholes option pricing model
valuation. Under the provisions of Emerging Issues Task Force (EITF) 01-9,
Accounting for Consideration by a Vendor to a Customer (Including a Reseller
of the Vendors Products), the non-cash charge of $2,748,000 was recorded as a
reduction of revenue, and the non-cash increase of $644,000 was recorded as an
increase to revenue.

6.  Earnings Per Share

The following table reconciles the differences in income and shares
outstanding between basic and diluted for the periods indicated (in thousands
except per share data):

For the Three Months EndedSeptember 30, 2003
    
    September 30, 2002Per-
    
    
    
    
    
    
    
    
    
    Per-Loss
    
    Shares
    
    Share
    
    Loss
    
    Shares
    
    Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    (6,669
    )
    
    
    89,463
    
    
    $
    (0.07
    )
    
    $
    (16,176
    )
    
    
    88,378
    
    
    $
    (0.18
    )Effect of dilutive
securities:Options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    (6,669
    )
    
    
    89,463
    
    
    $
    (0.07
    )
    
    $
    (16,176
    )
    
    
    88,378
    
    
    $
    (0.18
    )


Anti-dilution provisions of SFAS 128, Earnings Per Share, require
consistency between diluted per-common-share amounts and basic per-common-share
amounts in loss periods. Had the Company recognized net income for the periods
presented, an additional 5,272,000 and 906,000 of in-the-money options and
warrants would have been included in the diluted earnings per share calculation
for the three months ended September 30, 2003 and 2002, respectively. Using
the treasury stock purchase method prescribed by SFAS 128, this would have
increased

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##### Table of Contents



diluted shares outstanding by 1,895,000 and 196,000 for the three months
ended September 30, 2003 and 2002, respectively.

The weighted average diluted common shares outstanding for the three
months ended September 30, 2003 and 2002, also exclude the effect of
approximately 3,505,000 and 8,814,000 of out-of-the-money options and warrants,
respectively, and the 2,357,000 share effect for the assumed conversion of the
convertible subordinated notes, as their effect would be anti-dilutive. In
addition, the after-tax effect of interest expense on the convertible
subordinated notes of approximately $1,818,000 for the three months ended
September 30, 2003 and 2002, has not been added back to the numerator, as its
effect would be anti-dilutive.

7.  Reorganization Charges

During the year ended June 30, 2002, the Company announced it would
streamline operations in its Electronic Commerce division, refine its strategy
for the i-Solutions business unit of its Software division, and discontinue
certain product lines associated with its Investment Services division. As a
result of these actions, the Company closed or consolidated operations in
several locations and eliminated certain other positions in the Company. The
consolidation of three legacy transaction processing platforms into the Genesis
platform in the Electronic Commerce division resulted in the closing of its San
Francisco, California location on April 30, 2002; its Houston, Texas location
on June 30, 2002; and its Austin, Texas location on September 30, 2002. The
refinement in strategy for the i-Solutions business resulted in the closing of
its Ann Arbor, Michigan and Singapore locations on March 19, 2002.

As a result of these actions, during the year ended June 30, 2002, the
Company recorded $16,365,000 of reorganization charges for the year ended June
30, 2002, which included $1,640,000 of non-cash impairment charges, $10,962,000
of severance and related benefits costs for the termination of 707 employees,
and $3,763,000 of other exit costs, including lease termination fees and other
closure, employee and professional costs. For the year ended June 30, 2003,
the Company reviewed its estimated remaining liabilities under this
reorganization plan and recorded an additional charge of $1,405,000, which
included $165,000 of severance and related benefits and $1,240,000 of other
exit costs, including lease termination fees and other closure, employee and
professional costs. The reorganization is expected to be completed by October,
2005 and no additional charges are anticipated. A summary of activity related
to the reorganization reserve is as follows (in thousands):

OfficeSeverance
    
    Closureand Other
    
    andEmployee
    
    Business
    
    Other ExitCosts
    
    Exit Costs
    
    Costs
    
    TotalInitial reorganization charge
    
    $
    10,962
    
    
    $
    3,677
    
    
    $
    86
    
    
    $
    14,725Cash payments, year ended June 30, 2002
    
    
    (6,261
    )
    
    
    (649
    )
    
    
    (15
    )
    
    
    (6,925
    )Reorganization reserve at June 30, 2002
    
    
    4,701
    
    
    
    3,028
    
    
    
    71
    
    
    
    7,800Additional reorganization charge
    
    
    165
    
    
    
    1,248
    
    
    
    (8
    )
    
    
    1,405Cash payments, year ended June 30, 2003
    
    
    (4,866
    )
    
    
    (2,739
    )
    
    
    (63
    )
    
    
    (7,668
    )Balance as of June 30, 2003
    
    
    
    
    
    
    1,537
    
    
    
    
    
    
    
    1,537Cash payments, three months ended
September 30, 2003
    
    
    
    
    
    
    (263
    )
    
    
    
    
    
    
    (263
    )Balance as of September 30, 2003
    
    $
    
    
    
    $
    1,274
    
    
    $
    
    
    
    $
    1,274


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8.  Supplemental Disclosure of Cash Flow Information (in
thousands)

Three Months EndedSeptember 30,2003
    
    2002Interest paid
    
    $
    157
    
    
    $
    267Income taxes paid (received)
    
    $
    2,270
    
    
    $
    (2
    )Supplemental disclosure of non-cash investing and financing activities:Capital lease and other long-term asset additions
    
    $
    65
    
    
    $
    10,653Stock funding of 401(k) match
    
    $
    3,144
    
    
    $
    3,229Stock funding of Associate Stock Purchase Plan
    
    $
    1,447
    
    
    $
    1,707


9.  Comprehensive Loss

Available-for-sale securities are recorded at fair value and changes in
fair value are recorded as unrealized gains or losses and accumulated in other
comprehensive income. As a result, the Company is required to report the
components of comprehensive loss, which are as follows (in thousands):

Three Months EndedSeptember 30,2003
    
    2002Net loss
    
    $
    (6,669
    )
    
    $
    (16,176
    )Unrealized holding gains (losses) on investments, net of tax
    
    
    (226
    )
    
    
    81Comprehensive loss
    
    $
    (6,895
    )
    
    $
    (16,095
    )


10.  Business Segments

The Company operates in three business segments  Electronic Commerce,
Software and Investment Services along with a Corporate services segment.
These reportable segments are strategic business units that offer different
products and services. The Company evaluates performance based on revenues and
operating income (loss) of the respective segments. Segment operating income
(loss) excludes acquisition related intangible asset amortization and
significant one-time charges. There are no inter-segment sales.

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##### Table of Contents



The following sets forth certain financial information attributable to the
Companys business segments for the three months ended September 30, 2003 and
2002 (in thousands):

Three Months EndedSeptember 30,2003
    
    2002Revenues:Electronic Commerce
    
    $
    106,555
    
    
    $
    96,643Investment Services
    
    
    20,293
    
    
    
    20,523Software
    
    
    14,416
    
    
    
    13,069Total
    
    $
    141,264
    
    
    $
    130,235Segment operating income (loss):Electronic Commerce
    
    $
    33,922
    
    
    $
    27,096Investment Services
    
    
    4,918
    
    
    
    4,844Software
    
    
    2,228
    
    
    
    1,089Corporate
    
    
    (7,962
    )
    
    
    (8,023
    )Total
    
    
    33,106
    
    
    
    25,006Purchase accounting amortization
    
    
    (40,494
    )
    
    
    (46,157
    )Interest, net
    
    
    (1,624
    )
    
    
    (1,216
    )Total loss before income taxes and
cumulative effect of accounting
change
    
    $
    (9,012
    )
    
    $
    (22,367
    )


11.  Subsequent Events

On November 3, 2003, the Company announced that it completed the
acquisition of privately held HelioGraph Ltd., a company that specializes in
Straight Through Processing (STP) and Financial Messaging, for approximately
$18.3 million in cash. HelioGraph will become a part of CheckFree Financial
and Compliance Solutions (CFACS), a business unit within CheckFrees Software
Division. This acquisition is not material to CheckFree.

On November 12, 2003, the Company provided notice to the holders of
CheckFree Corporations 6 1/2% Convertible Subordinated Notes due 2006 (the Notes) that the Company has called for redemption on December 12,
2003, the entire outstanding aggregate principal amount of $172,500,000 of the
Notes. Pursuant to the terms of the Indenture governing the Notes, the Company
is optionally redeeming the Notes at a redemption price of 102.79% of the
principal amount thereof plus accrued but unpaid interest to, but not
including, the date of redemption of the Notes. Prior to December 12, 2003,
holders may convert their Notes into shares of the Companys common stock at a
price of $73.20 per share, or 13.6612 shares of the Companys common stock per
$1,000 principal amount of the Notes. Cash will be paid in lieu of fractional
shares. We expect to incur a charge of approximately $7.2 million for the
early redemption of the Notes and we will fund the redemption out of existing
resources, including cash, cash equivalents, and investments.

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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview

CheckFree was founded in 1981 as an electronic payment processing company
and has become a leading provider of financial electronic commerce products and
services. Our current business was developed through the expansion of our core
electronic payments business and the acquisition of companies operating in
similar or complementary businesses.

We operate our business through three independent but inter-related
divisions:



| |  |  | Electronic Commerce;
| | - |  | --------------------



| |  |  | Investment Services; and
| | - |  | ------------------------



| |  |  | Software.
| | - |  | ---------

Through our Electronic Commerce division, we enable consumers to receive
and pay bills electronically. For the year ended June 30, 2003, we processed
approximately 434 million electronic transactions and delivered approximately
32 million electronic bills. For the quarter ended September 30, 2003, we
processed nearly 127 million electronic payments and delivered approximately
14.7 million electronic bills. In the quarter ended September 30, 2003, there
were about 11 million consumers initiating payments via CheckFree supported
technology. The number of transactions we process each year continues to grow.
Growth in the number of transactions processed exceeded 37% for the year ended
June 30, 2003 and 31% for the quarter ended September 30, 2003 against the same
periods in the prior year. The Electronic Commerce division accounted for
approximately 75% of our revenue in the quarter ended September 30, 2003.

Our Electronic Commerce divisions products allow consumers to:



| |  |  | receive electronic bills through the Internet;
| | - |  | ----------------------------------------------



| |  |  | pay any bill  whether it arrives over the Internet or through traditional mail  to anyone;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | make payments not related to bills  to anyone; and
| | - |  | ---------------------------------------------------



| |  |  | perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

Through our Investment Services division, we provide a range of outsourced
portfolio management services to financial institutions, including broker
dealers, money managers and investment advisors. As of September 30, 2003, our
clients used the CheckFree APL Portfolio Accounting System to manage about 1.3
million portfolios totaling more than $700 billion in assets. The Investment
Services division accounted for approximately 14% of our revenue in the quarter
ended September 30, 2003.

Our institutional client base includes investment advisors, brokerage
firms, banks and insurance companies. Our fee-based money manager clients are
typically sponsors or managers of wrap or separately managed accounts, money
management products, or traditional money managers, managing investments of
institutions and high net worth individuals. We also support a growing number
of third party vendors providing quick-to-market turnkey solutions.

Our portfolio management systems are marketed under the product name
CheckFree APL and provide the following functions:



| |  |  | account open and trading capabilities;
| | - |  | --------------------------------------



| |  |  | graphical client reporting;
| | - |  | ---------------------------



| |  |  | performance measurement;
| | - |  | ------------------------



| |  |  | decision support tools;
| | - |  | -----------------------



| |  |  | account analytics;
| | - |  | ------------------



| |  |  | tax lot accounting;
| | - |  | -------------------



| |  |  | multiple strategy portfolios;
| | - |  | -----------------------------



| |  |  | straight through processing;
| | - |  | ----------------------------

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| |  |  | Depository Trust Corporation interfacing;
| | - |  | -----------------------------------------



| |  |  | billing functions; and
| | - |  | ----------------------



| |  |  | system and data security.
| | - |  | -------------------------

In addition to our APL portfolio management products, our Investment
Services division also offers proposal generation, investment performance, and
reporting products and services. Marketed under M-Pact, M-Search and M-Watch,
these products are a result of the acquisition of Mobius Group, Inc. in March
1999.

Through our Software division, we deliver software, maintenance, support
and professional services to large financial service providers and other
companies across a range of industries. The Software division is comprised of
three units, each with its own distinct set of software products. The ACH
Solutions unit provides software and services that are used to process more
than two-thirds of the nations nine billion annual Automated Clearing House
(ACH) payments. The CheckFree Financial and Compliance Solutions (CFACS) unit
enables organizations to handle their reconciliation and compliance
requirements. The i-Solutions unit provides software and services that enable
end-to-end e-billing and e-statement creation, delivery and payment. The
Software division accounted for approximately 11% of revenue in the quarter
ended September 30, 2003.

Results of Operations

The following table sets forth as percentages of total revenues, certain
consolidated statements of operations data:

Three Months EndedSeptember 30,2003
    
    2002Total revenues:
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Cost of processing, servicing and support
    
    
    42.0
    %
    
    
    45.1
    %Research and development
    
    
    10.6
    %
    
    
    9.4
    %Sales and marketing
    
    
    8.7
    %
    
    
    10.1
    %General and administrative
    
    
    8.2
    %
    
    
    7.9
    %Depreciation and amortization
    
    
    35.8
    %
    
    
    43.7
    %Total expenses
    
    
    105.2
    %
    
    
    116.2
    %Loss from operations
    
    
    (5.2
    )%
    
    
    (16.2
    )%Interest, net
    
    
    (1.2
    )%
    
    
    (0.9
    )%Loss before income taxes and cumulative effect of accounting change
    
    
    (6.4
    )%
    
    
    (17.2
    )%Income tax benefit
    
    
    1.7
    %
    
    
    7.0
    %Loss before cumulative effect of accounting change
    
    
    (4.7
    )%
    
    
    (10.2
    )%Cumulative effect of accounting change
    
    
    0.0
    %
    
    
    (2.2
    )%Net loss
    
    
    (4.7
    )%
    
    
    (12.4
    )%


Revenues.Reported revenue increased by $11.1 million, or 9%, from $130.2
million for the three months ended September 30, 2002 to $141.3 million for the
three months ended September 30, 2003. Total company revenue growth resulted
from 10% growth in our Electronic Commerce business and 10% growth in our
Software business, offset by a 1% decline in Investment Services revenue. The
growth in our Electronic Commerce business was driven primarily by an increase
in transactions processed from approximately 96.7 million for the three months
ended September 30, 2002 to approximately 126.7 million for the three months
ended September 30, 2003 and incremental revenue increases of approximately
$2.3 million from combined minimum revenue guarantees from Microsoft and First
Data Corporation. In October 1999, we entered into an agreement with a third
party in which we issued warrants for the purchase of one million shares of our
common stock, exercisable beginning on September 15, 2002, contingent upon
maintaining the existence of our agreement through that date. During the
quarter ended June 30, 2002, we recorded a non-cash charge of $2.7 million
against revenue resulting from the probable vesting of the warrants. In the
quarter ended September 30, 2002, the warrants vested. On the date of vesting,
however, the

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fair value of our common stock was lower than at June 30, 2002, when we
calculated the initial charge. As a result, a true up of the value of the
warrants resulted in an addition to revenue of $0.6 million in the quarter
ended September 30, 2002. Although the addition was non-cash in nature, it
added to our revenue for the quarter.

Growth continues to be impacted by economic conditions in both our
Investment Services and Software businesses. Portfolios managed within
Investment Services have increased modestly over the past few quarters as
investors have begun to increase equity holdings. However, in some cases, new
portfolios are being added to the APL system at a lower price point as a result
of price concessions we offered in the past fiscal year. We view these
concessions as a trade off between near term revenue reduction and long-term
strategic advantage. As investors continue to move into equity investments, we
expect growth rates of portfolios and revenue to improve. In our Software
business, we recently took steps in our CFACS unit to enter the European market
with our enterprise reconciliation solution, which will provide added
opportunities for new sales.

Our processing and servicing revenue increased by $9.7 million, or 8%,
from $114.5 million for the three months ended September 30, 2002, to $124.2
million for the three months ended September 30, 2003. Processing and
servicing revenue occurs in both our Electronic Commerce and Investment
Services businesses. Within Electronic Commerce, growth in processing and
servicing revenue is driven by the previously mentioned growth in transactions.
As expected, during the fiscal year ended June 30, 2003, and into fiscal 2004,
we have seen four large bank customers implement in-house bill payment
solutions. While transaction volume diverted to these in-house solutions from
CheckFree has dampened our growth during the transition, growth in the
remainder of our Electronic Commerce business has outpaced diverted
transactions. We delivered approximately 14.7 million electronic bills in the
three months ended September 30, 2003, which had a price point of approximately
$0.20 to $0.25, representing an increase in excess of 300% over the 4.8 million
bills delivered in the three months ended September 30, 2002. Our commercial
agreements with Microsoft and First Data Corporation, resulting from our
acquisition of TransPoint in September 2000, include monthly minimum revenue
guarantees that increase annually over the five-year term of the agreements.
We continue to operate under the minimum revenue levels with both, and as a
result of the increased minimum levels, revenue from Microsoft and First Data
Corporation grew by approximately $2.3 million from the three months ended
September 30, 2002 to the three months ended September 30, 2003. As interest
rates stabilized, the demand for our account balance transfer product declined
as opportunities to move credit card account balances to lower rate offerings
have subsided. As previously mentioned, we recorded a $0.6 million non-cash
credit to revenue related to the true-up of the charge we recorded against
revenue in the quarter ended June 30, 2002 resulting from warrants for shares
of our common stock issued to a third party that vested in the quarter ended
September 30, 2002. Processing and servicing revenue in our Investment
Services business has remained relatively flat.

We offer two basic levels of electronic billing and payment services to
our Electronic Commerce customers  a Full Service offering and a Payment
Services offering. Customers that use our Full Service offering generally
outsource their electronic billing and payment process to us. For instance, a
Full Service customer might not use a CheckFree-hosted user interface, but
still use a broad array of services, including payment processing, payment
warehouse, claims processing, e-bill, online proof of payment, customer care,
and other aspects of our service. Also, while a Full Service customer may
build its own payment warehouse, we may maintain a customer record and payment
history within our payment warehouse to support the Full Service customers
servicing needs. Customers in the Full Service category may contract to pay us
either on a per-subscriber basis, a per-transaction basis, or a blend of both.
Customers that utilize our Payment Services offering receive a limited subset
of our electronic billing and payment services. Additionally, within Payment
Services, we provide services to billers for electronic bill delivery and
hosting, as well as other payment services, such as account balance transfer.
A third category of revenue we simply refer to as Other Electronic Commerce.
Other Electronic Commerce includes our Health and Fitness business. We have
included a table of comparative transaction statistics in the Segment
Informationsection of this report.

Our license fee revenue increased by $0.8 million, or 18%, from $4.2
million for the three months ended September 30, 2002, to $5.0 million for the
three months ended September 30, 2003. License revenue is derived from our
Software business. Our September quarter, which is the first quarter of our
fiscal year, continues to be seasonally low for license sales, and relatively
small increases in license revenue result in relatively high growth rates. Our
efforts in Europe with an enterprise reconciliation solution as well as new ACH
software designed to take advantage of the recent Check 21 check conversion
rules and regulations, provide additional products for future sales
opportunities.

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##### Table of Contents



Our maintenance fee revenue increased by $0.5 million, or 8%, from $6.2
million for the three months ended September 30, 2002, to $6.7 million for the
three months ended September 30, 2003. Maintenance revenue, which represents
annually renewable product support for our software customers, is isolated to
our Software business, and tends to grow with incremental license sales. When
combining growth in license sales, customer retention rates exceeding 80%
across all business units, and moderate price increases on a year over year
basis, the result is a moderately growing maintenance base. Although we defer
revenue recognition on maintenance billings until cash is collected which can
cause quarter-to-quarter fluctuations, until license sales regain historical
growth rates, we would expect modest growth in maintenance to continue in the
near term.

Our other revenue remained flat at $5.3 million for the three months ended
September 30, 2002, and for the three months ended September 30, 2003. Other
revenue consists mostly of consulting and implementation fees across all three
of our businesses. With a slow down in revenue within Investment Services and
Software, we have seen a flattening of other related revenue as well.

Cost of Processing, Servicing and Support.Our cost of processing,
servicing and support was $58.8 million, or 45.1% of total revenue for the
three months ended September 30, 2002, and was $59.3 million, or 42.0% of total
revenue for the three months ended September 30, 2003. Cost of processing,
servicing and support as a percentage of processing only revenue (total revenue
less license fees) was 46.6% for the three months ended September 30, 2002,
versus 43.5% for the three months ended September 30, 2003. Our electronic
payment rate has increased from 73% for the three months ended September 30,
2002, to 76% for the three months ended September 30, 2003. Electronic
payments carry a significantly lower variable cost per unit than do paper-based
payments and are far less likely to result in a costly customer care claim. In
addition to leveraging a significant fixed-cost processing infrastructure, we
continue to focus investment on additional efficiency and quality improvements
within our customer care processes and our information technology
infrastructure to drive improvements in our cost per transaction.

Research and Development.Our research and development costs were $12.2
million, or 9.4% of total revenue, for the three months ended September 30,
2002, and $14.9 million, or 10.6% of total revenue, for the three months ended
September 30, 2003. Including our capitalized development costs of $0.5
million for the three months ended September 30, 2002, and $0.9 million for the
three months ended September 30, 2003, our gross expenditures for research and
development were $12.7 million, or 9.8% of total revenue for the three months
ended September 30, 2002, and were $15.8 million, or 11.1% of total revenue for
the three months ended September 30, 2003. We continue to invest heavily in
product enhancement and productivity improvement initiatives in all of our
business segments. While we have seen growth both in absolute dollars and as a
percentage of revenue, quarter over quarter, we expect the level of quarterly
spending to remain about the same in absolute dollars for the remainder of the
year.

Sales and Marketing. Our sales and marketing costs were $13.2 million, or
10.1% of total revenue for the three months ended September 30, 2002, and $12.3
million, or 8.7% of total revenue, for the three months ended September 30,
2003. The decrease in sales and marketing costs, as a percentage of revenue,
is due primarily to the fact that the predominance of our revenue growth has
taken place in our Electronic Commerce business, which has less associated
variable sales commission than our other businesses. On an absolute dollar
basis, we have incurred less general awareness marketing program expense in the
first quarter of fiscal 2003 than we had in the previous year. However, these
expenses have historically fluctuated due to the nature and timing of various
programs. As license revenues are expected to pick up from their seasonally
low first quarter and we resume general awareness marketing programs, we expect
the level of spending in sales and marketing to return to historical levels.

General and Administrative.Our general and administrative expenses were
$10.3 million, or 7.9% of total revenue for the three months ended September
30, 2002, and were $11.5 million, or 8.2% of total revenue for the three months
ended September 30, 2003. Although we experienced an increase in our bad debt
expense in the quarter ended September 30, 2003, we continue to manage our
corporate expenses through attrition and discretionary cost reduction,
resulting in expected underlying leverage in overhead costs. We may see a
positive impact to general and administrative costs over the next quarter or
two as collection efforts against aged accounts receivable balances are
successful.

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Depreciation and Amortization.Our depreciation and amortization costs
decreased from $56.9 million for the three months ended September 30, 2002, to
$50.6 million for the three months ended September 30, 2003. Depreciation and
amortization expense from operating fixed assets and internally capitalized
product costs has decreased from $10.7 million for the three months ended
September 30, 2002, to $10.1 million for the three months ended September 30,
2003. The remainder of our depreciation and amortization costs represents
acquisition related amortization. The decrease in non-acquisition related
depreciation and amortization is the result of investments in replacement
assets that carry lower costs than the assets they are replacing. The
remaining reduction in depreciation and amortization is the result of lower
acquisition related intangible amortization from intangible assets that have
fully depreciated since last year or lower non-goodwill intangible assets
balances resulting from impairment charges in the prior year.

Interest.Our interest income decreased from $2.1 million for the three
months ended September 30, 2002, to $1.5 million for the three months ended
September 30, 2003. Despite an increase in average cash and invested asset
balances between the three months ended September 30, 2002, and the three
months ended September 30, 2003, interest income for the three months ended
September 30, 2003 was $0.6 million less than for the three months ended
September 30, 2002, as a result of significantly lower average yields.

Our interest expense declined slightly, from $3.3 million for the three
months ended September 30, 2002, to $3.2 million for the three months ended
September 30, 2003. We continued to carry our 6 1/2% Convertible Subordinated
Notes at a balance of $172.5 million throughout both three-month periods ending
September 30, 2002 and 2003. As a result, our overall average interest rate
has remained fairly stable. The slight drop in expense, therefore, is the
result of new leases at lower interest rates than we have incurred in the past.

Income Taxes.We recorded an income tax benefit of $9.1 million with an
effective rate of 40.6% for the three months ended September 30, 2002 and an
income tax benefit of $2.3 million with an effective rate of 26.0% for the
three months ended September 30, 2003. Although we incurred a pre-tax loss for
the quarter ended September 30, 2003, we expect to achieve positive pre-tax
earnings on a full year basis for the fiscal year ending June 30, 2004, and we
expect the effective tax rate for the full year to be about 26.0%. The absolute
dollar value of research and experimental tax credits we expect to earn in the
fiscal year will cause our effective rate to be lower for the current fiscal
year.

Cumulative Effect of Accounting Change.On July 1, 2002, we adopted SFAS
142, Goodwill and Other Intangible Assets. SFAS 142 changes the accounting
for goodwill and other intangible assets. Goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment by applying a fair-value-based test.

In accordance with SFAS 142, we were required to perform a transitional
impairment test. The test was performed as of July 1, 2002. This impairment
test required us to (1) identify our reporting units, (2) determine the
carrying value of each reporting unit by assigning assets and liabilities,
including existing goodwill and intangible assets, to those reporting units,
and (3) determine the fair value of each reporting unit. If the carrying value
of any reporting unit exceeded its fair value, then the amount of any goodwill
impairment was determined through fair value analysis of each of the assigned
assets (excluding goodwill) and liabilities.

As a result of the transitional impairment test, we determined that
goodwill associated with our i-Solutions reporting unit was impaired. An
impairment charge of $2.9 million was recorded and is reflected as a cumulative
effect of a change in accounting principle in the Condensed Consolidated
Statement of Operations for the three months ended September 30, 2002.

17



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##### Table of Contents



Segment Information

We evaluate the performance of our segments based on revenues and
operating income (loss) of the respective segments. Segment operating income
(loss) excludes acquisition related intangible asset amortization and
significant one-time charges. The following table sets forth revenue and
operating income by segment, for the periods noted (in thousands):

Three Months EndedSeptember 30,2003
    
    2002Revenue:Electronic Commerce
    
    $
    106,555
    
    
    $
    96,643Investment Services
    
    
    20,293
    
    
    
    20,523Software
    
    
    14,416
    
    
    
    13,069Total revenue
    
    $
    141,264
    
    
    $
    130,235Operating income (loss):Electronic Commerce
    
    $
    33,922
    
    
    $
    27,096Investment Services
    
    
    4,918
    
    
    
    4,844Software
    
    
    2,228
    
    
    
    1,089Corporate
    
    
    (7,962
    )
    
    
    (8,023
    )Sub-total
    
    
    33,106
    
    
    
    25,006Purchase accounting amortization:Electronic Commerce
    
    
    (39,521
    )
    
    
    (43,757
    )Investment Services
    
    
    (232
    )
    
    
    (745
    )Software
    
    
    (741
    )
    
    
    (1,655
    )Total operating loss
    
    $
    (7,388
    )
    
    $
    (21,151
    )


Electronic Commerce.Revenue in our Electronic Commerce business
increased by $10.0 million, or 10%, from $96.6 million for the three months
ended September 30, 2002, to $106.6 million for the three months ended
September 30, 2003. During the quarter ended June 30, 2002, we recorded a
non-cash charge of $2.7 million against Electronic Commerce revenue associated
with the probable vesting of warrants we issued to a third party. In the
quarter ended September 30, 2002, the warrants vested. On the date of vesting,
however, the fair value of our common stock was lower than at June 30, 2002,
when we calculated the initial charge. As a result, a true-up of the value of
the warrants resulted in an addition to revenue of $0.6 million in the quarter
ended September 30, 2002, and is included in the $96.6 million of revenue for
the Electronic Commerce division. Revenue growth is primarily the result of an
increase in transactions processed, electronic bills distributed, and tiered
TransPoint related revenue minimums, offset by four bank customers transferring
transaction volume to in-house systems, dampened demand in our account balance
transfer offering and the loss of a large customer in our Health and Fitness
business.

We offer two basic levels of electronic billing and payment services to
our customers. Customers that use our Full Service offering generally
outsource their electronic billing and payment process to us. For instance, a
Full Service customer might not use a CheckFree-hosted user interface, but
still use a broad array of services, including payment processing, payment
warehouse, claims processing, e-bill, online proof of payment, customer care,
and other aspects of our service. Also, while a Full Service customer may
build its own payment warehouse, we may maintain a customer record and payment
history within our payment warehouse to support the Full Service customers
servicing needs. Customers in the Full Service category may contract to pay us
either on a per-subscriber basis, a per-transaction basis, or a blend of both.
Customers that utilize our Payment Services offering receive a limited subset
of our electronic billing and payment services. Additionally, within Payment
Services, we provide services to billers for electronic bill delivery and
hosting, as well as other payment services, such as account balance transfer.
A third category of revenue we simply refer to as Other Electronic Commerce.
Other Electronic Commerce includes our Health and Fitness business and other
ancillary revenue sources, such as CSP and biller implementation and consulting
services.

18



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##### Table of Contents



The following table identifies our core electronic billing and payment metrics:

Three Months EndedSeptember 30,2003
    
    2002(In thousands)Full Service RelationshipsRevenue
    
    $
    85,466
    
    
    $
    71,596Active subscribers
    
    
    4,595
    
    
    
    3,224Transactions processed
    
    
    94,259
    
    
    
    67,164Payment Services RelationshipsRevenue
    
    $
    11,924
    
    
    $
    14,667Transactions processed
    
    
    32,422
    
    
    
    29,519Other Electronic CommerceRevenue
    
    $
    9,165
    
    
    $
    9,736Non-cash credit to revenue related to warrants
    
    
    
    
    
    $
    644Total Electronic Commerce Revenue
    
    $
    106,555
    
    
    $
    96,643


In the Full Service portion of our Electronic Commerce business, revenue
has increased by $13.9 million, or 19%, on a quarter over quarter basis. The
primary drivers of the increased revenue were growth in Full Service
transactions processed of 40% and an increase in TransPoint revenue minimums
totaling $2.3 million. Since the quarter ended September 30, 2002, we have
seen two large customers move Full Service transaction volume to in-house
systems; Wachovia and Bank One. Wachovia started moving volume late in the
quarter ended December 31, 2002, and gradually completed that move, on a
state-by-state basis, by the quarter ended September 30, 2003. Bank One
completed their move between March 31, 2003, and September 30, 2003. In spite
of lost transaction volume, and related revenue, we experienced significant
transaction growth across our entire Full Service customer base. Due in part
to two pricing tier discounts earned by Bank of America during the last twelve
months, we have seen revenue per transaction decline in this category from
$1.07 for the quarter ended September 30, 2002, to $0.91 for the quarter ended
September 30, 2003. We expect Bank of America to reach another less
significant pricing tier discount by December 31, 2003 and, therefore, we would
expect a further decline in revenue per transaction in the coming quarter.

In the Payment Services area, revenue has decreased by $2.7 million, or
19%, on a quarter over quarter basis. The primary driver of the revenue
decline has been the movement of transactions to in-house solutions by J.P.
Morgan Chase and Wells Fargo since the quarter ended September 30, 2002. J.P.
Morgan Chase began moving volume off of our processing system early last fiscal
year and completed their move by December 31, 2002. Wells Fargo started slowly
moving volume in the quarters ended March 31, 2003 and June 30, 2003, but
accelerated their migration in the recent quarter ended September 30, 2003.
Wells Fargo still has a large volume of transactions left to migrate and we
expect them to substantially complete the remaining migration by December 31,
2003. We continued to see transaction growth in the ancillary payment
products, such as Account Balance Transfer on a year over year basis; however,
with interest rates leveling off, we expect less demand for balance transfers
in the near future. Revenue from electronic bill distribution continues to
increase with the growth in the number of bills presented, but are not
completely accounted for in payment transactions in this category. We expect
revenue per transaction to continue to fluctuate in this area until all
remaining in-house volume has moved out, at which time we expect revenue per
transaction to be a bit more predictable.

Our Other Electronic Commerce revenue has declined by $0.6 million on a
quarter over quarter basis. This is due to the loss of a large Health and
Fitness customer and less implementation revenue since this time last year.
The non-cash credit to revenue related to warrants is the result of the
previously mentioned true-up to impact of a warrant that vested in the quarter
ended September 30, 2002.

Operating income in our Electronic Commerce business has improved from
$27.1 million for the three months ended September 30, 2002, to $33.9 million
for the three months ended September 30, 2003. Our ratio of

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electronic payments to total payments has improved from 73% as of September 30,
2002, to 76% as of September 30, 2003. Electronic payments carry a
significantly lower variable cost per unit than paper payments and are far less
likely to result in a costly customer care inquiry or claim. When combined
with continued efforts toward improved quality and efficiency throughout
Electronic Commerce and the leverage we are experiencing in the fixed cost base
that is already in place, we are driving a significant reduction in cost per
transaction in the face of continued pressure on our revenue per transaction.
This has resulted in a near term increase in operating income. Our focus in
the Electronic Commerce business into fiscal 2004 continues to be geared toward
improved profitability through programs designed to:



| |  |  | drive increased consumer adoption and activation among our partners;
| | - |  | --------------------------------------------------------------------



| |  |  | improve product design and usability;
| | - |  | -------------------------------------



| |  |  | improve overall customer satisfaction; and
| | - |  | ------------------------------------------



| |  |  | reduce variable costs per transaction.
| | - |  | --------------------------------------

Investment Services.Revenue in our Investment Services business
decreased slightly by $0.2 million, or 1%, from $20.5 million for the three
months ended September 30, 2002, to $20.3 million for the three months ended
September 30, 2003. Revenue derived from the volume of portfolios managed has
remained essentially flat. We have provided incentives for new customers to
sign multi-year contracts with discounted implementation fees. The total amount
of accounts managed has increased marginally from 1.2 million at September 30,
2002 to 1.3 million at September 30, 2003. Current revenue growth has not
matched historical performance because the lack of growth in the stock market
has had a direct impact on the ability to grow our Investment Services revenue
stream. Additionally, the division has focused on securing new multi-year
contracts at lower prices. As a result, we anticipate experiencing similar
modest revenue growth in the second quarter.

Operating income in our Investment Services business increased slightly
from $4.8 million for the three months ended September 30, 2002 to $4.9 million
for the three months ended September 30, 2003, despite increases in investment
spending on new product offerings and quality improvement initiatives.
Throughout fiscal 2004, the key initiatives in the Investment Services division
include:



| |  |  | new product offerings (e.g.,next generation Multiple
Strategy Portfolios and New Account Workflow) with a shortened time
to market;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | additional web-based products with increased functionality and ease of use;
| | - |  | ---------------------------------------------------------------------------



| |  |  | continued improvement and strategic alignment of our technology platform; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | initiation of a Sigma program to improve quality.
| | - |  | -------------------------------------------------

Software.Revenue in our Software business increased by $1.3 million, or
10%, from $13.1 million for the three months ended September 30, 2002, to $14.4
million for the three months ended September 30, 2003. Our efforts in Europe
with an enterprise reconciliation solution as well as new ACH software designed
to take advantage of the recent Check 21 check conversion rules and
regulations provide additional products for new sales opportunities.

Operating results in our Software business has improved from $1.1 million
for the three months ended September 30, 2002, to $2.2 million for the three
months ended September 30, 2003. Improvements in operating income are
primarily the result of modest increases in license and related maintenance
revenue on a year over year basis as underlying expenses have remained flat,
with the exception of variable expenses associated with license revenue growth.

Corporate.Our Corporate results represent costs for legal, human
resources, finance and various other unallocated overhead expenses. Our
Corporate segment incurred operating expenses of $8.0 million, or 6% of total
revenue, for the three months ended September 30, 2002, and $8.0 million, or 6%
of total revenue, for the three months ended September 30, 2003. We continue
to experience expected leverage in overhead costs.

Purchase Accounting Amortization.The purchase accounting amortization
line in our chart on segment revenue and operating income above represents
amortization of intangible assets resulting from all of our various
acquisitions from 1996 forward. The total amount of purchase accounting
amortization has decreased from $46.2 million for the three months ended
September 30, 2002, to $40.5 million for the three months ended September 30,

20



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##### Table of Contents



2003. The reduction in depreciation and amortization is the result of
intangible assets that have fully depreciated since last year and lower
non-goodwill intangible assets balances resulting from impairment charges in
the prior year.

Liquidity and Capital Resources

The following chart summarizes our Consolidated Statement of Cash Flows
for the three months ended September 30, 2003 (in thousands):

Three MonthsEndedSeptember 30,2003Net cash provided by (used in):Operating activities
    
    $
    27,002Investing activities
    
    
    (49,237
    )Financing activities
    
    
    413Net increase (decrease) in cash and cash equivalents
    
    $
    (21,822
    )


As of September 30, 2003, we have $312.4 million of cash, cash equivalents
and short-term investments on hand and an additional $112.0 million in
long-term investments. Our balance sheet reflects a current ratio of 4.4 and
related working capital of $348.9 million. Due primarily to processing
efficiency improvement initiatives we have experienced a significant increase
in operating cash flow. Due to state and federal operating loss and credit
carryforwards, we do not expect to pay other than alternative minimum taxes for
up to two more years. As a result, when combined with existing balances, we
believe we have sufficient cash to meet our presently anticipated requirements
for the foreseeable future. Our board of directors has approved up to $40
million for the purpose of repurchasing shares of our common stock or
repurchase of our convertible debt through August 2004. As of September 30,
2003, no such purchases have taken place. However, refer to Recent
Developmentsin this report regarding our recent issuance of a notice to redeem
our convertible debt.

For the three months ended September 30, 2003, we generated $27.0 million
of cash from operating activities. During our September quarter, we typically
use a significant amount of cash for such things as payment of annual incentive
compensation and commissions related to seasonally high sales from the previous
quarter. As a result of efforts to improve our operating efficiency, we have
been able to generate an increasing amount of cash from operating activities
over the past several quarters. While timing of cash payments and collections
can cause fluctuations from quarter to quarter, we expect to generate positive
cash from operations for the full year ended June 30, 2004.

From an investing perspective, we used $49.2 million of cash for the three
months ended September 30, 2003. This is comprised of $5.4 million of cash
used for the purchase of property and software, $0.9 million of capitalized
software development costs and $42.9 million of cash used in the net purchases
and maturities of held to maturity and available for sale securities.

From a financing perspective, for the three months ended September 30,
2003, we generated $0.4 million of cash flow. We received $1.1 million from
option exercises and $0.6 million from payroll deductions set aside for our
employee stock purchase plan, and we used $1.3 million of cash for principal
payments under capital lease obligations.

Recent Accounting Pronouncements

There
have been no recent accounting pronouncements that will affect us beyond those we
reported in our Annual Report on Form 10-K for the fiscal year ended June 30,
2003, as filed with the Securities and Exchange Commission on September 15,
2003.

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##### Table of Contents



Application of Critical Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Critical accounting policies are those policies
that are both important to the portrayal of our financial condition and results
of operations, and they require our most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. In our Annual Report on Form 10-K for
the fiscal year ended June 30, 2003, as filed with the Securities and Exchange
Commission on September 15, 2003, we described the policies and estimates
relating to intangible assets, equity instruments issued to customers and
deferred income taxes as our critical accounting policies, and since then, we
have made no changes to our reported critical accounting policies.

Inflation

We believe the effects of inflation have not had a significant impact on
our results of operations.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q include certain forward-looking
statements within the meaning of Section 27A of the Securities Act, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding managements
intent, belief and expectations, such as statements concerning our future
profitability, and our operating and growth strategy. Investors are cautioned
that all forward-looking statements involve risks and uncertainties including,
without limitation, the factors set forth under the caption Business  Business
Risks in the Annual Report on Form 10-K for the year ended June 30, 2003, and
other factors detailed from time to time in our filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the
future could affect, our businesses and financial results in the future and
could cause actual results to differ materially from plans and projections.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking
statements included in this Quarterly Report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as representations by us or any other person that our objectives and
plans will be achieved. All forward-looking statements made in this Quarterly
Report are based on information presently available to our management. We
assume no obligation to update any forward-looking statements contained herein.

Recent Developments

Acquisition of HelioGraph Ltd.On November 3, 2003, we acquired all of
the capital stock of HelioGraph Ltd. for approximately $18.3 million in cash.
HelioGraph will become a part of the CheckFree Financial and Compliance
Solutions (CFACS) business unit within CheckFrees Software Division. This
acquisition is not material to CheckFree.

Call
to Redeem 6 1/2% Convertible Subordinated Notes.On November 12,
2003, we provided notice to the holders of our 6 1/2% Convertible Subordinated
Notes due 2006 (the Notes) that we have called for redemption on
December 12, 2003 the entire outstanding aggregate principal amount of
$172,500,000 of the Notes. Pursuant to the terms of the Indenture governing
the Notes, we are optionally redeeming the Notes at a redemption price of
102.79% of the principal amount thereof plus accrued but unpaid interest to,
but not including, the date of redemption of the Notes. Prior December 12,
2003, holders may convert their Notes into shares of our common stock at a
price of $73.20 per share, or 13.6612 shares of our common stock per $1,000
principal amount of the Notes. Cash will be paid in lieu of fractional shares.
We expect to incur a charge of approximately $7.2 million for the early
redemption of the Notes and we will fund the redemption out of existing
resources, including cash, cash equivalents, and investments.

22



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##### Table of Contents






Item 3.  Quantitative and Qualitative Disclosures About Market Risk

With the acquisition of BlueGill in April 2000, we obtained operations in
Canada and we maintain an office in the United Kingdom. As a result, we now
have assets and liabilities outside the United States that are subject to
fluctuations in foreign currency exchange rates. Due to the start up nature of
each of these operations, however, we currently utilize the U.S. dollar as the
functional currency for all international operations. As operations in Canada
and the United Kingdom begin to generate sufficient cash flow to provide for
their own cash flow requirements, we will convert to local currency as the
functional currency in each related operating unit as appropriate. Because we
utilize the U.S. dollar as the functional currency and due to the immaterial
nature of the amounts involved, our economic exposure from fluctuations in
foreign exchange rates is not significant enough at this time to engage in
forward foreign exchange and other similar instruments.

While our international sales represented less than two percent of our
revenue for the three months ended September 30, 2003, we market, sell and
license our products throughout the world. As a result, our future revenue
could be somewhat affected by weak economic conditions in foreign markets that
could reduce demand for our products.

Our exposure to interest rate risk is limited to the yield we earn on
invested cash, cash equivalents and investments and interest based revenue
earned on products such as our account balance transfer business. Our
convertible debt carries a fixed rate, as do any outstanding capital lease
obligations. Our Investment Policy was changed effective October 30, 2003, to
allow for the use of derivatives for trading or hedging purposes in the future.




Item 4.  Controls and Procedures

Disclosure Controls and Procedures.Disclosure controls and procedures
are controls and other procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded,
processed, summarized and reported, within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information we are
required to disclose in the reports that we file under the Exchange Act is
accumulated and communicated to our management as appropriate to allow timely
decisions regarding required disclosure.

As of end of the period covered by this report, our management, with the
participation of our chief executive officer and chief financial officer,
carried out an evaluation of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Based
upon this evaluation, our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures were (1) designed
to ensure that material information relating to our company is accumulated and
made known to our management, including our chief executive officer and chief
financial officer, in a timely manner, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information we are required to disclose in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms.

Management believes, however, that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.

Internal Controls.There has been no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act) during our fiscal quarter ended September 30, 2003,
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

23



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##### Table of Contents






Part II.  Other Information




Item 6.  Exhibits and Reports on Form 8-K.

(a) Exhibits.

ExhibitNumber
    
    Exhibit Description10*
    
    CheckFree Corporation 2003 Incentive Compensation Plan, effective as
of July 1, 2003 (Reference is made to Appendix A to the Companys Proxy
Statement for the Annual Meeting of Stockholders held on October 29,
2003, which was filed with the Securities and Exchange Commission on
September 29, 2003, and is hereby incorporated herein by reference)31(a)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Executive Officer.31(b)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Financial Officer.32(a)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive
Officer.32(b)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial
Officer.




---

|* |  | Filed with this report.    
|- |  | ---------------------------
|+ |  | Furnished with this report.



(b) Reports onForm 8-K.

We filed with or furnished to the Securities and Exchange Commission the
following Current Reports on Form 8-K during the quarter ended September 30,
2003:

(i) a Current Report on Form 8-K, dated and filed June 17, 2003, under
Item 5, announcing our stock option exchange program for employees; and

(ii) a Current Report on Form 8-K, dated and furnished August 5, 2003,
under Item 12, announcing our fourth quarter 2003 and fiscal 2003 financial
results.

24



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##### Table of Contents






Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CHECKFREE CORPORATIONDate: November 13, 2003
    
    By:
    
    /s/ David E. MangumDavid E. Mangum, Executive Vice
President and Chief Financial Officer*(Principal Financial Officer)Date: November 13, 2003
    
    By:
    
    /s/ John J. Browne, Jr.John J. Browne, Jr., Vice President,
Controller, and Chief Accounting Officer(Principal Accounting Officer)




---

|* |  | In his capacity as Executive Vice President and Chief Financial Officer,
Mr. Mangum is duly authorized to sign this report on behalf of the
Registrant.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

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EXHIBIT INDEX

ExhibitNumber
    
    Exhibit Description10*
    
    CheckFree Corporation 2003 Incentive Compensation Plan, effective as
of July 1, 2003 (Reference is made to Appendix A to the Companys Proxy
Statement for the Annual Meeting of Stockholders held on October 29,
2003, which was filed with the Securities and Exchange Commission on
September 29, 2003, and is hereby incorporated herein by reference)31(a)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Executive Officer.31(b)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Financial Officer.32(a)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive
Officer.32(b)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial
Officer.




---

|* |  | Filed with this report.    
|- |  | ---------------------------
|+ |  | Furnished with this report.