##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from                                        to
 Commission file number: 000-24931
 S1 CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    58-2395199
(I.R.S. Employer
Identification No.)705 Westech DriveNorcross, Georgia
    
    30092(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (404) 923-3500
 Securities registered pursuant to Section 12(b) of the Act:
 Securities registered pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   Documents Incorporated by Reference




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##### 



S1 CORPORATION
 FOR THE YEAR ENDED DECEMBER 31, 2006
 TABLE OF CONTENTS
  
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    13Item 1B. Unresolved Staff Comments
    
    
    19Item 2. Properties
    
    
    19Item 3. Legal Proceedings
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    21Item 6. Selected Financial Data
    
    
    24Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 7A. Qualitative and Quantitative Disclosures about Market Risk
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    47Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    88Item 9A. Controls and Procedures
    
    
    88Item 9B. Other Information
    
    
    88PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    89Item 11. Executive Compensation
    
    
    89Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    89Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    89Item 14. Principal Accountant Fees and Services
    
    
    89PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    90Signatures
    
    
    94EX-10.24 SEPARATION AGREEMENT/ JAIME ELLERTSONEX-10.25 DESCRIPTION OF ARRANGEMENT FOR DIRECTORS FEESEX-21 SUBSIDIARIES OF S1 CORPORATIONEX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATIONS OF CEOEX-32.2 SECTION 906 CERTIFICATIONS OF CFO




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##### Table of Contents



PART I
 
 Item 1. Business
  Business Overview
       General Background
  1




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Sources of Revenue
  S1 Vision and Strategy
  
    
    Achieve financial and operational stability by focusing on the satisfaction of our
current customers across all product lines.In 2006, we generated approximately 75% of our
revenues from the sale of licenses and services in the global financial services market and
the remaining 25%, or approximately $47.9 million, from services provided to our principal
insurance customer (State Farm Mutual Automobile Insurance Company). The State Farm revenue
is expected to be between $45.0 and $48.0 million in 2007. In February 2006, we
released a new version of our Enterprise solution to a small number of customers in our
Managed Introduction Program (MIP). Following the MIP implementations, we plan to make
this version available to the broader market. We will continue to sell to our community
bank customers and invest in the next-generation of Internet, voice and ATM banking
solutions that meet their unique needs. We believe that there are opportunities for
cross-selling our products and services across certain of our customer segments as we
continue to enhance and add new solutions to our offering. We remain committed to a
recurring license revenue model for our community bank customers, while using a traditional
license and maintenance revenue model in the other markets we serve. In addition, we expect
to generate implementation fees from the sale of most of our products, and offer hosting
services to our customers using most of our products.
    
    Release quality software solutions to the market that help our customers differentiate
themselves and be more successful.We believe by improving the quality of our software
code, our implementation services, and our customer support processes, we will improve
customer satisfaction and long-term profitability and will have a positive impact on our
ability to sell additional applications to our customers and use them as references to help
win future customers.
    
    Invest in our people to build greater return for our customers and shareholders.We
believe that our employees are at the core of our success. Based on input from the
employees and the management team, we embrace corporate values that ensure all employees
act with integrity through every customer and fellow employee interaction, have the tools
and knowledge to do their jobs to the best of their ability, understand the specific
standards of quality that are acceptable through a series of guiding principles, and take
pride in the leadership position that we hold in the markets that we serve.
 S1 Segments
  2




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##### Table of Contents



S1 Enterprise
    S1 Enterprise Online Banking Solutions
  
    
    S1 Enterprise Personal Bankingallows our customers to offer online capabilities for
personal finance management, electronic bill payment and presentment, account aggregation,
external account transfers, alerts and reminders, online self-service tools, and more. The
S1 Personal Banking user interface has been carefully designed and rigorously tested for
ease of use and visual appeal to ensure a satisfying customer experience.
    
    S1 Enterprise Business Bankingprovides online financial solutions appropriate for small
to mid-market business banking customers. The online tools allow these smaller businesses
to manage their money quickly and effectively. This allows our financial institution
customers to offer product packages that can satisfy an array of business customer segments
and include such features as account management and enhanced reporting, payments, foreign
exchange and self-service features including the ability to open new accounts online,
report lost cards, reset passwords, stop payments, reorder checks, request check copies,
and create electronic alerts.
    
    S1 Enterprise Corporate Bankingdelivers a sophisticated multilingual, multi-currency,
and multi-delivery channel offering with proven performance, giving our banking clients the
ability to offer cash management functions on a global basis for high-volume users. S1
Corporate Banking provides users real-time data on account balances and transactions as
well as straight-thru processing on payments from ACH to Fedwire to SWIFT.
 3




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
    
    S1 Enterprise Trade Financestreamlines the trade finance process for the online
marketplace. The S1 Enterprise Trade Finance product is engineered to increase the
efficiency of processing trade transactions and delivers one integrated system to create
and report on trade documents from purchase orders, to letters of credit, to direct
collections.
 S1 Enterprise Branch Banking and Call Center Solutions
  
    
    S1 Enterprise Tellerutilizes thin and rich client technologies rather than PC based
technologies. This provides scalability, real-time connectivity, and low total cost of
ownership with deep off-line capabilities. The application is highly flexible and
customizable, and its centralized administration capabilities enable quick and efficient
rollout of new products, features, and upgrades.
    
    S1 Enterprise Sales and Service Platformprovides transaction functionality and embedded
relationship management tools. With real-time information from all channels and advanced
features that support selling, branches can increase their visibility of potential
cross-sell and up-sell opportunities, and have the tools to act on those opportunities.
    
    S1 Enterprise Call Centeris a fully integrated call center solution that offers
workflows, transactions and core services that meet the specialized needs of the call
center environment. In addition to the core services found in the teller and sales and
service platform, S1 Enterprise Call Center provides the customer information, sales and
service capabilities, process flows, reporting, and fulfillment management functionality
that is typically found in call center operations.
    
    S1 Enterprise Voice Bankingprovides voice banking capabilities that can be rapidly
deployed using technology from a third-party solution partner. The voice application is
integrated with the S1 Enterprise Platform so it can be fully deployed with all of our
applications. As a result, customer information generated with Voice Banking can be
integrated and accessed with bank customer information from all other channels and
applications.
 S1 Enterprise Insurance
    4




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Postilion
  Postilion
  
    
    IBS Cash Management Systemis designed to help community banks deliver services to small
businesses. Functions include integrated front and back office systems, multiple payment
vehicles such as domestic and SWIFT wires,
ACH, and EFTPS, integration with the IBS Retail Internet Banking application and Electronic
Data Interchange (EDI) data display.
    
    IBS Retail Internet Bankingis designed specifically with the unique needs of the
community banking market in mind. This turn-key application includes functions such as the
ability to view statements, account activity, and cleared and pending transactions online,
to transfer funds between accounts and to pay bills electronically.
    
    Voice Bankingdelivers integrated voice response (IVR) functionality in a stable,
flexible, Windows-based application. With the push of a button, users can check on a
deposit or account balance, find a CD rate, pay bills or transfer funds.
    
    Postilionis a payment solution used by financial institutions, retailers, telecom
operators and processors to drive electronic payments through ATMs, POS terminals, phones
and Internet access points. It is a modularized family of products that can be implemented
in large financial institutions as well as smaller community and regional banks and credit
unions.
  FSB
   
    
    FSB Branch Automationincludes FSB Teller and FSB Sales and Services Platform. FSB
Teller is a functionally rich, client-server based application that provides the complete
set of transactions and core services necessary for the teller function including host
communications, sharing and storing of information, cumulative totals, electronic journal,
transaction security and approval and balancing aids. The FSB Sales and Services Platform
combines extensive transaction processing functionality with sales tools, and core services
that expedite selling new products, as well as servicing existing accounts.
    
    FSB Banking Call Centerprovides the customer information, sales and service
capabilities, process flows, reporting, and fulfillment management specific to call center
operations. The FSB Banking Call Center application
 5




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integrates with other call center
technologies, including IVR systems, computer telephony integration (CTI) servers and
automatic call distributor systems.
    
    FSB Marketing Centerprovides our customers the ability to develop and execute marketing
campaigns based on multiple segmentations of customers and prospects. It includes robust
inbound and outbound telemarketing features that can be combined with advanced CTI
functionality to enhance the efficiency of our customers marketing personnel.
    
    FSB Lendingprovides a highly customizable, complete credit origination system designed
for indirect, direct, credit card, home equity and revolving credit lending, to be used in
conjunction with multiple scoring and decision support tools for the personal lending
market. The application also offers a workflow solution that meets small business lending
requirements from data entry through qualification, notification, closing and document
delivery.
 Additional Solutions
 
    
    S1 Website Solutionsis a virtual financial lobby which provides customers with a
destination web site or portal that gives them access to product information, news and
other content, as well as community pages and bulletin boards. The S1 Customer Center
enables financial institutions to efficiently create, manage and quantify their web
presence.
    
    The S1 online adoption solution, marketed as S1 to One Solutions, is designed to help
financial institutions of all sizes improve their base of active online users. These
solutions range from marketing support to educational programs.
    
    Pay AnyoneBill-Pay services offered through partnerships with Checkfree, Princeton and
Metavante through all of our personal on-line banking applications.
    
    Account Aggregation. Through a reseller agreement with Yodlee, Inc. (described in Note
19 to our consolidated financial statements included elsewhere in this report) we provide
account aggregation capabilities, which allow the delivery of an integrated balance sheet
consolidating, organizing and presenting a consumers personal account information from a
variety of providers for confidential viewing and access.
    
    Voice and Speech Recognition.Through a strategic relationship with Edify Corporation (
previously an S1 company now a wholly owned subsidiary of Intervoice, Inc.), we provide
advanced voice and speech recognition solutions. Edifys voice solution was one of the
first third-party solutions to integrate with the S1 Enterprise Platform. Through this
solution, customers benefit from an ability to provide one view of the transactions,
transaction history and total banking relationship by providing a consistent view between
S1 Enterprise and Edify / Intervoice.
 Services
  Professional Services
  
    
    Project Management Our project managers are responsible
for oversight of services projects throughout the
implementation cycle;
    
    Custom Software Development Our software developers
customize certain software solutions to meet the specific
 6




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business requirements of our customers  from analysis and
design to building and testing;
    
    Technical Services Our technical services teams design,
implement and test the servers and network infrastructure
to support our solutions. Our expertise includes software
integration, database services, networking and the
applications skills required to deliver secure, robust
solutions;
 7




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
    
    Educational Services Our training professionals help
financial institutions train their employees to use our
solutions to better serve their customers; and
    
    Web Design Services Our web design group assists with
delivery of a complete web presence for financial
institutions.
  Customer Support
  
    
    Technical Support Customer support engineers provide technical support for solutions on our products;
    
    Software Release Management We provide software upgrades that include enhancements to our software
as well as operational and performance improvements; and
    
    Online Support The Support Website is designed to provide one-stop access to technical information
for our products. The Website provides access to technical FAQs, download patches, the latest
documentation, and support bulletins.
 Hosting Services
  Other Revenue
  Financial Industry Background
  
    
    pressure to grow their businesses organically instead of through mergers and acquisitions;
    
    increased security concerns and regulatory requirements; and
    
    the need to minimize information technology and infrastructure costs while meeting the
ever-rising consumer expectations for customer service and convenience.
  8




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
   Discontinued Operations
 Risk and Compliance
  9




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Edify
  Customers and Markets
   Strategic Alliances and Partners
   Sales and Marketing
     10




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Product Development
     Competition
  In-house Development Organizations
  
    
    building, maintaining and upgrading an in-house solution can be very costly;
    
    attracting and retaining the necessary technical personnel can be difficult and costly; and
    
    technological development may be too far outside the financial organizations core
competencies to be effective or successful.
 Single-Point Solution Vendors
  11




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
    
    integrating applications and channels from multiple vendors may greatly lengthen a financial organizations
time-to-market and implementation costs;
    
    operating and upgrading solutions from multiple vendors is typically very costly; and
    
    a combination of best-of-breed solutions across different channels does not provide a single view of the customer.
 Core Processing Vendors
  Enterprise Solution Vendors
  Government Regulation
   12




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Employees
  Available Information
 www.sec.gov
 
 Item 1A. Risk Factors
 You should consider carefully the following risks. If any of the following risks actually
occur, our business, financial condition or results of operations would likely suffer. In that
case, the trading price of our common stock could decline, and you may lose all or a part of the
money you paid to buy our common stock.
 Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price
of our common stock
  
    
    we cannot accurately predict the number and timing of contracts we will sign in a period, in part because
the budget constraints and internal review processes of existing and potential customers are not within our
control;
    
    as we will be selling our financial institutions products on both a perpetual license and a term or
subscription license, we cannot accurately predict the mix of perpetual licenses to term licenses sold in
any one quarter. Term licenses significantly reduce the amount of revenue recognized in the first year of
the contract, but is intended to increase the overall revenue earned from the customer during the typical
customer life cycle; perpetual license revenue can vary significantly on a quarterly basis;
    
    the length of our sales cycle to large financial organizations generally lasts from six to 18 months, which
adds an element of uncertainty to our ability to forecast revenues;
    
    if we fail to or are delayed in the introduction of new or enhanced products, or if our competitors
introduce new or enhanced products, sales of our products and services may not achieve expected levels
and/or may decline;
    
    our ability to expand the mix of distribution channels through which our products are sold may be limited;
    
    our products may not achieve widespread consumer acceptance, which could cause our revenues to be lower
than expected;
    
    we have had significant contracts with legacy customers that have decreased or terminated their services
and we may not be able to replace this revenue and / or the gross margins associated with this revenue;
    
    our sales may be constrained by the timing of releases of third-party software that works with our products;
 13




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
    
    a significant percentage of our expenses is relatively fixed, and
we may be unable to reduce expenses in the short term if revenues
decrease; and
    
    the migration of our license sales model to be more focused on
recurring revenue contracts may result in less predictable revenue
due to an inability to predict the rate at which it is adopted by
our customers, or the rate at which it may be deferred.
 We have experienced substantial losses in the past and may not achieve or maintain profitable
operations in the future
  In 2007, we will depend on one customer, State Farm, for a significant portion of our revenue and
if that customer terminates its contract with us, our revenues and financial performance would
decline
  System failures or performance problems with our products could cause demand for these products to
decrease, require us to make significant capital expenditures or impair customer relations
  §
    
    delays in completing and/or testing new products, resulting in significant delays in delivering new products;§
    
    extraordinary end-user volumes or other events could cause systems to fail;§
    
    our products could contain errors, or bugs, which could impair the services we provide;§
    
    during the initial implementation of some products, we have experienced significant delays in implementing
and integrating software, and we may experience similar difficulties or delays in connection with future
implementations and upgrades to new versions; and§
    
    many of our products require integration with third-party products and systems, and we may not be able to
integrate these products with new or existing products.
 We are subject to government regulation
  14




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We are engaged in offshore software development activities, which may not be successful and which
may put our intellectual property at risk
  §
    
    Communications and information flow may be less efficient and accurate as a consequence of the time zone
differences, distance and language differences between our primary development organization and the foreign based
activities, resulting in delays in development or errors in the software developed;§
    
    potential disruption from the involvement of the United States in political and military conflicts around the world;§
    
    the quality of the development efforts undertaken offshore may not meet our requirements because of language,
cultural and experiential differences, resulting in potential product errors and/or delays;§
    
    we have experienced a greater level of voluntary turnover of personnel in India than in other development centers
which could have an adverse impact on efficiency and timeliness of development as well as the opportunity for
misappropriation of our intellectual property;§
    
    in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general
risk of the potential for misappropriation of our intellectual property that might not be readily discoverable; and§
    
    currency exchange rates could fluctuate and adversely impact the cost advantages intended from maintaining these
facilities.
 A significant portion of our customers are in a consolidating financial services industry, which is
subject to economic changes that could reduce demand for our products and services
  We are from time to time involved in litigation over proprietary rights, which may be costly and
time consuming
  §
    
    be time-consuming to investigate and defend;§
    
    result in costly litigation;§
    
    cause product shipment delays;§
    
    require us to enter into royalty or licensing agreements; or§
    
    result in an injunction being issued against the use of our products.
 15




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§
    
    pay substantial damages;§
    
    discontinue the use and sale of infringing products;§
    
    expend significant resources to develop non-infringing technology; or§
    
    obtain licenses to infringing technology.
  Our operating results would suffer if we were subject to a protracted infringement claim or a
significant damage award.
    §
    
    costly litigation and damage awards;§
    
    diversion of management attention and resources;§
    
    product shipment delays or suspensions;§
    
    injunction prohibiting us from selling our products; and§
    
    the need to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all.
 Acquisitions and divestitures may be costly and difficult to integrate / divest, divert management
resources or dilute stockholder value
  16




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§
    
    potential incompatibility of business cultures;§
    
    potential delays in rationalizing diverse technology platforms;§
    
    potential difficulties in coordinating geographically separated organizations;§
    
    potential difficulties in re-training sales forces to market all of our products across all of our intended markets;§
    
    potential difficulties implementing common internal business systems and processes;§
    
    potential conflicts in third-party relationships; and§
    
    the loss of key employees and diversion of the attention of management from other ongoing business concerns.
 Market volatility may affect the price of our common stock
  §
    
    actual or anticipated variations in our quarterly operating results;§
    
    34% of our common stock is owned by 5 institutions, a rapid change in position of any one
of these holders could cause a significant drop in our stock price if market demand is
insufficient to meet sales demand;§
    
    announcements of new products, product enhancements, technological innovations or new
services by us or our competitors;§
    
    changes in financial estimates by securities analysts;§
    
    conditions or trends in the computer software, electronic commerce and Internet industries;§
    
    changes in the market valuations of other technology companies;§
    
    developments in Internet regulations;§
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;§
    
    unscheduled system downtime of our products in either a hosted or in-house environment;§
    
    additions or departures of key personnel; and§
    
    sales of our common stock or other securities in the open market.
 Future sales of our common stock in the public market could negatively affect our stock price
  17




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Our market is highly competitive and if we are unable to keep pace with evolving technology our
revenue and future prospects may decline
  International operations may adversely affect us
  §
    
    fluctuations in currency exchange rates;§
    
    governmental currency controls;§
    
    changes in various regulatory requirements;§
    
    political and economic changes and disruptions;§
    
    difficulties in enforcing our contracts in foreign jurisdictions;§
    
    export/import controls;§
    
    tariff regulations;§
    
    difficulties in staffing and managing foreign sales and support operations;§
    
    greater difficulties in trade accounts receivable collection; and§
    
    possible adverse tax consequences.
   18




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Infringement of our proprietary technology could hurt our competitive position and income potential
  If we are unable to attract and retain highly skilled technical employees, we may not be able to
compete
  The adoption or modification of laws or regulations relating to the Internet, or interpretations of
existing law, could adversely affect our business
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  19




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Item 3. Legal Proceedings.
   
 Item 4. Submission of Matters to a Vote of Security Holders.
     20




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities.
  High
    
    Low2005First Quarter
    
    $
    9.08
    
    
    $
    6.73Second Quarter
    
    
    6.99
    
    
    
    4.11Third Quarter
    
    
    5.42
    
    
    
    3.71Fourth Quarter
    
    
    4.67
    
    
    
    3.512006First Quarter
    
    $
    5.04
    
    
    $
    3.80Second Quarter
    
    
    5.96
    
    
    
    4.35Third Quarter
    
    
    5.15
    
    
    
    4.02Fourth Quarter
    
    
    5.66
    
    
    
    4.38
   Number of securities to beissued upon exercise of
    
    
    Weighted-average exercise
    
    
    Number of securities remaining available foroutstanding options, warrants
    
    
    price of outstanding options,
    
    
    future issuance under equity compensationand rights
    
    
    warrants and rights
    
    
    plans (excluding securities
reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
shareholders
    
    
    5,073,078
    
    
    $
    5.14
    
    
    
    1,230,539Equity compensation
plans not approved
by shareholders
    
    
    4,870,391
    
    
    
    13.97
    
    
    
    Total
    
    
    9,943,469
    
    
    $
    9.46
    
    
    
    1,230,539
  21




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Comparison of Cumulative Total Return Among
S1, Interactive Week Internet Index and Nasdaq Composite Index
from December 31, 2002 to December 31, 2006
 
 Comparison of Cumulative Total Return Among
S1, Interactive Week Internet Index and Nasdaq Composite Index
from December 31, 2002 to December 31, 2006
 12/31/2002
    
    
    12/31/2003
    
    
    12/31/2004
    
    
    12/31/2005
    
    
    12/31/2006S1 Corporation
    
    
    $
    100
    
    
    
    $
    181
    
    
    
    $
    203
    
    
    
    $
    98
    
    
    
    $
    124Interactive Week Internet Index
    
    
    $
    100
    
    
    
    $
    173
    
    
    
    $
    209
    
    
    
    $
    212
    
    
    
    $
    241NASDAQ Composite
    
    
    $
    100
    
    
    
    $
    150
    
    
    
    $
    163
    
    
    
    $
    165
    
    
    
    $
    181
 
 (b)
    
    Not applicable.(c)
    
    Changes in Securities Use of Proceeds and Issuer Purchases of Equity Securities. Issuer Purchases of Equity Securities
 Approximate DollarTotal Number of
    
    Value of Shares thatAverage
    
    Shares Purchased
    
    May Yet BeTotal Number
    
    Price Paid
    
    as Part of Publicly
    
    Purchased Underof Shares
    
    per
    
    Announced Plans
    
    the Plans orPurchased
    
    Share(1)
    
    or Programs
    
    ProgramsOctober 1, 2006 to
October 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    November 1, 2006 to
November 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1, 2006 to
December 31, 2006
    
    
    10,476,190
    
    
    
    5.32
    
    
    
    10,476,190
    
    
    
    Total
    
    
    10,476,190
    
    
    $
    5.32
    
    
    
    10,476,190
    
    
    $
    
 22




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(1)
    
    Average price per share includes related transaction costs to repurchase the stock.  23




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Item 6. Selected Financial Data.
  Year Ended December 31,2002 (1)
    
    2003
    
    2004 (2)
    
    2005 (3)
    
    2006 (3)(4)(in thousands, except per share data)Statement of Operations Data:Total revenues
    
    $
    237,090
    
    
    $
    209,740
    
    
    $
    185,156
    
    
    $
    179,140
    
    
    $
    192,310(Loss) income from
continuing operations
    
    
    (4,950
    )
    
    
    (12,516
    )
    
    
    5,396
    
    
    
    (28,382
    )
    
    
    (12,239
    )(Loss) income from
discontinued operations
    
    
    (11,447
    )
    
    
    (25,656
    )
    
    
    10,174
    
    
    
    27,325
    
    
    
    30,141Net (loss) income
    
    
    (16,397
    )
    
    
    (38,172
    )
    
    
    15,570
    
    
    
    (1,057
    )
    
    
    17,902(Loss) earnings per share:Basic:Continuing operations
    
    $
    (0.07
    )
    
    $
    (0.18
    )
    
    $
    0.08
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )Discontinued operations
    
    
    (0.17
    )
    
    
    (0.37
    )
    
    
    0.14
    
    
    
    0.38
    
    
    
    0.42Net (loss) income per share
    
    $
    (0.24
    )
    
    $
    (0.55
    )
    
    $
    0.22
    
    
    $
    (0.02
    )
    
    $
    0.25Diluted:Continuing operations
    
    $
    (0.07
    )
    
    $
    (0.18
    )
    
    $
    0.07
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )Discontinued operations
    
    
    (0.17
    )
    
    
    (0.37
    )
    
    
    0.14
    
    
    
    0.38
    
    
    
    0.42Net (loss) income per share
    
    $
    (0.24
    )
    
    $
    (0.55
    )
    
    $
    0.21
    
    
    $
    (0.02
    )
    
    $
    0.25
 Year Ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    94,162
    
    
    $
    76,713
    
    
    $
    43,223
    
    
    $
    85,108
    
    
    $
    69,612Short-term investments
    
    
    48,523
    
    
    
    87,477
    
    
    
    65,248
    
    
    
    44,170
    
    
    
    21,392Working capital
    
    
    120,864
    
    
    
    125,940
    
    
    
    105,715
    
    
    
    106,250
    
    
    
    83,227Goodwill, net
    
    
    106,971
    
    
    
    93,462
    
    
    
    117,699
    
    
    
    125,808
    
    
    
    125,300Total assets
    
    
    376,974
    
    
    
    337,088
    
    
    
    341,364
    
    
    
    344,523
    
    
    
    307,805Capital lease
obligation, excluding
current portion
    
    
    185
    
    
    
    523
    
    
    
    1,572
    
    
    
    791
    
    
    
    3,865Stockholders Equity
    
    
    279,761
    
    
    
    243,814
    
    
    
    254,996
    
    
    
    252,386
    
    
    
    224,229
 Year Ended December 31,2002 (1)
    
    2003
    
    2004 (2)
    
    2005 (3)
    
    2006(3)(4)(in thousands)Other Selected Data:Cash provided by (used in) operating
activities
    
    $
    21,421
    
    
    $
    22,374
    
    
    $
    (15,244
    )
    
    $
    (236
    )
    
    $
    2,944Depreciation
    
    
    21,233
    
    
    
    15,929
    
    
    
    9,013
    
    
    
    8,862
    
    
    
    7,840Amortization and impairment of
acquisition and intangible assets
    
    
    13,206
    
    
    
    3,729
    
    
    
    3,409
    
    
    
    4,932
    
    
    
    4,935Weighted average common shares
outstanding  basic
    
    
    67,725
    
    
    
    69,872
    
    
    
    70,613
    
    
    
    70,359
    
    
    
    70,780Weighted average common shares
outstanding  diluted

    
    n/a
    
    
    
    n/a
    
    
    
    73,130
    
    
    
    n/a
    
    
    
    n/a
 
 (1)
    
    Our net loss, net loss per share and cash flows for the year ended December 31, 2002 were affected by the results of operations from acquired businesses, including
Regency Systems, Inc. (February 2002) and the assets and subsidiaries of Point Holdings, Ltd. (March 2002). Revenues and expenses from the operations of these acquired
businesses were included in our operations from their respective dates of acquisition. 24




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##### Table of Contents



(2)
    
    Our net income for the year ended December 31, 2004 includes the gain on disposal of discontinued operations of $9.3 million.(3)
    
    Our net loss for the year ended December 31, 2005 includes the gain on disposal of discontinued operations of $25.0 million. Our net loss, net loss per share and cash
flows for the years ended December 31, 2005 and 2006 were affected by the results of operations from the acquired business, Mosaic Software Holdings Limited (November
2004). Revenues and expenses from the operations of the acquired business were included in our operations from its respective date of acquisition.(4)
    
    Our net income for the year ended December 31, 2006 includes the gain on disposal of discontinued operations of $32.1 million. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
   Executive Overview
     25




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##### Table of Contents



2005 Business Acquisition
  26




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##### Table of Contents



2004 Business Acquisitions
    Revenue from Significant Customers
  Restructuring Charges and Merger Related Costs
    27




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##### Table of Contents



Discontinued Operations
  Critical Accounting Policies and Estimates
   
    
    revenue recognition;
    
    estimation of our allowance for doubtful accounts and billing adjustments;
    
    valuation and recoverability of long-lived assets, including goodwill;
    
    valuation of acquired businesses;
    
    determination of technological feasibility and capitalization of software development costs;
    
    determination of the fair value of employee stock options;
    
    recognition of costs in connection with restructuring plans and merger-related activities;
    
    reserve for contingencies; and
    
    income taxes.
 Revenue recognition .
 28




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##### Table of Contents



Software license revenue.
   Support and maintenance revenue.
 Professional services revenue.
 Data center revenue.
   
    
    whether the fees associated with our products and services are fixed or determinable;
    
    whether or not collection of our fees is reasonably assured;
    
    whether professional services are essential to the functionality of the related software product;
 29




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##### Table of Contents




    
    whether we have the ability to make reasonably dependable estimates in the application of the
percentage of completion method; and
    
    whether we have verifiable objective evidence of fair value for our products and services.
  
    
    percentage of labor hours incurred to date to the estimated total labor hours for each contract;
    
    provisions for estimated losses on uncompleted contracts; and
    
    the need for an allowance for doubtful accounts or billing adjustments.
  Estimation of allowance for doubtful accounts and billing adjustments.
 Property and equipment.
 Valuation and recoverability of long-lived assets, including goodwill.
 
    
    significant under-performance relative to expected historical or projected future operating results;
    
    significant changes in the manner of our use of the acquired assets or the strategy of our overall business;
    
    significant negative industry or economic trends;
    
    significant decline in our stock price for a sustained period; and
    
    our market capitalization relative to net book value.
 30




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##### Table of Contents



Valuation of acquired businesses.
 Determination of technological feasibility and capitalization of software development costs.
 Determination of the fair value of equity based compensation.
  Recognition of costs in connection with restructuring plans and merger-related activities.
  31




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##### Table of Contents



Reserve for contingencies.
 Income taxes.
 Recent Accounting Pronouncements
   32




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33




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##### Table of Contents



Results of Operations
  2004
    
    
    2005
    
    
    2006Revenues:Software licenses
    
    $
    30,298
    
    
    
    17
    %
    
    $
    27,336
    
    
    
    15
    %
    
    $
    29,788
    
    
    
    15
    %Support and maintenance
    
    
    39,158
    
    
    
    21
    %
    
    
    44,289
    
    
    
    25
    %
    
    
    44,094
    
    
    
    23
    %Professional services
    
    
    76,075
    
    
    
    41
    %
    
    
    65,345
    
    
    
    37
    %
    
    
    70,297
    
    
    
    37
    %Data center
    
    
    37,355
    
    
    
    20
    %
    
    
    40,000
    
    
    
    22
    %
    
    
    46,856
    
    
    
    24
    %Other
    
    
    2,270
    
    
    
    1
    %
    
    
    2,170
    
    
    
    1
    %
    
    
    1,275
    
    
    
    1
    %Total revenues
    
    
    185,156
    
    
    
    100
    %
    
    
    179,140
    
    
    
    100
    %
    
    
    192,310
    
    
    
    100
    %Direct costs:Software licenses
    
    
    5,207
    
    
    
    3
    %
    
    
    4,915
    
    
    
    3
    %
    
    
    4,588
    
    
    
    2
    %Professional services, support and
maintenance
    
    
    54,289
    
    
    
    29
    %
    
    
    63,592
    
    
    
    35
    %
    
    
    65,231
    
    
    
    34
    %Data center
    
    
    18,279
    
    
    
    10
    %
    
    
    19,227
    
    
    
    11
    %
    
    
    22,354
    
    
    
    12
    %Other
    
    
    1,635
    
    
    
    1
    %
    
    
    1,998
    
    
    
    1
    %
    
    
    1,103
    
    
    
    1
    %Total direct costs (1)
    
    
    79,410
    
    
    
    43
    %
    
    
    89,732
    
    
    
    50
    %
    
    
    93,276
    
    
    
    49
    %Operating expenses:Selling and marketing
    
    
    22,487
    
    
    
    12
    %
    
    
    28,141
    
    
    
    15
    %
    
    
    27,658
    
    
    
    14
    %Product development
    
    
    41,086
    
    
    
    22
    %
    
    
    40,395
    
    
    
    23
    %
    
    
    38,937
    
    
    
    20
    %General and administrative
    
    
    24,407
    
    
    
    13
    %
    
    
    25,998
    
    
    
    15
    %
    
    
    26,694
    
    
    
    14
    %Merger related and restructuring costs
    
    
    
    
    
    
    0
    %
    
    
    15,030
    
    
    
    8
    %
    
    
    12,485
    
    
    
    6
    %Depreciation
    
    
    9,013
    
    
    
    5
    %
    
    
    8,862
    
    
    
    5
    %
    
    
    7,840
    
    
    
    4
    %Amortization of acquisition
intangible assets
    
    
    878
    
    
    
    1
    %
    
    
    1,311
    
    
    
    1
    %
    
    
    1,310
    
    
    
    1
    %Total operating expenses
    
    
    97,871
    
    
    
    53
    %
    
    
    119,737
    
    
    
    67
    %
    
    
    114,924
    
    
    
    59
    %Operating income (loss)
    
    
    7,875
    
    
    
    4
    %
    
    
    (30,329
    )
    
    
    (17
    )%
    
    
    (15,890
    )
    
    
    (8
    )%Interest, investment and other income, net

    
    (1,515
    )
    
    
    (1
    )%
    
    
    2,063
    
    
    
    1
    %
    
    
    4,929
    
    
    
    3
    %Income (loss) from continuing operations
before income taxes
    
    
    6,360
    
    
    
    3
    %
    
    
    (28,266
    )
    
    
    (16
    )%
    
    
    (10,961
    )
    
    
    (5
    )%Income tax expense
    
    
    (964
    )
    
    
    (0
    )%
    
    
    (116
    )
    
    
    (0
    )%
    
    
    (1,278
    )
    
    
    (1
    )%Income (loss) from continuing operations
    
    
    5,396
    
    
    
    3
    %
    
    
    (28,382
    )
    
    
    (16
    )%
    
    
    (12,239
    )
    
    
    (6
    )%Discontinued operations:Income from discontinued operations, net
of tax
    
    
    10,174
    
    
    
    5
    %
    
    
    27,325
    
    
    
    15
    %
    
    
    30,141
    
    
    
    15
    %Net (loss) income
    
    $
    15,570
    
    
    
    8
    %
    
    $
    (1,057
    )
    
    
    (1
    )%
    
    $
    17,902
    
    
    
    9
    %
 
 (1)
    
    Direct costs exclude charges for depreciation of property and equipment. 34




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##### Table of Contents



Comparison of 2006 to 2005 Results
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    Total2006:Enterprise
    
    $
    9,408
    
    
    $
    14,333
    
    
    $
    54,865
    
    
    $
    21,131
    
    
    $
    517
    
    
    $
    100,254Postilion
    
    
    20,380
    
    
    
    29,761
    
    
    
    15,432
    
    
    
    25,725
    
    
    
    758
    
    
    
    92,056Total
    
    $
    29,788
    
    
    $
    44,094
    
    
    $
    70,297
    
    
    $
    46,856
    
    
    $
    1,275
    
    
    $
    192,3102005:Enterprise
    
    $
    7,798
    
    
    $
    16,663
    
    
    $
    49,520
    
    
    $
    16,538
    
    
    $
    1,594
    
    
    $
    92,113Postilion
    
    
    19,538
    
    
    
    27,626
    
    
    
    15,825
    
    
    
    23,462
    
    
    
    576
    
    
    
    87,027Total
    
    $
    27,336
    
    
    $
    44,289
    
    
    $
    65,345
    
    
    $
    40,000
    
    
    $
    2,170
    
    
    $
    179,140
     35




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##### Table of Contents



Direct Costs.
     Selling and Marketing Expenses.
 36




---



##### Table of Contents



Product Development Expenses.
  General and Administrative Expenses.
 Restructuring and Merger Related Costs.
  Depreciation.
 Amortization of Other Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
  
    
    for tax expense in certain subsidiaries or jurisdictions for which do not have NOLs to
utilize;
 37




---



##### Table of Contents




    
    in the United States due to limitations on the use of our federal NOLs for alternative
minimum tax purposes which will be paid in cash; or
    
    if there are no NOLs that were acquired as part of a business combination, upon which we
placed a valuation allowance at acquisition date. This results in non-cash income tax
expense as goodwill is reduced and the valuation allowance is released.
 Income from discontinued operations.
 Year Ended December 31,2006(1)
    
    2005Loss from Davidge operations
    
    $
    
    
    
    $
    (31
    )Income from Edify operations
    
    
    
    
    
    
    1,658(Loss) income from Risk and Compliance operations
    
    
    (1,947
    )
    
    
    2,366Gain on disposal of Edify
    
    
    457
    
    
    
    24,985Gain on disposal of Risk and Compliance
    
    
    31,597
    
    
    
    Income tax benefit (expense)
    
    
    34
    
    
    
    (1,653
    )
 
 (1)
    
    For Risk and Compliance, approximately seven and a half months ended August 10, 2006 prior
to sale Comparison of 2005 to 2004 Results
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    Total2005:Enterprise
    
    $
    7,798
    
    
    $
    16,663
    
    
    $
    49,520
    
    
    $
    16,538
    
    
    $
    1,594
    
    
    $
    92,113Postilion
    
    
    19,538
    
    
    
    27,626
    
    
    
    15,825
    
    
    
    23,462
    
    
    
    576
    
    
    
    87,027Total
    
    $
    27,336
    
    
    $
    44,289
    
    
    $
    65,345
    
    
    $
    40,000
    
    
    $
    2,170
    
    
    $
    179,1402004:Enterprise
    
    $
    11,836
    
    
    $
    12,510
    
    
    $
    65,542
    
    
    $
    15,076
    
    
    $
    129
    
    
    $
    105,093Postilion
    
    
    18,462
    
    
    
    26,648
    
    
    
    10,533
    
    
    
    22,279
    
    
    
    2,141
    
    
    
    80,063Total
    
    $
    30,298
    
    
    $
    39,158
    
    
    $
    76,075
    
    
    $
    37,355
    
    
    $
    2,270
    
    
    $
    185,156
   38




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##### Table of Contents



Direct Costs.
    Selling and Marketing Expenses.
 39




---



##### Table of Contents



Product Development Expenses.
 General and Administrative Expenses.
 Depreciation.
 Restructuring Costs.
 Amortization of Other Intangible Assets.
 Interest and Other Income (Expense), Net.
 Income Tax Benefit (Expense).
  
    
    for tax expense in certain subsidiaries or jurisdictions for which do not have
NOLs to utilize;
    
    in the United States due to limitations on the use of our federal NOLs for
alternative minimum tax purposes which will be paid in cash; or
    
    if there are NOLs that were acquired as part of a business combination, upon
which we placed a valuation allowance at acquisition date. This results in non-cash
income tax expense as goodwill is reduced and the valuation allowance is released.
 Income from discontinued operations.
 40




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##### Table of Contents



Year Ended December 31,2004(1)
    
    2005Loss from Davidge operations
    
    $
    (1,148
    )
    
    $
    (31
    )Income from Edify operations
    
    
    618
    
    
    
    1,658Income from Risk and Compliance operations
    
    
    2,577
    
    
    
    2,366Gain on disposal of Davidge
    
    
    9,254
    
    
    
    Gain on disposal of Edify
    
    
    
    
    
    
    24,985Income tax expense
    
    
    (1,127
    )
    
    
    (1,653
    )
 
 (1)
    
    For Davidge, ten months ended October 31, 2004 prior to sale Valuation of Acquired Businesses
   Liquidity and Capital Resources
  Year Ended December 31,2004
    
    
    2005
    
    
    2006(in thousands)Net cash provided by (used in) operating activities
before changes in operating assets and liabilities
    
    $
    22,942
    
    
    $
    (4,503
    )
    
    $
    6,680Changes in operating assets and liabilities
    
    
    (38,186
    )
    
    
    4,267
    
    
    
    (3,736
    )Net cash (used in) provided by operating activities
    
    
    (15,244
    )
    
    
    (236
    )
    
    
    2,944Net cash (used in) provided by investing activities
    
    
    (12,534
    )
    
    
    46,597
    
    
    
    31,626Net cash used in financing activities
    
    
    (6,239
    )
    
    
    (3,877
    )
    
    
    (50,155
    )Effect of exchange rates on cash and cash equivalents
    
    
    527
    
    
    
    (599
    )
    
    
    89Net (decrease) increase in cash and cash equivalents
    
    $
    (33,490
    )
    
    $
    41,885
    
    
    $
    (15,496
    )
 As of December 31,2005
    
    2006(in thousands)Cash and cash equivalents
    
    $
    85,108
    
    
    $
    69,612Short-term investments
    
    
    44,170
    
    
    
    21,392Working capital (1)
    
    
    106,250
    
    
    
    83,227Total assets
    
    
    344,523
    
    
    
    307,805Total stockholders equity
    
    
    252,386
    
    
    
    224,229
 
 (1)
    
    Working capital includes deferred revenues of $27.5 million and $29.3 million as of December
31, 2005 and 2006, respectively. Operating Activities.
 41




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42




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##### Table of Contents



Cash provided by operations for the year ended December 31, 2006 included the effects of:
 
    
    our net income of $17.9 million;
    
    non-cash charges of $13.1 million of depreciation and amortization;
    
    gain on the disposal of Edify of $0.6 million and gain on disposal of the Risk and
Compliance business of $32.1 million less expenses of $0.5 million related to the
sales;
    
    provision for doubtful accounts receivable and billing adjustments of $1.3 million;
    
    stock based compensation expense of $5.7 million;
    
    a $0.9 million loss on disposal of property and equipment:
    
    an increase of $9.4 million in accounts receivable due to the increase of net revenues;
    
    a decrease in accrued expenses and other liabilities of $1.8 million for changes to accrued merger reserves;
    
    a $7.9 million increase in deferred revenues resulting from increases of deferred
services and support fees; and
    
    changes in other operating assets and liabilities of $0.4 million.
 Cash used in operations for the year ended December 31, 2005 included the effects of:
 
    
    our net loss of $1.1 million;
    
    gain on the disposal of Edify of $24.9 million;
    
    non-cash charges of $14.7 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $5.2 million;
    
    a $1.0 million loss on disposal of property and equipment;
    
    a decrease of $4.9 million in prepaid expenses and other assets; and
    
    changes in other operating assets and liabilities of $0.6 million.
 Cash used in operations for the year ended December 31, 2004 included the effects of:
 
    
    our net income of $15.6 million, which included the gain on the sale of a subsidiary
of $8.6 million and $1.5 million equity in net loss of affiliate;
    
    non-cash charges of $14.0 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $0.4 million;
    
    a decrease in accrued expenses and other liabilities of $10.1 million;
    
    an increase of $19.9 million in accounts receivable;
    
    a decrease in deferred revenues of $6.4 million; and
 43




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##### Table of Contents




    
    changes in other operating assets and liabilities of $1.8 million.
 Investing Activities.
 During the year ended 2006, we
 
    
    paid $14.0 million to the sellers of Mosaic in settlement of the earn-out of which
$12.9 million was accrued in 2005;
    
    converted $22.8 million, net, from short-term investments to cash and cash
equivalents lowering our short-term investments to $21.4 million;
    
    received net proceeds from the sale of the Risk and Compliance segment of $32.0 million;
    
    received cash held in escrow of $3.5 million related to the sale of the Risk and Compliance segment;
    
    received $0.6 million working capital adjustment from the sale of Edify; and
    
    acquired $6.3 million of property and equipment as we financed $7.0 million of
equipment through capital leases.
 During the year ended 2005, we:
 
    
    converted $21.1 million, net, from short-term investments to cash and cash
equivalents lowering our short-term investments to $44.2 million;
    
    received net proceeds from the sale of the Edify segment of $33.2 million;
    
    purchased $6.9 million of property and equipment as we financed $0.5 million of
equipment as capital leases; and
    
    paid approximately $0.9 million in connection with the acquisition of the Providus business.
 During the year ended 2004, we:
 
    
    spent $39.4 million in cash in connection with acquisitions;
    
    received net proceeds from the sale of the Davidge segment of $12.9 million;
    
    converted $22.2 million, net, from short-term investments to cash and cash equivalents;
    
    purchased $6.8 million of property and equipment as we financed $2.9 million of
equipment as capital leases; and
    
    invested $1.5 million in an equity investment.
 44




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##### Table of Contents



Financing Activities.
 During the year ended 2006, we:
 
    
    repurchased $55.8 million of our common stock in December 2006 as part of our review
of strategic alternatives;
    
    received $5.4 million from the sale of common stock under our employee stock option
plans;
    
    received $2.5 million from a sale lease back transaction in which we sold equipment
purchased in 2006 and then in turn leased it back as a capital lease; and
    
    paid $2.3 million for capital lease obligations.
 During the year ended 2005, we:
 
    
    received $1.1 million from the sale of common stock under our employee stock option plans;
    
    repurchased $3.4 million of our common stock; and
    
    paid $1.6 million for capital lease obligations.
 During the year ended 2004, we:
 
    
    received $6.0 million from the sale of common stock under our employee stock option plans;
    
    repurchased $11.2 million of our common stock; and
    
    paid $1.1 million for capital lease obligations.
 Commitments.
   45




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##### Table of Contents



GreaterLess than
    
    
    1  3
    
    
    
    
    
    
    than 51 year
    
    
    years
    
    
    3  5 years
    
    
    years
    
    
    TotalOperating leases
    
    $
    11,925
    
    
    $
    20,801
    
    
    $
    13,065
    
    
    $
    5,346
    
    
    $
    51,137Capital leases
    
    
    3,258
    
    
    
    4,036
    
    
    
    
    
    
    
    
    
    
    
    7,294Purchase obligations
    
    
    4,954
    
    
    
    5,603
    
    
    
    1,353
    
    
    
    
    
    
    
    11,910Total
    
    $
    20,137
    
    
    $
    30,440
    
    
    $
    14,418
    
    
    $
    5,346
    
    
    $
    70,341Operating sub-lease income
    
    $
    (2,111
    )
    
    $
    (3,918
    )
    
    $
    (3,022
    )
    
    $
    
    
    
    $
    (9,051
    )
  
 Item 7A. Qualitative and Quantitative Disclosures about Market Risk.
   46




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 INDEX TO FINANCIAL STATEMENTS
 PageFINANCIAL STATEMENTS:Report of Independent Registered Public Accounting Firm
    
    
    48Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    
    50Consolidated Statements of Operations for the Years Ended December 31, 2004, 2005 and 2006
    
    
    51Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006
    
    
    52Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the Years Ended
December 31, 2004, 2005 and 2006
    
    
    53Notes to Consolidated Financial Statements
    
    
    54FINANCIAL STATEMENT SCHEDULE:For each of the three years ended December 31, 2006
Schedule IIValuation and Qualifying Accounts
    
    
    87
  47




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
  Consolidated financial statements and financial statement schedule
   Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
  48




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49




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##### Table of Contents



S1 CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    December 31,2005
    
    
    2006(in thousands, except shareand per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    85,108
    
    
    $
    69,612Short-term investments
    
    
    44,170
    
    
    
    21,392Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $5,810 and $4,249 at December 31, 2005 and 2006
respectively
    
    
    48,659
    
    
    
    53,371Prepaid expenses
    
    
    4,885
    
    
    
    4,036Other current assets
    
    
    3,870
    
    
    
    2,308Total current assets
    
    
    186,692
    
    
    
    150,719Property and equipment, net
    
    
    11,351
    
    
    
    12,137Intangible assets, net
    
    
    18,375
    
    
    
    12,903Goodwill
    
    
    125,808
    
    
    
    125,300Other assets
    
    
    2,297
    
    
    
    6,746Total assets
    
    $
    344,523
    
    
    $
    307,805LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,292
    
    
    $
    3,750Accrued compensation and benefits
    
    
    8,267
    
    
    
    9,642Accrued restructuring
    
    
    7,675
    
    
    
    9,092Accrued other expenses
    
    
    17,587
    
    
    
    12,801Accrued purchase price consideration
    
    
    12,900
    
    
    
    Deferred revenues
    
    
    27,499
    
    
    
    29,265Current portion of capital lease obligation
    
    
    1,222
    
    
    
    2,942Total current liabilities
    
    
    80,442
    
    
    
    67,492Capital lease obligation, excluding current portion
    
    
    791
    
    
    
    3,865Accrued restructuring, excluding current portion
    
    
    7,810
    
    
    
    10,386Other liabilities
    
    
    3,094
    
    
    
    1,833Total liabilities
    
    
    92,137
    
    
    
    83,576Commitments and contingencies (Note 12)Stockholders equity:Preferred stock, $0.01 par value. Authorized 25,000,000 shares. Issued and
outstanding 749,064 shares at December 31, 2005 and 2006,
respectively
    
    
    10,000
    
    
    
    10,000Common stock, $0.01 par value. Authorized 350,000,000 shares. Issued and
outstanding 74,410,099 and 61,290,973 shares at December 31, 2005 and 2006,
respectively
    
    
    744
    
    
    
    613Additional paid-in capital
    
    
    1,915,617
    
    
    
    1,845,529Common stock held in treasury, at cost. 4,053,886 and 0 shares at
December 31, 2005 and 2006, respectively
    
    
    (25,000
    )
    
    
    Accumulated deficit
    
    
    (1,647,204
    )
    
    
    (1,629,302
    )Accumulated other comprehensive income (loss):Net gain (loss) on derivative financial instruments, net of tax
    
    
    104
    
    
    
    (168
    )Cumulative foreign currency translation adjustment, net of tax
    
    
    (1,875
    )
    
    
    (2,443
    )Total stockholders equity
    
    
    252,386
    
    
    
    224,229Total liabilities and stockholders equity
    
    $
    344,523
    
    
    $
    307,805
  50




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S1 CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2004
    
    
    2005
    
    
    2006(in thousands, except share and per share data)Revenues:Software licenses
    
    $
    30,298
    
    
    $
    27,336
    
    
    $
    29,788Support and maintenance
    
    
    39,158
    
    
    
    44,289
    
    
    
    44,094Professional services
    
    
    76,075
    
    
    
    65,345
    
    
    
    70,297Data center
    
    
    37,355
    
    
    
    40,000
    
    
    
    46,856Other
    
    
    2,270
    
    
    
    2,170
    
    
    
    1,275Total revenues
    
    
    185,156
    
    
    
    179,140
    
    
    
    192,310Operating expenses:Cost of software licenses
    
    
    5,207
    
    
    
    4,915
    
    
    
    4,588Cost of professional services, support and maintenance(1)
    
    
    54,289
    
    
    
    63,592
    
    
    
    65,231Cost of data center(1)
    
    
    18,279
    
    
    
    19,227
    
    
    
    22,354Cost of other revenue
    
    
    1,635
    
    
    
    1,998
    
    
    
    1,103Selling and marketing
    
    
    22,487
    
    
    
    28,141
    
    
    
    27,658Product development
    
    
    41,086
    
    
    
    40,395
    
    
    
    38,937General and administrative
    
    
    24,407
    
    
    
    25,998
    
    
    
    26,694Merger related and restructuring costs
    
    
    
    
    
    
    15,030
    
    
    
    12,485Depreciation
    
    
    9,013
    
    
    
    8,862
    
    
    
    7,840Amortization of intangible assets
    
    
    878
    
    
    
    1,311
    
    
    
    1,310Total operating expenses
    
    
    177,281
    
    
    
    209,469
    
    
    
    208,200Operating income (loss)
    
    
    7,875
    
    
    
    (30,329
    )
    
    
    (15,890
    )Interest and other (expense) income, net
    
    
    (1,515
    )
    
    
    2,063
    
    
    
    4,929Income (loss) before income tax expense
    
    
    6,360
    
    
    
    (28,266
    )
    
    
    (10,961
    )Income tax expense
    
    
    (964
    )
    
    
    (116
    )
    
    
    (1,278
    )Income (loss) from continuing operations
    
    
    5,396
    
    
    
    (28,382
    )
    
    
    (12,239
    )Income from discontinued operations, net of taxes
    
    
    10,174
    
    
    
    27,325
    
    
    
    30,141Net income (loss)
    
    $
    15,570
    
    
    $
    (1,057
    )
    
    $
    17,902Basic earnings (loss) per share:Continuing operations
    
    $
    0.08
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )Discontinued operations
    
    
    0.14
    
    
    
    0.38
    
    
    
    0.42Net income (loss) per share
    
    $
    0.22
    
    
    $
    (0.02
    )
    
    $
    0.25Diluted earnings (loss) per share:Continuing operations
    
    $
    0.07
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )Discontinued operations
    
    
    0.14
    
    
    
    0.38
    
    
    
    0.42Net income (loss) per share
    
    $
    0.21
    
    
    $
    (0.02
    )
    
    $
    0.25Weighted average common shares outstanding  basic
    
    
    70,612,973
    
    
    
    70,359,200
    
    
    
    70,779,502Weighted average common shares outstanding  fully diluted
    
    
    73,130,026
    
    
    
    n/a
    
    
    
    n/a
 
 (1)
    
    Cost of professional services, support and maintenance and cost of data center excludes charges for depreciation.  51




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S1 CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2004
    
    
    2005
    
    
    2006(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    15,570
    
    
    $
    (1,057
    )
    
    $
    17,902Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    14,010
    
    
    
    14,711
    
    
    
    13,061Gain on disposal of discontinued operations, net of tax
    
    
    (8,559
    )
    
    
    (24,850
    )
    
    
    (32,153
    )Provision for doubtful accounts receivable and billing adjustments
    
    
    421
    
    
    
    5,152
    
    
    
    1,301Equity in net loss of affiliate
    
    
    1,500
    
    
    
    
    
    
    
    Expense for stock based compensation
    
    
    
    
    
    
    570
    
    
    
    5,663Loss on disposal of property and equipment
    
    
    
    
    
    
    971
    
    
    
    906Changes in operating assets and liabilitiesIncrease in accounts receivable
    
    
    (19,884
    )
    
    
    (660
    )
    
    
    (9,435
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (1,314
    )
    
    
    4,881
    
    
    
    710Decrease in accounts payable
    
    
    (457
    )
    
    
    (362
    )
    
    
    (1,121
    )Decrease in accrued expenses and other liabilities
    
    
    (10,141
    )
    
    
    (536
    )
    
    
    (1,814
    )(Decrease) increase in deferred revenues
    
    
    (6,390
    )
    
    
    944
    
    
    
    7,924Net cash (used in) provided by operating activities
    
    
    (15,244
    )
    
    
    (236
    )
    
    
    2,944Cash flows from investing activities:Cash paid in connection with acquisition of businesses
    
    
    (39,434
    )
    
    
    (857
    )
    
    
    (14,000
    )Proceeds from sale of subsidiary
    
    
    12,924
    
    
    
    33,232
    
    
    
    32,639Maturities of short-term investment securities
    
    
    82,752
    
    
    
    73,500
    
    
    
    56,700Purchases of short-term investment securities
    
    
    (60,523
    )
    
    
    (52,422
    )
    
    
    (33,922
    )Investment in equity method investment
    
    
    (1,500
    )
    
    
    
    
    
    
    Amounts held in escrow related to sale of business
    
    
    
    
    
    
    
    
    
    
    (3,500
    )Purchases of property, equipment, and technology
    
    
    (6,753
    )
    
    
    (6,856
    )
    
    
    (6,291
    )Net cash (used in) provided by investing activities
    
    
    (12,534
    )
    
    
    46,597
    
    
    
    31,626Cash flows from financing activities:Proceeds from employee stock option exercises
    
    
    6,005
    
    
    
    1,139
    
    
    
    5,351Repurchase of common stock held in treasury
    
    
    (11,155
    )
    
    
    (3,407
    )
    
    
    Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (55,754
    )Proceeds from sale-lease back transactions
    
    
    
    
    
    
    
    
    
    
    2,502Payments on capital lease obligations
    
    
    (1,089
    )
    
    
    (1,609
    )
    
    
    (2,254
    )Net cash used in financing activities
    
    
    (6,239
    )
    
    
    (3,877
    )
    
    
    (50,155
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    527
    
    
    
    (599
    )
    
    
    89Net (decrease) increase in cash and cash equivalents
    
    
    (33,490
    )
    
    
    41,885
    
    
    
    (15,496
    )Cash and cash equivalents at beginning of year
    
    
    76,713
    
    
    
    43,223
    
    
    
    85,108Cash and cash equivalents at end of year
    
    $
    43,223
    
    
    $
    85,108
    
    
    $
    69,612Non-cash financing and investing activities:Property and equipment acquired through leases
    
    $
    2,899
    
    
    $
    527
    
    
    $
    7,048Maintenance agreement financed through vendor
    
    
    1,279
    
    
    
    105
    
    
    
    Accrual for additional purchase price consideration for business acquisitions
    
    
    
    
    
    
    12,900
    
    
    
    Accrual of working capital adjustment related to sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    664Assets acquired, net of cash acquired
    
    
    8,153
    
    
    
    32
    
    
    
    Liabilities assumed in acquisitions
    
    
    5,551
    
    
    
    123
    
    
    
    Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    25,000
  52




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S1 CORPORATION
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Treasury Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Shares
    
    
    Amount
    
    
    Deficit
    
    
    Loss
    
    
    Equity
    
    
    Income (Loss)(in thousands, except share data)Balance at December 31, 2003
    
    
    749,064
    
    
    $
    10,000
    
    
    
    73,230,760
    
    
    $
    732
    
    
    $
    1,907,918
    
    
    
    (2,105,862
    )
    
    $
    (10,438
    )
    
    $
    (1,661,717
    )
    
    $
    (2,681
    )
    
    $
    243,814Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,570
    
    
    
    
    
    
    
    15,570
    
    
    
    15,570Change in cumulative foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    762
    
    
    
    762
    
    
    
    762Common stock issued upon the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    921,769
    
    
    
    10
    
    
    
    5,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,005
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,438,249
    )
    
    
    (11,155
    )
    
    
    
    
    
    
    
    
    
    
    (11,155
    )
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,332Balance at December 31, 2004
    
    
    749,064
    
    
    $
    10,000
    
    
    
    74,152,529
    
    
    $
    742
    
    
    $
    1,913,913
    
    
    
    (3,544,111
    )
    
    $
    (21,593
    )
    
    $
    (1,646,147
    )
    
    $
    (1,919
    )
    
    $
    254,996Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,057
    )
    
    
    
    
    
    
    (1,057
    )
    
    
    (1,057
    )Change in net unrealized gain on cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    118
    
    
    
    118Change in cumulative foreign currency translation
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (575
    )
    
    
    (575
    )
    
    
    (575
    )Realized gain on cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )
    
    
    Realized cumulative foreign currency translation
related to sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    619
    
    
    
    619
    
    
    
    Common stock issued upon the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    257,570
    
    
    
    2
    
    
    
    1,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,136
    
    
    
    Deferred stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (509,775
    )
    
    
    (3,407
    )
    
    
    
    
    
    
    
    
    
    
    (3,407
    )
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,514
    )Balance at December 31, 2005
    
    
    749,064
    
    
    $
    10,000
    
    
    
    74,410,099
    
    
    $
    744
    
    
    $
    1,915,617
    
    
    
    (4,053,886
    )
    
    $
    (25,000
    )
    
    $
    (1,647,204
    )
    
    $
    (1,771
    )
    
    $
    252,386Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,902
    
    
    
    
    
    
    
    17,902
    
    
    
    17,902Change in net unrealized gain (loss) on cash flow
hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (314
    )
    
    
    (314
    )
    
    
    (314
    )Change in cumulative foreign currency translation
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (525
    )
    
    
    (525
    )
    
    
    (525
    )Realized loss on cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    42
    
    
    
    Realized cumulative foreign currency translation
related to sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    (43
    )
    
    
    Common stock issued upon the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    1,410,949
    
    
    
    14
    
    
    
    5,337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,351
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,184
    
    
    
    Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (10,476,189
    )
    
    
    (105
    )
    
    
    (55,649
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55,754
    )
    
    
    Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (4,053,886
    )
    
    
    (40
    )
    
    
    (24,960
    )
    
    
    4,053,886
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,063Balance at December 31, 2006
    
    
    749,064
    
    
    $
    10,000
    
    
    
    61,290,973
    
    
    $
    613
    
    
    $
    1,845,529
    
    
    
    
    
    
    $
    
    
    
    $
    (1,629,302
    )
    
    $
    (2,611
    )
    
    $
    224,229
  53




---



##### Table of Contents



S1 CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2004, 2005 and 2006
 1. Business
     2. Summary of Significant Accounting Policies
 Basis of presentation
   54




---



##### Table of Contents



Use of estimates
  
    
    revenue recognition;
    
    estimation of our allowance for doubtful accounts and billing adjustments;
    
    valuation and recoverability of long-lived assets, including goodwill;
    
    valuation of acquired businesses;
    
    determination of technological feasibility and capitalization of software development costs;
    
    recognition of costs in connection with restructuring plans and merger-related activities;
    
    reserves for contingencies;
    
    valuation of stock based compensation; and
    
    income taxes.
 Financial instruments
      55




---



##### Table of Contents



Accounts receivable and allowance for doubtful accounts and billing adjustments
  Property and equipment
   Furniture and fixtures
    
    5 yearsComputer equipment (1)
    
    1.5 to 3 yearsSoftware
    
    3 years
 
 (1)
    
    Computer equipment under capital lease is depreciated over the
term of the lease agreement which approximates the equipments economic useful
life. Goodwill
   56




---



##### Table of Contents



Other long-lived assets
   Cost-basis and equity method investments
  Concentration of credit risk
    Revenue recognition, deferred revenues and cost of revenues
 Software license revenue.
 57




---



##### Table of Contents



Support and maintenance revenue.
 Professional services revenue.
 Data center revenue.
   Other revenue.
 58




---



##### Table of Contents



Deferred revenues
 Cost of revenues .
 Product development
  Restructuring and merger related costs
      59




---



##### Table of Contents



Interest, investment and other(expense) income, net
  For the year endedDecember 31,2004
    
    
    2005
    
    
    2006Interest and investment income
    
    $
    2,108
    
    
    $
    3,299
    
    
    $
    5,896Interest expense
    
    
    (584
    )
    
    
    (498
    )
    
    
    (543
    )Equity in net loss of affiliate
    
    
    (1,500
    )
    
    
    
    
    
    
    Other
    
    
    (1,539
    )
    
    
    (738
    )
    
    
    (424
    )Total
    
    $
    (1,515
    )
    
    $
    2,063
    
    
    $
    4,929
 Income taxes
  Stock-based compensation
    60




---



##### Table of Contents



2004
    
    
    2005
    
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    101.9
    %
    
    
    66.9
    %
    
    
    51.9
    %Risk-free interest rate
    
    
    3.6
    %
    
    
    4.3
    %
    
    
    4.7
    %Expected term
    
    4.0 years
    
    4.0 years
    
    4.0 years
  2006Expected dividend yield
    
    
    0
    %Expected volatility
    
    
    59.1
    %Risk-free interest rate
    
    
    4.6
    %Expected term
    
    4.9 years
 61




---



##### Table of Contents



2006Increase in loss from continuing operations
    
    $
    (4,420
    )Decrease in income from discontinued operations
    
    
    (154
    )Decrease in net income
    
    $
    (4,574
    )
   2004
    
    
    2005Net income (loss), as reported
    
    $
    15,570
    
    
    $
    (1,057
    )Add: Stock-based employee compensation expense
included in reported net income (loss), net of
related tax effects
    
    
    
    
    
    
    570Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (25,143
    )
    
    
    (13,070
    )Pro forma net loss
    
    $
    (9,573
    )
    
    $
    (13,557
    )Basic and diluted net income (loss) per share:As reported  basic
    
    $
    0.22
    
    
    $
    (0.02
    )As reported  diluted
    
    
    0.21
    
    
    
    (0.02
    )Pro forma  basic and diluted
    
    
    (0.14
    )
    
    
    (0.19
    )
   62




---



##### Table of Contents



2004
    
    
    2005
    
    
    2006Costs and expenses:Cost of professional services, support and maintenance
    
    $
    
    
    
    $
    
    
    
    $
    481Cost of data center
    
    
    
    
    
    
    
    
    
    
    76Selling and marketing
    
    
    
    
    
    
    
    
    
    
    1,575Product development
    
    
    
    
    
    
    
    
    
    
    978General and administrative
    
    
    
    
    
    
    
    
    
    
    1,874Merger related and restructuring costs
    
    
    
    
    
    
    570
    
    
    
    525Discontinued operations
    
    
    
    
    
    
    
    
    
    
    154Total stock-based compensation expense
    
    $
    
    
    
    $
    570
    
    
    $
    5,663
    63




---



##### Table of Contents



Net income (loss) per share
    Foreign currency translation
  Derivative financial instruments
  Comprehensive income (loss)
  Recent accounting pronouncements
  64




---



##### Table of Contents



3. Business Acquisitions
  65




---



##### Table of Contents



66




---



##### Table of Contents



Providus
    
    
    Mosaic
    
    
    X/Net
    
    
    vMokshaCurrent assets
    
    $
    
    
    
    $
    10,553
    
    
    $
    18
    
    
    $
    87Property and equipment
    
    
    32
    
    
    
    594
    
    
    
    
    
    
    
    433Other non-current assets
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    Developed technology (1)
    
    
    500
    
    
    
    6,100
    
    
    
    600
    
    
    
    Customer relationship assets (2)
    
    
    100
    
    
    
    4,900
    
    
    
    200
    
    
    
    Goodwill (3)
    
    
    348
    
    
    
    34,136
    
    
    
    4,008
    
    
    
    888Current liabilities
    
    
    (123
    )
    
    
    (4,537
    )
    
    
    (743
    )
    
    
    (210
    )Non-current liabilities
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    Total purchase price
    
    $
    857
    
    
    $
    51,985
    
    
    $
    4,083
    
    
    $
    1,198
 
 (1)
    
    Developed technology for Mosaic, X/Net and Providus have an estimated useful life of
five years.(2)
    
    Customer relationship asset for Mosaic has a useful life of ten years and for X/Net
and Providus, it has an estimated useful life of five years.(3)
    
    Goodwill for Mosaic includes $14.0 million of consideration, paid in 2006 as earned
contingent consideration.  4. Discontinued Operations
    67




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##### Table of Contents



Year Ended December 31,2004(1)
    
    
    2005
    
    
    2006(2)RevenuesDavidge
    
    $
    5,650
    
    
    $
    
    
    
    $
    Edify
    
    
    36,848
    
    
    
    34,085
    
    
    
    Risk and Compliance
    
    
    21,198
    
    
    
    24,927
    
    
    
    12,434Pretax (loss) income from discontinued operations:Davidge
    
    $
    (1,148
    )
    
    $
    (31
    )
    
    $
    Edify
    
    
    618
    
    
    
    1,658
    
    
    
    Risk and Compliance
    
    
    2,577
    
    
    
    2,366
    
    
    
    (1,947
    )Gain on disposal of Davidge
    
    
    9,254
    
    
    
    
    
    
    
    Gain on disposal of Edify
    
    
    
    
    
    
    24,985
    
    
    
    457Gain on disposal of Risk and Compliance
    
    
    
    
    
    
    
    
    
    
    31,597Income tax (expense) benefit
    
    
    (1,127
    )
    
    
    (1,653
    )
    
    
    34Income from discontinued operations
    
    $
    10,174
    
    
    $
    27,325
    
    
    $
    30,141
 
 (1)
    
    For Davidge, ten months ended October 31, 2004 prior to sale(2)
    
    For Risk and Compliance, approximately seven and a half months ended August 10,
2006 prior to sale.  August 10,
    
    
    December 31,2006
    
    
    2005Current assets
    
    $
    8,373
    
    
    $
    8,605Property and equipment, net
    
    
    1,075
    
    
    
    525Other non-current assets
    
    
    142
    
    
    
    274Intangible assets
    
    
    480
    
    
    
    Goodwill
    
    
    1,558
    
    
    
    4,886Current liabilities
    
    
    (7,557
    )
    
    
    (10,601
    )Long term tax liabilities
    
    
    (560
    )
    
    
    Net assets of discontinued operations
    
    $
    3,511
    
    
    $
    3,689
  2004
    
    
    2005(in thousands)Continuing operations
    
    $
    164
    
    
    $
    120Discontinued operations
    
    
    1,994
    
    
    
    1,633
 68




---



##### Table of Contents



5. Investments
  6. Accounts Receivable
  7. Property and Equipment
   December 31,2005
    
    
    2006(in thousands)Leasehold improvements
    
    $
    5,749
    
    
    $
    3,162Furniture and fixtures
    
    
    4,827
    
    
    
    3,112Computer equipment
    
    
    20,778
    
    
    
    23,626Software
    
    
    10,056
    
    
    
    7,66841,410
    
    
    
    37,568Accumulated depreciation and amortization
    
    
    (30,059
    )
    
    
    (25,431
    )$
    11,351
    
    
    $
    12,137
 8. Goodwill and Other Intangible Assets
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(in thousands)Purchased and acquired technology
    
    $
    19,489
    
    
    $
    (13,553
    )Customer relationships
    
    
    12,000
    
    
    
    (5,033
    )Total
    
    $
    31,489
    
    
    $
    (18,586
    )
 69




---



##### Table of Contents



2007
    
    2008
    
    2009
    
    2010
    
    2011Enterprise
    
    $
    662
    
    
    $
    85
    
    
    $
    
    
    
    $
    
    
    
    $
    Postilion
    
    
    3,328
    
    
    
    3,081
    
    
    
    2,200
    
    
    
    1,090
    
    
    
    1,038
  Risk andEnterprise
    
    
    Postilion
    
    
    Compliance
    
    
    Total(In thousands)Balance, December 31, 2005
    
    $
    37,819
    
    
    $
    86,431
    
    
    $
    1,558
    
    
    $
    125,808Additional consideration
    
    
    
    
    
    
    1,100
    
    
    
    
    
    
    
    1,100Utilization of acquisition related
income tax benefits
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )Sale of Risk and Compliance
    
    
    
    
    
    
    
    
    
    
    (1,558
    )
    
    
    (1,558
    )Balance, December 31, 2006
    
    $
    37,769
    
    
    $
    87,531
    
    
    $
    
    
    
    $
    125,300
 9. Derivative Financial Instruments
     70




---



##### Table of Contents



Year EndedDecember 31, 2006Accumulated derivative net gain as of January 1, 2006
    
    $
    104Net change in fair value of derivatives
    
    
    (314
    )Net losses reclassified from AOCI into earnings
    
    
    42Accumulated derivative net loss as of December 31, 2006
    
    $
    (168
    )
  10. Restructuring and Merger Related Costs
  2004
    
    
    2005
    
    
    2006(in thousands)Merger related costs
    
    $
    
    
    
    $
    
    
    
    $
    (2,000
    )Restructuring costs
    
    
    
    
    
    
    15,030
    
    
    
    14,485Total
    
    $
    
    
    
    $
    15,030
    
    
    $
    12,485
 Pre-2003 Restructuring Plans
   Personnel Costs
    
    
    Lease Costs
    
    
    Other
    
    
    TotalBalance, December 31, 2003
    
    $
    944
    
    
    $
    10,312
    
    
    $
    518
    
    
    $
    11,774Amounts utilized through December 31, 2004
    
    
    (488
    )
    
    
    (2,989
    )
    
    
    (171
    )
    
    
    (3,648
    )Change in estimate
    
    
    (456
    )
    
    
    803
    
    
    
    (347
    )
    
    
    Balance, December 31, 2004
    
    
    
    
    
    
    8,126
    
    
    
    
    
    
    
    8,126Amounts utilized through December 31, 2005
    
    
    
    
    
    
    (3,245
    )
    
    
    
    
    
    
    (3,245
    )Change in estimate
    
    
    
    
    
    
    1,113
    
    
    
    
    
    
    
    1,113Sale of Edify business
    
    
    
    
    
    
    (194
    )
    
    
    
    
    
    
    (194
    )Balance, December 31, 2005
    
    
    
    
    
    
    5,800
    
    
    $
    
    
    
    $
    5,800Amounts utilized through December 31, 2006
    
    
    
    
    
    
    (1,248
    )
    
    
    
    
    
    
    (1,248
    )Change in estimate
    
    
    
    
    
    
    609
    
    
    
    
    
    
    
    609Balance at December 31, 2006
    
    $
    
    
    
    $
    5,161
    
    
    $
    
    
    
    $
    5,161
 71




---



##### Table of Contents



2005 Restructuring Plan
   Personnel Costs
    
    
    Lease Costs
    
    
    Other
    
    
    Total2005 restructuring charge
    
    $
    8,037
    
    
    $
    5,104
    
    
    $
    776
    
    
    $
    13,917Amounts utilized through December 31, 2005
    
    
    (3,402
    )
    
    
    (54
    )
    
    
    (776
    )
    
    
    (4,232
    )Balance, December 31, 2005
    
    
    4,635
    
    
    
    5,050
    
    
    $
    
    
    
    $
    9,6852006 restructuring charge
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    333Amounts utilized through December 31, 2006
    
    
    (4,308
    )
    
    
    (2,860
    )
    
    
    
    
    
    
    (7,168
    )Change in estimate
    
    
    
    
    
    
    1,455
    
    
    
    
    
    
    
    1,455Balance at December 31, 2006
    
    $
    660
    
    
    $
    3,645
    
    
    $
    
    
    
    $
    4,305
 2006 Restructuring Plan
   Personnel Costs
    
    
    Lease Costs
    
    
    Other
    
    
    Total2006 restructuring charge
    
    $
    5,504
    
    
    $
    5,805
    
    
    $
    779
    
    
    $
    12,088Amounts utilized through December 31, 2006
    
    
    (1,486
    )
    
    
    189
    
    
    
    (779
    )
    
    
    (2,076
    )Balance, December 31, 2006
    
    $
    4,018
    
    
    $
    5,994
    
    
    $
    
    
    
    $
    10,012
 72




---



##### Table of Contents



Merger Related Costs
  11. Accrued Other Expenses
  December 31,2005
    
    
    2006(in thousands)Accrued service fees payable
    
    $
    1,974
    
    
    $
    1,975Accrued for merger related costs
and costs related to the
disposal of a business
    
    
    6,115
    
    
    
    1,135Sales and income taxes payable
    
    
    1,838
    
    
    
    1,520Accrued contract losses
    
    
    2,313
    
    
    
    2,830Other
    
    
    5,347
    
    
    
    5,341$
    17,587
    
    
    $
    12,801
 12. Commitments and Contingencies
 Lease commitments
   Operating Lease
    
    
    Sublease
    
    
    Net LeaseCommitments
    
    
    Income
    
    
    Commitments2007
    
    $
    11,925
    
    
    $
    (2,111
    )
    
    $
    9,8142008
    
    
    11,371
    
    
    
    (2,033
    )
    
    
    9,3382009
    
    
    9,430
    
    
    
    (1,885
    )
    
    
    7,5452010
    
    
    8,064
    
    
    
    (1,824
    )
    
    
    6,2402011
    
    
    5,001
    
    
    
    (1,198
    )
    
    
    3,803Thereafter
    
    
    5,346
    
    
    
    
    
    
    
    5,346$
    51,137
    
    
    $
    (9,051
    )
    
    $
    42,806
  73




---



##### Table of Contents



2007
    
    $
    3,2582008
    
    
    2,6602009
    
    
    1,376$
    7,294Less amount representing interest
    
    
    (487
    )6,807Less current portion
    
    
    (2,942
    )Long-term capital lease obligations
    
    $
    3,865
 Contractual commitments
   Guarantees
  Sale-Leaseback Transaction
  74




---



##### Table of Contents



Litigation
   13. Income Taxes
  2004
    
    
    2005
    
    
    2006(in thousands)U.S. operations
    
    $
    13,944
    
    
    $
    (15,937
    )
    
    $
    (5,417
    )Foreign operations
    
    
    (7,584
    )
    
    
    (12,329
    )
    
    
    (5,544
    )$
    6,360
    
    
    $
    (28,266
    )
    
    $
    (10,961
    )
  2004
    
    
    2005
    
    
    2006(in thousands)Current:Federal
    
    $
    359
    
    
    $
    (21
    )
    
    $
    158Foreign
    
    
    462
    
    
    
    (361
    )
    
    
    386State
    
    
    143
    
    
    
    127
    
    
    
    734Total current
    
    $
    964
    
    
    $
    (255
    )
    
    $
    1,278Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    Foreign
    
    
    
    
    
    
    371
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    $
    
    
    
    $
    371
    
    
    $
    Total income tax expense
    
    $
    964
    
    
    $
    116
    
    
    $
    1,278
  2004
    
    
    2005
    
    
    2006(in thousands)Income taxes (benefit) expense at federal statutory rate of 35%
    
    $
    2,226
    
    
    $
    (9,893
    )
    
    $
    (3,836
    )State income tax (benefit) expense, net of federal benefit
    
    
    93
    
    
    
    (140
    )
    
    
    477(Decrease) increase in valuation allowance related to
current year operations
    
    
    (1,713
    )
    
    
    6,427
    
    
    
    3,932Foreign operations tax rate differences
    
    
    228
    
    
    
    73
    
    
    
    4Other foreign taxes
    
    
    
    
    
    
    
    
    
    
    315Other permanent items
    
    
    130
    
    
    
    3,649
    
    
    
    386Income tax expense
    
    $
    964
    
    
    $
    116
    
    
    $
    1,278
 75




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##### Table of Contents



2005
    
    
    2006(in thousands)Deferred income tax assets:Net operating loss carryforwards
    
    $
    154,009
    
    
    $
    119,754Equity in net loss of affiliate
    
    
    20,299
    
    
    
    20,299Accrued expenses
    
    
    7,887
    
    
    
    4,129Deferred revenue
    
    
    8,080
    
    
    
    10,295Tax credit carryforwards
    
    
    6,553
    
    
    
    6,663Restructuring
    
    
    5,548
    
    
    
    6,797Property and equipment depreciation
    
    
    1,626
    
    
    
    702Other
    
    
    509
    
    
    
    645Total gross deferred income tax assets
    
    
    204,511
    
    
    
    169,284Valuation allowance for deferred income tax assets
    
    
    (199,173
    )
    
    
    (165,576
    )Total deferred income tax assets
    
    
    5,338
    
    
    
    3,708Deferred income tax liabilities:Identifiable intangibles
    
    
    5,338
    
    
    
    3,643Other
    
    
    
    
    
    
    65Total gross deferred income tax liabilities
    
    
    5,338
    
    
    
    3,708Net deferred income taxes
    
    $
    
    
    
    $
    Included in:Other current assets
    
    $
    418
    
    
    $
    423Other liabilities
    
    
    (418
    )
    
    
    (423
    )Net deferred income taxes
    
    $
    
    
    
    $
    
    76




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##### Table of Contents



14. Convertible Preferred Stock
   
    
    any amendment to any charter provision that would change the specific terms of that
series which would adversely affect the rights of the holders of that series, and
    
    the merger or consolidation of S1 with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of the properties or business of S1 in
exchange for securities of another corporation if series B is to be exchanged for
securities of such other corporation and if the terms of such securities are less favorable
in any respect.
  77




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##### Table of Contents



15. Equity Transactions
   16. Stock Option Plans
  Stock Option Activity
  Weighted-Weighted-
    
    
    average
    
    
    Aggregateaverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Contractual
    
    
    Value(000)
    
    
    Price
    
    
    Life
    
    
    ($000)Outstanding at December 31, 2005
    
    
    14,932
    
    
    $
    9.40Granted
    
    
    1,892
    
    
    
    4.79Exercised
    
    
    (1,411
    )
    
    
    3.79
    
    
    
    
    
    
    $
    1,513Forfeited/canceled
    
    
    (5,636
    )
    
    
    9.01Outstanding at December 31, 2006
    
    
    9,777
    
    
    $
    9.54
    
    
    
    4.85
    
    
    $
    4,718Exercisable at December 31, 2006
    
    
    6,566
    
    
    $
    11.79
    
    
    
    2.77
    
    
    $
    1,981
  78




---



##### Table of Contents



Non-Vested
    
    
    Weighted-Number of
    
    
    averageShares
    
    
    Grant-Date(000)
    
    
    Fair ValueNon-vested balance at December 31, 2005
    
    
    4,339
    
    
    $
    3.73Granted
    
    
    1,892
    
    
    $
    2.75Canceled
    
    
    (1,406
    )
    
    $
    3.39Vested
    
    
    (1,614
    )
    
    $
    4.37Non-vested balance at December 31, 2006
    
    
    3,211
    
    
    $
    2.98
   Options OutstandingWeighted-
    
    
    
    
    
    
    Options Exercisableaverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    Remaining
    
    
    average
    
    
    Number
    
    
    averageOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable
    
    
    ExerciseRange of Exercise Price

    
    (000)
    
    
    Life
    
    
    Price
    
    
    (000)
    
    
    Price$
    0.95   4.00
    
    
    
    552
    
    
    
    5.1
    
    
    $
    3.52
    
    
    
    426
    
    
    $
    3.484.01   5.00
    
    
    
    3,328
    
    
    
    8.5
    
    
    
    4.47
    
    
    
    839
    
    
    
    4.265.01   7.00
    
    
    
    790
    
    
    
    5.3
    
    
    
    5.77
    
    
    
    546
    
    
    
    6.037.01   8.50
    
    
    
    1,731
    
    
    
    3.1
    
    
    
    8.00
    
    
    
    1,495
    
    
    
    8.048.51  11.00
    
    
    
    578
    
    
    
    4.5
    
    
    
    9.35
    
    
    
    462
    
    
    
    9.4111.01  15.00
    
    
    
    448
    
    
    
    1.5
    
    
    
    13.71
    
    
    
    448
    
    
    
    13.7115.01  20.00
    
    
    
    2,102
    
    
    
    1.5
    
    
    
    16.79
    
    
    
    2,102
    
    
    
    16.7920.01  97.44
    
    
    
    248
    
    
    
    2.2
    
    
    
    45.30
    
    
    
    248
    
    
    
    45.300.95  97.44
    
    
    
    9,777
    
    
    
    4.9
    
    
    $
    9.54
    
    
    
    6,566
    
    
    $
    11.79
  79




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##### Table of Contents



Restricted Stock Activity
  Weighted-average
    
    
    AggregateRemaining
    
    
    IntrinsicShares
    
    
    Contractual
    
    
    Value(000)
    
    
    Life
    
    
    ($000)Outstanding at December 31, 2005
    
    
    Granted
    
    
    167Exercised
    
    
    Forfeited/canceled
    
    
    Outstanding at December 31, 2006
    
    
    167
    
    
    
    9.85
    
    
    $
    919Expected to Vest
    
    
    167
    
    
    
    9.85
    
    
    $
    919
  Stock Appreciation Rights Activity
  Weighted-Weighted-
    
    
    average
    
    
    Aggregateaverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Contractual
    
    
    Value(000)
    
    
    Price
    
    
    Life
    
    
    ($000)Outstanding at December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    1,970
    
    
    
    4.87Exercised
    
    
    
    
    
    
    Forfeited/canceled
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    1,970
    
    
    $
    4.87
    
    
    
    9.85
    
    
    $
    1,265Exercisable at December 31, 2006
    
    
    
    
    
    $
    
  80




---



##### Table of Contents



Non-VestedNumber of
    
    
    Weighted-Shares
    
    
    average(000)
    
    
    Fair ValueNon-vested balance at December 31, 2005
    
    
    Granted
    
    
    1,970
    
    
    $
    2.65Canceled
    
    
    Vested
    
    
    Non-vested balance at December 31, 2006
    
    
    1,970
    
    
    $
    2.97
   SARs OutstandingWeighted-
    
    
    
    
    
    
    SARs Exercisableaverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    Remaining
    
    
    average
    
    
    Number
    
    
    averageOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable
    
    
    ExerciseExercise Price
    
    (000)
    
    
    Life
    
    
    Price
    
    
    (000)
    
    
    Price4.86
    
    
    1,863
    
    
    
    9.84
    
    
    $
    4.86
    
    
    
    
    
    
    $
    5.01
    
    
    107
    
    
    
    9.97
    
    
    
    5.01
    
    
    
    
    
    
    
    4.86  5.01
    
    
    1,970
    
    
    
    9.85
    
    
    $
    4.87
    
    
    
    
    
    
    $
    
 17. Retirement Savings Plan
 
 18. Segment Reporting, Geographic Disclosures and Major Customers
   81




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##### Table of Contents



Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    Total(in thousands)Year Ended December 31, 2004:Enterprise
    
    $
    11,836
    
    
    $
    12,510
    
    
    $
    65,542
    
    
    $
    15,076
    
    
    $
    129
    
    
    $
    105,093Postilion
    
    
    18,462
    
    
    
    26,648
    
    
    
    10,533
    
    
    
    22,279
    
    
    
    2,141
    
    
    
    80,063Total
    
    $
    30,298
    
    
    $
    39,158
    
    
    $
    76,075
    
    
    $
    37,355
    
    
    $
    2,270
    
    
    $
    185,156Year Ended December 31, 2005:Enterprise
    
    $
    7,798
    
    
    $
    16,663
    
    
    $
    49,520
    
    
    $
    16,538
    
    
    $
    1,594
    
    
    $
    92,113Postilion
    
    
    19,538
    
    
    
    27,626
    
    
    
    15,825
    
    
    
    23,462
    
    
    
    576
    
    
    
    87,027Total
    
    $
    27,336
    
    
    $
    44,289
    
    
    $
    65,345
    
    
    $
    40,000
    
    
    $
    2,170
    
    
    $
    179,140Year Ended December 31, 2006:Enterprise
    
    $
    9,408
    
    
    $
    14,333
    
    
    $
    54,865
    
    
    $
    21,131
    
    
    $
    517
    
    
    $
    100,254Postilion
    
    
    20,380
    
    
    
    29,761
    
    
    
    15,432
    
    
    
    25,725
    
    
    
    758
    
    
    
    92,056Total
    
    $
    29,788
    
    
    $
    44,094
    
    
    $
    70,297
    
    
    $
    46,856
    
    
    $
    1,275
    
    
    $
    192,310
  Year Ended December 31, 2004Enterprise
    
    
    Postilion
    
    
    Total(in thousands)Revenues
    
    $
    105,093
    
    
    $
    80,063
    
    
    $
    185,156Operating expenses:Direct costs
    
    
    52,462
    
    
    
    26,948
    
    
    
    79,410Selling and marketing
    
    
    16,453
    
    
    
    6,034
    
    
    
    22,487Product development
    
    
    29,273
    
    
    
    11,813
    
    
    
    41,086General and administrative
    
    
    13,744
    
    
    
    10,663
    
    
    
    24,407Depreciation
    
    
    6,929
    
    
    
    2,084
    
    
    
    9,013Amortization of other intangible assets
    
    
    180
    
    
    
    698
    
    
    
    878Total operating expenses
    
    
    119,041
    
    
    
    58,240
    
    
    
    177,281Segment operating (loss) income
    
    $
    (13,948
    )
    
    $
    21,823
    
    
    $
    7,875
 82




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##### Table of Contents



Year Ended December 31, 2005Enterprise
    
    
    Postilion
    
    
    Total(in thousands)Revenues
    
    $
    92,113
    
    
    $
    87,027
    
    
    $
    179,140Operating expenses:Direct costs
    
    
    58,124
    
    
    
    31,608
    
    
    
    89,732Selling and marketing
    
    
    14,684
    
    
    
    13,457
    
    
    
    28,141Product development
    
    
    27,312
    
    
    
    13,083
    
    
    
    40,395General and administrative
    
    
    15,569
    
    
    
    10,429
    
    
    
    25,998Restructuring costs
    
    
    8,250
    
    
    
    6,780
    
    
    
    15,030Depreciation
    
    
    5,794
    
    
    
    3,068
    
    
    
    8,862Amortization of other intangible assets
    
    
    164
    
    
    
    1,147
    
    
    
    1,311Total operating expenses
    
    
    129,897
    
    
    
    79,572
    
    
    
    209,469Segment operating (loss) income
    
    $
    (37,784
    )
    
    $
    7,455
    
    
    $
    (30,329
    )
 Year Ended December 31, 2006Enterprise
    
    
    Postilion
    
    
    Total(in thousands)Revenues
    
    $
    100,254
    
    
    $
    92,056
    
    
    $
    192,310Operating expenses:Direct costs
    
    
    56,278
    
    
    
    36,998
    
    
    
    93,276Selling and marketing
    
    
    12,626
    
    
    
    15,032
    
    
    
    27,658Product development
    
    
    23,968
    
    
    
    14,969
    
    
    
    38,937General and administrative
    
    
    13,901
    
    
    
    12,793
    
    
    
    26,694Restructuring costs
    
    
    9,018
    
    
    
    3,467
    
    
    
    12,485Depreciation
    
    
    5,107
    
    
    
    2,733
    
    
    
    7,840Amortization of other intangible assets
    
    
    180
    
    
    
    1,130
    
    
    
    1,310Total operating expenses
    
    
    121,078
    
    
    
    87,122
    
    
    
    208,200Segment operating (loss) income
    
    $
    (20,824
    )
    
    $
    4,934
    
    
    $
    (15,890
    )
    83




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##### Table of Contents



19. Related Party Transactions
 Yodlee, Inc.
  
    
    a sales representation (and OEM) agreement;
    
    a data center agreement; and
    
    a facilities sublease, which expired in 2001.
   84




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##### Table of Contents



20. Net Income (Loss) Per Share
    2004
    
    
    2005
    
    
    2006(in thousands, except per share data)Basic earnings (loss) per share:Earnings (loss) from continuing operations
    
    $
    5,396
    
    
    $
    (28,382
    )
    
    $
    (12,239
    )Amount allocated to participating preferred stockholders
    
    
    81
    
    
    
    
    
    
    
    Income (loss) from continuing
operations available to common stockholders  basic
    
    $
    5,315
    
    
    $
    (28,382
    )
    
    $
    (12,239
    )Weighted average common shares outstanding
    
    
    70,613
    
    
    
    70,359
    
    
    
    70,780Basic (loss) earnings from continuing operations per share
    
    $
    0.08
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )Diluted earnings (loss) per share:Earnings (loss) from continuing operations
    
    $
    5,396
    
    
    $
    (28,382
    )
    
    $
    (12,239
    )Amount allocated to participating preferred stockholders
    
    
    81
    
    
    
    
    
    
    
    Income (loss) from continuing operations
available to common stockholders  diluted
    
    $
    5,315
    
    
    $
    (28,382
    )
    
    $
    (12,239
    )Weighted average common shares outstanding
    
    
    70,613
    
    
    
    70,359
    
    
    
    70,780Weighted average effect of common stock equivalents:Stock options
    
    
    2,517
    
    
    
    922
    
    
    
    343Convertible preferred stock
    
    
    
    
    
    
    1,070
    
    
    
    1,070Weighted average diluted shares outstanding
    
    
    73,130
    
    
    
    72,351
    
    
    
    72,193Diluted earnings from continuing operations per share
    
    $
    0.07
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )
 85




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##### Table of Contents



21. Quarterly Financial Information (Unaudited)
  Three Months EndedMar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,
    
    
    Mar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006(in thousands, except per share data)Revenues
    
    $
    49,526
    
    
    $
    47,491
    
    
    $
    42,448
    
    
    $
    39,675
    
    
    $
    43,440
    
    
    $
    46,739
    
    
    $
    51,896
    
    
    $
    50,235Cost of revenues (1)
    
    
    21,666
    
    
    
    21,552
    
    
    
    21,969
    
    
    
    24,545
    
    
    
    21,452
    
    
    
    22,715
    
    
    
    24,470
    
    
    
    24,639Operating income (loss)
    
    
    485
    
    
    
    (1,142
    )
    
    
    (9,239
    )
    
    
    (20,433
    )
    
    
    (1,622
    )
    
    
    (1,861
    )
    
    
    869
    
    
    
    (13,276
    )Income (loss) from continuing operations
    
    
    313
    
    
    
    (283
    )
    
    
    (8,605
    )
    
    
    (19,807
    )
    
    
    (804
    )
    
    
    (1,084
    )
    
    
    1,893
    
    
    
    (12,244
    )Income loss) from discontinued
operations, net of tax
    
    
    407
    
    
    
    2,599
    
    
    
    1,109
    
    
    
    23,210
    
    
    
    360
    
    
    
    (1,027
    )
    
    
    31,452
    
    
    
    (644
    )Net income (loss)
    
    
    720
    
    
    
    2,316
    
    
    
    (7,496
    )
    
    
    3,403
    
    
    
    (444
    )
    
    
    (2,111
    )
    
    
    33,345
    
    
    
    (12,888
    )Earnings (loss) per share:Basic:Continuing operations
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.12
    )
    
    $
    (0.28
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.17
    )Discontinued operations
    
    
    0.01
    
    
    
    0.04
    
    
    
    0.01
    
    
    
    0.33
    
    
    
    0.00
    
    
    
    (0.01
    )
    
    
    0.44
    
    
    
    (0.01
    )Net income (loss) per common share  basic
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    (0.11
    )
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.47
    
    
    
    (0.18
    )Diluted:Continuing operations
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.12
    )
    
    $
    (0.28
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.17
    )Discontinued operations
    
    
    0.01
    
    
    
    0.04
    
    
    
    0.01
    
    
    
    0.33
    
    
    
    0.00
    
    
    
    (0.01
    )
    
    
    0.44
    
    
    
    (0.01
    )Net income (loss) per common share  diluted
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.47
    
    
    $
    (0.18
    )
 
 (1)
    
    Cost of revenues is derived from our statements of operations as the sum of cost of software
licenses, cost of professional services, support and maintenance, cost of data center and cost
of other revenue. Cost of revenues exclude charges for depreciation of property and equipment. 22.
Subsequent Events
  86




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Schedule II
 VALUATION AND QUALIFYING ACCOUNTS
 
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 Balance
    
    Additionsat
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atbeginning
    
    costs and
    
    other
    
    
    
    
    
    end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    period(in thousands)Year ended December 31, 2004:Allowance for doubtful accounts
    
    $
    5,106
    
    
    
    421
    
    
    
    775
    
    
    
    (1,597
    )
    
    $
    4,705Valuation allowance for deferred taxes
    
    $
    217,889
    
    
    
    (3,467
    )
    
    
    (8,181
    )
    
    
    
    
    
    $
    206,241Year ended December 31, 2005Allowance for doubtful accounts
    
    $
    4,705
    
    
    
    5,152
    
    
    
    
    
    
    
    (4,047
    )
    
    $
    5,810Valuation allowance for deferred taxes
    
    $
    206,241
    
    
    
    5,863
    
    
    
    (12,931
    )
    
    
    
    
    
    $
    199,173Year ended December 31, 2006:Allowance for doubtful accounts
    
    $
    5,810
    
    
    
    1,301
    
    
    
    
    
    
    
    ( 2,862
    )
    
    $
    4,249Valuation allowance for deferred taxes
    
    $
    199,173
    
    
    
    3,932
    
    
    
    (37,529
    )
    
    
    
    
    
    $
    165,576
 87




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
  Managements Report on Internal Control Over Financial Reporting .
    
 Item 9B. Other Information.
  88




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
    
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions and Directors Independence.
  
 Item 14. Principal Accountant Fees and Services.
  89




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
    ExhibitNo.
    
    Exhibit Description3.1
    
    Amended and Restated Certificate of Incorporation of S1 Corporation (S1) (filed as
Exhibit 1 to S1s Registration Statement on Form 8-A filed with the Securities and Exchange
Commission (the SEC) on September 30, 1998 and incorporated herein by reference).3.2
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
June 3, 1999 (filed as Exhibit 4.2 to S1s Registration Statement on Form S-8 (File No.
333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference).3.3
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
November 10, 1999 (filed as Exhibit 3.3 to S1s Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 and incorporated herein by reference).3.4
    
    Certificate of Designation for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 2 to S1s Registration Statement on Form 8-A filed with the SEC on September 30, 1998
and incorporated herein by reference).3.5
    
    Amended and Restated Bylaws of S1, as amended (filed as Exhibit 3.6 to S1s Amended Annual
Report on Form 10-K/A filed with the SEC on May 30, 2006 and incorporated herein by
reference).4.1
    
    Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference).4.2
    
    Specimen certificate for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 4.3 to S1s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).
 90




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##### Table of Contents



ExhibitNo.
    
    Exhibit Description10.1
    
    Stock Purchase Agreement, dated as of June 29, 1998, by and among SFNB, S1 and State Farm
Mutual Automobile Insurance Company (filed as Exhibit 10.4 to Pre-Effective Amendment No. 2 to
the S1s Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC on August
21, 1998 and incorporated herein by reference).10.2
    
    Security First Technologies Corporation Amended and Restated 1995 Stock Option Plan (filed as
Appendix Bto S1s definitive proxy statement for S1s 1999 annual meeting of shareholders and
incorporated herein by reference).*10.3
    
    Amendment to Security First Technologies Corporation Amended and Restated 1995 Stock Option
Plan (filed as Exhibit 10.3 to S1s Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000
and incorporated herein by reference).*10.4
    
    Security First Network Bank Amended and Restated Directors Stock Option Plan (filed as
Exhibit 10.2 to Pre-Effective Amendment No. 2 to S1s Registration Statement on Form S-4 (File
No. 333-56181) filed with the SEC on August 21, 1998 and incorporated herein by reference).*10.5
    
    Amendment to Security First Network Bank Amended and Restated Directors Stock Option Plan
(filed as Exhibit 10.1 to S1s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000 and incorporated herein by reference).*10.6
    
    Security First Technologies Corporation 1998 Directors Stock Option Plan (filed as Exhibit
10.3 to Pre-Effective Amendment No. 1 to S1s Registration Statement on Form S-4 (File No.
333-56181) filed with the SEC on July 30, 1998 and incorporated herein by reference).*10.7
    
    Amendment to Security First Technologies Corporation 1998 Directors Stock Option Plan (filed
as Exhibit 10.2 to S1s Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000 and incorporated herein by reference).*10.8
    
    Employment Agreement, entered into as of October 5, 2001, by and between S1 and Matthew Hale
(filed as Exhibit 10.36 to S1s Annual Report on Form 10-K for the fiscal year ended December
31, 2001 and incorporated herein by reference).*10.9
    
    Employment Agreement, entered into as of April 27, 2001, by and between S1 and Jaime
Ellertson (filed as Exhibit 10.1 to S1s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2002 and incorporated herein by reference).*10.10
    
    Employment Agreement, entered into as of April 30, 2001, by and between S1 and James Mahan
(filed as Exhibit 10.2 to S1s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2002 and incorporated herein by reference).*10.11
    
    S1 Corporation 2003 Stock Option Plan (filed as Attachment A to S1s Definitive Proxy
Statement on Schedule 14A filed with the SEC on April 18,2003 and incorporated herein by
reference).*10.12
    
    Stock Purchase Agreement By and Among S1 Corporation, Davidge Data Systems Corp. and GL
Consultants, Inc. Dated as of October 20, 2004 (filed as Exhibit 99 to S1s Current Report on
Form 8-K filed with the SEC on October 25, 2004 and incorporated herein by reference).10.13
    
    Share Purchase Agreement, dated November 6, 2004, among several persons listed in Schedule I
thereto and S1 Corporations (filed as Exhibit 2.1 to S1s Current Report on Form 8-K filed
with the SEC on November 16, 2004 and incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Exhibit Description10.14
    
    Agreement and Plan of Merger By and Among S1 Corporation, Edify Corporation, Edify Holding
Company, Inc., Intervoice, Inc., and Arrowhead I, Inc., dated as of November 18, 2005 (filed
as Exhibit 2.1 to S1s Current Report on Form 8-K filed with the SEC on January 4, 2006 and
incorporated herein by reference).10.15
    
    Settlement Agreement By and between S1 Corporation, and Ramius Group, dated as of March 3,
2006 (filed as Exhibit 10.1 to S1s Current Report on Form 8-K filed with the SEC on March
9,2006 and incorporated herein by reference).10.16
    
    Master Software Development and Consulting Services Agreement between S1 Corporation and
State Farm, dated as of March 31, 2000 (filed as Exhibit 10.18 to S1s Amended Annual Report
on Form 10-K/A filed with the SEC on July 26, 2006 and incorporated herein by reference).10.17
    
    Change in Control  Severance Plan, dated as of May 3, 2000 (filed as Exhibit 10.1 to S1s
Quarterly Report on Form 10-Q filed with the SEC on August 8, 2006 and incorporated herein by
reference).10.18
    
    Purchase Agreement By and between Financial Information Consulting Services Group NV, S1
Corporation, and CETP FRS S.a.r.l., dated as of August 9, 2006 (filed as Exhibit 2.1 to S1s
Current Report on Form 8-K filed with the SEC on August 14, 2006 and incorporated herein by
reference).10.19
    
    Separation Agreement, entered into as of November 9, 2006, by and between S1 and James S.
Mahan, III (filed as Exhibit 10.1 to S1s Current Report on Form 8-K filed with the SEC on
November 13, 2006 and incorporated herein by reference).*10.20
    
    Form of Indemnification Agreement, executed by Johann Dreyer, Thomas P. Johnson, Jr., Ram
Gupta, M. Douglas Ivester, Jeffrey Smith, Gregory J. Owens, John W. Spiegel and Richard P.
Dobb on November 13, 2006 (filed as Exhibit 10 to S1s Current Report on Form 8-K filed with
the SEC on November 14, 2006 and incorporated herein by reference).10.21
    
    Separation Agreement, entered into as of November 29, 2006, by and between S1 and Matt Hale
(filed as Exhibit 10.1 to S1s Current Report on Form 8-K filed with the SEC on November 30,
2006 and incorporated herein by reference).*10.22
    
    Agreement, entered into as of November 30, 2006, by and between S1 and John A. Stone (filed
as Exhibit 10.2 to S1s Current Report on Form 8-K filed with the SEC on November 30, 2006 and
incorporated herein by reference).*10.23
    
    Employment Agreement, entered into as of December 18, 2006, by and between S1 and Johann
Dreyer (filed as Exhibit 10.1 to S1s Current Report on Form 8-K filed with the SEC on
December 21, 2006 and incorporated herein by reference).*10.24
    
    Separation Agreement, dated of May 26, 2006, by and between S1 and Jaime Ellertson.*10.25
    
    Description of Arrangement for Directors Fees.21
    
    Subsidiaries of   S1.23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certificate of Chief Executive Officer
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##### Table of Contents



ExhibitNo.
    
    Exhibit Description31.2
    
    Certificate of Chief Financial Officer32.1
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes -Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes -Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan. 93




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##### Table of Contents



SIGNATURES
  S1 CORPORATIONBy:
    /s/ Johann DreyerJohann DreyerChief Executive Officer  Name
    
    Title/s/ JOHN W. SPIEGEL
    
    Chairman of the BoardJohn W. Spiegel/s/ Johann dreyer
    
    Chief Executive Officer and DirectorJohann Dreyer
    
    (Principal
Executive Officer)/s/ John A. Stone
    
    Chief Financial Officer (Principal FinancialJohn A. Stone
    
    Officer
and Principal Accounting Officer)/s/ Ram Gupta
    
    DirectorRam Gupta/s/ M. Douglas Ivester
    
    DirectorM. Douglas Ivester/s/ Thomas P. Johnson, Jr.
    
    DirectorThomas P. Johnson, Jr./s/ Gregory J. Owens
    
    DirectorGregory J. Owens/s/ JEFFREY C. SMITH
    
    DirectorJeffrey C. Smith
 94