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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2003

Commission file number 0-26123


ONLINE RESOURCES CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 52-1623052                                 
|(State or other jurisdiction of incorporation
    or organization) |  | (I.R.S. Employer Identification
    Number)
|                                                                  
|7600 Colshire Drive                                                |  |                                            
|McLean, Virginia                                                   |  | 22102                                      
|(Address of principal executive
    offices)                       |  | (Zip code)                                 

(703) 394-5100


(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Title of Each Class

Common Stock, $0.0001 par value per share

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     x

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).  Yes x  No

As of June 30, 2003, the aggregate market
value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the
registrants common stock of $6.37 per share as reported on
the Nasdaq National Market System, was approximately
$97.4 million. As of February 12, 2003, the registrant
had 17,924,472 shares of its common stock outstanding.

DOCUMENTS INCORPORATED BY
REFERENCE

The registrant intends to file a definitive proxy
statement for its 2004 Annual Meeting of Stockholders pursuant
to Regulation 14A within 120 days of the end of the
fiscal year ended December 31, 2003. Portions of such proxy
statement are incorporated by reference into Part III of
this Form 10-K.









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ONLINE RESOURCES CORPORATION

FORM 10-K

TABLE OF CONTENTS

|                              |  |                                                                                                                          |    |      |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                              |  |                                                                                                                          |    | Page
|                              |  |                                                                                                                          |    |     
|PART I                        |  |                                                                                                                          |    |     
|Item 1:                       |  | Business                                                                                                                 |    |      | 2  | 
|Item 2:                       |  | Properties                                                                                                               |    |      | 18 | 
|Item 3:                       |  | Legal Proceedings                                                                                                        |    |      | 19 | 
|Item 4:                       |  | Submission of Matters to a Vote of Security
    Holders                                                                  |    |      | 19 | 
|PART II                       |  |                                                                                                                          |    |     
|Item 5:                       |  | Market for the Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 20 | 
|Item 6:                       |  | Selected Financial Data                                                                                                  |    |      | 21 | 
|Item 7:                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                |    |      | 22 | 
|Item 7A:                      |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                           |    |      | 32 | 
|Item 8:                       |  | Financial Statements and Supplementary Data                                                                              |    |      | 33 | 
|Item 9:                       |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure                                 |    |      | 51 | 
|Item 9A:                      |  | Controls and Procedures                                                                                                  |    |      | 51 | 
|PART III                      |  |                                                                                                                          |    |     
|Item 10:                      |  | Directors and Executive Officers of the Company                                                                          |    |      | 51 | 
|Item 11:                      |  | Executive Compensation                                                                                                   |    |      | 51 | 
|Item 12:                      |  | Security Ownership of Certain Beneficial Owners
    and Management                                                       |    |      | 51 | 
|Item 13:                      |  | Certain Relationships and Related Transactions                                                                           |    |      | 51 | 
|Item 14:                      |  | Principal Accountant Fees and Services                                                                                   |    |      | 51 | 
|PART IV                       |  |                                                                                                                          |    |     
|Item 15:                      |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                                                     |    |      | 52 | 
|Signatures                    |  |                                                                                                                          | 56 |     
|Index to financial statements |  |                                                                                                                          | 33 |     



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SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

In addition to historical information, this
Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. These
statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking
statements by terminology such as may,
will, should, expect,
anticipate, intend, plan,
believe, estimate,
potential, continue, the negative of
these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ
materially from any forward-looking statement. In evaluating
these statements, you should specifically consider various
factors, including the risks outlined under Risk
Factors in Item 1 of Part I.

Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to update
publicly any forward-looking statements for any reason after the
date of this Annual Report on Form 10-K.





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PART I

Item 1.     Business
Overview

Online Resources Corporation is an outsourcer of
Internet banking and payment services to over 600 financial
institutions nationwide. We own and operate the critical
banking, payments and marketing infrastructure that enable our
clients to provide their customers with end-to-end Internet
channel functionality and a high quality user experience. Our
services, branded to our financial institution clients, power
approximately 100 million transactions and $8 billion
in consumer bill payments annually.

Our clients are primarily regional and
community-based depository financial institutions with assets of
$10 billion or less. Regional and community financial
institutions serve over half of the nations retail
checking accounts, but often lack the internal resources to
build or operate Internet-based remote financial services. We
enable these clients to offer services through the Internet
channel on a cost effective basis and without the resource
commitment of building and supporting the infrastructure
internally.

Depending on their needs, our financial
institution clients choose one of our two primary product lines:
full service, which includes a suite of Internet banking, bill
payment, call center and other support services, or stand-alone
bill payment and presentment services. One third of our
implemented financial institution clients use our full suite of
services, while the rest use our stand-alone bill payment
services. Our full service Internet banking clients typically
pay us a recurring monthly fee based on the number of their
customers who use our services. Our stand-alone bill payment
clients also typically pay us a recurring monthly fee based on
their number of customers and, in some cases, pay us an
additional fee per payment transaction. In addition, they
typically pay us a one-time implementation fee to link our
respective systems, allowing their customers to connect to us
through the Internet.

The customers of our full service clients may
access our proprietary banking service, which allows them to
view account statements and balances of accounts maintained with
our clients, and perform funds transfers and certain other funds
management functions. These customers may also use our bill
payment and presentment services, allowing them to pay any bill
automatically. Our banking and bill payment services are
complemented by our call center, database services, consumer
marketing, web site design and hosting and other support
services, giving our clients the benefit of a single, integrated
solution. We help our clients drive increased adoption of
Internet-based services and create a profitable Internet channel
through our extensive consumer marketing capabilities. We also
back our services with a comprehensive end-to-end service
quality guarantee.

Our bill payment services are built on patented
debit architecture that we believe offers substantial cost and
quality advantages. By connecting to our clients through online
payments networks, we realize the advantage of real-time,
guaranteed debits in reducing paper remittances and improving
the speed of payments. We have certified over 50 online payment
networks, commonly known as electronic funds transfer, or EFT
networks, operated by both core processors and ATM networks,
potentially allowing us access to approximately 95% of U.S.
consumer checking accounts. We believe our patented EFT
connectivity is unique and has broad applications for payments
products beyond the payment of bills.

As of December 31, 2003, we provided
services to approximately 841,000 customers of our
633 client financial institutions. These 633 financial
institutions collectively serve an aggregate of approximately
19.5 million retail accounts, including approximately
10.6 million checking accounts.

We are a Delaware corporation with our principal
executive offices located at 7600 Colshire Drive, McLean,
Virginia. Our telephone number is 703-394-5100 and our website
address is www.orcc.com. We make available free of charge
through the Investor Relations section of our website our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and
Exchange Commission. We include our web address in this Annual
Report on Form 10-K only as an inactive textual reference
and do not intend it to be an active link to our website.

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Industry Background

The outlook for the e-financial services industry
continues to be vigorous with consumers and small businesses
increasingly banking online because of the 24 hours a day,
7 days a week convenience and related processing cost
savings. In its December 2003 report, Jupiter Media Matrix, a
technology research and advisory firm, estimated that
31.4 million U.S. households banked online in 2003, and
that the number of U.S. households banking online will more than
double to 54.6 million by 2007.

Today, the overwhelming majority of U.S.
financial institutions with more than $100 million in
assets have adopted the Internet as a means of delivering
financial services to their customers. Financial institutions
recognize the advantages offered by online delivery systems,
including the opportunity to offer their services to targeted
audiences while reducing or eliminating workload, paper and
other back office expenses associated with traditional
distribution channels. Additionally, these solutions provide
financial institutions the opportunity to gain market share by
attracting new customers and then increase profitability by more
successfully retaining them. In 2003, the Boston Consulting
Group and Forrester Research, financial research and advisory
firms, both conducted studies concluding that the profitability
of online bill payment consumers over a 12 month period was
up to 40 percent higher than those consumers who did not
pay bills online, due to increases in the number of accounts and
balances.

Historically, very large financial institutions
have been the drivers of the online banking trend. Regional and
community financial institutions were compelled to offer
comparable services to remain competitive. Initially, there were
many obstacles in making e-financial services available to their
customers. In particular, they often lacked the capital and
human resources required to develop and manage the technology
infrastructure to provide their customers with online banking
services.

Today, however, the picture is very different.
With the majority of financial institutions having already
adopted the Internet, either by developing the capability
in-house or outsourcing to one of several providers, there are
new obstacles:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Managing technology vendors, which could mean
    multiple relationships in order to provide online banking, bill
    payment and other services;
|
| |  | Providing integrated customer support for their
    online banking services to an increasingly sophisticated
    consumer base;                  
|
| |  | Understanding how to evaluate channel
    profitability and/or return on investment; and                                                         
|
| |  | Maximizing the value of the channel by increasing
    adoption through consumer marketing and other means.                                       

As a service provider, we believe that we must
help our financial institution clients to meet these challenges
as a part of inducing them to choose, or switch to, our solution
for providing competitive online banking and payments services.

The Online Resources Solution

We provide a single source, fully integrated
solution through our QuotienSM e-financial suite of
services, which we believe enables depository financial
institutions to offer the breadth of financial services needed
to remain competitive as well as profit from their Internet
channel. We bring economies of scale and technical expertise to
our clients, who would otherwise lack the resources to compete
in the rapidly changing, complex financial services industry. We
differentiate ourselves by internally developing, integrating
and controlling many critical services, such as bill payment,
consumer marketing and call center support, rather than relying
primarily on third-party providers for these services. As a
single source vendor, we believe our clients benefit from having
one point of accountability and control. We believe our solution
provides our clients with a cost-

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effective means to retain and expand their
customer base, deliver their services more efficiently and
strengthen their customer relationships. We provide our services
through:


Our Technology Infrastructure.We provide our QuotienSM
e-financial suite of services by connecting our financial
institution clients, their customers and other financial service
providers through our integrated communications, systems,
processing and support capabilities. Our middleware enables us
to integrate customer and financial data in order to coordinate
customer authorization, transactions, settlement, security, user
profiles, data warehousing, database marketing, registration,
fulfillment, administrative support and our customer call center
services. These functions operate substantially in real-time and
provide an integrated application for our clients and their
customers.

Our Operating and Technical Expertise.We provide regional and community
based depository financial institutions with our operating and
technical expertise. We believe that our industry focus and
outsourcing capabilities add value for our clients by
simplifying complex processes and technologies. After more than
a decade of operating experience, we have established the
processes, procedures, controls and staff necessary to keep our
systems running reliably and securely. At the same time, we have
developed the organizational flexibility and staff relationships
necessary to adjust to a rapidly changing environment.

Our Consumer Contact Services.We drive the Internet channel through
the entire user lifecycle, using Integrated Consumer Management
(ICM) a unique process that combines cutting-edge customer
relationship management technology with our multiple consumer
touch-points. Marketing costs are born by or shared with our
clients. The marketing programs include web-based marketing,
direct marketing, telemarketing, statement stuffers and branch
incentives. We privately brand the marketing programs for our
financial institution clients so that they may take advantage of
their existing relationships.

Our Support Services.We provide a comprehensive set of
support services to complement our Internet banking and bill
payment services. These support services include our call
center, web site design and hosting, training, professional
services and administrative services. We provide each of these
services on an optional basis and have fully integrated them
into our service platform.

Strategy

Our goal is to become the vendor of choice for
regional and community-based banks, thrifts and credit unions
who outsource remote delivery of consumer and small business
e-financial services. We position ourselves as a single,
outsourced solution to our financial institution clients,
providing them our Internet banking and bill payment services,
and other complementary e-financial services. Our consumer and
small business services and content are further supported by our
proprietary infrastructure and support services, such as our
call center, consumer marketing, real-time payments processing,
customization and other professional services.

We believe our offering gives our clients the
advantage of a single point-of-contact, an end-to-end service
quality guarantee, relatively seamless customer care, packaged
pricing advantages, and integrated data for consumer marketing
and service enhancement purposes. Approximately one-third of our
implemented financial institution clients use our full suite of
services, while the rest use our stand-alone bill payment
services. Both enjoy the benefit of our real-time debit
capabilities, integrated customer care, and relatively high
percentage of electronic remittances.

We have grown our business organically and
developed by December 31, 2003, a base of 633 financial
institution clients, who have typically entered into two to five
year service contracts. They typically pay us based on their
number of users and volume of transactions, as well as on the
number of products and services used. Our primary strategy,
therefore, is to focus on our substantial existing client base,
and to promote Internet banking usage and the cross-selling of
our proprietary bill payment services. Also important is our
goal to retain and add to our client base, expanding our
distribution channel for an integrated suite of e-financial
transaction, cultivation and communication services.

We have become profitable but believe that our
shareholders, clients, employees and partners still place a high
premium on our ability to increase and sustain our
profitability. Our business model is driven by financial

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and operating leverage derived from earning
largely recurring user and transaction fees spread over our
relatively fixed cost base. Therefore, our near-term efforts
center on:




| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increasing adoption of our Internet banking
    services among the customers of our 211 full service clients,
    who have approximately 2.5 million checking account and
    2.1 million non-checking account relationships;                                                       
|
| |  | Cross-selling our proprietary bill payment, as
    well as other services, to those Internet banking users;                                                                                                                                                                         
|
| |  | Cross-selling our bill payment, as well as other
    services, to the customers of our 422 stand-alone bill payment
    clients, who have approximately 8.1 million checking
    account and 6.8 million non-checking account relationships;                                        
|
| |  | Retaining and expanding the financial institution
    distribution channel for our services, particularly by
    attracting clients who wish to replace another provider,
    bringing with them an already established base of Internet
    banking and bill payment customers; and
|
| |  | Controlling our costs by keeping growth in our
    overhead expenses low, gaining operating efficiencies through
    ongoing automation and process improvement efforts, and creating
    further standardization of our technology infrastructure.                                 

Though near-term growth in profitability is an
important objective, we recognize, and are investing in, a
number of strategic initiatives that we believe will result in
high, sustainable profitability. These include:

Consumer Marketing.We have invested heavily in a variety
of consumer marketing capabilities where we materially
supplement the marketing efforts of our client institutions.
These programs are fully funded or co-funded by our clients,
with the goal of increasing customer adoption and converting the
Internet into a cost-effective means to promote and deliver a
profitable set of financial services. Our integrated consumer
management process makes extensive use of multiple consumer
touch-points and data derived from our banking and bill payment
applications to drive consumers through the online banking user
lifecycle from activation to retention. These consumer
touch-points include real-time personalized and targeted
messages within our banking application, use of our call center,
targeted emails, and offline media. Our database capabilities
include data mining, analysis, campaign management and data
integration. All of our consumer marketing efforts use patented
methods for the collection and analysis of confidential banking
and bill payment data that are fully self-contained and
compliant with privacy laws.

Strategic New Products.We believe our large business base of
633 financial institutions with its potential of approximately
20 million consumer relationships represents an attractive
distribution channel for the additional financial services and
content provided by us and by our third-party partners.
Therefore, we will continue our strategy to cross-sell new
products to clients with the goal of increasing the recurring
revenue per customer. In the later half of 2003, we introduced a
package of premium online financial services called Money
HQSM, which includes account aggregation, bill
presentment, inter-bank funds transfer, person-to-person
payments and alerts. The new services are tightly integrated
within our existing online banking and bill payment services and
leverage our real-time financial transaction processing over the
Internet. A limited number of financial institutions were
launched on this service at the end of 2003. We believe that we
can further leverage patented payments architecture to develop
additional new products and services. By the end of 2003, we
were processing approximately 100 million in annual
transactions and our bill payment service was processing over
$8 billion in consumer payments per year. The increased
volume and efficiency of these transactions not only is critical
to our business, but also will generate potentially valuable
data using our patented method for confidential messaging
without compromising consumer privacy. This data can be
extracted using various data mining and aggregation tools and
techniques, and packaged for new personalized products and
services.

Enhanced Technology Infrastructure.We believe that the scope and
integration of our technology-based services gives us a
competitive advantage. Our data center and front-end web
server-based technology is integrated with our back-end payments
processing and multiple databases through middleware and a set of

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tools that manage it completely. We continue to
standardize protocols and interfaces to both internal and
external content and services in order to more effectively
integrate additional capabilities.


Other Strategic Initiatives.While we have built our business
organically, without mergers or acquisitions, we have relied on
partnerships and alliances to augment our growth and provide
critical technologies. These include both software providers and
core processors who resell our Internet banking and payment
services. We have relationships with specialized technology
providers in cases where we believe we are better off using
third-party technology for a portion of our service than
developing it ourselves. We also have product partnerships where
third-party software and services are integrated into our
platform. We intend to further develop both existing and new
partnerships, as well as pursue merger and acquisition
opportunities to supplement our organic growth.

Our Services

We offer our outsourced services under the
QuotienSM brand to our client financial institutions,
which in turn brand them under the financial institutions
name. Client financial institutions typically contract with us
for one of two major service lines: full service, consisting of
our integrated suite Internet banking, bill payment, call center
and other support services; or stand-alone bill payment and
presentment service, which is unbundled from our full service
suite. In addition, we offer a number of complementary
e-financial services, such as cash management, and additional
functionality from third-party providers that enhance our
solution. Finally, we offer professional services to support new
client and product implementations, as well as customization.

Most of our services generate revenue from
recurring monthly fees charged to financial institution clients,
typically based on the number of customers they have using our
system. The pricing of these services to customers is at the
discretion of each financial institution. Because our clients
generally derive internal cost savings, account retention and
other return on investment and marketing benefits by offering
our services, the majority of our clients do not pass all of
these charges through to their customers, and most of our
clients offer the banking portion of our services free-of-charge.

Full Service Suite

Our QuotienSM Internet Banking and
Bill Payment service provides a comprehensive set of online
services for a financial institutions customers. The
services include the following features:



| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Viewing transaction histories and real-time
    account balances;                                                                                                                                                                                                                                
|
| |  | Transferring funds within and between financial
    institutions either immediately or in the future;                                                                                                                                                                                            
|
| |  | Pay anyone functionality by
    initiating immediate and future bill payments or transfers;                                                                                                                                                                                                    
|
| |  | Accessing account information and initiating
    transactions through Intuits Quicken application;                                                                                                                                                                                              
|
| |  | Guaranteed, real-time payments and transfers
    through the patented EFT gateway; and                                                                                                                                                                                                           
|
| |  | Viewing projected balances based upon bill
    payment and account activities.                                                                                                                                                                                                                   
|
| |  | For customers who register for Money
    HQ: aggregating online financial accounts from other
    financial service providers, viewing bills from these accounts,
    transferring funds between accounts, making payments to
    individuals via email, and setting balance and due date alerts.

Using our bill payment service, Internet banking
customers may pay any merchant biller or individual.
Approximately 65% of our bill payments are currently made
electronically to merchants. We guarantee electronic bill
payments will be received by the payee within two business days
of initiation by the customer. We guarantee paper check payments
will be received by the payee within five business days. Paper
and electronic payments are drawn on our escrow account. As of
December 31, 2003, we had a bill payment database of
approximately 634,000 discrete merchants.

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We believe our real-time debit process offers
substantial cost and quality advantages in our bill payment
services. Under alternative batch-oriented debit systems, the
bill payment processor cannot immediately verify the
availability of sufficient funds to cover the bill payment. This
may result in potential collections issues, the need to assess
credit risk and increased use of paper versus electronic
payments. We therefore believe that real-time debit capability
results in a higher percentage of electronic payments, lower
operating costs and a higher quality of service.

Stand-Alone Bill Payment and Presentment
Services

Our QuotienSM Internet Bill Payment
Service is an unbundled version of the bill payment service
featured in our full service suite of services. It is unique in
the industry because it leverages the banking industrys
EFT infrastructure for online payments. By leveraging this
patented technology, our clients take advantage of existing
trusted systems, security, clearing, settlement, regulations and
procedures. Users of QuotienSM Internet Bill Payment
Service also benefit from a secure, reliable real-time direct
link to their accounts. As in our full service suite, customers
schedule transactions and view balances via our intuitive web
user interface, which is branded for the financial institution.
We provide users of this service with complete support and
payment inquiry processing through our call center.
Additionally, users of this service can register for Money HQ,
which includes account aggregation, bill presentment, inter-bank
funds transfer, person-to-person payments and alerts.

Our QuotienSM Remittance Service is an
attractive add-on service for financial institutions of all
sizes that run their own in-house online banking system or other
providers of Internet banking solutions that do not have a bill
payment infrastructure. It provides their system with the extra
functionality of bill payment processing, and is backed by
complete funds settlement, payment research, inquiry resolution,
and merchant services. Customers provide bill payment
instructions via their existing online banking interface, which
validates the availability of funds on the date bills are to be
paid. If funds are available, the users account is debited
and a designated clearing account is credited. On a daily basis,
we receive a file of all bill payment requests and we respond
immediately, processing bill payment requests and remitting
payments to designated merchants. We return a file of
transaction confirmations, error descriptions, and data updates.
Additionally we provide instant access to comprehensive payment
processing and status information through our web-based Payment
IQ system.

Other Complementary e-financial
Services

Our QuotienSM Cash Management service
is a key component of our business banking service offering.
Through customized software developed by Magnet Communications,
Inc. and integrated into our platform, we provide added value in
a number of ways. QuotienSM Cash Managements
comprehensive application platform provides financial
institutions with additional leverage to attract a greater
spectrum of business customers. And, as it helps them build
their business base, QuotienSM Cash Management can
help them retain that base with a highly flexible selection of
applications, compelling support features, 24 hours a day, seven
days a week online accessibility, and a secure environment. Just
as important, QuotienSM Cash Management provides
additional revenue opportunities through fee-based transactions
such as ACH, balance reporting, wire transfers, book transfers,
and stop payments.

Our QuotienSM Customer Care service
provides critical high touch customer support to the
consumer and small business users of our services, all branded
in our financial institution clients name. We maintain a
customer service center for financial institution clients that
choose to outsource this service to us. Customers can access the
customer service operation by phone or e-mail 24 hours a day,
seven days a week. As of December 31, 2003, our customer
service center had over 100 employees available to respond to
customers questions relating to enrollment, transactions
or technical support. Customer care services generate revenue
from recurring monthly fees charged to financial institution
clients, typically based on the number of enrolled customers.

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Our QuotienSM Web Design and Hosting
capabilities give clients an integrated, outsourced solution for
their informational web site. We charge an upfront fee for
design which is recognized as revenue immediately and a
recurring monthly maintenance fee for hosting the web site which
is recognized monthly.

Our QuotienSM Training Services fit
the needs of our clients, ranging from operational training to
service-oriented sales workshops. Our training services team
develops and delivers effective and professional programs in
banking, operations, call centers, sales and communications for
our clients. We generally charge our clients on an hourly basis
for these services and revenue is recognized when services are
completed.

Our QuotienSM Integrated Consumer
Management Support provides consumer marketing capabilities to
our clients to help maximize adoption and usage of their
Internet channel by their customers. We have developed a
customer relationship management approach designed to motivate
customers to sign up for Internet banking, begin using Internet
banking, sign up for Internet bill payment and, finally, to
continue ongoing usage of the Internet channel. We employ a
variety of offline, online and call center based marketing
programs to contact the customers and influence their use of our
clients Internet channel. We charge our clients on a
marketing program basis when they are completed and revenue is
recognized when services are provided.

Our QuotienSM Administrative Services
provides administrative and MIS support services to our
financial institution clients including the compilation of
customized reports regarding their customers account
activity. We generally charge our clients on an hourly basis for
these services and revenue is recognized when earned.

Enhancing Third-Party
Services

We facilitate customers linking to
additional service capabilities and content that are provided or
controlled outside of our platform by third parties who enhance
our QuotienSM suite of services. The following
services are available or scheduled for launch within the next
twelve months.



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Fully integrated bill payment and account
    retrieval through Intuits Quicken®;                     
|
| |  | Check ordering, available through either Harland,
    Deluxe, Clarke American or Liberty;              
|
| |  | Inter-institution funds transfer and account
    aggregation, provided by CashEdge;                    
|
| |  | Check imaging, provided by AFS, Bisys, FiServ,
    FSI/ Vsoft, Empire, Intercept, and Mid-Atlantic; and
|
| |  | Statement through BIT Statement.                                                                       

To provide our clients with a business
application and complement our cash management offering, we
provide small office/ home office capabilities and
have partnered with Intuit to support Quicken online access.

We have also developed business arrangements and
links to third parties for expanded customer access. We
currently have such arrangements with third-party access
providers, typically banking and credit union software providers
such as Ultradata (a subsidiary of Harland), Aftech and Users,
Inc. (subsidiaries of Fiserv), and Symitar (a subsidiary of Jack
Henry).

By aggregating the customers of our financial
institution clients into a large online community, we believe we
have begun to assemble an attractive audience for third parties
to market their products and services. In cooperation with our
financial institution clients, we believe that over time this
aggregated community will generate significant buying power and
could attract many additional third-party providers.

Professional Services

The majority of our professional services are
implementation services, consisting of systems integration work.
At the time of entering into a contract, the financial
institution client pays a one-time fee, which generally ranges
from $2,500 to $25,000, depending on the size and complexity of
the implementation. A project management team is assembled to
integrate our platform with a financial institution
clients legacy host system, typically via an ATM network
or a direct host communications interface. A financial
institutions

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legacy host system houses its transaction
accounts. Upon completion of systems integration, we conduct a
testing period using selected customers and employees of the
client financial institution. Following the testing, the
financial institution client is fully launched and services are
made available to its customers. Generally, at this point, the
financial institution client begins to pay at least the minimum
service fees. For clients who are linked to the over 50 core
processors and ATM networks with whom we are certified,
implementation typically takes 90 to 180 days between
signing and launch.


Additionally, we offer professional services
intended to tailor our services to meet the financial
institutions specific needs. Our financial institution
clients generally pay us an hourly rate for these customization
services.

Institutional Sales and Marketing

In addition to our extensive consumer marketing
capabilities to drive customer adoption and cross-selling, we
seek to retain and expand our financial institution client base,
which serves as a distribution channel for our consumer and
small business online financial services. Our client services
function consists of a 14 person team of account managers who
support and cross-sell our services to existing financial
institution clients and an 11 person sales team focusing on new
financial institution prospects.

Our account management team focuses primarily on
helping our clients increase the profitability of their Internet
channel. They do this by introducing our extensive consumer
marketing capabilities and supporting our clients own
marketing programs. The account management team also cross-sells
our clients to new and enhanced services, and was responsible
for almost 1,000 sales events in 2003. This team also handles
contract renewals and supports our clients in resolving
operating issues.

Our sales team focuses on new client acquisition,
either through direct contact with prospects or through our
network of reseller relationships. Our target prospects are
typically regional and community-based banks, thrifts and credit
unions who are either looking to replace their current Internet
banking or bill payment solution, and institutions who have no
existing capability. We believe that our suite of services is
especially attractive to prospects whose Internet solution has
limited capabilities, or who seek a more integrated set of
banking, bill payment, call center, marketing and other
services. Further, we offer these prospects a single point of
accountability backed by our unique end-to-end service
guarantee, which covers access systems availability, response
time, payments speed and quality, problem resolution, call
center access and other service functions that we own, operate
and control.

Systems and Technology

Overview.We
designed our systems and technology around real-time
communications and processing, which optimizes quality,
scalability and cost. Our systems are based on a multi-tiered
architecture consisting of:



| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Front-end servers  proprietary and
    commercial communications software and hardware providing
    Internet and private communications access to our platform for
    customers;
|
| |  | Middleware  proprietary and commercial
    software and hardware used to integrate customer and financial
    data and to process financial transactions;                         
|
| |  | Back-end systems  databases and
    proprietary software which support our banking and bill payment
    services;                                                                 
|
| |  | Support systems  proprietary and
    commercial systems supporting our customer service and other
    support services; and                                                       
|
| |  | Enabling technology  software enabling
    clients and their customers to easily access our platform.                                                                             

Our systems architecture is designed to provide
customer access into a common database integrated with our
banking and bill payment services and our proprietary support
services software. Third-party financial services are linked to
our systems through the Internet, which we integrate into our
customer application and

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transaction processing. Incorporating such
third-party capabilities into our system, enable us to focus our
technical resources on our proprietary middleware and
integrating capabilities.


Connectivity for Real-Time Financial
Information and Online Payments.We
typically link to our client financial institutions in two ways;
we operate an information gateway to gather customer account
information and we operate an EFT payment gateway for online
debits, settlement authentication and limited supplemental
financial information. We believe that our extensive
connectivity to financial institutions is unique, particularly
our EFT gateway component that links to the online payments
infrastructure of core processors and ATM networks.

By using an online payment network to link into a
financial institution clients primary database for
customer accounts, we take advantage of established electronic
funds transfer infrastructure. This includes all
telecommunications and software links, security, settlements and
other critical operating rules and processes. Using this
real-time payments architecture, financial institution clients
avoid the substantial additional costs necessary to expand their
existing infrastructure. The net result of using this
architecture is that high quality remote financial electronic
commerce services can be provided, enabling customers to access
their financial account information and pay bills by debiting
funds from their accounts.

In addition to quality and cost benefits
associated with bill payment, we believe that our real-time
architecture is more scalable than traditional batch systems,
which warehouse and store duplicate data. Instead of duplicating
each financial institutions host system by daily batch
transmittal of customer balance information, we communicate in
real-time through EFT networks and directly to our clients or
their core processors to retrieve account balances as needed.

Security and Systems Integrity.Our services and related products are
designed to provide security and system integrity, based on
Internet and other communications standards, EFT network
transaction processing procedures, and banking industry
standards for control and data processing. Prevailing security
standards for Internet-based transactions are incorporated into
our Internet services, including but not limited to, Secure
Socket Layer 128K encryption, using public-private key
algorithms developed by RSA Security, along with firewall
technology for secure transactions. In the case of payment and
transaction processing, we meet security transaction processing
and other operating standards for each EFT network or core
processor through which we route transactions. Additionally, we
have established a business resumption plan to ensure that our
technical services and operating infrastructure could be resumed
within an acceptable time frame should some sort of business
interruption affect our data center. Furthermore, management
receives feedback on the sufficiency of security and controls
built into our information technology, payment processing, and
customer support processes from independent reviews such as
semi-annual network penetration tests, an annual
SAS70  Type II Examination, periodic FFIEC
examinations, and internal audits.

Proprietary Rights

Patents are important to our business; no
particular patent is so important, however, that its loss would
significantly adversely affect our operations as a whole.

In June 1993, we were awarded U.S. patent number
5,220,501 covering our real-time EFT network-based payments
process. This patent covers bill payment and other online
payments made from the home using any enabling device where the
transaction is routed in real-time through an EFT network. We
have licensed this patent to other parties for limited use. In
March 1995 we cross-licensed this patent to Citibank for their
internal use in settlement of litigation.

On February 9, 1999, we were awarded U.S.
patent number 5,870,724 for targeting advertising in a home
banking delivery service. This patent provides for the targeting
of advertising or messaging to home banking users, using their
confidential bill payment and other financial information, while
preserving consumer privacy. Acting in cooperation and on behalf
of a financial institution client, we first analyze their bill
payment and other financial data to determine an advertising
profile or purchasing power. The patent provides for the
targeted advertisement or other message to the selected person
or group based on their profile. No third parties gain access to
the customers sensitive financial data. Through
interactive messaging, selected customers of

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our financial institutions receiving the
advertisement or message then have the choice of releasing their
names to the advertiser or messenger. The confidentiality of
their sensitive financial information is thereby preserved and
released only with the approval of the financial institution
client and their customers.


On March 13, 2001, we were awarded U.S.
patent number 6,202,054 that is a continuation of U.S. patent
number 5,220,501. The continuation expands and clarifies the
claims in that patent thereby increasing its applicability and
usefulness. For example, the continuation broadens the original
narrow definitions: PIN is replaced by user identification info;
ATM network is replaced by inter-bank financial services
network; debit becomes debit or credit.

In addition to our patents, we have registered
trademarks. A significant portion of our systems, software and
processes are proprietary. Accordingly, as a matter of policy,
all management and technical employees execute non-disclosure
agreements as a condition of employment.

Competition

We believe that the principal competitive factors
in our market are industry trust, technical capabilities,
operating effectiveness, cost and scalability, customer service,
security, speed to market, and capital. Many of our competitors
have the financial, technical and marketing resources, plus
established industry relationships, to better compete based on
these factors. Competitive pressures we face may have a
materially adverse effect on our business, financial condition
or operating results.

We are not aware of any other company that offers
a similar suite of Internet banking and payment services that
fully integrates support services and online payment links to
other financial service providers. However, many of our current
and potential competitors have longer operating histories,
greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing
resources. Further, some of our more specialized competitors,
such as CheckFree, while currently targeting bill payment
services to large financial institutions, may increasingly
direct their marketing initiatives towards our targeted smaller
financial institution client base.

Other competitors that serve primarily smaller
depository financial institutions, such as Jack Henry,
Metavante, EDS, Fiserv and other core banking processors, have
large distribution channels that bundle broader services and
products for their clients. These competitors also have
developed or acquired Internet banking capabilities of their
own, including a bill payment service in the case of Metavante,
which may be further expanded to exceed or meet our capabilities.

In addition, a significant number of companies
offer portions of the services provided by us and compete
directly with us to provide such services. For example, the web
servers of companies such as Digital Insight, FundsXpress and S1
Corporation compete with our front-end Internet banking
capabilities. These companies may in turn use bill payment
providers, such as CheckFree, Princeton eCom, and Metavante, to
compete with our full service offering. There are also other
software providers such as Intelidata, Corillian and Sybase
Financial Fusion that market their software to large financial
institutions, that may seek to penetrate our targeted regional
and community banking market.

There are also Internet financial service
providers who target non-banking firms, who may target our
depository financial institution market. These potential
competitors support brokerage firms, credit card issuers,
insurance and other financial service companies. There are also
Internet financial portals, such as Quicken.com, Yahoo Finance
and MSN, who offer bill payment and aggregate consumer financial
information from multiple financial institutions. Suppliers to
these remote financial service providers potentially compete
with us.

Government Regulation

We are not licensed by the Office of the
Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation, the National Credit Union
Administration or other federal or state agencies that regulate
or supervise depository institutions or other providers of
financial services. We are subject to examination by federal
depository

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institution regulators under the Bank Service
Company Act, and the Gramm Leach Bliley Act of 1999, among other
regulations. As such, we have agreed to periodic examinations by
these agencies and these agencies have broad supervisory
authority to remedy any shortcomings identified in any such
examination.


We are also subject to encryption and security
export laws and regulations that, depending on future
developments, could render our business or operations more
costly, less efficient or impossible.

Federal, state or foreign agencies may attempt to
regulate our activities. Congress could enact legislation that
would require us to comply with consumer privacy, data, record
keeping, processing and other requirements. The Federal Reserve
Board may adopt new rules and regulations for electronic funds
transfers that could lead to increased operating costs and could
also reduce the convenience and functionality of our services,
possibly resulting in reduced market acceptance. Because of the
growth in the electronic commerce market, Congress has held
hearings on whether to regulate providers of services and
transactions in the electronic commerce market, and Federal or
state authorities could enact laws, rules or regulations
affecting our business operations. We also may be subject to
Federal, state and foreign money transmitter laws, encryption
and security export laws and regulations and state and foreign
sales and use tax laws. If enacted or deemed applicable to us,
such laws, rules or regulations could be imposed on our
activities or our business thereby rendering our business or
operations more costly, burdensome, less efficient or
impossible, any of which could have a material adverse effect on
our business, financial condition and operating results.

The market we currently target, depository
financial institutions, is subject to extensive and complex
Federal and state regulation. Our current and prospective
clients, which consist of financial institutions such as
commercial banks, thrifts, credit unions, brokerage firms,
credit card issuers, consumer finance companies, other loan
originators, insurers and other providers of retail financial
services, operate in markets that are subject to extensive and
complex Federal and state regulations and oversight. While we
are not generally subject to such regulations, our services and
related products must be designed to work within the extensive
and evolving regulatory constraints in which our clients
operate. These constraints include Federal and state
truth-in-lending disclosure rules, state usury laws, the Equal
Credit Opportunity Act, the Electronic Funds Transfer Act, the
Fair Credit Reporting Act, the Bank Secrecy Act, the Community
Reinvestment Act, the Financial Services Modernization Act, the
Bank Service Company Act, the Electronic Signatures in Global
and National Commerce Act, privacy and information security
regulations, laws against unfair or deceptive practices, the
Electronic Signatures in Global and National Commerce Act, the
USA Patriot Act of 2001 and other state and local laws and
regulations. Because many of these regulations were promulgated
before the development of our system, the application of such
regulations to our system must be determined on a case-by-case
basis. We do not make representations to clients regarding the
applicable regulatory requirements, but instead rely on each
such client making its own assessment of the applicable
regulatory provisions in deciding whether to become a client.
Furthermore, some consumer groups have expressed concern
regarding the privacy, security and interchange pricing of
financial electronic commerce services. It is possible that one
or more states or the Federal government may adopt laws or
regulations applicable to the delivery of financial electronic
commerce services in order to address these or other privacy
concerns. We cannot predict the impact that any such regulations
could have on our business.

We currently offer services on the Internet. It
is possible that laws and regulations may be enacted with
respect to the Internet, covering issues such as user privacy,
pricing, content, characteristics and quality of services and
products. The adoption of any such laws or regulations may limit
the growth of the Internet, which could affect our ability to
utilize the Internet to deliver financial electronic commerce
services.

Employees

At December 31, 2003, we had 299 employees.
None of our employees are represented by a collective bargaining
arrangement. We believe our relationship with our employees is
good.

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RISK FACTORS

You should carefully consider the following risk
factors in your evaluation of us. Our business and results of
operations could be seriously harmed by any of the following
risks. The trading price of our common stock could decline due
to any of these risks, and you may lose part or all of your
investment.

Prior to the third quarter of 2002, we had a
history of net losses; we have achieved net income profitability
for five of six quarters since and cannot be sure that we will
be profitable in future periods.

Although we achieved profitability under
generally accepted accounting principles, or GAAP, in the third
quarter of 2002, we cannot be certain that we can be profitable
in future periods. As of December 31, 2003, we had an
accumulated deficit of $82.9 million. Although we believe
we have achieved economies of scale, if growth in our revenues
does not significantly outpace the increase in our expenses, we
may not be profitable in future periods.

Our quarterly financial results are subject to
fluctuations and could cause our stock price to
fluctuate.

Our quarterly revenues, expenses and operating
results may vary from quarter to quarter in the future based
upon a number of factors, many of which are not within our
control. Our revenue model is based largely on recurring
revenues derived from actual customer counts. The number of our
total customers is affected by many factors, many of which are
beyond our control, including the number of new user
registrations, customer turnover, loss of clients, and general
consumer trends. Our results of operations for a particular
period may be adversely affected if the revenues based on the
number of customers forecasted for that period are less than
expected. As a result, our operating results may fall below
market analysts expectations in some future quarters,
which could have a material adverse effect on the market price
of our stock.

We may need to raise capital in order to
accelerate revenue and profit growth.

Although we achieved positive income in the year
2003 and we believe that we have sufficient capital resources to
meet our operating needs during 2004, we may require additional
infusions of capital to sustain operations after 2004. This
capital may not be available on favorable terms, or at all. We
may need to raise additional funds sooner than we expect if we
incur unforeseen required capital expenditures or substantial
operating losses. If adequate funds are not available or are not
available on acceptable terms, we may not be able to develop or
enhance our services, take advantage of future opportunities or
respond to competitive pressures, which could have a material
adverse effect on our business.

The number of customers using our services may
not continue to increase.

There is no guarantee that the number of
customers using our services will continue to increase. Because
our fee structure is designed to establish recurring revenues
through monthly usage by customers of our financial institution
clients, our recurring revenues are dependent on the acceptance
of our services by customers and their continued use of online
banking, bill payment and other financial services. Failing to
retain the existing customers and the change in spending
patterns and budgetary resources of financial institutions and
their customers will affect our operating results.

We depend upon our financial institution
clients to market our services.

To market our services to customers, we depend
upon our financial institution clients. We generally charge our
clients fees based on the number of their customers who have
enrolled with our clients for online bill payment services and,
in some cases, online banking services. Therefore, customer
enrollment affects our revenue and is important to us. Because
our clients offer our services under their name, we must depend
on those clients to get their customers to use our services.
Although we conduct extensive marketing programs for our
clients, our clients may decide not to participate in our
programs or our financial institution clients may not
effectively market our services to their customers. Any failure
of our clients to effectively market our services could have a
material adverse effect on our business.

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Consumer demand for low-cost or free online
financial services may force us to reduce or eliminate the fees
we charge for some services.

Consumers of many of the online services we
offer, including home-banking, bill payment and bill
presentment, may demand that these services be offered for lower
cost or even for free. Consumers may therefore reject our
services in favor of companies that can offer more competitive
prices. Thus, consumer demand and competition may place
significant pressure on our pricing structure and revenues, and
may have an adverse effect on our financial condition.

We rely on third parties for the success of
our marketing efforts.

We depend in part upon the assistance of
marketing partners who include some or all of our services and
related products as a part of their offerings to financial
institutions. Failure by these marketing partners to continue to
offer our services and related products could have a material
adverse effect on our business.

We may not be able to expand to meet increased
demand.

We may not be able to expand or adapt our
services and related products to meet the demands of our
financial institution clients and their customers quickly or at
a reasonable cost. The number of customers registered for our
services has increased from 21,000 as of December 31, 1997
to 841,000 as of December 31, 2003. This resulting growth
has placed, and is expected to continue to place, significant
demands on our personnel, management and other resources. We
will need to continue to expand and adapt our infrastructure,
services and related products to accommodate additional
financial institution clients and their customers, increased
transaction volumes and changing customer requirements. This
will require substantial financial, operational and management
resources. If we are unable to scale our system and processes to
support the variety and number of transactions and customers who
ultimately use our services, our business may be materially
adversely affected.

If we lose a material client, our business may
be adversely impacted.

Loss of any material financial institution
contract could negatively impact our ability to increase our
revenues and maintain profitability in the future. Additionally,
the departure of a large financial institution could impact our
ability to attract and retain other financial institution
clients.

One of our financial institution clients,
California Federal Bank, accounted for 9%, 15% and 13% of our
revenue for the years ended December 31, 2003, 2002 and
2001. During 2002, Citigroup acquired California Federal Bank or
Cal Fed and converted the Cal Fed customers to the Citigroup
banking and bill payment platform in the first quarter of 2003.

Additionally, BB&T Corporation acquired our
second largest customer, First Virginia Banks, Inc., in the
third quarter of 2003. In the years ended December 31,
2003, 2002 and 2001, First Virginia accounted for 5% of our
revenue. BB&T Corporation converted the First Virginia
customers to the BB&T banking and bill payment platform in
the fourth quarter of 2003.

Consolidation of the banking and financial
services industry could negatively impact our
business.

The continuing consolidation of the banking and
financial services industry could result in a smaller market for
our services. Consolidation frequently results in a complete
change in the electronic infrastructure of the combined entity.
This could result in the termination of our services and related
products if the acquiring institution has its own in-house
system or outsources to competitive vendors. This would also
result in the loss of revenue from actual or potential retail
customers of the acquired financial institution.

We may not be able to compete with larger,
more established businesses offering similar products or
services.

We may not be able to compete with current and
potential competitors, many of whom have longer operating
histories, greater name recognition, larger, more established
customer bases and significantly greater

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financial, technical and marketing resources.
Further, some of our competitors provide or have the ability to
provide the same range of services we offer. They could market
to our targeted regional and community financial institution
client base. Other competitors, such as core banking processors,
have broad distribution channels that bundle competing products
directly to financial institutions. Also, competitors may
compete directly with us by adopting a similar business model or
through the acquisition of companies, such as resellers, who
provide complimentary products or services.


A significant number of companies offer portions
of the services we provide and compete directly with us. For
example, the web servers of some companies compete with our
front-end Internet access capabilities. Other software providers
have created units to provide on an outsourced basis a portion
of services like ours. These companies may use bill payers who
team with access providers. Also, certain services may be
available to retail customers independent of financial
institutions such as Intuits Quicken.com and Yahoo!
Finance. Finally, there are some ATM and other networks that
provide similar services in addition to connecting to financial
institutions.

Many of our competitors may be able to afford
more extensive marketing campaigns and more aggressive pricing
policies in order to attract financial institutions. Our failure
to compete effectively in our markets would have a material
adverse effect on our business.

System failures could hurt our business and we
could be liable for some types of failures.

Like other system operators, our operations are
dependent on our ability to protect our system from interruption
caused by damage from fire, earthquake, power loss,
telecommunications failure, unauthorized entry or other events
beyond our control. Although we have an agreement with an
offsite disaster recovery facility, Savvis, in the event of
major disasters, both locations could be equally impacted. We do
not currently have sufficient backup facilities to provide full
Internet services, if the Savvis facility is not functioning. We
could also experience system interruptions due to the failure of
our systems to function as intended or the failure of the
systems we rely upon to deliver our services such as ATM
networks, the Internet, or the systems of financial
institutions, processors that integrate with our systems and
other networks and systems of third parties. Loss of all or part
of our systems for a period of time could have a material
adverse effect on our business. We may be liable to our clients
for breach of contract for interruptions in service. Due to the
numerous variables surrounding system disruptions, we cannot
predict the extent or amount of any potential liability.

Security breaches could disrupt our
business.

Like other system operators, our computer systems
may be vulnerable to computer viruses, hackers, and other
disruptive problems caused by unauthorized parties entering our
system. We transmit confidential financial information in
providing our services. Although we intend to continue to
implement state-of-the-art security measures, computer attacks
or disruptions may jeopardize the security of information stored
in and transmitted through the computer systems of our financial
institution clients and their customers using our services,
which may result in significant losses or liability. This, or
the perception and concern that our systems may be vulnerable to
such attacks or disruptions, also may deter retail customers
from using our services.

Data networks are also vulnerable to attacks,
unauthorized access and disruptions. For example, in a number of
public networks, hackers have bypassed firewalls and
misappropriated confidential information. It is possible, that
despite existing safeguards, an employee could divert retail
customer funds while these funds are in our control, exposing us
to a risk of loss or litigation and possible liability. In
dealing with numerous consumers, it is possible that some level
of fraud or error will occur, which may result in erroneous
external payments. Losses or liabilities that we incur as a
result of any of the foregoing could have a material adverse
effect on our business.

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The potential obsolescence of our technology
or the offering of new, more efficient means of conducting
Internet banking and bill payment could negatively impact our
business.

The industry for Internet banking services and
bill payment services is relatively new and unproven and is
subject to rapid change. Our success will depend substantially
upon our ability to enhance our existing products and to develop
and introduce, on a timely and cost-effective basis, new
products and features that meet the changing financial
institution and retail customer requirements and incorporate
technological advancements. If we are unable to develop new
products and enhanced functionalities or technologies to adapt
to these changes or if we cannot offset a decline in revenues of
existing products by sales of new products, our business would
suffer.

Our newly developed products may contain
undetected or unresolved defects.

Any new or enhanced products we introduce may
contain undetected or unresolved software or hardware defects
when they are first introduced or as new version are released.
These defects could result in a loss of sales and additional
costs as well as damage to our reputation and the loss of
relationship with our financial institution clients and their
customers.

We depend on our officers and skilled
employees due to our complex business.

If we fail to attract, assimilate or retain
highly qualified managerial and technical personnel our business
could be materially adversely affected. Our performance is
substantially dependent on the performance of our executive
officers and key employees who must be knowledgeable and
experienced in both banking and technology. We are also
dependent on our ability to retain and motivate high quality
personnel, especially management and highly skilled technical
teams. The loss of the services of any executive officers or key
employees could have a material adverse effect on our business.
Our future success also depends on the continuing ability to
identify, hire, train and retain other highly qualified
managerial and technical personnel. If our managerial and key
personnel fail to effectively manage our business, our results
of operations and reputation could be harmed.

Potential litigation and liability claims may
have a material adverse effect on the operations, financial
performance and cash flows.

Our industry in general is susceptible to
litigation, liability claims and risks. Any negative outcome in
any significant legal proceeding or prolonged litigation may
result in material losses to us. Any errors, defects or other
performance problems in our products and services could result
in financial or other damages to our financial institutions for
which we may be liable. Moreover, we may be liable for
transactions executed using Internet services based on our
products and services even if the errors, defects or other
problems are unrelated to our products and services.

Management and directors have the ability to
control our corporate affairs.

As of February 28, 2004, management and
directors beneficially owned approximately 15% of our
outstanding common stock. As a result, they may have the ability
to effectively control us and direct our affairs and business,
including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may also
have the effect of delaying, deferring or preventing a change in
control, and make some transactions more difficult or impossible
without the support of such stockholders, including proxy
contests, mergers, tender offers, open-market purchase programs
or other purchases of common stock that could give our
stockholders the opportunity to realize a premium over the
then-prevailing market price for shares of common stock.

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Our stock price is volatile.

The market price of our common stock has been
subject to significant fluctuations and may continue to be
volatile in response to:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in quarterly
    operating results;                                               
|
| |  | announcements of technological innovations;                                                                        
|
| |  | new products or services offered by us or our
    competitors;                                                     
|
| |  | changes in financial estimates or ratings by
    securities analysts;                                              
|
| |  | conditions or trends in the Internet and online
    commerce industries;                                           
|
| |  | changes in the economic performance and/or market
    valuations of other Internet, online service industries;     
|
| |  | announcements by us of significant acquisitions,
    strategic partnerships, joint ventures or capital commitments;
|
| |  | additions or departures of key personnel;                                                                          
|
| |  | future equity or debt offerings or acquisitions
    or our announcements of these transactions; and                
|
| |  | other events or factors, many of which are beyond
    our control.                                                 

The stock market in general and the Nasdaq
National Market have experienced extreme price and volume
fluctuations and volatility that has particularly affected the
market prices of many technology, emerging growth and
developmental stage companies. Such fluctuations and volatility
have often been unrelated or disproportionate to the operating
performance of such companies. In the past, following periods of
volatility in the market price of a companys securities,
securities class action litigation has often been instituted
against a company. Litigation, if instituted, whether or not
successful, could result in substantial costs and a diversion of
managements attention and resources, which would have a
material adverse effect on our business.

Government regulation could interfere with our
business.

The financial services industry is subject to
extensive and complex federal and state regulation. Financial
institutions such as commercial banks, savings and loans
associations, savings banks, and credit unions operate under
high levels of governmental supervision. Our customers must
ensure that our services and related products work within the
extensive and evolving regulatory requirements applicable to
them.

Neither federal depository institution regulators
nor other federal regulators of financial services require us to
obtain any licenses. We are subject to examination by federal
depository institution regulators under the Bank Service Company
Act and the Gramm Leach Bliley Act of 1999 among other
regulations. Although we believe we are not subject to direct
supervision by federal and state banking agencies relating to
other regulations, we have from time to time agreed to
examinations of our business and operations by these agencies.
These regulators have broad supervisory authority to remedy any
shortcomings identified in any such examination.

Federal, state or foreign authorities could also
adopt laws, rules or regulations relating to the financial
services industry that affect our business, such as requiring us
or our customers to comply with data, record keeping and
processing and other requirements. It is possible that laws and
regulations may be enacted or modified with respect to the
Internet, covering issues such as end user privacy, pricing,
content, characteristics, taxation and quality of services and
products. If enacted or deemed applicable to us, these laws,
rules or regulations could be imposed on our activities or our
business, thereby rendering our business or operations more
costly, burdensome, less efficient or impossible and requiring
us to modify our current or future products or services.

17



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##### 



If we cannot achieve and maintain a
satisfactory rating from the federal depository institution
regulators, we may lose existing clients and have difficulty
attracting new clients.

We are subject to examination by the Federal
Financial Institutions Examination Council, FFIEC, under the
Bank Service Company Act, the Gramm-Leach-Bliley Act of 1999,
and various other federal regulations. In our most recent
examination report, dated as of March 2002, these regulators
noted several opportunities for improvement in our documentation
and operations, and we received a less satisfactory rating than
we had in our previous examination. This examination report has
been distributed, or is available to our client financial
institutions through their regulatory agencies. This less
satisfactory rating increases the obligation of our clients to
monitor our capabilities and performance as a part of their own
compliance process.

We have taken the appropriate steps to mitigate
the regulators concerns, and based on these efforts they
do not intend to take any further actions prior to our next
examination, which we expect to occur in April 2004. If we do
not improve our rating, our financial institution clients and
prospects may lose confidence in us and seek alternate
providers. This would affect our revenue and revenue growth and
could lower our profit margins.

We have a substantial number of shares of
common stock that may be sold, which could affect the trading
prices of our common stock.

We have a substantial number of shares of common
stock that may be issued upon exercise of stock options and
warrants. We cannot predict the effect, if any, that future
sales of shares of common stock or the availability of shares of
common stock for future sale will have on the market price of
our common stock. Sales of substantial amounts of common stock
(including shares issued upon the exercise of stock options or
warrants), or the perception that such sales could occur, may
adversely affect prevailing market prices for our common stock.

Our stockholder rights plan contains
provisions that could discourage a takeover.

In January 2002, we announced that our Board of
Directors has adopted a stockholder rights plan. This plan along
with provisions contained in our Certificate of Incorporation
may discourage or prevent a change of control through the
issuance of additional equity securities that can substantially
dilute the interests of a third party seeking to gain control
over our company in the absence of the approval of our Board of
Directors.

Terrorism and the possibility of further acts
of violence may have a material adverse effect on our
operations.

War, the threat of war, terrorist attacks, such
as the attacks that occurred on September 11, 2001, the
response by the United States and further acts of violence or
war may affect the market on which our common stock will trade,
the markets in which we operate, and our operations and
profitability. Further terrorist attacks against the United
States may occur. The potential near-term and long-term effect
of these attacks on our business, the market for our common
stock and the economy is uncertain. The consequences of any
terrorist attacks, or any armed conflicts that may result, are
unpredictable, and we may not be able to foresee events that
could have an adverse material effect on our business or the
trading price of our common stock.

Item 2.     Properties

We are headquartered in McLean, Virginia where we
lease approximately 54,000 square feet of office space. The
lease expires July 31, 2004. We believe that all of our
facilities are in good condition and are suitable and adequate
to meet our operations. Additionally, we believe that suitable
additional or alternative space will be available in the future
on commercially reasonable terms as needed.

18



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##### 



Item 3.     Legal
Proceedings

From time to time we may be involved in
litigation arising in the normal course of our business. We are
not a party to any litigation, individually or in the aggregate,
that we believe would have a material adverse effect on our
financial condition or results of operations.

Item 4.     Submission
of Matters to a Vote of Security Holders

No matters were submitted to a vote of security
holders, through the solicitation of proxies or otherwise,
during the fourth quarter of 2003.

19



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##### 



PART II



|        |                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities

Our common stock began trading on the Nasdaq
National Market on June 4, 1999 under the symbol
ORCC. The following table sets forth the range of
high and low closing sales prices of our common stock for the
periods indicated, as reported by Nasdaq:

|                     |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|                     |  |      |       |     
|                     |  | 2003 |       | 2002
|                     |  |      |       |     
|Fiscal Quarter Ended |  | High |       | Low  |  | High |       | Low
|                     |  |      |       |      |  |      |       |    
|First Quarter        |  | $    | 3.450 |      |  | $    | 2.500 |     |  | $ | 3.300 |  |  | $ | 2.600 | 
|Second Quarter       |  |      | 6.370 |      |  |      | 2.620 |     |  |   | 3.850 |  |  |   | 2.800 | 
|Third Quarter        |  |      | 7.400 |      |  |      | 5.240 |     |  |   | 3.140 |  |  |   | 2.510 | 
|Fourth Quarter       |  |      | 7.980 |      |  |      | 6.030 |     |  |   | 4.640 |  |  |   | 2.700 | 

The market price of our common stock is highly
volatile and fluctuates in response to a wide variety of
factors. See Business  Risk Factors 
Our Stock Price is Volatile.

On December 31, 2003, we had approximately
171 holders of record of common stock. This does not reflect
persons or entities that hold their stock in nominee or
street name through various brokerage firms.

We have not paid any cash dividends on our common
stock. We expect to invest any future earnings to finance
growth, and therefore do not intend to pay dividends in the
foreseeable future. Our board of directors will determine if we
pay any future dividends.

On June 9, 2003, we increased our
stockholders equity by $4.4 million through a private
placement of 1,336,000 newly issued common shares to a group of
institutional investors. This transaction was priced at a
discount to the Online Resources volume weighted average closing
share price for the 10 trading days prior to the seventh trading
day before closing. In separate transactions, these proceeds
were used to repurchased $3.9 million of its Convertible
Notes at par. The remaining $8.1 million in Convertible
Notes were converted into 2,001,314 shares of common stock in
October and November of 2003.

20



---



##### 





|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following balance sheet data and statements
of operations were derived from our financial statements. You
should read the following selected financial information in
conjunction with our financial statements and related notes
thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations included
elsewhere in this report.

|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |           |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------------------- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | --------- | ---------- | 
|                                                                                                                                               |                                 |                       
|                                                                                                                                               |                                 | Year Ended December 31
|                                                                                                                                               |                                 |                       
|                                                                                                                                               |                                 | 2003                   |            | 2002       |            | 2001 |            | 2000       |            | 1999
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |     
|Statement of Operations Data:                                                                                                                  |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Revenues:                                                                                                                                      |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|                                                                                                                                               | Service fees                    |                        | $          | 33,606,782 |            |      | $          | 29,603,510 |            |      | $          | 21,679,291 |            |   | $           | 13,311,370 |            |   | $           | 6,378,175 |           
|                                                                                                                                               | Professional services and other |                        |            | 4,800,833  |            |      |            | 2,750,673  |            |      |            | 2,956,472  |            |   |             | 2,332,940  |            |   |             | 2,067,360 |           
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|                                                                                                                                               |                                 | Total revenues         |            |            | 38,407,615 |      |            |            | 32,354,183 |      |            |            | 24,635,763 |   |             |            | 15,644,310 |   |             |           | 8,445,535  | 
|                                                                                                                                               | Cost of revenues                |                        |            | 15,502,564 |            |      |            | 14,627,981 |            |      |            | 14,313,734 |            |   |             | 13,170,656 |            |   |             | 9,081,269 |           
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Gross profit (loss)                                                                                                                            |                                 |                        | 22,905,051 |            |            |      | 17,726,202 |            |            |      | 10,322,029 |            |            |   | 2,473,654   |            |            |   | (635,734    | )        
|                                                                                                                                               | General and administrative      |                        |            | 8,627,640  |            |      |            | 7,037,884  |            |      |            | 6,930,462  |            |   |             | 6,370,848  |            |   |             | 3,894,475 |           
|                                                                                                                                               | Sales and marketing             |                        |            | 6,433,211  |            |      |            | 5,368,177  |            |      |            | 5,931,222  |            |   |             | 8,972,094  |            |   |             | 5,266,044 |           
|                                                                                                                                               | Systems and development         |                        |            | 3,830,565  |            |      |            | 4,344,765  |            |      |            | 5,854,866  |            |   |             | 6,246,174  |            |   |             | 3,998,936 |           
|                                                                                                                                               | Non-recurring charges           |                        |            |           |            |      |            |           |            |      |            | 209,434    |            |   |             |           |            |   |             |          |           
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|                                                                                                                                               |                                 | Total expenses         |            |            | 18,891,416 |      |            |            | 16,750,826 |      |            |            | 18,925,984 |   |             |            | 21,589,116 |   |             |           | 13,159,455 | 
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Income (loss) from operations                                                                                                                  |                                 |                        | 4,013,635  |            |            |      | 975,376    |            |            |      | (8,603,955 | )          |            |   | (19,115,462 | )          |            |   | (13,795,189 | )        
|Other (expense) income                                                                                                                         |                                 |                        | (1,234,081 | )          |            |      | (1,380,959 | )          |            |      | (2,291,756 | )          |            |   | 501,680     |            |            |   | (34,045     | )        
|Gain (loss) from extinguishment of
    debt (1)                                                                                                |                                 |                        |           |            |            |      |           |            |            |      | 1,083,153  |            |            |   |            |            |            |   | (885,407    | )        
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Income (loss) before change in accounting
    principle                                                                                        |                                 |                        | 2,779,554  |            |            |      | (405,583   | )          |            |      | (9,812,558 | )          |            |   | (18,613,782 | )          |            |   | (14,714,641 | )        
|Change in accounting principle (2)                                                                                                             |                                 |                        |           |            |            |      |           |            |            |      |           |            |            |   | (216,818    | )          |            |   |            |          
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Income (loss) before income tax provision                                                                                                      |                                 |                        | 2,779,554  |            |            |      | (405,583   | )          |            |      | (9,812,558 | )          |            |   | (18,830,600 | )          |            |   | (14,714,641 | )        
|Income tax provision                                                                                                                           |                                 |                        | 15,785     |            |            |      |           |            |            |      |           |            |            |   |            |            |            |   |            |          
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Net income (loss)                                                                                                                              |                                 |                        | 2,763,769  |            |            |      | (405,583   | )          |            |      | (9,812,558 | )          |            |   | (18,830,600 | )          |            |   | (14,714,641 | )        
|Preferred stock accretion                                                                                                                      |                                 |                        |           |            |            |      |           |            |            |      |           |            |            |   |            |            |            |   | (2,236,716  | )        
|Beneficial return on preferred shares (3)                                                                                                      |                                 |                        |           |            |            |      |           |            |            |      |           |            |            |   |            |            |            |   | (2,668,109  | )        
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Net income (loss) available for common
    stockholders                                                                                        |                                 | $                      | 2,763,769  |            |            | $    | (405,583   | )          |            | $    | (9,812,558 | )          |            | $ | (18,830,600 | )          |            | $ | (19,619,466 | )        
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Net income (loss) per share                                                                                                                    |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|                                                                                                                                               | Basic                           |                        | $          | 0.18       |            |      | $          | (0.03      | )          |      | $          | (0.82      | )          |   | $           | (1.64      | )          |   | $           | (2.45     | )         
|                                                                                                                                               | Diluted                         |                        |            | 0.17       |            |      |            | (0.03      | )          |      |            | (0.82      | )          |   |             | (1.64      | )          |   |             | (2.45     | )         
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Pro forma, assuming the change in accounting
    principle was accounted for retroactively: (4) Net loss
    available for common stockholders |                                 |                        |            |            |            |      |            |            |            |      |            |            |            | $ | (18,613,782 | )          |            | $ | (19,482,536 | )        
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Basic and diluted loss per share                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            | $ | (1.62       | )          |            | $ | (2.43       | )        
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|Shares used in calculation of income
    (loss) per share                                                                                      |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          
|                                                                                                                                               | Basic                           |                        |            | 15,140,538 |            |      |            | 13,520,642 |            |      |            | 12,026,476 |            |   |             | 11,487,192 |            |   |             | 8,010,331 |           
|                                                                                                                                               | Diluted                         |                        |            | 16,685,602 |            |      |            | 13,520,642 |            |      |            | 12,026,476 |            |   |             | 11,487,192 |            |   |             | 8,010,331 |           
|                                                                                                                                               |                                 |                        |            |            |            |      |            |            |            |      |            |            |            |   |             |            |            |   |             |          




|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On June 10, 1999, we used $9.4 million
    of the net proceeds from our initial public offering to pay off
    corporate debt, which payment resulted in a one-time charge of
    $885,407. In May 2001, we used $2.2 million of our cash to
    repurchase $3.5 million of the 8% convertible subordinated
    notes, which payments resulted in a one-time gain of $1,083,153.
|   
|(2) | In the fourth quarter of 2000, we adopted a
    change in accounting principle for implementation fees,
    retroactive to January 1, 2000, under Staff Accounting
    Bulletin 101 (SAB 101), Revenue Recognition in
    Financial Statements.                                                                                                                               
|   
|(3) | We recorded a deemed beneficial return on the
    Series C preferred stock issued during the first three
    months of 1999, due to these shares being convertible into
    common stock at a discount from fair value at the date of
    issuance.                                                                                                                             
|   
|(4) | Pro forma (as if) amounts, assuming retroactive
    application of SAB 101 for period of change and all prior
    periods presented.                                                                                                                                                                                                                                            

21



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##### 



|                                                |  |                        |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|----------------------------------------------- |  | ---------------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                                                |  |                       
|                                                |  | Year Ended December 31
|                                                |  |                       
|                                                |  | 2003                   |            | 2002 |  | 2001 |            | 2000 |  | 1999
|                                                |  |                        |            |      |  |      |            |      |  |     
|Balance Sheet Data:                             |  |                        |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Cash, cash equivalents and investments          |  | $                      | 13,633,926 |      |  | $    | 6,785,827  |      |  | $    | 7,703,622  |  |  | $ | 21,459,931 |  |  | $ | 21,494,116 | 
|Working capital                                 |  |                        | 15,456,994 |      |  |      | 8,650,044  |      |  |      | 8,785,201  |  |  |   | 21,338,693 |  |  |   | 20,895,369 | 
|Total assets                                    |  |                        | 26,851,959 |      |  |      | 21,329,940 |      |  |      | 21,521,614 |  |  |   | 35,128,428 |  |  |   | 29,217,175 | 
|Notes payable, less current portion             |  |                        |           |      |  |      | 12,000,000 |      |  |      | 13,000,000 |  |  |   | 20,000,000 |  |  |   |           | 
|Capital lease obligations, less current portion |  |                        | 10,521     |      |  |      | 111,491    |      |  |      | 348,552    |  |  |   | 232,125    |  |  |   | 329,480    | 
|Other non-current liabilities                   |  |                        | 353,754    |      |  |      | 355,662    |      |  |      | 566,539    |  |  |   | 1,193,404  |  |  |   |           | 
|Total liabilities                               |  |                        | 3,881,040  |      |  |      | 15,831,810 |      |  |      | 17,183,999 |  |  |   | 25,923,458 |  |  |   | 3,750,141  | 
|Stockholders equity                            |  |                        | 22,970,919 |      |  |      | 5,498,130  |      |  |      | 4,337,615  |  |  |   | 9,204,970  |  |  |   | 25,467,034 | 



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the financial statements and related notes
included elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from the results
anticipated in these forward-looking statements as a result of
factors including, but not limited to, those under
Business Risk Factors and elsewhere in this
report.

Overview

We are a leading outsourcer of Internet banking,
payment and customer contact services to financial institution
clients nationwide. Our services, branded in the clients
name, integrate seamlessly into a single-vendor, end-to-end
solution, supported by 24x7 customer care, targeted consumer
marketing, training and other network and technical professional
products and services.

Registered customers using Internet banking, bill
payment or both, are the major driver of our revenue. During
2003 the number of customers using our banking services
increased by 3% and the number of customers using our payment
services increased 61%, for an overall 35% increase in
customers. This resulted in a 19% increase in revenue. While we
have seen some reduction in average monthly recurring revenue
per user, due largely to our decision to fix price the banking
service to our clients, this has been more than offset by a
decline in the average monthly recurring cost per user. Although
the average monthly recurring revenue per user decreased by 15%
in 2003, the average monthly recurring gross margin per user
increased from 55% in 2002 to 57% in 2003 as a result of a 19%
decrease in the average monthly recurring cost of revenues per
user.

We have long-term service contracts with our
financial institution clients. The majority of our revenue is
recurring, though these contracts also provide for
implementation, set-up and other non-recurring fees. Internet
banking services revenue is based either on a monthly license
fee allowing our financial institution client to register an
unlimited number of customers, or on a monthly fee for each
registered customer. Payment services revenue is based on either
a monthly fee for each customer enrolled, a fee per executed
transaction, or a combination of the two. Our financial
institution clients pay all of our fees and then determine if or
how they want to pass these costs on to their customers. They
typically provide Internet banking services to customers free of
charge, as they derive significant potential benefits including
account retention, delivery and paper cost savings, account
consolidation and cross-selling of other products. However,
almost all of our financial institution clients charge their
customers for providing payment services.

As a network-based service provider, we have made
substantial up-front investments in infrastructure, particularly
for our proprietary systems. While we continue to incur ongoing
development and maintenance costs, we believe the infrastructure
we have built provides us with significant operating leverage.
In 2003 we began an effort to upgrade and rewrite certain of our
applications infrastructure that will span a period of two to
three years. We expect that this effort will require incremental
capital expenditures, primarily for additional development
labor, of between $3.0 million and $5.0 million over
that period.

22



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##### 



We continue to automate processes and develop
applications that allow us to make only small increases in labor
and other operating costs relative to increases in customers and
transactions. We believe our financial and operating performance
will be based primarily on our ability to leverage additional
users and transactions over this relatively fixed cost base.

Critical Accounting Policies

The policies discussed below are considered by
management to be critical to an understanding of our financial
statements because their application places the most significant
demands on managements judgment, with financial reporting
results relying on estimates about the effect of matters that
are inherently uncertain. Specific risks for these critical
accounting policies are described in the following paragraphs.
For all of these policies, management cautions that future
events rarely develop exactly as forecast, and the best
estimates routinely require adjustment.

The provision for losses on accounts receivable
and allowance for doubtful accounts are recognized based on our
estimate, which considers our historical loss experience,
including the need to adjust for current conditions, and
judgments about the probable effects of relevant observable data
and financial health of specific customers. We reduced the
allowance for doubtful accounts $10,000 during 2003. There were
no write-offs of uncollectible accounts in 2003. At
December 31, 2003 the allowance for doubtful accounts was
$67,000, which represents managements estimate of the
probable losses in the accounts receivable balance at
December 31, 2003. While the allowance for doubtful
accounts and the provision for losses on accounts receivable
depend to a large degree on future conditions, management does
not forecast significant adverse developments in 2004.

Property and equipment, including leasehold
improvements, are recorded at cost. Software and hardware
consisting of central processing systems and terminals represent
the majority of the property and equipment and are potentially
subject to technological changes and obsolescence. Depreciation
is calculated using the straight-line method over the estimated
useful lives of the related assets, which is generally five
years. Equipment recorded under capital leases is amortized over
the estimated useful life of the asset.

We capitalize the cost of computer software
developed or obtained for internal use in accordance with
Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use. Capitalized computer software costs consist
primarily of payroll-related and consulting costs incurred
during the development stage. We expense costs related to
preliminary project assessments, research and development,
re-engineering, training and application maintenance as they are
incurred. Capitalized software costs are being depreciated on a
straight-line method over a period of three years upon being
placed in service. We periodically evaluate the assets for
recoverability when events or circumstances indicate a potential
impairment.

We generate revenues from service fees,
professional services, and other supporting services. Service
fees are primarily composed of three business lines, Internet
banking services, payment services and consumer contact
services. Revenues from service fees include new user
registration fees, account access fees, transaction fees,
customer service fees and relationship marketing support fees.
Revenue from service fees are recognized over the term of the
contract as the services are provided.

Professional services revenues consist of
implementation fees associated with the linking of our financial
institution clients to our QuotienSM
e-financial suite through various networks, web development and
hosting fees, training fees and communication services. In
accordance with Staff Accounting Bulletin No. 101
Revenue Recognition in Financial Statements(SAB 101), as superseded by SAB 104,
which we adopted effective January 1, 2000, implementation
fees and related direct implementation costs are recognized on a
straight line basis over the contract term as the services are
provided, which typically range from one to five years
(generally three years). Prior to 2000, we recognized
nonrefundable implementation fees as revenue under the
percentage of completion method as certain milestone output
measures were completed. Due to the adoption of SAB 101,
revenue that was previously recognized under our prior revenue
recognition policy will be recognized under our revised revenue
recognition policy through periods up to 2004 because some
contract periods extend through 2004. During the years ended
December 31, 2003, 2002 and 2001, we recognized

23



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##### 



revenue of $37,000, $275,000, and $541,000,
respectively, and related direct incremental costs that were
included in the cumulative effect adjustment at January 1,
2000. Revenue from web development, web hosting and training are
recognized over the term of the contract as the services are
provided.


Other revenue consists of service fees associated
with enhanced third-party solutions and termination fees.
Service fees for enhanced third-party solutions include fully
integrated bill payment and account retrieval through
Intuits Quicken, check ordering, inter-institution funds
transfer, account aggregation and check imaging. Revenue from
these service fees are recognized over the term of the contract
as the services are provided. Termination fees are recognized
upon termination of a contract.

In December 2002, Emerging Issues Task Force
(EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables,
(EITF 00-21) was released effective for revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. EITF 00-21 establishes new requirements
for determining whether an arrangement involving multiple
deliverables contains more than one unit of accounting. We
adopted EITF 00-21 and there has been no material impact on
the financial position or results of operations from the
adoption of EITF 00-21.

As of December 31, 2003, we have a full
valuation allowance on our deferred tax asset resulting from
$88 million of net operating loss carry forwards since the
likelihood of the realization of that asset cannot be
determined. We have cumulative losses of over $7 million
during the three years ended December 31, 2003. These
cumulative losses constitute significant negative evidence about
the realization of the deferred tax asset and our projection of
future taxable income does not provide positive evidence of
equal or greater significance to overcome the negative evidence.
Therefore, in accordance with SFAS 109 Accounting for
Income Taxes, we recognize a full valuation allowance on
our net deferred tax assets until sufficient positive evidence
exists that it is more likely than not that the
benefit will be realized.

In the third quarter of 2003, we adopted a policy
to recognize as assets the amounts underlying bill payment
checks drawn upon our escrow accounts that have been outstanding
for at least a year after reviewing legal analysis from outside
counsel to ensure that there is a basis for making a claim of
ownership to such funds. Our policy is to recognize as assets
funds from checks that have been outstanding more than a year
and are less than $200 as an offset to payment processing costs.
Checks greater than $200 will be recognized as assets after they
are outstanding for two years. During 2003, we recognized $0.6
million in assets as an offset to payment processing costs net
of a $51,000 reserve for estimated bill payments that could
potentially be processed.

Financial Condition

While we achieved net income profitability in the
first, third and fourth quarters of 2003 and expect our
profitability to be sustainable, we have historically
experienced operating losses and negative cash flow due to the
initial costs of developing our infrastructure and the early
revenues typical of an emerging market segment. As a result, at
December 31, 2003 we had an accumulated deficit of
$82.9 million. We have funded our operations primarily
through the issuance of equity and debt securities, and ongoing
working capital requirements consist primarily of personnel
costs related to providing our services and operating, enhancing
and maintaining our systems.

Cash and investments in securities
available-for-sale were $13.6 and $6.8 million as of
December 31, 2003 and 2002, respectively. The
$6.8 million increase in cash and investments resulted
primarily from cash provided by operating and financing
activities of $7.0 and $2.5 million, respectively, offset
by cash used for capital expenditures of $2.7 million.
Total liabilities decreased from $15.8 million as of
December 31, 2002 to $3.9 million as of
December 31, 2003 primarily as a result of the repurchase
and conversion of $12.0 million of 8% convertible
subordinated notes (the Convertible Notes).
Accordingly, no long term debt was outstanding as of
December 31, 2003.

24



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##### 



Results of Operations

The following table presents certain items
derived from our statements of operations expressed as a
percentage of revenue.

|                                     |                                 |                         |      |      |       |      |      |      |       |  |       |      |       | 
|------------------------------------ | ------------------------------- | ----------------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- |  | ----- | ---- | ----- | 
|                                     |                                 |                        
|                                     |                                 | Year Ended December 31,
|                                     |                                 |                        
|                                     |                                 | 2003                    |      | 2002 |       | 2001
|                                     |                                 |                         |      |      |       |     
|Statement of Operations Data:        |                                 |                         |      |      |       |      |      |      |       |  |       |     
|Revenues:                            |                                 |                         |      |      |       |      |      |      |       |  |       |     
|                                     | Banking services                |                         |      | 10.6 | %     |      |      | 16.4 | %     |  |       | 20.6 | %    
|                                     | Payment services                |                         |      | 54.8 |       |      |      | 47.2 |       |  |       | 41.9 |      
|                                     | Consumer contact services       |                         |      | 22.1 |       |      |      | 27.9 |       |  |       | 25.5 |      
|                                     | Professional services and other |                         |      | 12.5 |       |      |      | 8.5  |       |  |       | 12.0 |      
|                                     |                                 |                         |      |      |       |      |      |      |       |  |       |     
|                                     |                                 | Total revenues          |      |      | 100.0 |      |      |      | 100.0 |  |       |      | 100.0 | 
|Costs and expenses:                  |                                 |                         |      |      |       |      |      |      |       |  |       |     
|                                     | Costs of revenues               |                         |      | 40.4 |       |      |      | 45.2 |       |  |       | 58.1 |      
|                                     |                                 |                         |      |      |       |      |      |      |       |  |       |     
|Gross profit                         |                                 |                         | 59.6 |      |       |      | 54.8 |      |       |  | 41.9  |     
|                                     | General and administrative      |                         |      | 22.5 |       |      |      | 21.8 |       |  |       | 28.1 |      
|                                     | Sales and marketing             |                         |      | 16.7 |       |      |      | 16.6 |       |  |       | 24.1 |      
|                                     | Systems and development         |                         |      | 10.0 |       |      |      | 13.4 |       |  |       | 23.7 |      
|                                     | Non-recurring charges           |                         |      |     |       |      |      |     |       |  |       | 0.9  |      
|                                     |                                 |                         |      |      |       |      |      |      |       |  |       |     
|                                     |                                 | Total expenses          |      |      | 49.2  |      |      |      | 51.8  |  |       |      | 76.8  | 
|                                     |                                 |                         |      |      |       |      |      |      |       |  |       |     
|Income (loss) from operations        |                                 |                         | 10.4 |      |       |      | 3.0  |      |       |  | (34.9 | )   
|Other expense, net                   |                                 |                         | (1.9 | )    |       |      | (3.6 | )    |       |  | (4.8  | )   
|Debt conversion expense              |                                 |                         | (1.3 | )    |       |      | (0.7 | )    |       |  | (4.5  | )   
|Gain from the extinguishment of debt |                                 |                         |     |      |       |      |     |      |       |  | 4.4   |     
|                                     |                                 |                         |      |      |       |      |      |      |       |  |       |     
|Net income (loss)                    |                                 |                         | 7.2  | %    |       |      | (1.3 | )%   |       |  | (39.8 | )%  
|                                     |                                 |                         |      |      |       |      |      |      |       |  |       |     

Although inflation has slowed in recent years, it
is still a factor in our economy and we do not believe it will
have a material impact on the results of operations.

Year Ended December 31, 2003 Compared
to the Year Ended December 31, 2002

Revenues

We generate revenue from Internet banking
services, payment services, consumer contact services and
professional services and other revenue. Revenue increased
$6.0 million, or 19%, to $38.4 million for the year
ended December 31, 2003, from $32.4 million for the
same period of 2002. This increase was attributable to 38% and
75% increases in payment services and professional services and
other revenue, respectively, partially offset by 23% and 6%
decreases in Internet banking services and consumer contact
services revenue, respectively.

25



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##### 



|                                  |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |     |    |  
|--------------------------------- | ------------------------------- | -------------- | - | ------ | ---- | ---------- | - | ------ | ---- |  | - | ----- | --- |  |  | --- | -- | -
|                                  |                                 |                |   |        |      |           
|                                  |                                 | Year Ended     |   |       
|                                  |                                 | December 31,   |   | Change
|                                  |                                 |                |   |       
|                                  |                                 | 2003           |   | 2002   |      | Difference |   | %     
|                                  |                                 |                |   |        |      |            |   |       
|Revenues (in millions):           |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Banking services                |                | $ | 4.1    |      |            | $ | 5.3    |      |  | $ | (1.2  | )   |  |  | (23 | )%
|                                  | Payment services                |                |   | 21.0   |      |            |   | 15.3   |      |  |   | 5.7   |     |  |  | 38  | % 
|                                  | Consumer contact services       |                |   | 8.5    |      |            |   | 9.0    |      |  |   | (0.5  | )   |  |  | (6  | )%
|                                  | Professional services and other |                |   | 4.8    |      |            |   | 2.8    |      |  |   | 2.0   |     |  |  | 75  | % 
|                                  |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  |                                 | Total revenues |   | $      | 38.4 |            |   | $      | 32.4 |  |   | $     | 6.0 |  |  |     | 19 | %
|Users and transactions (000s):    |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Internet banking services users |                |   | 416    |      |            |   | 403    |      |  |   | 13    |     |  |  | 3   | % 
|                                  | Payment services users          |                |   | 528    |      |            |   | 327    |      |  |   | 201   |     |  |  | 61  | % 
|                                  | All services users              |                |   | 841    |      |            |   | 623    |      |  |   | 218   |     |  |  | 35  | % 
|                                  | Payment transactions            |                |   | 24,825 |      |            |   | 16,491 |      |  |   | 8,334 |     |  |  | 51  | % 
|Average monthly revenue per user: |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Internet banking services       |                | $ | 0.83   |      |            | $ | 1.24   |      |  | $ | (0.41 | )   |  |  | (33 | )%
|                                  | Payment services                |                |   | 4.10   |      |            |   | 4.50   |      |  |   | (0.40 | )   |  |  | (9  | )%
|Adoption rates:                   |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Internet banking services(1)    |                |   | 16.8   | %    |            |   | 11.2   | %    |  |   | 5.6   | %   |  |  | 50  | % 
|                                  | Payment services(2)             |                |   | 5.1    | %    |            |   | 4.2    | %    |  |   | 0.9   | %   |  |  | 21  | % 



---

Notes:




|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the percentage of users subscribing to
    our Internet banking services out of the total number of
    checking accounts enabled for banking services.
|   
|(2) | Represents the percentage of users subscribing to
    our payment services out of the total number of checking
    accounts enabled for payment services.         

Internet Banking Services.During 2003 Internet banking services
revenue decreased $1.2 million to $4.1 million, driven
by a loss of Internet banking services revenue resulting from
the departures of Calfed and First Virginia in March and October
2003, respectively. Internet banking services revenue generated
by our remaining client base remained flat versus 2002 even
though the number of year-end Internet banking services users
increased by 3% compared to the prior year-end. This was the
result of a 33% decrease in the average monthly revenue per
Internet banking services user. This decrease was attributable
to our decision to move from a monthly user fee pricing model to
a monthly license fee pricing model for Internet banking
services in an effort to drive adoption of those services. This
allows our financial institution clients to register an
unlimited number of Internet banking services users (as
evidenced by the 50% increase in Internet banking services
adoption in 2003) to whom we can then attempt to up-sell our
higher margin bill pay products and other services.

Payment Services.Payment services revenue increased to
$21.0 million in 2003 compared to $15.3 million in the
prior year. Even with the departures of Calfed and First
Virginia during 2003, payment services revenue increased 38%,
driven by a 61% increase in the number of year-end payment
services users and a 51% increase in the number of payment
transactions processed during the year. The increases in
year-end payment services users and the number of payment
transactions processed were driven by two factors: an increase
in financial institution clients using our payment services and
an increase in payment services adoption. During 2003, the
number of financial institution clients using our payment
services increased from 534 clients to 633 clients.
Additionally, we were able to increase the adoption rate of our
payment services from 4.2% at the end of 2002 to 5.1% at the end
of 2003.

Consumer Contact Services.Consumer contact services revenue
decreased from $9.0 million in 2002 to $8.5 million in
2003 as a result of the departures of Calfed and First Virginia
in March and October 2003, respectively. However, these losses
were partially offset by increased consumer contact services
revenue from

26



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our remaining client base driven by an increase
of 35% in the number of year-end customers utilizing either
Internet banking or payment services.


Professional Services and Other.Professional services and other
revenue increased $2.0 million from $2.8 million in
2002 to $4.8 million in 2003. This increase was the result
of a $2.2 million termination payment received from Calfed.
Including this payment, we received $2.8 million in
termination payments during the year ended December 31,
2003, compared to $0.5 million during the year ended
December 31, 2002. This increase in termination payments
during 2003 resulting from the Calfed termination payment was
offset by a decrease in implementation fee revenue resulting
from lower average implementation fees per enabled bank.

Costs
and Expenses

|                                  |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |     |    |    |  
|--------------------------------- | ------------------------------- | ------------ | ------------------------ | ------- | -- | ------------- | ---- | ------------ | -- | ---- | --- | ----- | - | --- | --- | --- | -- | -- | -
|                                  |                                 |              |                          |         |    |              
|                                  |                                 | Year Ended   |                          |        
|                                  |                                 | December 31, |                          | Change 
|                                  |                                 |              |                          |        
|                                  |                                 | 2003(1)      |                          | 2002(1) |    | Difference(1) |      | % Difference
|                                  |                                 |              |                          |         |    |               |      |             
|Revenues                          |                                 | $            | 38.4                     |         |    | $             | 32.4 |              |    | $    | 6.0 |       |   |     | 19  | %  
|Costs of revenues                 |                                 |              | 15.5                     |         |    |               | 14.7 |              |    |      | 0.8 |       |   |     | 6   | %  
|                                  |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|Gross profit                      |                                 | $            | 22.9                     |         |    | $             | 17.7 |              |    | $    | 5.2 |       |   |     | 29  | %  
|                                  | Gross margin                    |              |                          | 60      | %  |               |      | 55           | %  |      |     | 5     | % |     |     | 9   | % 
|Operating expenses                |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|                                  | General & administrative        |              | $                        | 8.6     |    |               | $    | 7.0          |    |      | $   | 1.6   |   |     |     | 23  | % 
|                                  | Sales & marketing               |              |                          | 6.5     |    |               |      | 5.4          |    |      |     | 1.1   |   |     |     | 20  | % 
|                                  | Systems & development           |              |                          | 3.8     |    |               |      | 4.3          |    |      |     | (0.5  | ) |     |     | (12 | )%
|                                  |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|                                  |                                 |              | Total operating expenses |         |    | 18.9          |      |              |    | 16.7 |     |       |   | 2.2 |     |     |    | 13 | %
|                                  |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|Income from operations            |                                 |              | 4.0                      |         |    |               | 1.0  |              |    |      | 3.0 |       |   |     | 311 | %  
|Other expense, net                |                                 |              | (1.2                     | )       |    |               | (1.4 | )            |    |      | 0.2 |       |   |     |     |    
|                                  |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|Net income (loss)                 |                                 | $            | 2.8                      |         |    | $             | (0.4 | )            |    | $    | 3.2 |       |   |     |     |    
|                                  |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|                                  | Diluted income (loss) per share |              | $                        | 0.17    |    |               | $    | (0.03        | )  |      | $   | 0.20  |   |     |     |     |   
|Average monthly metrics per user: |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|                                  | Recurring revenues(2)           |              | $                        | 3.84    |    |               | $    | 4.51         |    |      | $   | (0.67 | ) |     |     | (15 | )%
|                                  | Recurring costs of revenues(2)  |              |                          | 1.64    |    |               |      | 2.02         |    |      |     | (0.38 | ) |     |     | (19 | )%
|                                  |                                 |              |                          |         |    |               |      |              |    |      |     |       |   |     |     |    
|                                  | Gross profit                    |              | $                        | 2.20    |    |               | $    | 2.49         |    |      | $   | (0.29 | ) |     |     | (12 | )%
|                                  |                                 | Gross margin |                          |         | 57 | %             |      |              | 55 | %    |     |       | 2 | %   |     |     | 4  | % 



---

Notes:




|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | In millions except for diluted income
    (loss) per share and per user metrics.                                    
|   
|(2) | Calculation excludes revenues and costs
    associated with professional services and implementation
    activities.

Costs of Revenues.Costs of revenues encompasses the
direct expenses associated with providing our services. These
expenses include telecommunications, payment processing, systems
operations, customer service, implementation and professional
service work. Costs of revenues increased by $0.8 million,
or 6%, to $15.5 million for the year ended
December 31, 2003, from $14.7 million for 2002. This
increase was primarily attributable to a $1.0 million
increase in bill payment processing costs, a $0.5 million
increase in systems operations support costs and a
$0.3 million increase in telecommunications costs, offset
by a $0.8 million decrease in customer service costs. The
increases in payment processing, systems operations support and
telecommunications costs resulted from increases in the number
of billable users and transactions and in the cost of supporting
the systems on which our users conduct their transactions. The
decrease in customer service costs was due to reductions in
headcount resulting from technological efficiencies implemented
over the past two years. Although total costs of revenues
increased by 6% in 2003, the average monthly recurring costs of
revenues per user decreased by 19% due to a 35% increase in the
number of customers using our services.

27



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##### 



Additionally, beginning in the third quarter of
2003, we began to offset payment costs with idle funds we
recapture from bill payment transactions that have not been
completed after 12 or 24 months from the authorization of the
transactions. The amount of funds recovered and recognized in
2003 was $0.6 million.


Gross Profit.Gross
profit increased to $22.9 million for the year ended
December 31, 2003 from $17.7 million for the same
period of 2002. Gross margin improved to 60% from 55% in the
prior year, due to increased service fees leveraged over our
relatively fixed cost of revenues in addition to the
$2.2 million termination fee received from Calfed. Gross
profit also improved as a result of improved efficiency from
technology development and cost control initiatives.

General and Administrative.General and administrative expenses
primarily consist of salaries for executive, administrative and
financial personnel, consulting expenses and facilities costs
such as office leases, insurance, and depreciation. General and
administrative expenses increased $1.6 million, or 23%, to
$8.6 million in 2003, from $7.0 million in 2002. The
increase in general and administrative expenses was primarily
attributable to increased salary and benefits costs and the
implementation of a profit sharing plan in 2003 and increased
depreciation expenses.

Sales and Marketing.Sales and marketing expenses include
salaries and commissions paid to sales and marketing personnel,
consumer marketing costs, public relations costs, and other
costs incurred in marketing our services and products. Sales and
marketing expenses increased $1.1 million, or 20%, to
$6.5 million in 2003, from $5.4 million in 2002. The
primary reason for the increase in sales and marketing expenses
was increased salary and benefits costs and the implementation
of a profit sharing plan in 2003.

Systems and Development.Systems and development expenses
include salaries, consulting fees and all other expenses
incurred in supporting the research and development of new
services and products and new technology to enhance existing
products. Systems and development expenses decreased
$0.5 million, or 12%, to $3.8 million in 2003, from
$4.3 million in 2002. The decrease in our systems and
development expenses was due to an increase in work associated
with capitalizable projects as defined by Statement of
Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. These
projects included major enhancements to our applications
infrastructure and development of our Money HQSM product. We
capitalized $1.6 million of development costs associated
with software developed or obtained for internal use in 2003,
compared to $1.1 million in 2002. The decrease in expenses
related to this shift in work was partially offset by an
increase in salary and benefits costs as a result of the
restoration of salaries and the implementation of a profit
sharing plan in 2003.

Income from Operations.Income from operations increased
$3.0 million, or 311%, to $4.0 million for the year
ended December 31, 2003 from $1.0 million in 2002. The
significant increase in income from operations was primarily due
to increases in service fee revenue leveraged over relatively
fixed costs and the $2.2 million termination fee received
from Calfed.

Other Expense, Net.Interest income decreased $48,000, or
38%, to $79,000 in 2003, from $127,000 for 2002. The decrease
was due to lower interest rates. Interest and other expense
decreased $0.4 million, or 33%, to $0.8 million in
2003, as compared to $1.3 million in 2002, as the result of
lower interest expense and amortization of debt issuance costs
due to the repurchase and conversion of the Convertible Notes in
2003. The conversion of $1.0 million of Convertible Notes
in March 2002 resulted in a non-cash debt conversion expense of
$0.2 million attributable to the issuance of 45,031
incremental shares of common stock. The repurchase of
$3.9 million of Convertible Notes in June 2003 and the
conversion of $8.1 million of Convertible Notes in October
and November 2003 resulted in a non-cash debt conversion expense
of $0.5 million attributable to the issuance of 2,001,314
incremental shares of common stock.

Net Income (Loss) Per Share.Net income was $2.8 million for
the year ended December 31, 2003, compared to a loss of
$0.4 million for 2002. Basic income (loss) per share
was $0.18 and $(0.03) for the years ended December 31, 2003
and 2002, respectively, while diluted income (loss) per
share was $0.17 and $(0.03) for the years ended
December 31, 2003 and 2002, respectively.

28



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##### 



Year Ended December 31, 2002 Compared
to the Year Ended December 31, 2001

Revenues

Revenue increased $7.8 million, or 31%, to
$32.4 million for the year ended December 31, 2002,
from $24.6 million for the same period of 2001. This
increase was attributable to 5%, 48% and 44% increases in
Internet banking services revenue, payment services revenue and
consumer contact services revenue, respectively, partially
offset by a 7% decrease in professional services and other
revenue.

|                                  |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |     |    |  
|--------------------------------- | ------------------------------- | -------------- | - | ------ | ---- | ---------- | - | ------ | ---- |  | - | ----- | --- |  |  | --- | -- | -
|                                  |                                 |                |   |        |      |           
|                                  |                                 | Year Ended     |   |       
|                                  |                                 | December 31,   |   | Change
|                                  |                                 |                |   |       
|                                  |                                 | 2002           |   | 2001   |      | Difference |   | %     
|                                  |                                 |                |   |        |      |            |   |       
|Revenues (in millions):           |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Banking services                |                | $ | 5.3    |      |            | $ | 5.1    |      |  | $ | 0.2   |     |  |  | 5   | % 
|                                  | Payment services                |                |   | 15.3   |      |            |   | 10.3   |      |  |   | 5.0   |     |  |  | 48  | % 
|                                  | Consumer contact services       |                |   | 9.0    |      |            |   | 6.3    |      |  |   | 2.7   |     |  |  | 44  | % 
|                                  | Professional services and other |                |   | 2.8    |      |            |   | 2.9    |      |  |   | (0.1  | )   |  |  | (7  | )%
|                                  |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  |                                 | Total revenues |   | $      | 32.4 |            |   | $      | 24.6 |  |   | $     | 7.8 |  |  |     | 31 | %
|Users and transactions (000s):    |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Internet banking services users |                |   | 403    |      |            |   | 292    |      |  |   | 111   |     |  |  | 38  | % 
|                                  | Payment services users          |                |   | 327    |      |            |   | 233    |      |  |   | 94    |     |  |  | 40  | % 
|                                  | All services users              |                |   | 623    |      |            |   | 449    |      |  |   | 174   |     |  |  | 39  | % 
|                                  | Payment transactions            |                |   | 16,491 |      |            |   | 11,323 |      |  |   | 5,168 |     |  |  | 46  | % 
|Average monthly revenue per user: |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Internet banking services       |                | $ | 1.24   |      |            | $ | 1.76   |      |  | $ | (0.52 | )   |  |  | (30 | )%
|                                  | Payment services                |                |   | 4.50   |      |            |   | 4.29   |      |  |   | 0.21  |     |  |  | 5   | % 
|Adoption rates:                   |                                 |                |   |        |      |            |   |        |      |  |   |       |     |  |  |    
|                                  | Internet banking services(1)    |                |   | 11.2   | %    |            |   | 7.2    | %    |  |   | 4.0   | %   |  |  | 56  | % 
|                                  | Payment services(2)             |                |   | 4.2    | %    |            |   | 2.7    | %    |  |   | 1.5   | %   |  |  | 56  | % 



---

Notes:




|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the percentage of users subscribing to
    our Internet banking service out of the total number of checking
    accounts enabled for banking services.
|   
|(2) | Represents the percentage of users subscribing to
    our payment services out of the total number of checking
    accounts enabled for payment services.        

Internet Banking Services.Although the number of year-end
Internet banking services users increased by 38% in 2002,
Internet banking services revenue increased only 5% from
$5.1 million in 2001 to $5.3 million in 2002. This is
the result of a 30% decrease in the average monthly revenue per
Internet banking services user. This decrease was attributable
to our decision to move from a monthly user fee pricing model to
a monthly license fee pricing model for Internet banking
services in an effort to drive adoption of those services. This
allows our financial institution clients to register an
unlimited number of Internet banking services users (as
evidenced by the 56% increase in Internet banking services
adoption in 2002) to whom we can then attempt to up-sell our
higher margin bill pay products and services.

Payment Services.Payment services revenue increased to
$15.3 million in 2002 compared to $10.3 million in the
prior year. This increase was driven by a 40% increase in the
number of year-end payment services users and a 46% increase in
the number of payment transactions processed during the year.
The increases in year-end payment services users and the number
of payment transactions processed were driven by two factors: an
increase in financial institution clients using our payment
services and an increase in payment services adoption. During
2002, the number of financial institution clients using our
payment services increased from 472 clients to 534 clients.
Additionally, even with the increased pool of potential
customers to

29



---



##### 



which to sell, we were able to increase the
adoption rate of our payment services from 2.7% at the end of
2001 to 4.2% at the end of 2002.


Consumer Contact Services.Consumer contact services revenue
increased 44% from $6.3 million in 2001 to
$9.0 million in 2002 as a result of an increase of 39% in
the number of year-end customers utilizing either Internet
banking or payment services.

Professional Services and Other.Professional services and other
revenue remained relatively flat at $2.8 million in 2002
compared to $2.9 million in 2001. This slight decrease was
due to a decrease in implementation fees resulting from a lower
number of new clients that were enabled in 2002 versus 2001.
Also included in other revenues was $0.5 million and
$0.3 million from termination payments during the years
ended December 31, 2002 and 2001, respectively.

Costs
and Expenses

|                                  |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |      |    |     |   
|--------------------------------- | ----------------------------- | ------------ | ------------------------ | ------- | -- | ------------- | ---- | ------------ | -- | ---- | ---- | ----- | -- | ---- | -- | ---- | -- | --- | --
|                                  |                               |              |                          |         |    |              
|                                  |                               | Year Ended   |                          |        
|                                  |                               | December 31, |                          | Change 
|                                  |                               |              |                          |        
|                                  |                               | 2002(1)      |                          | 2001(1) |    | Difference(1) |      | % Difference
|                                  |                               |              |                          |         |    |               |      |             
|Revenues                          |                               | $            | 32.4                     |         |    | $             | 24.6 |              |    | $    | 7.8  |       |    |      | 31 | %   
|Costs of revenues                 |                               |              | 14.7                     |         |    |               | 14.3 |              |    |      | 0.4  |       |    |      | 2  | %   
|                                  |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |     
|Gross profit                      |                               | $            | 17.7                     |         |    | $             | 10.3 |              |    | $    | 7.4  |       |    |      | 72 | %   
|                                  | Gross margin                  |              |                          | 55      | %  |               |      | 42           | %  |      |      | 13    | %  |      |    | 31   | % 
|Operating expenses                |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |     
|                                  | General & administrative      |              | $                        | 7.0     |    |               | $    | 6.9          |    |      | $    | 0.1   |    |      |    | 2    | % 
|                                  | Sales & marketing             |              |                          | 5.4     |    |               |      | 5.9          |    |      |      | (0.5  | )  |      |    | (9   | )%
|                                  | Systems & development         |              |                          | 4.3     |    |               |      | 5.9          |    |      |      | (1.6  | )  |      |    | (26  | )%
|                                  | Non-recurring charges         |              |                          |        |    |               |      | 0.2          |    |      |      | (0.2  | )  |      |    | (100 | )%
|                                  |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |     
|                                  |                               |              | Total operating expenses |         |    | 16.7          |      |              |    | 18.9 |      |       |    | (2.2 | )  |      |    | (11 | )%
|Income (loss) from operations     |                               |              | 1.0                      |         |    |               | (8.6 | )            |    |      | 9.6  |       |    |      |    |     
|Other expense, net                |                               |              | (1.4                     | )       |    |               | (1.2 | )            |    |      | (0.2 | )     |    |      |    |     
|                                  |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |     
|Net loss                          |                               | $            | (0.4                     | )       |    | $             | (9.8 | )            |    |      | 9.4  |       |    |      |    |     
|                                  |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |     
|                                  | Diluted loss per share        |              | $                        | (0.03   | )  |               | $    | (0.82        | )  |      | $    | 0.79  |    |      |    |      |   
|Average monthly metrics per user: |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |     
|                                  | Recurring revenues(2)         |              | $                        | 4.51    |    |               | $    | 4.78         |    |      | $    | (0.27 | )  |      |    | (6   | )%
|                                  | Recurring cost of revenues(2) |              |                          | 2.02    |    |               |      | 2.83         |    |      |      | (0.81 | )  |      |    | (29  | )%
|                                  |                               |              |                          |         |    |               |      |              |    |      |      |       |    |      |    |     
|                                  | Gross profit                  |              | $                        | 2.49    |    |               | $    | 1.95         |    |      | $    | 0.54  |    |      |    | 28   | % 
|                                  |                               | Gross margin |                          |         | 55 | %             |      |              | 41 | %    |      |       | 14 | %    |    |      | 34 | %  



---

Notes:




|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | In millions except for diluted loss per share and
    per user metrics.                                             
|   
|(2) | Calculation excludes revenues and costs
    associated with professional services and implementation
    activities.

Costs of Revenue.Costs of revenue encompasses the
direct expenses associated with providing our services. These
expenses include telecommunications, payment processing, systems
operations, customer service, implementation and professional
services work. Costs of revenues increased by $0.4 million,
or 2%, to $14.7 million for the year ended
December 31, 2002, from $14.3 million in 2001. This
increase was primarily attributable to a $0.3 million
increase in bill payment processing costs, a $0.6 million
increase in implementation costs, a $0.2 million increase
in systems operations support costs, offset by a
$0.8 million decrease in customer service costs. The
increases in payment processing, implementation and systems
operations support costs resulted from increases in the number
of billable users and transactions and in the cost of supporting
the systems on which our users conduct their transactions. The
decrease in customer service costs was due to

30



---



##### 



reductions in headcount resulting from
technological efficiencies implemented during the
2002 year. Although total cost of revenues increased by 2%
in 2002, the average monthly recurring cost of revenues per user
decreased by 29%, due to a 39% increase in the number of
customers using our services.


Gross Profit.Gross
profit increased to $17.7 million for the year ended
December 31, 2002 from $10.3 million for 2001. Gross
margin improved to 55% from 42% in the prior year, primarily due
to increased service fees leveraged over our relatively fixed
cost of revenue. Gross profit also improved as a result of
improved efficiency from technology development and cost control
initiatives.

General and Administrative.General and administrative expenses
primarily consist of salaries for executive, administrative and
financial personnel, consulting expenses and facilities costs
such as office leases, insurance, and depreciation. General and
administrative expenses increased $0.1 million, or 2%, to
$7.0 million in 2002, from $6.9 million in 2001. The
increase in general and administrative expenses was primarily
attributable to increased depreciation expense partially offset
by decreased compensation costs attributable to cost control
initiatives implemented in the fourth quarter of 2001.

Sales and Marketing.Sales and marketing expenses include
salaries and commissions paid to sales and marketing personnel,
consumer marketing costs, public relations costs, and other
costs incurred in marketing our services and products. Sales and
marketing expenses decreased $0.5 million, or 9%, to
$5.4 million in 2002, from $5.9 million in 2001. The
primary reason for the decrease in sales and marketing expenses
was a reduction in staff as a result of consolidating certain
client service responsibilities.

Systems and Development.Systems and development expenses
include salaries, consulting fees and all other expenses
incurred in supporting the research and development of new
services and products and new technology to enhance existing
products. Systems and development expenses decreased
$1.6 million, or 26%, to $4.3 million in 2002, from
$5.9 million in 2001. The decrease in our systems and
development expenses was primarily due to a reduction in
compensation costs and consulting fees during the year.
Additionally, in 2002 we capitalized $1.1 million of
development costs associated with software developed or obtained
for internal use in 2002.

Income (Loss) from Operations.Income from operations increased $9.6
million to $1.0 million for the year ended
December 31, 2002, from an $8.6 million loss in 2001.
The significant increase in income from operations was primarily
due to increases in service fee revenue leveraged over
relatively fixed costs and decreases in various operating
expenditures derived from our expense control initiatives.

Other Expense, Net.Interest income decreased
$0.5 million, or 79%, to $0.1 million in 2002, from
$0.6 million for 2001. The decrease was due to the lower
average cash and investment balances and lower interest rates.
Interest and other expense decreased $0.5 million, or 28%,
to $1.3 million in 2002, as compared to $1.8 million in
2001, as the result of lower interest expense and amortization
of debt issuance costs due to the conversion of Convertible
Notes. The conversion of $1.0 million of Convertible Notes
in March 2002 resulted in a non-cash debt conversion expense of
$0.2 million attributable to the issuance of 45,031
incremental shares of common stock. Until September 2005, unless
the Convertible Notes are earlier converted or repurchased, we
will continue to incur interest expense related to the
Convertible Notes.

Net Loss Per Share.Net loss was $0.4 million for the
year ended December 31, 2002, compared to a loss of
$9.8 million for 2001. Basic and diluted loss per share was
$(0.03) and $(0.82) for the years ended December 31, 2002
and 2001, respectively.

Liquidity and Capital Resources

Since inception, we have primarily financed our
operations through private placements and public offerings of
our common and preferred stock and the issuance of debt. We have
also entered into various capital lease financing agreements.
Cash and investments in available for sale securities were $13.6
million and $6.8 million as of December 31, 2003 and
2002, respectively. The $6.8 million increase in cash and
investments results from $7.0 million in cash generated by
operating activities and $2.5 million in cash generated by
financing activities, partially offset by capital expenditures
of $2.7 million.

31



---



##### 



Net cash provided by operating activities was
$7.0 million for the year ended December 31, 2003 as
compared to $2.7 million during the year ended
December 31, 2002. While cash provided by operating
activities during the years ended December 31, 2003 and
2002 resulted primarily from income from operations net of
non-cash charges, $2.2 million of the cash provided by
operating activities in 2003 was the result of the termination
payment received from Calfed.

Net cash used in investing activities for the
year ended December 31, 2003 was $4.2 million, which
was the result of a net increase of $1.5 million in
securities available-for-sale and $2.7 million in capital
expenditures. For the year ended December 31, 2002, net
cash used in investing activities was $2.6 million, of which
approximately $1.1 million was provided by sales of
securities available-for-sale offset by $3.7 million used
for capital expenditures.

Net cash provided by financing activities was
$2.5 million in the year ended December 31, 2003 as
compared to $3,300 in the year ended December 31, 2002.
During 2003 the Company generated $6.6 million in
cash $4.4 million through a private stock placement
in June 2003, and $2.2 million through the exercise of
stock options. The Company used $3.9 million of the June
2003 private stock placement to repurchase $3.9 million of
the Convertible Notes. Additionally, the Company used
$0.2 million for the repayment of capital lease
obligations. Cash provided by financing activities for the year
ended December 31, 2002 resulted primarily from the issuance
$0.3 million of common stock offset by the repayment of
capital lease obligations.

Our contractual obligations are as follows:

|                          |                   |       |           |           |  |      |         |           |  |            |         |         |  |   |         |         |  |   |   |   | 
|------------------------- | ----------------- | ----- | --------- | --------- |  | ---- | ------- | --------- |  | ---------- | ------- | ------- |  | - | ------- | ------- |  | - | - | - | 
|                          |                   | Total |           | 2004      |  | 2005 |         | 2006      |  | Thereafter
|                          |                   |       |           |           |  |      |         |           |  |           
|Capital lease obligations |                   | $     | 116,103   |           |  | $    | 105,087 |           |  | $          | 11,016  |         |  | $ |        |         |  | $ |  |  
|Operating lease           |                   |       | 729,458   |           |  |      | 729,458 |           |  |            |        |         |  |   |        |         |  |   |  |  
|Purchase obligations      |                   |       | 1,018,000 |           |  |      | 400,500 |           |  |            | 515,000 |         |  |   | 102,500 |         |  |   |  |  
|                          |                   |       |           |           |  |      |         |           |  |            |         |         |  |   |         |         |  |   |   |  
|                          | Total obligations |       | $         | 1,863,561 |  |      | $       | 1,235,045 |  |            | $       | 526,016 |  |   | $       | 102,500 |  |   |   |  | 
|                          |                   |       |           |           |  |      |         |           |  |            |         |         |  |   |         |         |  |   |   |  

Future capital requirements will depend upon many
factors, including the timing of research and product
development efforts and the expansion of our marketing effort.
We expect to continue to expend significant amounts on expansion
of facility infrastructure, ongoing research and development,
computer and related equipment, and personnel.

We currently believe that cash on hand,
investments and the cash we expect to generate from operations
will be sufficient to meet our current anticipated cash
requirements for at least the next twelve months. We expect to
have additional cash requirements over the next two to three
years because of efforts we are undertaking to upgrade and
rewrite certain of our infrastructure applications. We forecast
that all incremental expenses related to this undertaking can be
financed out of cash provided by operating activities.

There can be no assurance that additional capital
beyond the amounts currently forecasted by us will not be
required or that any such required additional capital will be
available on reasonable terms, if at all, at such time as
required. We intend to invest our cash in excess of current
operating requirements in marketable government, corporate and
mortgage-backed securities.



|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We invest primarily in short-term, investment
grade, marketable government, corporate, and mortgage-backed
debt securities. The Companys interest income is most
sensitive to changes in the general level of U.S. interest rates
and given the short-term nature of our investments, our exposure
to interest rate risk is not material. We do not have operations
subject to risks of foreign currency fluctuations, nor do we use
derivative financial instruments in our operations or investment
portfolio. We have classified all of our investments as

32



---



##### 



available-for-sale financial instruments. The
following table provides information about our
available-for-sale investments that are sensitive to changes in
interest rates.


|                                     |                   |                   |           |            |  |               |           |           |  |  |      |   | 
|------------------------------------ | ----------------- | ----------------- | --------- | ---------- |  | ------------- | --------- | --------- |  |  | ---- | - | 
|                                     |                   |                  
|                                     |                   | December 31, 2003
|                                     |                   |                  
|                                     |                   | Amortized Cost    |           | Fair Value |  | Interest Rate
|                                     |                   |                   |           |            |  |              
|U.S. government treasury obligations |                   | $                 | 3,119,026 |            |  | $             | 3,122,780 |           |  |  | 1.00 | %
|Mortgage backed securities           |                   |                   | 2,809,516 |            |  |               | 2,810,935 |           |  |  | 1.11 | %
|Commercial obligations               |                   |                   | 50,000    |            |  |               | 50,154    |           |  |  | 1.13 | %
|                                     |                   |                   |           |            |  |               |           |           |  |  |      |  
|                                     | Total investments |                   | $         | 5,978,542  |  |               | $         | 5,983,869 |  |  |      |   | 
|                                     |                   |                   |           |            |  |               |           |           |  |  |      |  

Long term debt as of December 31, 2003 is
comprised of capital lease obligations with interest rates
ranging from 4% to 13%.

Item 8.     Financial
Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

|                                                      |  |  |    | 
|----------------------------------------------------- |  |  | -- | 
|Report of Ernst & Young LLP, Independent
    Auditors |  |  | 34 | 
|Balance Sheets                                        |  |  | 35 | 
|Statements of Operations                              |  |  | 36 | 
|Statements of Stockholders Equity                    |  |  | 37 | 
|Statements of Cash Flows                              |  |  | 38 | 
|Notes to Financial Statements                         |  |  | 39 | 

33



---



##### 



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Shareholders and Board of Directors

Online Resources Corporation


We have audited the accompanying balance sheets
of Online Resources Corporation as of December 31, 2003 and
2002, and the related statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Online Resources Corporation at December 31,
2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

McLean, Virginia

February 2, 2004


34



---



##### 



ONLINE RESOURCES CORPORATION

BALANCE SHEETS

|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |             |            | 
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ----------- | ---------- |  | ---------- | ----------- | ---------- | 
|                                                        |                                                                                                                                                                                                                                   |                                           
|                                                        |                                                                                                                                                                                                                                   | December 31,                              
|                                                        |                                                                                                                                                                                                                                   |                                           
|                                                        |                                                                                                                                                                                                                                   | 2003                                       |           | 2002       
|                                                        |                                                                                                                                                                                                                                   |                                            |           |            
|Assets                                                  |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|Current assets:                                         |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        | Cash and cash equivalents                                                                                                                                                                                                         |                                            | $         | 7,650,057   |            |  | $          | 2,290,950   |           
|                                                        | Investments                                                                                                                                                                                                                       |                                            |           | 5,983,869   |            |  |            | 4,494,877   |           
|                                                        | Accounts receivable (net of allowance of $67,000
    and $77,000 at December 31, 2003 and 2002, respectively)                                                                                                                     |                                            |           | 3,935,513   |            |  |            | 3,825,801   |           
|                                                        | Deferred implementation costs                                                                                                                                                                                                     |                                            |           | 493,689     |            |  |            | 631,087     |           
|                                                        | Prepaid expenses and other current assets                                                                                                                                                                                         |                                            |           | 910,631     |            |  |            | 771,986     |           
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        |                                                                                                                                                                                                                                   | Total current assets                       |           |             | 18,973,759 |  |            |             | 12,014,701 | 
|Property and equipment, net                             |                                                                                                                                                                                                                                   |                                            | 7,344,170 |             |            |  | 7,804,229  |            
|Deferred implementation costs, less current
    portion |                                                                                                                                                                                                                                   |                                            | 416,518   |             |            |  | 401,051    |            
|Debt issuance costs                                     |                                                                                                                                                                                                                                   |                                            |          |             |            |  | 659,879    |            
|Other assets                                            |                                                                                                                                                                                                                                   |                                            | 117,512   |             |            |  | 450,080    |            
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        |                                                                                                                                                                                                                                   | Total assets                               |           | $           | 26,851,959 |  |            | $           | 21,329,940 | 
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|Liabilities and stockholders
    equity                |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|Current liabilities:                                    |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        | Accounts payable                                                                                                                                                                                                                  |                                            | $         | 646,531     |            |  | $          | 891,313     |           
|                                                        | Accrued expenses and other current liabilities                                                                                                                                                                                    |                                            |           | 660,473     |            |  |            | 984,535     |           
|                                                        | Accrued compensation                                                                                                                                                                                                              |                                            |           | 1,526,926   |            |  |            | 743,107     |           
|                                                        | Deferred revenues                                                                                                                                                                                                                 |                                            |           | 585,804     |            |  |            | 531,789     |           
|                                                        | Current portion of capital lease obligation                                                                                                                                                                                       |                                            |           | 97,031      |            |  |            | 213,913     |           
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        |                                                                                                                                                                                                                                   | Total current liabilities                  |           |             | 3,516,765  |  |            |             | 3,364,657  | 
|Capital lease obligation, less current maturities       |                                                                                                                                                                                                                                   |                                            | 10,521    |             |            |  | 111,491    |            
|Deferred revenues, less current portion                 |                                                                                                                                                                                                                                   |                                            | 302,535   |             |            |  | 355,662    |            
|Other long term liabilities                             |                                                                                                                                                                                                                                   |                                            | 51,219    |             |            |  |           |            
|Notes payable                                           |                                                                                                                                                                                                                                   |                                            |          |             |            |  | 12,000,000 |            
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        |                                                                                                                                                                                                                                   | Total liabilities                          |           |             | 3,881,040  |  |            |             | 15,831,810 | 
|Commitments and Contingencies                           |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|Stockholders equity                                    |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        | Series A convertible preferred stock, $.01
    par value; 1,000,000 shares authorized, none issued at
    December 31, 2003 and 2002                                                                                              |                                            |           |            |            |  |            |            |           
|                                                        | Series B junior participating preferred
    stock, $.01 par value; 297,500 shares authorized, none issued at
    December 31, 2003 and 2002                                                                                       |                                            |           |            |            |  |            |            |           
|                                                        | Common stock, $.0001, par value; 35,000,000
    shares authorized, 17,887,727 issued and 17,812,202 outstanding
    at December 31, 2003; and 13,781,946 issued and 13,706,421
    outstanding at December 31, 2002, respectively |                                            |           | 1,781       |            |  |            | 1,370       |           
|                                                        | Additional paid-in capital                                                                                                                                                                                                        |                                            |           | 106,128,290 |            |  |            | 91,410,356  |           
|                                                        | Accumulated deficit                                                                                                                                                                                                               |                                            |           | (82,936,679 | )          |  |            | (85,700,448 | )         
|                                                        | Treasury stock, 75,525 shares at
    December 31, 2003 and 2002                                                                                                                                                                   |                                            |           | (227,800    | )          |  |            | (227,800    | )         
|                                                        | Accumulated other comprehensive income                                                                                                                                                                                            |                                            |           | 5,327       |            |  |            | 14,652      |           
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        |                                                                                                                                                                                                                                   | Total stockholders equity                 |           |             | 22,970,919 |  |            |             | 5,498,130  | 
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            
|                                                        |                                                                                                                                                                                                                                   | Total liabilities and stockholders equity |           | $           | 26,851,959 |  |            | $           | 21,329,940 | 
|                                                        |                                                                                                                                                                                                                                   |                                            |           |             |            |  |            |            

See notes to financial statements.

35



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##### 



ONLINE RESOURCES CORPORATION

STATEMENTS OF OPERATIONS

|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |            |            |            |  
|---------------------------------------------------------- | ------------------------------------ | ----------------------- | ------------------- | ---------- | ---------- | ---------- | -------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | -
|                                                           |                                      |                        
|                                                           |                                      | Year ended December 31,
|                                                           |                                      |                        
|                                                           |                                      | 2003                    |                     | 2002       |            | 2001      
|                                                           |                                      |                         |                     |            |            |           
|Revenues:                                                  |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           | Banking services                     |                         | $                   | 4,064,083  |            |            | $        | 5,309,558  |            |            | $          | 5,075,237  |           
|                                                           | Payment services                     |                         |                     | 21,041,685 |            |            |          | 15,253,963 |            |            |            | 10,328,305 |           
|                                                           | Consumer contact services            |                         |                     | 8,501,014  |            |            |          | 9,039,989  |            |            |            | 6,275,749  |           
|                                                           | Professional services and other      |                         |                     | 4,800,833  |            |            |          | 2,750,673  |            |            |            | 2,956,472  |           
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           |                                      |                         | Total revenues      |            |            | 38,407,615 |          |            |            | 32,354,183 |            |            |            | 24,635,763 |  
|Costs and expenses:                                        |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           | Service costs                        |                         |                     | 14,331,942 |            |            |          | 13,244,837 |            |            |            | 12,826,124 |           
|                                                           | Implementation and other costs       |                         |                     | 1,170,622  |            |            |          | 1,383,144  |            |            |            | 1,487,610  |           
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           |                                      | Costs of revenues       |                     |            | 15,502,564 |            |          |            | 14,627,981 |            |            |            | 14,313,734 |           
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           |                                      | Gross profit            |                     |            | 22,905,051 |            |          |            | 17,726,202 |            |            |            | 10,322,029 |           
|                                                           | General and administrative           |                         |                     | 8,627,640  |            |            |          | 7,037,884  |            |            |            | 6,930,462  |           
|                                                           | Sales and marketing                  |                         |                     | 6,433,211  |            |            |          | 5,368,177  |            |            |            | 5,931,222  |           
|                                                           | Systems and development              |                         |                     | 3,830,565  |            |            |          | 4,344,765  |            |            |            | 5,854,866  |           
|                                                           | Non-recurring charges                |                         |                     |           |            |            |          |           |            |            |            | 209,434    |           
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           |                                      |                         | Total expenses      |            |            | 18,891,416 |          |            |            | 16,750,826 |            |            |            | 18,925,984 |  
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|Income (loss) from operations                              |                                      |                         | 4,013,635           |            |            |            | 975,376  |            |            |            | (8,603,955 | )         
|Other (expense) income:                                    |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           | Interest income                      |                         |                     | 79,090     |            |            |          | 126,876    |            |            |            | 613,487    |           
|                                                           | Interest expense                     |                         |                     | (817,603   | )          |            |          | (1,260,209 | )          |            |            | (1,788,520 | )         
|                                                           | Other                                |                         |                     | (455       | )          |            |          | (35,072    | )          |            |            | (1,141     | )         
|                                                           | Debt repurchase/conversion expense   |                         |                     | (495,113   | )          |            |          | (212,554   | )          |            |            | (1,115,582 | )         
|                                                           | Gain from the extinguishment of debt |                         |                     |           |            |            |          |           |            |            |            | 1,083,153  |           
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           |                                      |                         | Total other expense |            |            | (1,234,081 | )        |            |            | (1,380,959 | )          |            |            | (1,208,603 | )
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|Income (loss) before income tax provision                  |                                      |                         | 2,779,554           |            |            |            | (405,583 | )          |            |            | (9,812,558 | )         
|Income tax provision                                       |                                      |                         | 15,785              |            |            |            |         |            |            |            |           |           
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|Net income (loss)                                          |                                      | $                       | 2,763,769           |            |            | $          | (405,583 | )          |            | $          | (9,812,558 | )         
|                                                           |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|Net income (loss) per share:                               |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           | Basic income (loss) per share        |                         | $                   | 0.18       |            |            | $        | (0.03      | )          |            | $          | (0.82      | )         
|                                                           | Diluted income (loss) per share      |                         | $                   | 0.17       |            |            | $        | (0.03      | )          |            | $          | (0.82      | )         
|Shares used in calculation of income
    (loss) per share: |                                      |                         |                     |            |            |            |          |            |            |            |            |           
|                                                           | Basic                                |                         |                     | 15,140,538 |            |            |          | 13,520,642 |            |            |            | 12,026,476 |           
|                                                           | Diluted                              |                         |                     | 16,685,602 |            |            |          | 13,520,642 |            |            |            | 12,026,476 |           

See notes to financial statements.

36



---



##### 



ONLINE RESOURCES CORPORATION

STATEMENTS OF STOCKHOLDERS
EQUITY

|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |            |  
|----------------------------- | -------------------------------------------------------------- | ------------ | ---------- | ---------- | - | ----------- | ----- | -------------- | - | ------------ | ----------- | ------------- | - | -------- | ----------- | ------------- | - | ------ | -------- | ------- |  | - | -------- | -------- | - | - | ------ | ------- | - | - | -------- | ------- |  | - | ---------- | ---------- | -
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             | Receivable    |   |       
|                              |                                                                |              |            |            |   |             |       |                |   |              |             | Accumulated   |   | From the |             |              
|                              |                                                                | Common Stock |            | Additional |   |             |       |                |   |              |             | Other         |   | Sale of  |             | Total        
|                              |                                                                |              |            | Paid-in    |   | Accumulated |       | Deferred Stock |   | Treasury     |             | Comprehensive |   | Common   |             | Stockholders
|                              |                                                                | Shares       |            | Amount     |   | Capital     |       | Deficit        |   | Compensation |             | Stock         |   | Income   |             | Stock         |   | Equity
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |       
|Balance at December 31, 2000. |                                                                |              | 11,616,649 |            |   | $           | 1,162 |                |   | $            | 85,238,538  |               |   | $        | (75,482,307 | )             |   | $      | (185,894 | )       |  | $ |         |          |   | $ | 56,075 |         |   | $ | (422,604 | )       |  | $ | 9,204,970  |           
|                              | Comprehensive loss:                                            |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |            |  
|                              | Net loss                                                       |              |            |           |   |             |       |               |   |              |             |              |   |          |             | (9,812,558    | ) |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | (9,812,558 | )
|                              | Unrealized loss on available-for-sale securities               |              |            |           |   |             |       |               |   |              |             |              |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        | (30,705 | ) |   |          |        |  |   |            | (30,705    | )
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |           
|                              | Comprehensive loss                                             |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            | (9,843,263 | )
|                              | Exercise of common stock options                               |              |            | 6,488      |   |             |       |               |   |              |             | 26,148        |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 26,148     |  
|                              | Exercise of common stock warrants                              |              |            | 21,385     |   |             |       | 2              |   |              |             | 149,998       |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 150,000    |  
|                              | Conversion of notes payable                                    |              |            | 1,577,869  |   |             |       | 158            |   |              |             | 4,406,297     |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 4,406,455  |  
|                              | Issuance of common stock options                               |              |            |           |   |             |       |               |   |              |             | 20,303        |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 20,303     |  
|                              | Issuance of common stock                                       |              |            | 70,847     |   |             |       | 7              |   |              |             | 123,458       |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 123,465    |  
|                              | Reclassification of stock subscription to notes
    receivable |              |            |           |   |             |       |               |   |              |             |              |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          | 148,254 |  |   |            | 148,254    |  
|                              | Amortization of deferred stock compensation                    |              |            |           |   |             |       |               |   |              |             | (60,564       | ) |          |             |              |   |        |          | 124,970 |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 64,406     |  
|                              | Surrender of stock subscription receivable                     |              |            | (44,848    | ) |             |       | (4             | ) |              |             | 33,493        |   |          |             |              |   |        |          |        |  |   |          | (148,581 | ) |   |        |        |   |   |          | 151,969 |  |   |            | 36,877     |  
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |           
|Balance at December 31, 2001. |                                                                |              | 13,248,390 |            |   |             | 1,325 |                |   |              | 89,937,671  |               |   |          | (85,294,865 | )             |   |        | (60,924  | )       |  |   | (148,581 | )        |   |   | 25,370 |         |   |   | (122,381 | )       |  |   | 4,337,615  |           
|                              | Comprehensive loss:                                            |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |            |  
|                              | Net loss                                                       |              |            |           |   |             |       |               |   |              |             |              |   |          |             | (405,583      | ) |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | (405,583   | )
|                              | Unrealized loss on available-for-sale securities               |              |            |           |   |             |       |               |   |              |             |              |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        | (10,718 | ) |   |          |        |  |   |            | (10,718    | )
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |           
|                              | Comprehensive loss                                             |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            | (416,301   | )
|                              | Exercise of common stock options                               |              |            | 189,955    |   |             |       | 19             |   |              |             | 291,150       |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 291,169    |  
|                              | Conversion of notes payable                                    |              |            | 295,031    |   |             |       | 30             |   |              |             | 1,141,818     |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 1,141,848  |  
|                              | Issuance of common stock                                       |              |            | 29,395     |   |             |       | 2              |   |              |             | 45,906        |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 45,908     |  
|                              | Cancellation of over-issued shares                             |              |            | (25,673    | ) |             |       | (3             | ) |              |             | 3             |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            |           |  
|                              | Amortization of deferred stock compensation                    |              |            |           |   |             |       |               |   |              |             | (6,195        | ) |          |             |              |   |        |          | 60,924  |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 54,729     |  
|                              | Surrender of stock subscription receivable                     |              |            | (30,677    | ) |             |       | (3             | ) |              |             | 3             |   |          |             |              |   |        |          |        |  |   |          | (79,219  | ) |   |        |        |   |   |          | 122,381 |  |   |            | 43,162     |  
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |           
|Balance at December 31, 2002. |                                                                |              | 13,706,421 |            |   |             | 1,370 |                |   |              | 91,410,356  |               |   |          | (85,700,448 | )             |   |        |         |         |  |   | (227,800 | )        |   |   | 14,652 |         |   |   |         |         |  |   | 5,498,130  |           
|                              | Comprehensive income:                                          |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |            |  
|                              | Net income                                                     |              |            |           |   |             |       |               |   |              |             |              |   |          |             | 2,763,769     |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 2,763,769  |  
|                              | Unrealized loss on available-for-sale securities               |              |            |           |   |             |       |               |   |              |             |              |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        | (9,325  | ) |   |          |        |  |   |            | (9,325     | )
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |           
|                              | Comprehensive income                                           |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            | 2,754,444  |  
|                              | Exercise of common stock options                               |              |            | 746,911    |   |             |       | 75             |   |              |             | 2,167,806     |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 2,167,881  |  
|                              | Issuance of common stock                                       |              |            | 1,357,556  |   |             |       | 136            |   |              |             | 4,450,328     |   |          |             |              |   |        |          |        |  |   |          |         |   |   |        |        |   |   |          |        |  |   |            | 4,450,464  |  
|                              | Conversion of notes payable                                    |              |            | 2,001,314  |   |             |       | 200            |   |              |             | 8,099,800     |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            | 8,100,000  |  
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |           
|Balance at December 31, 2003. |                                                                |              | 17,812,202 |            |   | $           | 1,781 |                |   | $            | 106,128,290 |               |   | $        | (82,936,679 | )             |   | $      |         |         |  | $ | (227,800 | )        |   | $ | 5,327  |         |   | $ |         |         |  | $ | 22,970,919 |           
|                              |                                                                |              |            |            |   |             |       |                |   |              |             |               |   |          |             |               |   |        |          |         |  |   |          |          |   |   |        |         |   |   |          |         |  |   |            |           

See notes to financial statements.

37



---



##### 



ONLINE RESOURCES CORPORATION

STATEMENTS OF CASH FLOWS

|                                                                                                           |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |           |            |          |  
|---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------- | ----------------------------------------- | --------- | --------- | -------- | ---------- | --------- | --------- | ---------- | ----------- | --------- | ---------- | -------- | -
|                                                                                                           |                                                             |                                            
|                                                                                                           |                                                             | Year ended December 31,                    
|                                                                                                           |                                                             |                                            
|                                                                                                           |                                                             | 2003                                        |                                           | 2002      |           | 2001    
|                                                                                                           |                                                             |                                             |                                           |           |           |         
|Operating activities                                                                                       |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Net income (loss)                                                                                          |                                                             | $                                           | 2,763,769                                 |           |           | $        | (405,583   | )         |           | $          | (9,812,558  | )        
|Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|                                                                                                           |                                                             | Gain from the extinguishment of debt        |                                           |           |          |          |            |           |          |            |             |           | (1,083,153 | )       
|                                                                                                           |                                                             | Debt repurchase/conversion expense          |                                           |           | 495,113   |          |            |           | 212,554   |            |             |           | 1,115,582  |         
|                                                                                                           |                                                             | Depreciation and amortization               |                                           |           | 3,137,072 |          |            |           | 2,679,727 |            |             |           | 2,108,046  |         
|                                                                                                           |                                                             | Amortization of debt issuance costs         |                                           |           | 164,766   |          |            |           | 252,663   |            |             |           | 320,847    |         
|                                                                                                           |                                                             | Stock compensation                          |                                           |           |          |          |            |           | 97,891    |            |             |           | 144,011    |         
|                                                                                                           |                                                             | Provision for losses on accounts receivable |                                           |           | (10,000   | )        |            |           | 88,000    |            |             |           | 239,564    |         
|                                                                                                           |                                                             | Net realized gain on investments            |                                           |           | (6,867    | )        |            |           | (10,035   | )          |             |           | (73,288    | )       
|                                                                                                           |                                                             | Amortization of bond premium (discount)     |                                           |           | 1,366     |          |            |           | (6,892    | )          |             |           | (15,946    | )       
|                                                                                                           |                                                             | Changes in assets and liabilities:          |                                           |           |           |          |            |           |           |            |             |           |            |         
|                                                                                                           |                                                             |                                             | Accounts receivable                       |           |           | (99,712  | )          |           |           | (1,278,063 | )           |           |            | 150,708  |  
|                                                                                                           |                                                             |                                             | Prepaid expenses and other current assets |           |           | (138,645 | )          |           |           | (22,789    | )           |           |            | (255,084 | )
|                                                                                                           |                                                             |                                             | Deferred implementation costs             |           |           | 121,931  |            |           |           | 641,374    |             |           |            | (104,116 | )
|                                                                                                           |                                                             |                                             | Other assets                              |           |           | 332,568  |            |           |           | 513,094    |             |           |            | (510,943 | )
|                                                                                                           |                                                             |                                             | Accounts payable                          |           |           | (244,782 | )          |           |           | 166,629    |             |           |            | (134,297 | )
|                                                                                                           |                                                             |                                             | Accrued expenses                          |           |           | 459,757  |            |           |           | 374,436    |             |           |            | (863,250 | )
|                                                                                                           |                                                             |                                             | Other long term liabilities               |           |           | 51,219   |            |           |           |           |             |           |            |         |  
|                                                                                                           |                                                             |                                             | Deferred revenues                         |           |           | 888      |            |           |           | (559,468   | )           |           |            | (850,450 | )
|                                                                                                           |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Net cash provided by (used in) operating
    activities                                                    |                                                             |                                             | 7,028,443                                 |           |           |          | 2,743,538  |           |           |            | (9,624,327  | )        
|Investing activities                                                                                       |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Purchases of property and equipment                                                                        |                                                             |                                             | (2,677,013                                | )         |           |          | (3,670,833 | )         |           |            | (1,836,180  | )        
|Purchases of available-for-sale securities                                                                 |                                                             |                                             | (12,658,680                               | )         |           |          | (6,117,950 | )         |           |            | (20,427,641 | )        
|Sales of available-for-sale securities                                                                     |                                                             |                                             | 11,165,864                                |           |           |          | 7,212,652  |           |           |            | 34,591,254  |          
|                                                                                                           |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Net cash (used in) provided by investing
    activities                                                    |                                                             |                                             | (4,169,829                                | )         |           |          | (2,576,131 | )         |           |            | 12,327,433  |          
|Financing activities                                                                                       |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Net proceeds from issuance of common stock                                                                 |                                                             |                                             | 6,618,345                                 |           |           |          | 337,077    |           |           |            | 277,188     |          
|Repayment of capital lease obligations                                                                     |                                                             |                                             | (217,852                                  | )         |           |          | (333,786   | )         |           |            | (411,658    | )        
|Payment of financing costs                                                                                 |                                                             |                                             |                                          |           |           |          |           |           |           |            | (52,472     | )        
|Repurchase of notes payable                                                                                |                                                             |                                             | (3,900,000                                | )         |           |          |           |           |           |            | (2,167,389  | )        
|                                                                                                           |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Net cash provided by (used in) financing
    activities                                                    |                                                             |                                             | 2,500,493                                 |           |           |          | 3,291      |           |           |            | (2,354,331  | )        
|                                                                                                           |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Net increase in cash and cash equivalents                                                                  |                                                             |                                             | 5,359,107                                 |           |           |          | 170,698    |           |           |            | 348,775     |          
|Cash and cash equivalents at beginning of year                                                             |                                                             |                                             | 2,290,950                                 |           |           |          | 2,120,252  |           |           |            | 1,771,477   |          
|                                                                                                           |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Cash and cash equivalents at end of year                                                                   |                                                             | $                                           | 7,650,057                                 |           |           | $        | 2,290,950  |           |           | $          | 2,120,252   |          
|                                                                                                           |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|Supplemental information to statement of cash
    flows:                                                   |                                                             |                                             |                                           |           |           |          |            |           |           |            |             |          
|                                                                                                           | Cash paid for interest                                      |                                             | $                                         | 830,170   |           |          | $          | 1,061,917 |           |            | $           | 1,611,000 |           
|                                                                                                           | Income taxes paid                                           |                                             |                                           | 48,500    |           |          |            |          |           |            |             |          |           
|                                                                                                           | Acquisition of property and equipment by capital
    leases |                                             |                                           |          |           |          |            |          |           |            |             | 560,085   |           
|                                                                                                           | Conversion of notes payable                                 |                                             |                                           | 8,100,000 |           |          |            | 1,000,000 |           |            |             | 3,500,000 |           
|                                                                                                           | Net unrealized loss on investments                          |                                             |                                           | (9,325    | )         |          |            | (10,718   | )         |            |             | (30,705   | )         

See notes to financial statements

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##### 



Online Resources Corporation

Notes to Financial Statements


1.  Organization

Online Resources Corporation, a Delaware
corporation, (the Company) is a leading outsourcer
of Internet banking, payment and customer contact services to
financial institution clients nationwide. The Company offers
services, branded in the clients name, that integrate
seamlessly into a single-vendor, end-to-end solution, supported
by 24x7 customer care, targeted consumer marketing, training and
other network and technical professional products and services.
The Company operates in one business segment.

2.  Summary of Significant
Accounting Policies

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid
instruments purchased with an original maturity of three months
or less to be cash equivalents. Cash held for bill payments in
process is immediately disbursed on behalf of users and no net
cash balance is reflected on the Companys financial
statements.

Fair Value of Financial Instruments

At December 31, 2003 and 2002, the carrying
value of the following financial instruments: cash and cash
equivalents, investments in available-for-sale securities,
accounts receivable, accounts payable and accrued liabilities
approximates their fair value based on the liquidity of these
financial instruments or based on their short-term nature.

Concentration of Credit Risk

Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily
of cash and cash equivalents and investments in
available-for-sale securities. The Company has cash in financial
institutions that is insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000 per institution.
At December 31, 2003 and 2002, the Company had cash and
cash equivalent accounts in excess of the FDIC insured limits.
Investments in available-for-sale securities are limited to
investment-grade securities. The fair value of the
Companys financial instruments is substantially equivalent
to their carrying value and, although there is some credit risk
associated with these instruments, the Company believes this
risk to be insignificant.

Allowance for Doubtful Accounts

The Company performs ongoing credit evaluations
of its customers financial condition and limits the amount
of credit extended when deemed necessary, but generally does not
require collateral. Management believes that any risk of loss is
significantly reduced due to the nature of the customers being
financial institutions and credit unions as well as the number
of its customers and geographic areas. The Company maintains an
allowance for doubtful accounts to provide for probable losses
in accounts receivable. A receivable is considered past due if
payment has not been received within the agreed-upon terms.

Property and Equipment

Property and equipment, including leasehold
improvements, are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives
of the related assets, which is generally three to five years.
Equipment recorded under capital leases is also amortized over
the lease term or

39



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##### 



2.  Summary of Significant
Accounting Policies (continued)


the estimated useful life of the asset.
Depreciation and amortization expense was $3.1 million,
$2.7 million, and $2.1 million for the years ended
December 31, 2003, 2002, and 2001, respectively.

Systems and Development

The Company capitalizes the cost of computer
software developed or obtained for internal use in accordance
with Statement of Position 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal
Use. Capitalized computer software costs consist primarily
of payroll-related and consulting costs incurred during the
development stage. The Company expenses costs related to
preliminary project assessments, research and development,
re-engineering, training and application maintenance as they are
incurred. Capitalized software costs are included in Property,
Plant & Equipment and are being depreciated on the
straight-line method over a period of three years upon being
placed in service.

Impairment of Long-Lived Assets

In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,the Company
periodically evaluates the recoverability of long-lived assets,
including deferred implementation costs and property and
equipment, whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. There were no
indicators of impairment that might indicate that impairment
exists for a particular asset or asset group.

Income Taxes

The Company accounts for taxes under Statement of
Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS No. 109). Under SFAS No. 109,
deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of
assets and liabilities using enacted rates expected to be in
effect during the year in which the differences reverse.

Reclassification

Certain amounts reported in prior periods have
been reclassified to conform to the 2003 presentation.

Revenue Recognition

The Company generates revenues from service fees,
professional services, and other supporting services. Service
fees are primarily composed of three business lines, internet
banking services, payment services and consumer contact
services. Revenues from service fees include new user
registration fees, account access fees, transaction fees,
customer service fees and relationship marketing support fees.
Revenue from service fees are recognized over the term of the
contract as the services are provided.

Professional services revenues consist of
implementation fees associated with the linking of the
Companys financial institution clients to the
Companys QuotienSM e-financial suite through
various networks, web development and hosting fees, training
fees and communication services. In accordance with Staff
Accounting Bulletin No. 101  Revenue
Recognition in Financial Statements(SAB 101),
as superseded by SAB 104, which the Company adopted
effective January 1, 2000, implementation fees and related
direct implementation costs are recognized on a straight line
basis over the contract term as the services are provided, which
typically range from one to five years (generally three years).
Prior to 2000, the Company recognized nonrefundable
implementation fees as revenue under the percentage of
completion method as certain milestone output measures were
completed. Due to the adoption of SAB 101, revenue that was
previously recognized under the Companys prior revenue
recognition policy will be recognized under the Companys
revised revenue recognition policy through periods up to 2004
because some contract periods extend through 2004. During the
years ended December 31, 2003, 2002 and 2001, the Company
recognized revenue of $37,000, $275,000, and $541,000,
respectively, and related direct incremental costs that were
included in the cumulative effect adjustment at January 1,
2000. Revenue from web development, web hosting and training are
recognized over the term of the contract as the services are
provided.

40



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##### 



2.  Summary of Significant
Accounting Policies (continued)


Other revenue consists of service fees associated
with enhanced third-party solutions and termination fees.
Service fees for enhanced third-party solutions include fully
integrated bill payment and account retrieval through
Intuits Quicken, check ordering, inter-institution funds
transfer, account aggregation and check imaging. Revenue from
these service fees are recognized over the term of the contract
as the services are provided. Termination fees are recognized
upon termination of a contract.

In December 2002, Emerging Issues Task Force
(EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables, (EITF
00-21) was released effective for revenue arrangements
entered into in fiscal periods beginning after June 15,
2003. EITF 00-21 establishes new requirements for determining
whether an arrangement involving multiple deliverables contains
more than one unit of accounting. The Company adopted EITF 00-21
and there has been no material impact on the Companys
financial position or results of operations from the adoption of
EITF 00-21.

Major Customer

One of the Companys financial institution
clients, California Federal Bank or Cal Fed, accounted for
approximately $3.4, $4.8, and $3.2 million or 9%, 15%, and
13%, of the Companys total revenues for the years ended
December 31, 2003, 2002, and 2001, respectively. During
2002, Citigroup acquired Cal Fed, and converted the Cal Fed
customers to the Citigroup banking and bill payment platform in
the first quarter of 2003. The Company extended its full service
contract with Cal Fed through the first quarter of 2003 and
terminated a subsequent bill payment only contract that was to
run through 2005. In consideration of this extension and
termination, the Company received a combination of service and
termination fee revenue of $3.3 million that was recognized
in the first quarter of 2003. No other customer accounts for
more than 10% of the Companys revenue.

Advertising Costs

The Company expenses advertising costs as
incurred. The Company incurred $695, $250, and $200 in
advertising costs for the years ended December 31, 2003,
2002 and 2001, respectively.

Recognition of Amounts from Outstanding Bill
Payment Checks

In the third quarter of 2003, we adopted a policy
to recognize as assets the amounts underlying bill payment
checks drawn upon our escrow accounts that have been outstanding
for at least a year after reviewing legal analysis from outside
counsel to ensure that there is a basis for making a claim of
ownership to such funds. Our policy is to recognize as assets
funds from checks that have been outstanding more than a year
and are less than $200 as an offset to payment processing costs.
Checks greater than $200 will be recognized as assets after they
are outstanding for two years. During 2003, we recognized $0.6
million in assets as an offset to payment processing costs net
of a $51,000 reserve for estimated bill payments that could
potentially be processed.

Net Income (Loss) Per Share

Net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted
average number of common shares outstanding. Shares associated
with stock options, warrants and convertible securities are not
included to the extent they are anti-dilutive.

Stock-Based Compensation

The Company accounts for stock option grants
using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, for stock-based compensation
and to furnish the pro forma disclosures required under SFAS
No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure. In electing to continue to follow
APB No. 25 for expense recognition purposes, the Company
has provided below the expanded disclosures required under SFAS
No. 148 for stock-based compensation granted, including, if
materially different from reported results, disclosure of pro
forma net earnings or losses and earnings or losses per share
had compensation expense relating to grants been measured under
the fair value recognition provisions of SFAS No. 123.

41



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##### 



2.  Summary of Significant
Accounting Policies (continued)


The weighted-average fair values at date of grant
for options granted during 2003, 2002, and 2001 were $3.49,
$2.25, and $1.77, respectively, and were estimated using the
Black-Scholes option valuation model with the following
weighted-average assumptions:

|                        |  |                         |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                        
|                        |  | Year Ended December 31,
|                        |  |                        
|                        |  | 2003                    |      | 2002 |  | 2001
|                        |  |                         |      |      |  |     
|Dividend yield          |  |                         |     |      |  |      |     |   |  |  |     |  
|Expected volatility     |  |                         | 91.1 | %    |  |      | 104  | % |  |  | 104  | %
|Risk-free interest rate |  |                         | 2.97 | %    |  |      | 4.91 | % |  |  | 4.25 | %
|Expected life in years  |  |                         | 5.2  |      |  |      | 6.6  |   |  |  | 5.0  |  

A reconciliation of the Companys net income
(loss) to pro forma net income (loss), and the related basic and
diluted pro forma income (loss) per share amounts, for the years
ended December 31, 2003, 2002,and 2001, is provided below.
For purposes of pro forma disclosure, stock-based compensation
expense is recognized in accordance with the provisions of SFAS
No. 123. Further, pro forma stock-based compensation
expense is amortized to expense on a straight-line basis over
the vesting period.

|                                    |                                                            |                         |           |            |   |      |            |            |   |   |             |            |  
|----------------------------------- | ---------------------------------------------------------- | ----------------------- | --------- | ---------- | - | ---- | ---------- | ---------- | - | - | ----------- | ---------- | -
|                                    |                                                            |                        
|                                    |                                                            | Year Ended December 31,
|                                    |                                                            |                        
|                                    |                                                            | 2003                    |           | 2002       |   | 2001
|                                    |                                                            |                         |           |            |   |     
|Net income (loss) as reported       |                                                            | $                       | 2,763,769 |            |   | $    | (405,583   | )          |   | $ | (9,812,558  | )         
|Adjustment to net loss for:         |                                                            |                         |           |            |   |      |            |            |   |   |             |           
|                                    | Stock based compensation included in net
    income (loss) |                         |           |           |   |      |            | 97,891     |   |   |             | 144,011    |  
|                                    | Pro forma stock-based compensation expense                 |                         |           | (2,558,313 | ) |      |            | (4,567,065 | ) |   |             | (4,307,921 | )
|                                    |                                                            |                         |           |            |   |      |            |            |   |   |             |           
|Pro forma net income (loss)         |                                                            | $                       | 205,456   |            |   | $    | (4,874,757 | )          |   | $ | (13,976,468 | )         
|                                    |                                                            |                         |           |            |   |      |            |            |   |   |             |           
|Basic net income (loss) per share   |                                                            |                         |           |            |   |      |            |            |   |   |             |           
|                                    | As reported                                                |                         | $         | 0.18       |   |      | $          | (0.03      | ) |   | $           | (0.82      | )
|                                    | Pro forma                                                  |                         | $         | 0.01       |   |      | $          | (0.36      | ) |   | $           | (1.16      | )
|                                    |                                                            |                         |           |            |   |      |            |            |   |   |             |           
|Diluted net income (loss) per share |                                                            |                         |           |            |   |      |            |            |   |   |             |           
|                                    | As reported                                                |                         | $         | 0.17       |   |      | $          | (0.03      | ) |   | $           | (0.82      | )
|                                    | Pro forma                                                  |                         | $         | 0.01       |   |      | $          | (0.36      | ) |   | $           | (1.16      | )
|                                    |                                                            |                         |           |            |   |      |            |            |   |   |             |           

Recent Pronouncements

The Company adopted SFAS No. 145,
Rescission of FASB Statement 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections,
effective for the Companys fiscal year beginning on
January 1, 2003. SFAS 145 requires that any gain or loss on
extinguishment of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria
in Accounting Principles Board Opinion No. 30 for
classification as an extraordinary item be reclassified. These
gains and losses will now be required to be presented within the
statement of operations in appropriate segregated line items. As
required by SFAS No. 145, these financial statements
reflect the reclassification of the extraordinary gains
associated with the extinguishment of debt as other
(expense) income in the 2001 statement of operations.

3.  Investments

The Company classifies its investments as
available-for-sale. Investments in securities that are
classified as available-for-sale and have readily determinable
fair values are measured at fair market value in the balance
sheets. Fair market value is based on quoted market value. Any
unrealized gains or losses are reported as a separate component
of stockholders equity. Realized gains and losses are
included in investment income. Interest and dividends also are
included in investment income. The net realized gain on
investments for the years ended December 31, 2003, 2002 and
2001 were approximately $6,900, $10,000, and $73,000,

42



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##### 



3.  Investments
(continued)


respectively. For purposes of determining gross
realized gains and losses, the cost of securities sold is based
on the average cost method. As of December 31, 2003 and
2002, the unrealized gain on investments was $5,327 and $14,652,
respectively.

The following is a summary of the Companys
available-for-sale securities:

|                                   |  |                   |           |                   |  |                |           |            |  |   |           |  |  |   |           | 
|---------------------------------- |  | ----------------- | --------- | ----------------- |  | -------------- | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                                   |  |                   |           |                  
|                                   |  | December 31, 2003 |           | December 31, 2002
|                                   |  |                   |           |                  
|                                   |  | Amortized Cost    |           | Fair Value        |  | Amortized Cost |           | Fair Value
|                                   |  |                   |           |                   |  |                |           |           
|US Government treasury obligations |  | $                 | 3,119,026 |                   |  | $              | 3,122,780 |            |  | $ | 3,422,947 |  |  | $ | 3,435,111 | 
|Mortgage backed securities         |  |                   | 2,809,516 |                   |  |                | 2,810,935 |            |  |   | 415,631   |  |  |   | 417,125   | 
|Corporate obligations              |  |                   | 50,000    |                   |  |                | 50,154    |            |  |   | 641,647   |  |  |   | 642,641   | 
|                                   |  |                   |           |                   |  |                |           |            |  |   |           |  |  |   |           | 
|                                   |  | $                 | 5,978,542 |                   |  | $              | 5,983,869 |            |  | $ | 4,480,225 |  |  | $ | 4,494,877 | 
|                                   |  |                   |           |                   |  |                |           |            |  |   |           |  |  |   |           | 

At December 31, 2003, contractual maturities
of available-for-sale securities were as follows:

|       |  |                |           |            |  |   |           | 
|------ |  | -------------- | --------- | ---------- |  | - | --------- | 
|Due in |  | Amortized Cost |           | Fair Value
|       |  |                |           |           
|2004   |  | $              | 5,432,033 |            |  | $ | 5,434,025 | 
|2005   |  |                | 546,509   |            |  |   | 549,844   | 

4.  Property and Equipment

Property and equipment consists of the following:

|                                                                  |  |              |            |      |  |   |            | 
|----------------------------------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                                                  |  |             
|                                                                  |  | December 31,
|                                                                  |  |             
|                                                                  |  | 2003         |            | 2002
|                                                                  |  |              |            |     
|Central processing systems and terminals                          |  | $            | 16,245,861 |      |  | $ | 13,668,910 | 
|Office furniture and equipment                                    |  |              | 1,862,830  |      |  |   | 1,762,768  | 
|Central processing systems and terminals under
    capital leases |  |              | 500,532    |      |  |   | 500,532    | 
|Office furniture and equipment under capital
    leases           |  |              | 572,117    |      |  |   | 572,117    | 
|Leasehold improvements                                            |  |              | 1,119,130  |      |  |   | 1,119,130  | 
|                                                                  |  |              |            |      |  |   |            | 
|                                                                  |  |              | 20,300,470 |      |  |   | 17,623,457 | 
|Less accumulated depreciation                                     |  |              | 12,048,873 |      |  |   | 9,199,646  | 
|Less accumulated depreciation under capital leases                |  |              | 907,427    |      |  |   | 619,582    | 
|                                                                  |  |              |            |      |  |   |            | 
|                                                                  |  | $            | 7,344,170  |      |  | $ | 7,804,229  | 
|                                                                  |  |              |            |      |  |   |            | 

5.  Long Term Notes
Payable

On September 28, 2000, the Company completed
the private placement of $20 million in convertible subordinated
notes (the Convertible Notes) to a group of
accredited investors. The Company received proceeds of
$18.7 million net of debt issuance costs of
$1.3 million including commission of $917,200. The
Convertible Notes carried an 8% coupon. Interest payment dates
were April 1 and October 1, commencing April 1, 2001.
The Convertible Notes were initially convertible at a price of
$4.75 per share but were subject to an annual reset under
certain circumstances. In no event could the price be less than
$4.00 per share. Subject to certain conditions, the Company was
able to redeem all or part of the Convertible Notes prior to
maturity. Jefferies & Company, Inc., one of the underwriters
of the placement, also obtained 200,000 warrants that expire on
September 30, 2005 that are exercisable at the same price
as the conversion price under the Convertible Notes (see Note 9).

During 2001, the Company paid $2.2 million
to repurchase $3.5 million of the Convertible Notes in
privately negotiated transactions. After $289,000 of debt
issuance costs were written off, the Company recognized a gain
of $1.1 million as a result of the transactions.

On September 28, 2001, November 2, 2001
and March 27, 2002, the Company induced conversion of
$2.5 million, $1.0 million and $1.0 million of
the Convertible Notes at $2.00, $3.05 and $3.39 per common

43



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##### 



5.  Long Term Notes Payable
(continued)


share, respectively, instead of the $4.00
conversion price that otherwise existed under the Convertible
Notes. These induced conversions resulted in the issuance of
1,250,000, 327,869 and 295,031 shares or 625,000, 77,869 and
45,031 additional shares, respectively, had the Convertible
Notes been converted at the $4.00 per common share conversion
price. The Company recognized $731,250, $175,205 and $141,848
non-cash debt conversion expense and wrote off $157,157, $51,970
and $70,706 of related debt issuance costs in September 2001,
November 2001 and March 2002, respectively, in connection with
the transactions.

On May 30, 2003 and June 9, 2003, the
Company repurchased $1.9 million and $2.0 million,
respectively, of the Convertible Notes at par value. This
removed 975,000 shares from possible future issuance in
conjunction with conversion of the repurchased Convertible
Notes. The Company wrote off $181,179 of related debt issuance
costs in connection with these transactions.

Between October 1 and October 28, 2003,
Noteholders converted $7.5 million in Convertible Notes
into 1,875,000 shares of the Companys common stock at
$4.00 per share pursuant to the terms of the Notes. On
October 29, 2003, the conversion price reset to $4.75 per
share as defined by the terms of the Notes. And on
November 18 and November 20, 2003, remaining
Convertible Notes of approximately $0.6 million were
converted into 126,314 shares. The Company wrote-off $313,934 of
related debt issuance costs in connection with the transactions.

Interest expense related to the Convertible Notes
was approximately $627,000, $980,000 and $1,680,000 in 2003,
2002 and 2001, respectively. As of December 31, 2003 and
2002, accrued interest on notes payable totaled approximately $0
and $240,000, respectively.

6.  Commitments

Office Space

The Company leases office space and equipment
under operating leases expiring in 2004. The office leases
provide for escalating rent over the respective lease term. Rent
expense under the operating leases and sublease rentals received
by the Company for the years ended December 31, 2003, 2002
and 2001, are as follows:

|     |  |      |           |          |  |   |        | 
|---- |  | ---- | --------- | -------- |  | - | ------ | 
|     |  |      |           | Sublease
|     |  | Rent |           | Income  
|     |  |      |           |         
|2001 |  | $    | 1,121,000 |          |  | $ | 26,000 | 
|2002 |  |      | 1,179,000 |          |  |   |       | 
|2003 |  |      | 1,312,000 |          |  |   |       | 

The sublease agreement was fully expired as of
December 31, 2001.

Equipment

The Company also leases equipment under capital
leases. Amortization of assets held under capital leases is
included in depreciation and amortization in the statements of
cash flows.

44



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##### 



6.  Commitments
(continued)


Future minimum lease payments on operating and
capital leases are as follows:

|                                            |                              |              |         |              |  |   |         |         | 
|------------------------------------------- | ---------------------------- | ------------ | ------- | ------------ |  | - | ------- | ------- | 
|                                            |                              | Operating    |         | Capital     
|                                            |                              |              |         |             
|                                            |                              | December 31, |         | December 31,
|                                            |                              | 2003         |         | 2003        
|                                            |                              |              |         |             
|2004                                        |                              | $            | 729,458 |              |  | $ | 105,087 |        
|2005                                        |                              |              |        |              |  |   | 11,016  |        
|Thereafter                                  |                              |              |        |              |  |   |        |        
|                                            |                              |              |         |              |  |   |         |        
|                                            | Total minimum lease payments |              | $       | 729,458      |  |   |         | 116,103 | 
|                                            |                              |              |         |              |  |   |         |        
|Less amount representing interest           |                              |              |         |              |  |   | (8,551  | )      
|                                            |                              |              |         |              |  |   |         |        
|Present value of minimum lease payments     |                              |              |         |              |  |   | 107,552 |        
|Less current portion                        |                              |              |         |              |  |   | 97,031  |        
|                                            |                              |              |         |              |  |   |         |        
|Long-term portion of minimum lease payments |                              |              |         |              |  | $ | 10,521  |        
|                                            |                              |              |         |              |  |   |         |        

7.  Income Taxes

In 2003, the Company has a $16,000 current tax
liability for federal income taxes as a result of Alternative
Minimum Tax (AMT). The Company did not pay income taxes during
2002 and 2001 due to its net operating loss position.

At December 31, 2003, the Company has net
operating loss carryforwards of approximately $88 million
that expire at varying dates from 2010 to 2022. Of that
$88 million, approximately $4.3 million relates to the
exercise of stock options. The timing and manner in which the
operating loss carryforwards may be utilized by the Company will
be limited to the Companys ability to generate future
taxable income. The use of these losses may also be subject to
significant limitations due to ownership changes pursuant to
Section 382 of the Internal Revenue Code resulting from
prior issuances of Preferred and Common Stock. As the Company
has not generated consistent earnings and no assurance can be
made of future earnings needed to utilize these net operating
losses, a valuation allowance in the amount of the deferred tax
assets has been recorded. The Company expects to utilize
approximately $700,000 of net operating loss carryforwards for
the year ended December 31, 2003.

Significant components of the Companys net
deferred tax assets are as follows:

|                                                |                                  |                                |             |            |            |   |             |            |            |  
|----------------------------------------------- | -------------------------------- | ------------------------------ | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | -
|                                                |                                  |                               
|                                                |                                  | December 31,                  
|                                                |                                  |                               
|                                                |                                  | 2003                           |             | 2002      
|                                                |                                  |                                |             |           
|Deferred tax assets:                            |                                  |                                |             |            |            |   |             |           
|                                                | Net operating loss carryforwards |                                | $           | 35,184,000 |            |   | $           | 35,269,000 |           
|                                                | Deferred wages                   |                                |             | 166,000    |            |   |             | 169,000    |           
|                                                | Other deferred tax assets        |                                |             | 169,000    |            |   |             | 123,000    |           
|                                                |                                  |                                |             |            |            |   |             |           
|                                                |                                  | Total deferred tax assets      |             |            | 35,519,000 |   |             |            | 35,561,000 |  
|Deferred liabilities:                           |                                  |                                |             |            |            |   |             |           
|                                                | Depreciation                     |                                |             | (534,000   | )          |   |             | (346,000   | )         
|                                                |                                  |                                |             |            |            |   |             |           
|                                                |                                  | Total deferred tax liabilities |             |            | (534,000   | ) |             |            | (346,000   | )
|Valuation allowance for net deferred tax assets |                                  |                                | (34,985,000 | )          |            |   | (35,215,000 | )         
|                                                |                                  |                                |             |            |            |   |             |           
|Net deferred tax assets                         |                                  | $                              |            |            |            | $ |            |           
|                                                |                                  |                                |             |            |            |   |             |           

45



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##### 



7.  Income Taxes
(continued)


The following is a summary of the items that
caused the income tax expense to differ from taxes computed
using the statutory federal income tax rate for the years ended
December 31, 2003, 2002 and 2001:

|                                                    |                                            |                         |         |            |   |      |          |         |   |   |            |           |  
|--------------------------------------------------- | ------------------------------------------ | ----------------------- | ------- | ---------- | - | ---- | -------- | ------- | - | - | ---------- | --------- | -
|                                                    |                                            |                        
|                                                    |                                            | Year Ended December 31,
|                                                    |                                            |                        
|                                                    |                                            | 2003                    |         | 2002       |   | 2001
|                                                    |                                            |                         |         |            |   |     
|Tax expense (benefit) at statutory Federal
    rate |                                            | $                       | 945,000 |            |   | $    | (138,000 | )       |   | $ | (3,336,000 | )        
|Effect of:                                          |                                            |                         |         |            |   |      |          |         |   |   |            |          
|                                                    | State income tax (benefit), net            |                         |         | 35,000     |   |      |          | (20,000 | ) |   |            | (562,000  | )
|                                                    | Other                                      |                         |         | 20,000     |   |      |          | 26,000  |   |   |            | 150,000   |  
|                                                    | Alternative minimum tax                    |                         |         | 16,000     |   |      |          |        |   |   |            |          |  
|                                                    | (Decrease) increase in valuation allowance |                         |         | (1,000,000 | ) |      |          | 132,000 |   |   |            | 3,748,000 |  
|                                                    |                                            |                         |         |            |   |      |          |         |   |   |            |          
|Income tax expense                                  |                                            | $                       | 16,000  |            |   | $    |         |         |   | $ |           |          
|                                                    |                                            |                         |         |            |   |      |          |         |   |   |            |          

There was no incremental effect to the excess tax
benefits from the exercise of stock options during 2003 and no
benefit was charged to equity. Approximately $770,000 of the
decrease in the valuation allowance during 2003 was tagged as
excess tax benefits and the benefit will be credited to equity
if the valuation allowance is reduced in future periods.

8.  Preferred Stock

Of the 3,000,000 authorized preferred shares of
the Company, 1,000,000 shares have been designated as
Series A convertible Preferred Stock (Series A
Preferred Stock). Holders of Series A Preferred Stock
shares are entitled to receive dividends at the same rate as
holders of common stock and have voting rights equal to their
common stock equivalent on an as if converted basis.
Additionally, each Series A Preferred Stock holder is
entitled to a liquidation preference equal to $1.00 plus
declared but unpaid dividends. There were no shares of
Series A Preferred Stock outstanding at December 31,
2003 and 2002.

In anticipation of the adoption of a stockholders
rights plan that was implemented on January 11, 2002, the
Company, through a certificate of designation that became
effective on December 24, 2001, authorized 297,500 shares
of Series B Junior Participating Preferred Stock
(Series B Preferred Stock). Under the
stockholders right plan, which is intended to protect the
Companys stockholders from unsolicited attempts to acquire
or gain control of the Company, each holder of record on
January 11, 2002 of a share of common stock received a
right to purchase a unit of 1/100th of a share of Series B
Preferred Stock at a price, subject to adjustment, of $115 per
unit. The right is not exercisable until an attempt occurs to
acquire or gain control of the Company that is unsolicited and
does not have the approval of the Companys board of
directors. Upon exercise of a right, each holder of a right will
be entitled to receive 1/100th of a share of Series B
Preferred Stock or, in lieu thereof, a number of shares of
common stock equal to the exercise price of the right divided by
one-half of the current market price of the Companys
common stock. Until exercise of a right for 1/100th of a share
of Series B Preferred Stock, no shares of Series B
Preferred Stock will be issued. Holders of a share of
Series B Preferred Stock are entitled to receive cumulative
quarterly dividends equal to the greater of $1.00 per share or
100 times any dividend declared on the Companys common
stock and have voting rights equal to 100 votes per share.
Additionally, each holder of a share of Series B Preferred
Stock is entitled to a liquidation preference equal to $100 plus
accrued and unpaid dividends thereon, whether or not declared.

9.  Stockholders
Equity

On June 9, 2003, the Company increased
stockholders equity by $4.4 million through a private
placement of 1,336,000 newly issued common shares to a group of
institutional investors. This transaction was priced at a
discount to the volume weighted average closing share price for
the 10 trading days prior to the seventh trading day before
closing. In separate transactions, the Company also repurchased
$3.9 million of its Convertible Notes at par. The remaining
$8.1 million in Convertible Notes were converted into
2,001,314 shares of common stock in October and November of 2003.

46



---



##### 



9.  Stockholders Equity
(continued)


Stock Options

In February 1989, the Company adopted an
Incentive Stock Option Plan (the Plan). During June
1997, the Companys Board of Directors authorized an
increase of 124,747 shares of common stock that can be issued
under the Plan. During 1998, the Companys Board of
Directors increased the number of shares of common stock that
can be issued under the plan to 2,316,730. The option price
under the Plan will not be less than fair market value of the
Companys common stock on the date of grant. The vesting
period of the options is determined by the Board of Directors
and is generally four years. Outstanding options expire after
ten years.

During 1999, the Company adopted the 1999 Stock
Option Plan (the 1999 Plan). The 1999 Plan permits
the granting of both incentive stock options and nonqualified
stock options to employees, directors and consultants. The
aggregate number of shares that can be granted under the 1999
Plan is 5,858,331. The option exercise price under the 1999 Plan
will not be less than fair market value of the Companys
common stock on the date of grant. The vesting period of the
options is determined by the Board of Directors and is generally
four years. Outstanding options expire after seven to ten years.

Additional information with respect to stock
option activity under the stock option plans is summarized as
follows:

|                                     |  |                              |           |           |  |        |      |           |  |        |           |           |  |   |      |  |  |  |           |   |  |   |      | 
|------------------------------------ |  | ---------------------------- | --------- | --------- |  | ------ | ---- | --------- |  | ------ | --------- | --------- |  | - | ---- |  |  |  | --------- | - |  | - | ---- | 
|                                     |  |                             
|                                     |  | Year Ended December 31, 2002
|                                     |  |                             
|                                     |  |                              |           |           |  |       
|                                     |  | 2003                         |           | 2002      |  | 2001  
|                                     |  |                              |           |           |  |       
|                                     |  |                              |           | Weighted- |  |        |      | Weighted- |  |        |           | Weighted-
|                                     |  |                              |           | Average   |  |        |      | Average   |  |        |           | Average  
|                                     |  |                              |           | Exercise  |  |        |      | Exercise  |  |        |           | Exercise 
|                                     |  | Shares                       |           | Price     |  | Shares |      | Price     |  | Shares |           | Price    
|                                     |  |                              |           |           |  |        |      |           |  |        |           |          
|Outstanding at beginning of period   |  |                              | 5,925,240 |           |  | $      | 5.30 |           |  |        | 4,529,080 |           |  | $ | 6.69 |  |  |  | 3,135,812 |   |  | $ | 9.55 | 
|Options granted                      |  |                              | 484,835   |           |  |        | 4.88 |           |  |        | 2,316,821 |           |  |   | 2.70 |  |  |  | 1,885,501 |   |  |   | 2.17 | 
|Options exercised                    |  |                              | (746,911  | )         |  |        | 2.86 |           |  |        | (189,955  | )         |  |   | 1.54 |  |  |  | (6,488    | ) |  |   | 1.50 | 
|Options canceled or expired          |  |                              | (253,046  | )         |  |        | 6.14 |           |  |        | (730,706  | )         |  |   | 6.79 |  |  |  | (485,745  | ) |  |   | 7.66 | 
|                                     |  |                              |           |           |  |        |      |           |  |        |           |           |  |   |      |  |  |  |           |   |  |   |      | 
|Outstanding at end of period         |  |                              | 5,410,118 |           |  | $      | 5.47 |           |  |        | 5,925,240 |           |  | $ | 5.30 |  |  |  | 4,529,080 |   |  | $ | 6.69 | 
|                                     |  |                              |           |           |  |        |      |           |  |        |           |           |  |   |      |  |  |  |           |   |  |   |      | 
|Options exercisable at end of period |  |                              | 3,410,392 |           |  | $      | 6.21 |           |  |        | 3,721,302 |           |  | $ | 5.70 |  |  |  | 2,508,584 |   |  | $ | 7.22 | 
|                                     |  |                              |           |           |  |        |      |           |  |        |           |           |  |   |      |  |  |  |           |   |  |   |      | 

The following table summarizes information about
stock options outstanding at December 31, 2003.

|                 |  |                     |           |                     |  |           |      |             |  |           |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | ------------------- |  | --------- | ---- | ----------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  |                     |           |                     |  |          
|                 |  | Options Outstanding |           |                    
|                 |  |                     |           | Options Exercisable
|                 |  |                     |           | Weighted-           |  |           |      |            
|                 |  |                     |           | Average             |  | Weighted- |      |             |  | Weighted-
|                 |  |                     |           | Remaining           |  | Average   |      |             |  | Average  
|                 |  | Number              |           | Contractual Life    |  | Exercise  |      | Number      |  | Exercise 
|                 |  | Outstanding         |           | (In Years)          |  | Price     |      | Exercisable |  | Price    
|                 |  |                     |           |                     |  |           |      |             |  |          
|$0.06 to $2.30   |  |                     | 1,187,353 |                     |  |           | 6.45 |             |  | $         | 1.95  |  |  |  | 986,138   |  |  | $ | 1.93  | 
|$2.31 to $2.86   |  |                     | 967,645   |                     |  |           | 7.87 |             |  |           | 2.80  |  |  |  | 241,288   |  |  |   | 2.74  | 
|$2.88 to $3.81   |  |                     | 1,132,840 |                     |  |           | 6.79 |             |  |           | 3.20  |  |  |  | 573,596   |  |  |   | 3.25  | 
|$3.84 to $8.40   |  |                     | 1,211,588 |                     |  |           | 4.30 |             |  |           | 7.23  |  |  |  | 846,050   |  |  |   | 7.85  | 
|$8.42 to $20.19  |  |                     | 909,555   |                     |  |           | 3.23 |             |  |           | 13.37 |  |  |  | 762,392   |  |  |   | 13.21 | 
|$21.50 to $21.50 |  |                     | 1,137     |                     |  |           | 3.20 |             |  |           | 21.50 |  |  |  | 928       |  |  |   | 21.50 | 
|                 |  |                     |           |                     |  |           |      |             |  |           |       |  |  |  |           |  |  |   |       | 
|                 |  |                     | 5,410,118 |                     |  |           | 5.75 |             |  | $         | 5.47  |  |  |  | 3,410,392 |  |  | $ | 6.21  | 
|                 |  |                     |           |                     |  |           |      |             |  |           |       |  |  |  |           |  |  |   |       | 

47



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##### 



9.  Stockholders Equity
(continued)


Warrants

The Companys warrant activity is as follows:

|                             |                                      |          |           |          |  
|---------------------------- | ------------------------------------ | -------- | --------- | -------- | -
|                             |                                      | Warrants
|                             |                                      |         
|Balance at December 31, 2000 |                                      |          | 1,736,397 |         
|                             | Exercise of warrants during 2001     |          |           | (21,385  | )
|                             | Cancellation of warrants during 2001 |          |           | (272,830 | )
|                             |                                      |          |           |         
|Balance at December 31, 2001 |                                      |          | 1,442,182 |         
|                             | Exercise of warrants during 2002     |          |           |         |  
|                             | Cancellation of warrants during 2002 |          |           | (630,736 | )
|                             |                                      |          |           |         
|Balance at December 31, 2002 |                                      |          | 811,446   |         
|                             | Exercise of warrants during 2003     |          |           |         |  
|                             | Cancellation of warrants during 2003 |          |           | (611,446 | )
|                             |                                      |          |           |         
|Balance at December 31, 2003 |                                      |          | 200,000   |         
|                             |                                      |          |           |         

Outstanding warrants were issued in 2000 in
connection with the Convertible Notes with an exercise price of
$4.00 and an expiration date of September 30, 2005.

Shares Reserved for Issuance

As of December 31, 2003, the Company has
6,370,264 and 200,000 shares reserved for issuance for stock
options and warrants, respectively.

10.  Net Income (Loss) Per
Share

The following table sets forth the computation of
basic and diluted net loss per share:

|                                                           |                       |                          |           |            |  |      |          |            |   |   |            |            |  
|---------------------------------------------------------- | --------------------- | ------------------------ | --------- | ---------- |  | ---- | -------- | ---------- | - | - | ---------- | ---------- | -
|                                                           |                       |                         
|                                                           |                       | Years Ended December 31,
|                                                           |                       |                         
|                                                           |                       | 2003                     |           | 2002       |  | 2001
|                                                           |                       |                          |           |            |  |     
|Net income (loss)                                          |                       | $                        | 2,763,769 |            |  | $    | (405,583 | )          |   | $ | (9,812,558 | )         
|Shares used in calculation of income
    (loss) per share: |                       |                          |           |            |  |      |          |            |   |   |            |           
|                                                           | Basic                 |                          |           | 15,140,538 |  |      |          | 13,520,642 |   |   |            | 12,026,476 |  
|                                                           | In the money warrants |                          |           | 38,073     |  |      |          |           |   |   |            |           |  
|                                                           | In the money options  |                          |           | 1,506,991  |  |      |          |           |   |   |            |           |  
|                                                           |                       |                          |           |            |  |      |          |            |   |   |            |           
|                                                           | Diluted               |                          |           | 16,685,602 |  |      |          | 13,520,642 |   |   |            | 12,026,476 |  
|Net income (loss) per share:                               |                       |                          |           |            |  |      |          |            |   |   |            |           
|                                                           | Basic                 |                          | $         | 0.18       |  |      | $        | (0.03      | ) |   | $          | (0.82      | )
|                                                           | Diluted               |                          | $         | 0.17       |  |      | $        | (0.03      | ) |   | $          | (0.82      | )

Due to their antidilutive effects, outstanding
shares from the conversion of the Convertible Notes, stock
options and warrants to purchase 4,113,639, 9,736,686 and
9,221,262 shares of common stock at December 31, 2003, 2002
and 2001, respectively, were excluded from the computation of
diluted earnings per share.

11.  Employee Benefit
Plans

Employee Savings and Retirement Plan

The Company has a 401(k) plan that allows
eligible employees to contribute up to 15% of their salary. The
Company has total discretion about whether to make an employer
contribution to the plan and the amount of the employer
contribution. The Company has historically not chosen to match
the employee contributions and, therefore, has not incurred any
contribution expense.

48



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##### 



11.  Employee Benefit Plans
(continued)


Employee Stock Purchase Plan

The Company has an employee stock purchase plan
for all eligible employees to purchase shares of common stock at
85% of the lower of the fair market value on the first or the
last day of each six-month offering period. Employees may
authorize the Company to withhold up to 10% of their
compensation during any offering period, subject to certain
limitations. The employee stock purchase plan authorizes up to
400,000 shares to be granted. During the year ended
December 31, 2003 and 2002, shares totaling 21,557 and
29,395 were issued under the plan at an average price of $4.11
and $2.20 per share, respectively. At December 31, 2003,
270,586 shares were reserved for future issuance.

12.  Related Party
Transactions

During 2001, the Company surrendered the recourse
right under the stock subscription receivables for two former
employees in the amount of $151,969 and the related collateral
of 43,484 shares was retained by the Company. During 2002, the
Company surrendered the recourse right under the stock
subscription receivables for two employees in the amount of
$122,381 and the related collateral of 30,677 shares was
retained by the Company. The Company accounted for the
conversions as a repurchase of shares previously exercised as a
treasury stock transaction. The fair value of the collateral on
the conversion date was $126,159, and $79,219, respectively, and
was recorded as treasury stock. The shares under the new
non-recourse notes were accounted for as the grant of a new
stock compensation arrangement and were accounted for as a
variable award pursuant to the terms in EITF issue 95-16,
Accounting for Stock Compensation Arrangement with
Employer Loan Features. Stock compensation expense was
not material during the three years ended December 31,
2003. The agreements expired during 2003 and were not renewed,
and the Company retained the collateral it held.

One director, who resigned in 2003, is Chairman
and Chief Executive Officer of a financial institution that
generated approximately $1,040,000, $860,000 and $623,000 in
revenue for the Company during the years ended December 31,
2003, 2002 and 2001, respectively. The financial institution
owed $200,000 and $163,000 to the Company at December 31,
2003 and 2002, respectively. Such amounts are included in
Accounts Receivable on the balance sheets.

13.  Non-Recurring Charges

The Company incurred and paid a one-time charge
of $209,434 including severance and benefit payments during the
twelve months ended December 31, 2001 as a result of the
staff reduction of 23 employees, approximately 9% of the total
employees, on January 3, 2001.

14.  Summarized Quarterly Data
(Unaudited)

The following financial information reflects all
normal recurring adjustments that are, in the opinion of
management, necessary for a fair statement of the results of the
interim periods. Summarized quarterly data for the years 2003
and 2002 is as follows:

|                             |         |               |            |          |  |               |           |              |   |   |           |      |  |   |           |      | 
|---------------------------- | ------- | ------------- | ---------- | -------- |  | ------------- | --------- | ------------ | - | - | --------- | ---- |  | - | --------- | ---- | 
|                             |         |              
|                             |         | Quarter Ended
|                             |         |              
|                             |         | March 31,     |            | June 30, |  | September 30, |           | December 31,
|                             |         | 2003          |            | 2003     |  | 2003          |           | 2003        
|                             |         |               |            |          |  |               |           |             
|Total revenues               |         | $             | 11,009,998 |          |  | $             | 8,417,410 |              |   | $ | 9,259,122 |      |  | $ | 9,721,085 |     
|Gross profit                 |         |               | 7,159,509  |          |  |               | 4,656,985 |              |   |   | 5,247,600 |      |  |   | 5,840,957 |     
|Net income (loss)            |         | $             | 2,123,172  |          |  | $             | (148,215  | )            |   | $ | 363,804   |      |  | $ | 425,008   |     
|                             |         |               |            |          |  |               |           |              |   |   |           |      |  |   |           |     
|Net income (loss) per share: |         |               |            |          |  |               |           |              |   |   |           |      |  |   |           |     
|                             | Basic   |               | $          | 0.15     |  |               | $         | (0.01        | ) |   | $         | 0.02 |  |   | $         | 0.02 | 
|                             | Diluted |               | $          | 0.15     |  |               | $         | (0.01        | ) |   | $         | 0.02 |  |   | $         | 0.02 | 

49



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##### 



14.  Summarized Quarterly Data
(continued)


|                             |         |               |           |          |   |               |           |              |   |   |           |      |  |   |           |      | 
|---------------------------- | ------- | ------------- | --------- | -------- | - | ------------- | --------- | ------------ | - | - | --------- | ---- |  | - | --------- | ---- | 
|                             |         |              
|                             |         | Quarter Ended
|                             |         |              
|                             |         | March 31,     |           | June 30, |   | September 30, |           | December 31,
|                             |         | 2002          |           | 2002     |   | 2002          |           | 2002        
|                             |         |               |           |          |   |               |           |             
|Total revenues               |         | $             | 7,827,379 |          |   | $             | 7,878,977 |              |   | $ | 8,151,876 |      |  | $ | 8,495,951 |     
|Gross profit                 |         |               | 3,893,627 |          |   |               | 4,205,253 |              |   |   | 4,613,082 |      |  |   | 5,014,240 |     
|Net (loss) income            |         | $             | (806,722  | )        |   | $             | (133,068  | )            |   | $ | 92,593    |      |  | $ | 441,614   |     
|                             |         |               |           |          |   |               |           |              |   |   |           |      |  |   |           |     
|Net (loss) income per share: |         |               |           |          |   |               |           |              |   |   |           |      |  |   |           |     
|                             | Basic   |               | $         | (0.06    | ) |               | $         | (0.01        | ) |   | $         | 0.01 |  |   | $         | 0.03 | 
|                             | Diluted |               | $         | (0.06    | ) |               | $         | (0.01        | ) |   | $         | 0.01 |  |   | $         | 0.03 | 

50



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##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

No changes in or disagreements with accountants
on accounting and financial disclosure have occurred during the
two most recent fiscal years.

Item 9A.     Controls
and Procedures

Our principal executive officer and principal
financial officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this Annual Report on Form 10-K, have concluded
that, based on such evaluation, our disclosure controls and
procedures were adequate and effective to ensure that material
information relating to us, was made known to them by others
within those entities, particularly during the period in which
this Annual Report on Form 10-K was being prepared.

There were no changes in our internal control
over financial reporting, identified in connection with the
evaluation of such internal control that occurred during the
fourth quarter of our last fiscal year, that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

PART III

Item 10.     Directors
and Executive Officers of the Company

The information required by this item is
incorporated by reference to the sections and subsections
entitled Management, Executive
Compensation, Code of Ethics, Audit
Committee, Audit Committee Financial Experts
and Section 16(a) Beneficial Ownership Reporting
Compliance contained in our Proxy Statement for the 2004
Annual Meeting of Stockholders to be filed with the SEC pursuant
to Regulation 14A.

Item 11.     Executive
Compensation

The information required by this item is
incorporated by reference to the section entitled
Executive Compensation and Transactions contained in
our Proxy Statement for the 2004 Annual Meeting of Stockholders
to be filed with the SEC pursuant to Regulation 14A.

Item 12.     Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

The information required by this item is
incorporated by reference to the section entitled Security
Ownership of Certain Beneficial Owners and Management
contained in our Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed with the SEC pursuant to
Regulation 14A.

Item 13.     Certain
Relationships and Related Transactions

The information required by this item is
incorporated by reference to the section entitled Certain
Relationships and Related Transactions contained in our
Proxy Statement for the 2004 Annual Meeting of Stockholders to
be filed with the SEC pursuant to Regulation 14A.

Item 14.     Principal
Accountant Fees and Services

The information required by this item is
incorporated by reference to the section entitled
Principal Accountant Fees and Services contained in
our Proxy Statement for the 2004 Annual Meeting of Stockholders
to be filed with the SEC pursuant to Regulation 14A.

51



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##### 



PART IV

Item 15.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) Exhibits
and Financial Statements and Schedules.

(1) Financial Statements. The Companys
financial statements are included in Part II, Item 8 of
this report on Form 10-K.

(2) Schedule II  Valuation and
Qualifying Accounts.



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules set forth in the applicable
    accounting regulations of the Securities and Exchange Commission
    either are not required under the related instructions or are
    not applicable and, therefore, have been omitted.

(3) List of Exhibits.

| |      |   |  |                                                                                                                                                                                                                                                                  
| | ---- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1  |   |  | Form of Amended and Restated Certificate of
    Incorporation of the Company (Incorporated by reference from our
    registration statement on Form S-1; Registration
    No. 333-74777)                                                                         
| | 3.2  |   |  | Form of Amended and Restated Bylaws of the
    Company (Incorporated by reference from our registration
    statement on Form S-1; Registration No. 333-74777)                                                                                                   
| | 3.3  |   |  | Certificate of Designation of Shares of
    Series B Junior Participating Preferred Stock                                                                                                                                                                        
| | 4.1  |   |  | Specimen of Common Stock Certificate of the
    Company (Incorporated by reference from our registration
    statement on Form S-1; Registration No. 333-74777)                                                                                                  
| | 4.9  |   |  | Form of warrants issued to placement agents
    (Incorporated by reference from our registration statement on
    Form S-1; Registration No. 333-74777)                                                                                                          
| | 4.1  | 0 |  | Registration Rights Agreement for purchasers of
    Series C preferred stock and Sirrom Capital Corporation
    (Incorporated by reference from our registration statement on
    Form S-1; Registration No. 333-74777)                                          
| | 4.1  | 1 |  | Indenture dated September 28, 2000 between
    the registrant and Bankers Trust Company, as trustee. (Filed as
    Exhibit 4.1 to our Form 10-Q for the quarter ended
    September 30, 2000 filed on November 14, 2000 and
    incorporated herein by reference)
| | 4.1  | 2 |  | Form of warrants issued to placement agent (Filed
    as Exhibit 4.3 to our Form 10-Q for the quarter ended
    September 30, 2000 filed on November 14, 2000 and
    incorporated herein by reference)                                                          
| | 4.1  | 4 |  | Rights Agreement dated as of January 11,
    2002, between the registrant and American Stock Transfer &
    Trust Company (filed as Exhibit 4.1 to our Form 8-K
    filed on January 15, 2002 and incorporated herein by
    reference)                          
| | 10.1 |   |  | Lease Agreement for premises at 7600 Colshire
    Drive, McLean, Virginia (Incorporated by reference from our
    registration statement on Form S-1; Registration
    No. 333-74777)                                                                            
| | 10.2 |   |  | Online Resources & Communications Corporation
    1989 Stock Option Plan (Incorporated by reference from our
    registration statement on Form S-1; Registration
    No. 333-74777)                                                                             
| | 10.3 |   |  | 1999 Stock Option Plan (Incorporated by reference
    from our registration statement on Form S-1; Registration
    No. 333-74777)                                                                                                                               
| | 10.4 |   |  | Employee Stock Purchase Plan (Incorporated by
    reference from our registration statement on Form S-8;
    Registration No. 333-40674)                                                                                                                         
| | 13   |   |  | Annual Report to Shareholders                                                                                                                                                                                                                                    
| | 14   |   |  | Code of Ethics                                                                                                                                                                                                                                                   
| | 23   |   |  | Consent of Ernst & Young LLP (See Exhibit
    attached to this Report)                                                                                                                                                                                           
| | 31.1 |   |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(a) of the Securities Exchange Act, as amended                                                                                                                                               

52



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##### 



| |      |  |  |                                                                                                                                                                             
| | ---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.2 |  |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) of the Securities Exchange Act, as amended                                                          
| | 32   |  |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
    pursuant to Section 906 of the Sabanes-Oxley Act of 2002

(b) Reports on
Form 8-K.

Form 8-K dated October 21, 2003 for its
third Quarter Earnings Press Release.

53



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##### 



REPORT OF INDEPENDENT AUDITORS ON FINANCIAL
STATEMENT SCHEDULE

We have audited the financial statements of
Online Resources Corporation as of December 31, 2003 and
2002, and for each of the three years in the period ended
December 31, 2003, and have issued our report thereon dated
February 2, 2004. Our audits also included the financial
statement schedule listed in Item 15(a)(2) of the
Form 10-K. This schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion based on our audits.

In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

McLean, Virginia

February 2, 2004


54



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##### 



Schedule II  Valuation
and Qualifying Accounts

|                                                   |                              |            |   |           |  |            |   |            |  |  |   |         |     |  |   |        | 
|-------------------------------------------------- | ---------------------------- | ---------- | - | --------- |  | ---------- | - | ---------- |  |  | - | ------- | --- |  | - | ------ | 
|                                                   |                              | Balance at |   |           |  |            |   |           
|                                                   |                              | Beginning  |   |           |  |            |   | Balance at
|                                                   |                              | of         |   |           |  |            |   | End of    
|Classification                                     |                              | Period     |   | Additions |  | Deductions |   | Period    
|                                                   |                              |            |   |           |  |            |   |           
|Allowance for doubtful accounts:                   |                              |            |   |           |  |            |   |            |  |  |   |         |     |  |   |       
|                                                   | Year ended December 31, 2001 |            | $ | 117,310   |  |            | $ | 239,564    |  |  | $ | 321,874 | (1) |  | $ | 35,000 | 
|                                                   | Year ended December 31, 2002 |            | $ | 35,000    |  |            | $ | 88,000     |  |  | $ | 46,095  | (1) |  | $ | 76,905 | 
|                                                   | Year ended December 31, 2003 |            | $ | 76,905    |  |            | $ |           |  |  | $ | 10,000  | (2) |  | $ | 66,905 | 
|Reserve for stale dated payment processing checks: |                              |            |   |           |  |            |   |            |  |  |   |         |     |  |   |       
|                                                   | Year ended December 31, 2003 |            | $ |          |  |            | $ | 51,219     |  |  | $ |        |     |  | $ | 51,219 | 



---

Notes:




|    |                                                                 
|--- | ----------------------------------------------------------------
|(1) | Uncollectible accounts written off.                             
|   
|(2) | Reversal of previously reserved amounts that were
    collected.

55



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##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                             
| | ----------------------------
| | ONLINE RESOURCES CORPORATION

Date: March 12, 2004

| |     |                                                                                            
| | --- | -------------------------------------------------------------------------------------------
| | By: | /s/ MATTHEW P. LAWLOR 
     _______________________________________ 
     Matthew P. Lawlor

| |                        
| | -----------------------
| | Chairman and           
| | Chief Executive Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the date indicated.

|                                           |  |                                                                             |  |               
|------------------------------------------ |  | --------------------------------------------------------------------------- |  | --------------
|Signature                                  |  | Title                                                                       |  | Date          
|                                           |  |                                                                             |  |               
|/s/ MATTHEW P. LAWLORMatthew P. Lawlor     |  | Chairman and Chief Executive Officer Executive
    Vice President and Chief |  | March 12, 2004
|                                          
|/s/ CATHERINE A. GRAHAMCatherine A. Graham |  | Financial Officer
    (Principal Financial Officer)                         |  | March 12, 2004
|/s/ EDWARD E. FURASHEdward E. Furash       |  | Director                                                                    |  | March 12, 2004
|/s/ JOSEPH J. SPALLUTOJoseph J. Spalluto   |  | Director                                                                    |  | March 12, 2004
|/s/ DAVID A. OCONNERDavid A. OConner     |  | Director                                                                    |  | March 12, 2004
|/s/ ERVIN R. SHAMESErvin R. Shames         |  | Director                                                                    |  | March 12, 2004
|/s/ BARRY D. WESSLERBarry D. Wessler       |  | Director                                                                    |  | March 12, 2004
|/s/ MICHAEL H. HEATHMichael H. Heath       |  | Director                                                                    |  | March 12, 2004

56