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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-31254
 THE BISYS GROUP, INC.
  DELAWARE
    
    13-3532663(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 105 Eisenhower Parkway, Roseland, New Jersey
07068
 973-461-2500
 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 report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check One):
 Large accelerated
filer þ
      Accelerated filer
o     
Non-accelerated filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No
þ
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
 As of December 31, 2006, there were 121,021,484 shares of common stock, par value $0.02 per share,
of the issuer outstanding.




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##### 



THE BISYS GROUP, INC.
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed Consolidated Statements of Income for the three months ended September 30, 2006 and 2005
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2006 and June 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    39EXHIBIT INDEX
    
    
    40EX-31.1EX-31.2EX-32
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PART I
 
 ITEM 1. FINANCIAL STATEMENTS
 THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share data)
 (Unaudited)
 Three Months EndedSeptember 30,2006
    
    
    2005Revenues
    
    $
    211,535
    
    
    $
    205,674Operating costs and expenses:Service and operating
(exclusive of depreciation and
amortization shown separately below)
    
    
    141,281
    
    
    
    132,937Selling, general and administrative
(exclusive of depreciation and
amortization shown separately below)
    
    
    38,668
    
    
    
    37,634Depreciation and amortization
    
    
    12,195
    
    
    
    11,981Litigation and regulatory settlements
    
    
    1,740
    
    
    
    4,442Total operating costs and expenses
    
    
    193,884
    
    
    
    186,994Operating earnings
    
    
    17,651
    
    
    
    18,680Interest income
    
    
    1,949
    
    
    
    1,498Interest expense
    
    
    (741
    )
    
    
    (5,854
    )Investment gains and other
    
    
    145
    
    
    
    38Income from continuing operations before
income taxes
    
    
    19,004
    
    
    
    14,362Income taxes
    
    
    4,963
    
    
    
    4,744Income from continuing operations
    
    
    14,041
    
    
    
    9,618Income (loss) from discontinued
operations, net of tax
    
    
    (78
    )
    
    
    3,812Net income
    
    $
    13,963
    
    
    $
    13,430Basic earnings per share:Continuing operations
    
    $
    0.12
    
    
    $
    0.08Discontinued operations
    
    
    
    
    
    
    0.03Total basic earnings per share
    
    $
    0.12
    
    
    $
    0.11Diluted earnings per share:Continuing operations
    
    $
    0.12
    
    
    $
    0.08Discontinued operations
    
    
    
    
    
    
    0.03Total diluted earnings per share
    
    $
    0.12
    
    
    $
    0.11
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THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except per share data)
 September 30,2006
    
    
    June 30,(Unaudited)
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    134,571
    
    
    $
    159,610Restricted cash
    
    
    43,927
    
    
    
    40,151Accounts receivable, net
    
    
    97,182
    
    
    
    90,550Insurance premiums and commissions receivable
    
    
    85,017
    
    
    
    119,461Deferred tax asset
    
    
    57,126
    
    
    
    56,981Other current assets
    
    
    14,474
    
    
    
    16,889Total current assets
    
    
    432,297
    
    
    
    483,642Property and equipment, net
    
    
    41,333
    
    
    
    42,100Goodwill
    
    
    725,952
    
    
    
    716,810Intangible assets, net
    
    
    138,240
    
    
    
    139,177Other assets
    
    
    17,393
    
    
    
    17,014Total assets
    
    $
    1,355,215
    
    
    $
    1,398,743LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    1,767
    
    
    $
    1,656Accounts payable
    
    
    11,144
    
    
    
    10,735Insurance premiums and commissions payable
    
    
    98,160
    
    
    
    132,637Other current liabilities
    
    
    116,385
    
    
    
    144,200Litigation and regulatory settlements
    
    
    115,361
    
    
    
    115,361Total current liabilities
    
    
    342,817
    
    
    
    404,589Long-term debt
    
    
    2,608
    
    
    
    2,890Deferred tax liability
    
    
    36,591
    
    
    
    36,256Deferred revenues
    
    
    5,935
    
    
    
    6,622Other liabilities
    
    
    7,587
    
    
    
    6,772Total liabilities
    
    
    395,538
    
    
    
    457,129Stockholders equity:Common stock, $0.02 par value, 320,000,000 shares
authorized, 122,242,440 and 121,914,030 shares
issued
    
    
    2,445
    
    
    
    2,438Additional paid-in capital
    
    
    397,655
    
    
    
    396,484Retained earnings
    
    
    576,493
    
    
    
    564,809Employee benefit trust, 436,908 and 434,505 shares
    
    
    (6,677
    )
    
    
    (6,819
    )Deferred compensation
    
    
    6,686
    
    
    
    6,848Accumulated other comprehensive income
    
    
    360
    
    
    
    141Treasury stock at cost, 1,180,545 and 1,502,478 shares
    
    
    (17,285
    )
    
    
    (22,287
    )Total stockholders equity
    
    
    959,677
    
    
    
    941,614Total liabilities and stockholders equity
    
    $
    1,355,215
    
    
    $
    1,398,743
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THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedSeptember 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    13,963
    
    
    $
    13,430Adjustment for income from discontinued operations, net of tax
    
    
    78
    
    
    
    (3,812
    )Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    12,195
    
    
    
    11,981Deferred income tax provision
    
    
    1,659
    
    
    
    (397
    )Share-based compensation
    
    
    1,719
    
    
    
    1,944Investment gains and other
    
    
    (145
    )
    
    
    (38
    )Change in assets and liabilities, net of effects from
acquisitions and divestitures
    
    
    (20,872
    )
    
    
    (27,914
    )Tax payment made on sale of discontinued operations business
    
    
    (13,000
    )
    
    
    Net cash provided by operating activities from discontinued
operations
    
    
    273
    
    
    
    15,029Net cash provided by (used in) operating activities
    
    
    (4,130
    )
    
    
    10,223CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of businesses, net of cash acquired
    
    
    (15,365
    )
    
    
    Payments related to businesses previously acquired
    
    
    
    
    
    
    (254
    )Capital expenditures for property and equipment
    
    
    (2,264
    )
    
    
    (2,979
    )Capitalized software costs
    
    
    (3,585
    )
    
    
    (1,971
    )Proceeds from sale of investments
    
    
    
    
    
    
    63Other
    
    
    (572
    )
    
    
    (538
    )Net cash used in investing activities from discontinued operations
    
    
    (273
    )
    
    
    (13,732
    )Net cash used in investing activities
    
    
    (22,059
    )
    
    
    (19,411
    )CASH FLOWS FROM FINANCING ACTIVITIESShort-term borrowings, net
    
    
    
    
    
    
    (40,000
    )Payment of long-term debt
    
    
    (469
    )
    
    
    (424
    )Exercise of stock options
    
    
    593
    
    
    
    2,991Issuance of common stock
    
    
    2,757
    
    
    
    Repurchases of common stock
    
    
    (1,053
    )
    
    
    (824
    )Repayment of notes receivable from stockholders
    
    
    
    
    
    
    3,718Changes in bank overdrafts
    
    
    (740
    )
    
    
    (3,191
    )Excess tax benefits from share-based payment arrangements
    
    
    62
    
    
    
    180Net cash used in financing activities from discontinued operations
    
    
    
    
    
    
    (1,229
    )Net cash provided by (used in) financing activities
    
    
    1,150
    
    
    
    (38,779
    )Change in cash and cash equivalents
    
    
    (25,039
    )
    
    
    (47,967
    )Cash and cash equivalents at beginning of period (includes cash
of discontinued operations of $0 in 2006 and $618 in 2005)
    
    
    159,610
    
    
    
    172,953Cash and cash equivalents at end of period (includes cash of
discontinued operations of $0 in 2006 and $686 in 2005)
    
    $
    134,571
    
    
    $
    124,986
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THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unless otherwise noted, tabular dollars and share information in thousands, except per share data)
 (Unaudited)
 1.
    
    Basis of Presentation and Summary of Significant Accounting PoliciesThe CompanyThe BISYS Group, Inc. and subsidiaries (the Company) provides outsourcing solutions to the
financial services sector. The Investment Services segment provides administration and
distribution services for mutual funds, hedge funds, private equity funds, retirement plans,
and other investment products. The Insurance Services segment provides independent wholesale
distribution of life insurance and commercial property/casualty insurance, long-term care,
disability, and annuity products.Discontinued OperationsOn September 15, 2005, the Company entered into an agreement to sell its Information
Services segment, which included the Banking Solutions and Document Solutions divisions, to
Open Solutions Inc. for $471.3 million in cash. The transaction closed on March 3, 2006, and
the Company recognized a gain of $203.7 million, net of tax.In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144), the financial results of the Companys Information Services segment are
reported as discontinued operations for all periods presented. Accordingly, the notes to the
consolidated financial statements reflect historical amounts exclusive of discontinued
operations, unless otherwise noted.Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of America and
with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not contain all
of the information and footnotes required by accounting principles generally accepted in the
United States of America for complete annual statements. The accompanying financial
information includes all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of the results for
the interim period. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended
June 30, 2006 (the Fiscal 2006 Form 10-K).Fiscal YearThe Companys fiscal year is from July 1 to June 30. Unless otherwise stated, references to
the years 2007 and 2006 relate to the fiscal years ended June 30, 2007 and 2006,
respectively. References to future years also relate to the fiscal year ended June 30.Restricted CashUnremitted insurance premiums are held in a fiduciary capacity and approximated $43.9
million and $40.2 million at September 30, 2006 and June 30, 2006, respectively. The period
for which the Company holds such funds is dependent upon the date the agent or broker remits
the payment of the premium to the Company and the date the Company is required to forward
such payment to the insurer.Insurance Premiums and Commissions Receivable and PayableThe Company has separately reflected receivables and payables arising from its insurance-related businesses on the
accompanying condensed consolidated balance sheets. The captions insurance premiums and commissions
receivable and insurance premiums and commissions payable include insurance premiums and commissions in
the Companys Commercial Insurance Services business. In its capacity as a commercial property and casualty
wholesale distributor, the Company collects premiums from other agents and brokers and, after deducting its
commissions, remits the premiums to the respective insurers. In the Companys Life Insurance Services business,
commissions receivable from carriers are reflected net of amounts owed to agents and brokers as a component of
insurance premiums and commission receivable. In its capacity as a distributor of life insurance products, the
Company typically receives commissions from the respective insurance carriers and remits the appropriate
commission to agents and brokers after deducting its commission. Life insurance premiums are usually paid directly
to the carrier by the insured.
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InvestmentsManagement determines the appropriate classification of investments in equity securities at
the time of purchase. Marketable equity securities available for sale are carried at market
value based upon quoted market prices. Unrealized gains or losses on available for sale
securities are accumulated as an adjustment to stockholders equity, net of related deferred
income taxes. Realized gains or losses are computed based on specific identification of the
securities sold. During the three months ended September 30, 2006 and 2005, proceeds from
securities sold and the realized gains were not significant.LeasesThe Company leases facilities and equipment used in its operations, some of which are
required to be capitalized in accordance with SFAS No. 13, Accounting for Leases (FAS
13). FAS 13 requires the capitalization of leases meeting certain criteria, with the
related asset being recorded in property, plant and equipment subject to amortization and an
offsetting amount recorded as a liability.Rental payments, including rent escalations, rent holidays, rent concessions and leasehold
improvement incentives in connection with operating leases of real property, are amortized
on a straight-line basis over the lease term.Income TaxesThe asset and liability method is used in accounting for income taxes whereby deferred tax
assets and liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws. A
valuation allowance is provided when the Company determines that it is more likely than not
that a portion of the deferred tax asset balances will not be realized.The provision for income taxes of $5.0 million and $4.7 million for the three months ended
September 30, 2006 and 2005, respectively, represent an effective tax rate of 26.1% in 2006
and 33.0% in 2005. The effective tax rate for the three months ended September 30, 2006 was
impacted by the reversal of a loss contingency for state taxes for which the statute of
limitations has expired, and a more favorable mix of foreign and domestic income. For the
three months ended September 30, 2005, the effective tax rate was impacted by permanent
differences associated with certain error corrections in the Life Insurance Services
business.New Accounting PronouncementsIn May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
Accounting for Changes and Error Corrections  A Replacement of APB Opinion No. 20 and FASB
Statement No. 3 (FAS 154). FAS 154 requires retrospective application to prior period
financial statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. The
Company has adopted FAS 154 effective July 1, 2006. The adoption of FAS 154 did not have a
material impact on the Companys financial position and results of operations.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments  an amendment to FASB Statements No. 133 and 144 (FAS 155). FAS 155
simplifies the accounting for certain hybrid financial instruments containing embedded
derivatives. FAS 155 allows fair value measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation under FAS 133. In
addition, it amends FAS 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. The Company has adopted FAS 155
effective July 1, 2006. The adoption of FAS 155 did not have a material impact on the
Companys financial position and results of operations.In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets 
an amendment of FASB Statement No. 140 (FAS 156). This Statement amends FASB Statement
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to accounting for separately recognized servicing assets and
servicing liabilities. This Statement clarifies when servicing rights should be separately
accounted for, requires companies to account for separately recognized servicing rights
initially at fair value, and gives companies the option of subsequently accounting for those
servicing rights at either fair value or under the amortization method. FAS 156 is effective
for fiscal years beginning after September 15, 2006 (the Companys Fiscal 2008). The
implementation of FAS 156 is not expected to have a material impact on its consolidated
financial statements.
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In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial
statements. This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Specifically, FIN 48 requires the recognition in financial
statements of the impact of a tax position, if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. Additionally, FIN
48 provides guidance on the derecognition of previously recognized deferred tax items,
classification, accounting for interest and penalties, and accounting in interim periods
related to uncertain tax positions, as well as, requires expanded disclosures. FIN 48 is
effective for fiscal years beginning after December 15, 2006 (the Companys Fiscal 2008),
with the cumulative effect of the change in accounting principle recorded as an adjustment
to opening retained earnings. The Company has not completed its evaluation of adopting FIN
48.In September 2006, the FASB issued SFAS No. 157, Fair Value Measures (FAS 157). FAS 157
defines fair value and establishes a framework for measuring fair value in accordance with
generally accepted accounting principles. This Statement also applies to other accounting
pronouncements that require or permit a fair value measure. As defined by this Statement,
the fair value of an Asset or Liability would be based on an exit price basis rather than
an entry price basis. Additionally, the fair value should be market-based and not an
entity-based measurement. FAS 157 is effective for fiscal years beginning after November 15,
2007 (the Companys Fiscal 2009). The implementation of FAS 157 is not expected to have a
material impact on its consolidated financial statements.In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements (SAB 108), which provides interpretive guidance on
the consideration of the effects of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. SAB 108 is effective for the
first fiscal year ending after November 15, 2006. The Company
plans to apply the provisions of SAB 108 in its
Annual Report on Form 10-K for the year ending June 30, 2007. The Company does not expect
the application of this interpretation to have an impact on its financial position or results
of operations.2.
    
    Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting
principles requires management to make certain 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 revenue and
expenses during the reporting period. The most significant estimates are related to
goodwill, acquired intangible assets, income taxes, legal and regulatory contingencies, and
revenue recognition.The Company bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.
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3.
    
    Comprehensive IncomeThe components of comprehensive income are as follows:
 Three Months EndedSeptember 30,2006
    
    
    2005Net income
    
    $
    13,963
    
    
    $
    13,430Unrealized gain on investments, net of tax
    
    
    2
    
    
    
    16Unrealized gain (loss) on foreign currency
exchange contracts
    
    
    (23
    )
    
    
    64Foreign currency translation adjustment
    
    
    240
    
    
    
    (74
    )Total comprehensive income
    
    $
    14,182
    
    
    $
    13,436
 4.
    
    Per Share DataAmounts utilized in per share computations for the three months ended September 30, 2006 and
2005 are as follows:
 Three Months EndedSeptember 30,2006
    
    2005Weighted average common shares outstanding
    
    
    119,472
    
    
    
    118,543Assumed conversion of common shares issuable
under stock-based compensation plans
    
    
    363
    
    
    
    1,090Weighted average common and common equivalent
shares outstanding
    
    
    119,835
    
    
    
    119,633
 For the three months ended September 30, 2005, the effect of the assumed conversion of the
convertible subordinated notes into common stock would be antidilutive and therefore is
excluded from the computation of diluted earnings per share.Certain stock options were not included in the computation of diluted EPS because the
options exercise prices were greater than the average market price of common shares during
the period:
 Three Months EndedSeptember 30,2006
    
    2005Number of options excluded
    
    
    8,843
    
    
    
    8,415Option price per share
    
    $
    11.81 to $35.10
    
    
    $
    15.05 to $35.30Average market price of common
shares for the period
    
    $
    11.52
    
    
    $
    15.04
 5.
    
    Share-Based CompensationIn December 2004, the FASB issued SFAS 123R, Share-Based Payment (FAS 123R) that
requires companies to expense the value of employee stock purchase plans, stock option
grants and similar awards at the beginning of their next fiscal year that begins after June
15, 2005 and requires the use of either the modified prospective or the modified
retrospective application method. The Company adopted FAS 123R on July 1, 2005 under the
modified prospective method; as such, prior periods do not include share-based compensation
expense related to FAS 123R. The modified prospective method requires the application of FAS
123R to new awards and to awards modified, repurchased or cancelled after the effective
date. Additionally, compensation cost for the portion of outstanding awards for which
service has not been rendered (such as unvested options) that are outstanding as of the date of adoption are recognized as the
remaining services are
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rendered. The Company recognizes the fair value of stock-based
compensation awards in service and operating expense or selling, general and administrative
expense based upon the department classification of each employee in the condensed
consolidated statements of income on a straight-line basis over the vesting period.The Companys stock-based compensation primarily consists of the following:Stock Options:The Company generally grants stock options to employees and directors at
exercise prices equal to fair market value of the Companys stock at the dates of grant.
Stock options are typically granted in the first fiscal quarter, generally vest 20% one year
from date of grant and 20% each year thereafter and expire 10 years from the date of the
award. The Company recognizes compensation expense for the fair value of the stock options
on a straight-line basis over the vesting period of each stock option award.Restricted Stock:The Company awards shares of stock to employees that are restricted.
Except for limited exceptions for some non-U.S. employees, the holder of restricted stock
has voting rights and is entitled to receive all distributions including any dividends paid
with respect to the stock during the period of restriction. The Company recognizes
compensation expense relating to the issuance of restricted stock based on market price on
the date of award over the period during which the restrictions expire, which is generally
four years from the date of grant, on a straight-line basis.Employee Stock Purchase Plan:The Company offers an employee stock purchase plan that grants
eligible employees the right to purchase a limited number of shares of common stock each
calendar year through payroll deductions at 85% of the lower of either (1) the closing price
of the Companys common stock on the first business day of the plan year (grant date) or (2)
the closing price of the Companys common stock on the last business day of the plan year
(exercise date). Compensation expense is based upon the 15% discount and the fair value of
the look-back feature under the employee stock purchase plan and is recognized ratably over
the plan year, adjusted for withdrawals.During the three months ended September 30, 2006, the
Company recognized approximately $1.7
million of stock-based compensation expense ($0.6 million and
$1.1 relating to stock option
and restricted stock, respectively) and $0.5 million in related tax benefits. As of
September 30, 2006, the total remaining unrecognized compensation cost related to non-vested
stock options and restricted stock awards, net of forfeitures, was approximately $20.9
million and is expected to be recognized over an estimated weighted amortization period of
4.74 years. During the three months ended September 30, 2006, the Company modified certain
stock options by extending the life of the options through December 31, 2006. The financial
impact of the modification was not significant.The fair values of stock options granted during the three months ended September 30, 2006
and 2005 were estimated on the date of grant using the Black-Scholes pricing model with the
following assumptions:
 Three Months EndedSeptember 30,2006
    
    2005Expected life (in years)
    
    
    5.23
    
    
    
    4.08Average risk-free interest rate
    
    
    4.85
    %
    
    
    4.09
    %Expected volatility
    
    
    40.7
    %
    
    
    39.6
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 The Company determined the expected life of the stock options using historical data. The
risk-free interest rate is based on the U.S. treasury spot rates in effect at the time of
the grant. Expected volatility was determined using a weighted average of implied market
volatility combined with historical volatility. The Company determined that a blend of
historical volatility and implied volatility better reflects future market conditions and
better indicates expected volatility than purely historical volatility.The weighted-average estimated fair value of stock options granted during the three months
ended September 30, 2006 and 2005 was $5.15 and $5.74 per share, respectively.
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The table below presents information related to stock option activity for the three months
September 30, 2006 and 2005:
 Three Months EndedSeptember 30,2006
    
    2005Total intrinsic value of stock options exercised
    
    $
    170
    
    
    $
    761Total fair value of stock options vested
    
    
    550
    
    
    
    587Cash received from stock option exercises
    
    
    593
    
    
    
    2,991
 A summary of stock option activity for the three months ended September 30, 2006 is as
follows:
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueOutstanding, June 30, 2006
    
    
    10,262
    
    
    $
    19.45Granted
    
    
    476
    
    
    
    11.52Exercised
    
    
    (70
    )
    
    
    8.51Forfeited or expired
    
    
    (1,402
    )
    
    
    20.71Outstanding, September
30, 2006
    
    
    9,266
    
    
    $
    18.93
    
    
    
    3.97
    
    
    
    592Exercisable, September
30, 2006
    
    
    8,149
    
    
    $
    19.71
    
    
    
    3.34
    
    
    
    589
 A summary of unvested stock option activity for the three months ended September 30, 2006 is
as follows:
 WeightedNumber of
    
    
    Average FairShares
    
    
    ValueUnvested at June 30, 2006
    
    
    1,176
    
    
    $
    6.08Granted
    
    
    476
    
    
    
    5.03Vested
    
    
    (250
    )
    
    
    5.96Forfeited or expired
    
    
    (285
    )
    
    
    6.45Unvested at September 30, 2006
    
    
    1,117
    
    
    $
    5.56
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A summary of restricted stock activity for the three months ended September 30, 2006 is as
follows:
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average Fair
    
    
    Vesting Term
    
    
    IntrinsicShares
    
    
    Value
    
    
    (years)
    
    
    ValueUnvested at June 30, 2006
    
    
    1,145
    
    
    $
    14.83
    
    
    
    3.57
    
    
    $
    16,988Granted
    
    
    533
    
    
    
    10.69
    
    
    
    3.95
    
    
    
    5,694Vested
    
    
    (306
    )
    
    
    15.11
    
    
    
    
    
    
    
    (4,627
    )Forfeited
    
    
    (214
    )
    
    
    14.42
    
    
    
    2.53
    
    
    
    (3,083
    )Unvested at September
30, 2006
    
    
    1,158
    
    
    $
    12.93
    
    
    
    3.22
    
    
    $
    14,972
 At September 30, 2006, options to purchase 8.4 million shares were available for grant under
the Companys stock option and restricted stock plans. At September 30, 2006, there were 0.8
million shares available for grant under the employee stock purchase plan.The Company has a policy of utilizing shares held in treasury to satisfy stock option
exercises and does not expect to repurchase any additional shares in the open market until
it completes its evaluation of strategic alternatives.6.
    
    RestructuringThe Company did not incur any restructuring costs during the three months ended September
30, 2006 and 2005. In Fiscal 2006, restructuring charges of $1.4 million were primarily
related to the completion of the relocation of the Companys corporate headquarters from New
York to Roseland, New Jersey. The restructuring charges represent the excess of the future
minimum lease commitments of the former New York headquarters over the expected sublease
income, partially offset by a related deferred rent liability of approximately $0.3 million.
The following summarizes activity with respect to the Companys restructuring activities for
the three months ended September 30, 2006:
 Restructuring accrual at June 30, 2006
    
    $
    1,729Expense provision:Facility closure
    
    
    Cash payments and other
    
    
    150Remaining accrual at September 30, 2006:Employee severance
    
    
    Facility closure
    
    
    1,579Total
    
    $
    1,579
 7.
    
    Litigation and Regulatory InvestigationsLitigationFollowing the Companys May 17, 2004 announcement regarding the restatement of its financial
results, seven putative class action and two derivative lawsuits were filed against the
Company and certain of its current and former officers in the United States District Court
for the Southern District of New York. By order of the Court, all but one of the putative
class actions were consolidated into a single action, and on October 25, 2004, plaintiffs
filed a consolidated amended complaint generally alleging that during the class period the
Company, certain of its officers, and its independent registered public accounting firm
allegedly violated the federal securities laws in connection with the purported issuance of
false and misleading information concerning the Companys financial condition. On October
28, 2005, the Court dismissed certain claims under the Securities Exchange Act of 1934 as to
six of the individual defendants, narrowed certain additional claims against the
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Company and the individual defendants and dismissed all claims as to the Companys
independent registered public accounting firm.The remaining putative class action purported to be brought on behalf of all persons who
acquired BISYS securities from the Company as part of private equity transactions during the
class period. The complaint generally asserted that the Company and certain of its officers
allegedly violated the federal securities laws in connection with the purported issuance of
false and misleading information concerning the Companys financial condition, and seeks
damages in an unspecified amount. The Court subsequently consolidated plaintiffs complaint
into the above complaint, but in August 2006, a magistrate judge issued a recommendation to
the Court that it not certify the proposed class of non-publicly traded Company security
holders. Plaintiff subsequently filed objections to the magistrate judges recommendation.On October 16, 2006, the Company announced that it had reached an agreement in principle to
settle the consolidated class action lawsuit (including claims relating to the second
restatement filed on April 26, 2006), as well as the remaining putative class lawsuit on an
individual basis. The parties signed two definitive stipulations of settlement dated as of
October 30, 2006. Under the proposed settlements, the Company paid an aggregate of $66.5
million in cash into escrow accounts on November 15 and 16, 2006. The consolidated class
action settlement received preliminary Court approval on November 6, 2006 but remains
subject to, among other things, final Court approval. Following such approval, the funds
will be disbursed to certain purchasers of BISYS securities according to a Court-approved
distribution plan. A fairness hearing for the consolidated class action settlement was held
on January 18, 2007, at which time the Court took the matter under advisement. If the Court
determines that the settlement is fair to the class members, the settlement will be
approved. The settlements include no admission of wrongdoing by the Company or any of the
individual defendants, and were funded through a combination of cash on hand and the
Companys existing credit facility. The Company has reached an agreement with three of its
insurers to recover a total of $16 million under its $25 million directors and officers
liability policy. The Company has also filed a request for mediation under its insurance
policy to assert a claim against an additional insurance carrier. The claim is for recovery
of monetary losses of $5 million paid by the Company in excess of policy limits to settle
the securities class action lawsuit. There can be no assurance that the claim will be
successful. The Company will not record a recovery related to this claim prior to final
settlement.The derivative complaints filed in 2004 purported to be brought on behalf of the Company and
generally asserted that certain officers and directors were liable for alleged breaches of
fiduciary duties, abuse of control, gross mismanagement, waste, and unjust enrichment that
purportedly occurred between October 23, 2000 and the time of
the filing. The derivative complaints
sought disgorgement, a constructive trust and damages in an unspecified amount. The Court
ordered that the derivative actions be consolidated into a single action and on November 24,
2004, plaintiffs filed a consolidated amended complaint. On January 24, 2005, the Company
and the individual defendants filed separate motions to dismiss the complaint. On October
31, 2005, the Court granted defendants motions, dismissing on the merits plaintiffs claim
under Section 304 of the Sarbanes-Oxley Act of 2002 on the ground that the Act does not
create a private right of action upon which plaintiffs may sue. Having so ruled, the Court
also dismissed plaintiffs state law claims on the ground that it lacked subject matter
jurisdiction over them. Plaintiffs appealed the rulings, but subsequently determined to
dismiss with prejudice their appeal to the United States Court of Appeals for the Second
Circuit and the Company agreed to such dismissal. Plaintiffs then filed similar
derivative complaints in New Jersey state court and subsequently
dismissed one of the actions. The Company has commenced preliminary
settlement negotiations with the attorneys representing the
remaining shareholder to address the
issues raised in her complaint.The Companys Life Insurance Services division is involved in litigation with a West Coast-based
distributor of life insurance products, with which it had a former business relationship.
The lawsuit, which is captioned Potomac Group West, Inc., et al, v. The BISYS Group, Inc.,
et al, was filed in September 2002 in the Circuit Court for Montgomery County, Maryland. The
original complaint asserted breach of contract and a number of tort claims against BISYS,
several subsidiaries, and several employees. The Court subsequently dismissed all claims
against BISYS, its subsidiaries, and its employees, leaving only a breach of contract claim
against one BISYS subsidiary. Plaintiffs continue to assert that they have not been paid all
monies due for covered insurance policies. A jury trial commenced on January 22, 2007. The
Company intends to continue to vigorously defend the claims asserted and has asserted a
number of counterclaims. The Company believes that
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it has adequate defenses against claims arising in such litigation and that the outcome of
this matter will not have a material adverse effect upon its financial position, results of
operations or cash flows.The Company is also involved in other litigation arising in the ordinary course of business.
The Company believes that it has adequate defenses and/or insurance coverage against claims
arising in such litigation and that the outcome of these proceedings, individually or in the
aggregate, will not have a material adverse effect upon the Companys financial position,
results of operations or cash flows.Regulatory InvestigationsThe Company notified the Securities and Exchange Commission
(SEC) in May 2004 that it would restate certain prior period
financial statements, and subsequently the SEC Staff advised the Company that the SEC was
conducting an investigation into the facts and circumstances related to this restatement. On
May 17, 2004, the Company announced that it would restate its financial results for the
fiscal years ended June 30, 2003, 2002, and 2001 and for the quarters ended December 31 and
September 30, 2003 (the 2004 restatement) in order to record adjustments for correction of
errors resulting from various accounting matters in the Life Insurance Services division. An
amended Annual Report on Form 10-K for the fiscal year ended June 30, 2003 was filed with
the SEC on August 10, 2004 along with amended Quarterly Reports on Form 10-Q for the
quarters ended December 31 and September 30, 2003 to reflect the restated financial results.
In July 2005, the Company determined that an additional restatement of previously issued
financial statements was necessary and the SECs investigation was expanded to include the
2005 restatement. The Company has cooperated and intends to continue to cooperate with the
SECs investigation, which has resulted in significant expenses. On November 3, 2006, the
Company announced that it had reached an agreement in principle with the SEC Staff, which
would, if approved by the SEC and the court in which the SECs complaint will be filed,
settle the SECs investigation into the 2004 and 2005 restatements. Under the proposed
settlement, which remains subject to final approval by the Commission, the Company will
consent to refrain from future violations of the reporting, books and records and internal
controls provisions of the federal securities laws and related SEC rules. The Company has
agreed to pay $25.1 million in disgorgement and prejudgment interest, which amount was
placed in escrow in January 2007, pending the determination by the SEC to accept or reject
the offer of settlement.On September 26, 2006, the SEC approved the settlement offer of the Company with respect to
the SECs investigation of certain of the Companys past marketing and distribution
arrangements in its mutual funds services business. The practices at issue related to the
structure and accounting for arrangements pursuant to which BISYS Fund Services (BFS), a
subsidiary of the Company, agreed with the advisers of certain U.S. mutual funds to use a
portion of the administration fees paid to BFS by the mutual funds to pay for, among other
things, expenses relating to the marketing and distribution of the fund shares, to make
payments to certain advisers and to pay for certain other expenses. The Company identified
27 fund support arrangements to the SEC, all of which were entered into prior to December
2003 and have been terminated.The settlement resolved the issues with respect to all fund support arrangements disclosed
by the Company to the Staff and provided for the simultaneous initiation and settlement of
an administrative proceeding through the entry of an administrative order. The order set
forth the SECs findings that BFS aided and abetted violations of Sections 206(1) and 206(2)
of the Investment Advisers Act, Sections 12(b) and 34(b) of the Investment Company Act and
SEC Rule 12(b)-1(d). These rules and regulations prohibit investment advisers from employing
any device, scheme or artifice to defraud and from engaging in any course of business that
would operate as a fraud, prohibit untrue statements or omissions of material facts in
certain documents filed with the SEC, and regulate the circumstances under which open-end
mutual funds may participate in the distribution of the securities that they issue. Without
admitting or denying the SECs findings, BFS consented to cease and desist from aiding and
abetting or causing any violations of the referenced provisions of the federal securities
laws and related SEC rules. The order also required BFS to disgorge $9.7 million and pay
prejudgment interest of $1.7 million and a penalty of $10 million, as well as BFS to agree
to certain undertakings. As part of the settlement, for a period of up to 18 months
following the order of settlement, BFS has retained an Independent Consultant to review BFS
policies and procedures governing (i) the receipt of revenues and payment of expenses
associated with its administrative, fund accounting and distribution services, and (ii) the
accuracy of disclosures to fund boards of directors concerning agreements between BFS, the
funds, advisors, banks and related entities with respect to those services. BFS has also
retained an Independent Distribution Consultant to review and administer the plan of
distribution of the funds paid by BFS as part of the settlement.
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The Company established an initial estimated liability of $20.9 million at June 30, 2005,
representing expected amounts to be paid as part of this settlement, which was comprised of
an estimated $9.7 million disgorgement recognized as a reduction to 2005 revenues, and an
estimated fine of $10 million and prejudgment interest of $1.2 million recognized as an
operating expense in 2005. During 2006, the liability was increased to $21.4 million to
properly reflect interest associated with the settlement. The Company paid the entire
settlement amount in October 2006.At June 30, 2006, the Company established estimated liabilities of $25.1 million and $66.5
million for the SEC settlement associated with the 2004 and 2005 restatements and the
settlement of the class action suits, respectively. Both liabilities were recognized as an
operating expense in 2006.Amounts accrued as part of estimated litigation settlements are as follows:
 September 30,
    
    
    June 30,2006
    
    
    2006Regulatory
settlement  Fund Services
    
    $
    21,403
    
    
    $
    21,403Class action suit settlement
    
    
    66,500
    
    
    
    66,500SEC settlement  financial restatements
    
    
    25,100
    
    
    
    25,100Other
    
    
    2,358
    
    
    
    2,358$
    115,361
    
    
    $
    115,361
 The Company recorded the following expenses related to estimated settlement costs and legal
fees in connection with the aforementioned litigation and investigatory matters for the
three months ended September 30, 2006 and 2005:
 Three Months EndedSeptember 30,2006
    
    
    2005Litigation
    
    $
    5,533
    
    
    $
    4,278Regulatory settlement
    
    
    
    
    
    
    164Insurance recoveries
    
    
    (3,793
    )
    
    
    $
    1,740
    
    
    $
    4,442
 In Fiscal 2006, the Company reached an agreement regarding coverage with its insurance
carriers that resulted in an insurance recovery of $11.9 million for certain legal expenses
incurred by the Company in connection with the aforementioned litigation and investigatory
matters. For the three months ended September 30, 2006, the Company recognized an additional
recovery of $3.8 million from its insurance carriers. Amounts recovered under the agreement
have been recognized as a reduction to legal expenses. Subsequent to September 30, 2006, the
Company reached agreement and received final payments from three of its insurance carriers
and filed a request for mediation under its policy to assert a claim against the remaining
carrier. The Company has received insurance proceeds of $16.0 million associated with its
directors and officers policy and $5.0 million associated with its errors and omissions
policy, $5.3 million of which will be recognized in the second quarter of Fiscal 2007.
 Legal fees and related costs for litigation arising in the ordinary course of business, and
exclusive of the specific aforementioned litigation and investigatory matters, are included
in the caption, Selling, general and administrative in the accompanying consolidated
statements of income.
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8.
    
    Goodwill and Intangible AssetsGoodwillThe changes in carrying amount of goodwill by business segment for the three months ended
September 30, 2006 were as follows:
 Investment
    
    
    InsuranceServices
    
    
    Services
    
    
    TotalBalance, June 30, 2006
    
    $
    362,858
    
    
    $
    353,952
    
    
    $
    716,810Additions
    
    
    
    
    
    
    9,142
    
    
    
    9,142Dispositions
    
    
    
    
    
    
    
    
    
    
    Adjustments to previous
acquisitions
    
    
    
    
    
    
    
    
    
    
    Balance, September 30, 2006
    
    $
    362,858
    
    
    $
    363,094
    
    
    $
    725,952
 Intangible AssetsAt September 30, 2006, intangible assets were comprised of the following:
 Gross Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    ValueCapitalized software
    
    $
    62,511
    
    
    $
    (36,513
    )
    
    $
    25,998Customer related
    
    
    185,561
    
    
    
    (80,720
    )
    
    
    104,841Noncompete agreements
    
    
    17,336
    
    
    
    (11,539
    )
    
    
    5,797Other
    
    
    4,115
    
    
    
    (2,511
    )
    
    
    1,604Total
    
    $
    269,523
    
    
    $
    (131,283
    )
    
    $
    138,240
 At June 30, 2006, intangible assets were comprised of the following:
 Gross Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    ValueCapitalized software
    
    $
    59,983
    
    
    $
    (35,181
    )
    
    $
    24,802Customer related
    
    
    185,580
    
    
    
    (77,832
    )
    
    
    107,748Noncompete agreements
    
    
    16,299
    
    
    
    (11,014
    )
    
    
    5,285Other
    
    
    3,695
    
    
    
    (2,353
    )
    
    
    1,342Total
    
    $
    265,557
    
    
    $
    (126,380
    )
    
    $
    139,177
 All of the Companys intangible assets are subject to amortization. Amortization expense for
intangible assets was $8.8 million for the three months ended September 30, 2006 and $34.5
million for the year ended June 30, 2006. Estimated annual
amortization expense is $36.5
million in 2007, $31.3 million in 2008, $26.7 million in 2009, $17.6 million in 2010,
$12.9 million in 2011, and $22.2 million thereafter.9.
    
    BorrowingsIn March 2004, the Company entered into a four-year senior unsecured credit facility with a
syndicate of lenders (the 2004 facility). The 2004 facility initially contained a $300
million revolving line of credit facility and a $100 million term loan that was created to
support working capital requirements, repurchases of the Companys common stock, and the
funding of acquisitions. In September 2005, the revolving facility was reduced to $150
million and a portion of the $100 million term loan was prepaid pursuant to an agreement
with the lenders. The balance of the term loan was repaid in full in December 2005.Outstanding borrowings under the 2004 facility bore interest at prime or, at the Companys
option, LIBOR plus a margin. The credit agreement required the Company to pay an annual
facility fee of 0.30% on the total revolving credit commitment. The facility was guaranteed
by certain subsidiaries of The BISYS Group, Inc. The Company could borrow under the
revolving credit facility through March 2008 up to $300 million, reduced by any outstanding
letters of credit. The $100 million term loan had quarterly principal payments
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commencing on June 30, 2005 with a final maturity of March 31, 2008. Interest was payable
quarterly for prime rate borrowings or at maturity for LIBOR borrowings, which range from 30
to 180 days.The credit agreement required the Company to maintain certain financial covenants and
limited the Companys ability to incur future indebtedness and to pay dividends. In May
2005, a default occurred under the 2004 facility due to the Companys failure to timely file
its Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and its failure to
deliver the related compliance certificate for such fiscal quarter. On June 14, 2005, the
Company obtained a consent and waiver from the lenders under the 2004 facility, which
extended the cure period arising from these defaults to August 1, 2005. As a condition of
the waiver, additional borrowings under the revolving line of credit were not permitted
until the default was cured. After obtaining additional consents and waivers from the
lenders subsequent to June 30, 2005, the 2004 facility was eventually terminated by the
Company in January 2006 and replaced with a new interim credit facility (see 2006 Credit
Facility below).In March 2001, the Company issued $300 million of convertible subordinated notes (the
Notes) due March 15, 2006. The Notes bore interest at 4% and required semi-annual interest
payments. The Notes were convertible at any time at the option of the holder into shares of
the Companys common stock at a conversion price of $33.39 per share, subject to adjustment
under certain conditions. In March 2006, the Company used the net proceeds from the sale of
the Information Services segment for the repayment of the Notes (see
Note 12  Discontinued
Operations).Debt outstanding at September 30, 2006 and June 30, 2006 is as follows:
 September 30, 2006
    
    
    June 30, 2006Capital lease obligations
    
    $
    4,375
    
    
    $
    4,546Less amounts due within one year
    
    
    1,767
    
    
    
    1,656Long-term debt
    
    $
    2,608
    
    
    $
    2,890
 2006 Credit Facility
 In January 2006, the Company entered into a Credit Agreement with a syndicate of lenders,
providing for (i) an interim revolving credit facility in an aggregate amount of up to $100
million (the Revolver) and (ii) an interim term loan in an aggregate amount of up to $300
million (the Term Loan; together with the Revolver, the Interim Facility). The maturity
date of the Interim Facility was January 2, 2007. The proceeds of the Revolver may be used
for working capital and other corporate purposes. The Term Loan commitment was subsequently
cancelled since the proceeds were no longer required to repay the $300 million of Notes.In August 2006, the Company amended the Credit Agreement to, among other things, extend the
maturity date of the Interim Facility from January 2, 2007 to June 30, 2007. On November 15,
2006, the Company entered into a second amendment to the Credit Agreement to, among other
things, extend the time to deliver its Form 10-Q for the first and second quarters of Fiscal
2007 until March 1, 2007 and May 1, 2007, respectively, without resulting in a default. The
amendment also allows the Company to seek an extension in the maturity date under the
Credit Agreement from June 30, 2007 to December 31, 2007 and includes an uncommitted
accordion feature that allows the Company to request a term loan of up to $50 million under the Interim Facility. The
Lender, or participating lenders if the Interim Facility is syndicated, has no obligation to
make such term loan. On December 20, 2006, the Company entered into a third amendment to the
Credit Agreement to, among other things, provide for a term loan in the aggregate amount of
up to $50 million, which could have been drawn on or before January 15, 2007. The Company
did not draw down on the term loan.The Interim Facility bears interest at (i) a base rate equal to the higher of the banks
prime lending rate or the applicable federal funds rate plus 0.5%, or (ii) at an applicable
margin above the Eurodollar rate. The amount of the applicable margin is 0.75%, and the
commitment fee on the unborrowed funds available under the Revolver is 0.15%.The loans under the Interim Facility are guaranteed by certain of the Companys significant
subsidiaries. As of September 30, 2006, there were no balances outstanding under the Interim
Facility. In November 2006, the Company borrowed $20 million under the facility to fund the
$66.5 million settlement payment (see Note 7  Litigation and Regulatory Investigations).
The Credit Agreement contains various representations,
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warranties and covenants generally consistent with the 2004 credit facility. Financial
covenants require the Company to meet certain financial tests on an on-going basis,
including minimum net worth, minimum fixed charge coverage ratio, and total leverage ratio,
based upon its consolidated financial results.10.
    
    Business Segment InformationThe Company provides business outsourcing solutions to financial institutions and other
financial organizations. The Companys continuing operations have been classified into two
business segments: Investment Services and Insurance Services.The Companys reportable segments are separately managed strategic business units that offer
different products and services, and they are based on the Companys method of internal
reporting. The businesses that comprise the Investment Services segment are Fund Services,
Retirement Services and Alternative Investment Services. The Investment Services segment
provides business process outsourcing services, including administration and distribution,
to domestic and offshore mutual fund complexes, hedge funds and private equity funds and
retirement plan services to small to mid-size retirement plans. The Insurance Services
segment, comprised of the Life Insurance Services and Commercial Insurance Services
businesses, provides distribution solutions for commercial property and casualty, annuities,
life, long-term care, disability, and special risk insurance products.Summarized financial information by business segment and for corporate operations for the
three months ended September 30, 2006 and 2005 is presented below. Measures used to assess
segment performance include revenues and operating earnings, exclusive of restructuring and
impairment charges and litigation and regulatory settlements. Segment operating
earnings exclude restructuring and impairment charges and litigation and regulatory
settlements for specific matters described in Note 7 since they are not allocated to the
segments for internal evaluation purposes. While these items are identifiable to the
business segments, they are not included in the measurement of segment operating earnings
provided to the chief operating decision maker for purposes of assessing segment performance
and decision making with respect to resource allocation. Legal expenses for other litigation
matters arising in the normal course of business are included in operating earnings of the
reportable segments and corporate.
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Three Months EndedSeptember 30,2006
    
    
    2005Revenues:Investment Services
    
    $
    151,660
    
    
    $
    149,277Insurance Services
    
    
    59,875
    
    
    
    56,397Total consolidated revenues
    
    $
    211,535
    
    
    $
    205,674Operating earnings for reportable segments:Investment Services
    
    $
    17,014
    
    
    $
    19,447Insurance Services
    
    
    10,587
    
    
    
    12,844Total
    
    $
    27,601
    
    
    $
    32,291Less reconciling items:Corporate expenses
    
    
    8,210
    
    
    
    9,169Litigation
and regulatory settlements (net of recoveries):Investment Services
    
    $
    
    
    
    $
    164Insurance Services
    
    
    363
    
    
    
    730Corporate
    
    
    1,377
    
    
    
    3,548Total litigation and regulatory
settlements
    
    $
    1,740
    
    
    $
    4,442Total consolidated operating earnings
    
    $
    17,651
    
    
    $
    18,680
 September 30,
    
    
    June 30,2006
    
    
    2006Assets:Investment Services
    
    $
    638,586
    
    
    $
    631,696Insurance Services
    
    
    576,877
    
    
    
    601,036Corporate
    
    
    139,752
    
    
    
    166,011Total
    
    $
    1,355,215
    
    
    $
    1,398,743
 11.
    
    AcquisitionsAssets acquired and liabilities assumed in business combinations were recorded on the
Companys condensed consolidated balance sheets based on their estimated fair values as of
the respective acquisition dates. The results of operations of business acquired by the
Company have been included in the Companys condensed statements of income as of their
respective acquisition date through the end of the interim period. The excess of the
purchase price over the estimated fair values of the assets acquired (both tangible and
intangible) and liabilities assumed was allocated to goodwill. In certain circumstances, the
allocations of the excess purchase price are based upon preliminary estimates and
assumptions. Accordingly, the allocations are subject to adjustments based on final
information, including appraisals and other analyses.The Company acquired Ramkade Insurance Services, Inc. (d/b/a TIME Financial Services), a
life insurance services business, on July 13, 2006 for cash consideration of approximately
$9.0 million. The acquisition resulted in approximately $5.1 million of goodwill. Intangible
assets acquired, which totaled approximately $1.6 million, consist primarily of broker
contract rights, commission renewals and non-compete agreements that are being amortized
over a weighted average life of 6.87 years. Proforma information has not been presented due
to the lack of materiality. The total amount of goodwill assigned is not deductible for tax
purposes.
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The Company acquired substantially all the assets of D&O Concepts, Inc., David A. Ratner
Associates, Inc. and David A. Ratner Associates of New Jersey, Inc., a commercial insurance
services business, on September 1, 2006 for cash consideration of approximately $4.4
million. The acquisitions resulted in approximately $2.2 million of goodwill. Intangible
assets acquired, which totaled approximately $2.2 million consists primarily of customer
relationships and non-compete agreements that are being amortized over a weighted average
life of 6.94 years. Proforma information has not been presented due to the lack of
materiality. The total amount of goodwill assigned is expected to be deductible for tax
purposes.The Company acquired substantially all the assets of the environmental solutions business of
James C. Hermann & Associates Ltd., a commercial insurance services business, on September
7, 2006 for cash consideration of approximately $2.3 million. The acquisition resulted in
approximately $1.8 million of goodwill. Intangible assets acquired, which totaled
approximately $0.5 million consists primarily of customer relationships and non-compete
agreements that are being amortized over a weighted average life of 6.73 years. Proforma
information has not been presented due to the lack of materiality. The total amount of
goodwill assigned is expected to be deductible for tax purposes.12.
    
    Discontinued OperationsOn September 15, 2005, the Company entered into an agreement to sell its Information
Services segment, which included the Banking Solutions and Document Solutions divisions, to
Open Solutions Inc. (OSI) for $471.3 million in cash. The transaction closed on March 3,
2006, and the Company recognized an after-tax gain of $203.7 million.The Company has classified the results of operations of these businesses as discontinued
operations. Operating results of these discontinued operations were as follows:
 Three months endedSeptember 30,2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    50,836Expenses
    
    
    16
    
    
    
    40,579Income (loss) from discontinued operations,
before taxes
    
    
    (16
    )
    
    
    10,257Applicable income taxes
    
    
    62
    
    
    
    6,445Income (loss) from discontinued operations, net
of tax
    
    $
    (78
    )
    
    $
    3,812
 The total tax expense associated with the disposition of the Information Services segment
was $151.6 million, consisting of $156.7 million associated with the gain on the sale offset
by a $5.1 million reversal of deferred tax liability associated with the business segment.
All of these taxes associated with the disposition have been paid: $143.7 million during the
fourth quarter of Fiscal 2006 and $13.0 million in July 2006.13.
    
    Repatriation of Foreign EarningsThe Company evaluated the provisions of the American Jobs Creation Act of 2004 (the AJCA),
which includes a temporary incentive for U.S. multinationals to repatriate foreign earnings
at a substantially reduced effective tax rate. The Company repatriated $33.7 million in
Fiscal 2006 ($22.7 million in November 2005 and $11.0 million in June 2006) from certain of
its foreign subsidiaries under the AJCA. The Company recorded tax charges of $1.3 million in
November 2005 and $0.6 million in June 2006 for this repatriation.14.
    
    Other CommitmentsOn September 12, 2006, in connection with our initiative to explore strategic alternatives,
we entered into retention bonus agreements with certain key employees, including certain
executive officers of the Company. Under these agreements, we offered two separate bonus
opportunities of equal amounts to selected employees. The first bonus payment will be
payable March 8, 2007, if the employee remains with the Company. The
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second bonus payment will be payable September 8, 2007, if the employee remains with the
Company and there has been a change in control of the Company. If any employee voluntarily
terminates employment or is terminated for cause before a payment is made, the employee
would not receive that payment. Aggregate future payments in connection with these bonuses
and other retention bonuses may range up to $13.0 million. We will recognize the first bonus
as compensation expense ratably over the service period, which ends on March 8, 2007. The
second bonus will be recognized ratably over the remaining applicable service period upon
the consummation of a change of control of the Company as specified in the agreement. As
of September 30, 2006, the Company recognized $1.0 million in compensation expense
associated with these bonus agreements.
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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Overview
    Recent Developments
   Results of Operations
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Three Months EndedSeptember 30,2006
    
    2005Revenues
    
    
    100
    %
    
    
    100
    %Operating costs and expenses:Service and operating
    
    
    66.8
    
    
    
    64.6Selling, general and administrative
    
    
    18.3
    
    
    
    18.3Depreciation and amortization
    
    
    5.8
    
    
    
    5.8Litigation and regulatory settlements
    
    
    0.8
    
    
    
    2.2Total operating costs and expenses
    
    
    91.7
    
    
    
    90.9Operating earnings
    
    
    8.3
    
    
    
    9.1Interest income
    
    
    0.9
    
    
    
    0.7Interest expense
    
    
    (0.4
    )
    
    
    (2.8
    )Investment gains and other
    
    
    0.1
    
    
    
    Income from continuing operations before
income taxes
    
    
    8.9
    
    
    
    7.0Income taxes
    
    
    2.3
    
    
    
    2.3Income from continuing operations
    
    
    6.6
    
    
    
    4.7Income from discontinued operations, net of tax
    
    
    
    
    
    
    1.8Net income
    
    
    6.6
    %
    
    
    6.5
    %
 Comparison of the Three Months Ended September 30, 2006 with the Three Months Ended September 30, 2005
 Continuing Operations
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Discontinued Operations
  Restructuring and Impairment Charges
  Restructuring accrual at June 30, 2006
    
    $
    1,729Expense provision:Facility closure
    
    
    Cash payments and other
    
    
    150Remaining accrual at September 30, 2006:Employee severance
    
    
    Facility closure
    
    
    1,579Total
    
    $
    1,579
 Litigation and Regulatory Settlements
   September 30,
    
    
    June 30,2006
    
    
    2006Regulatory
settlement  Fund Services
    
    $
    21,403
    
    
    $
    21,403Class action suit settlement
    
    
    66,500
    
    
    
    66,500SEC settlement  financial restatements
    
    
    25,100
    
    
    
    25,100Other
    
    
    2,358
    
    
    
    2,358$
    115,361
    
    
    $
    115,361
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Three Months EndedSeptember 30,2006
    
    
    2005Litigation
    
    $
    5,533
    
    
    $
    4,278Regulatory settlement
    
    
    
    
    
    
    164Insurance recoveries
    
    
    (3,793
    )
    
    
    $
    1,740
    
    
    $
    4,442
   Segment Information
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Three Months EndedSeptember 30,2006
    
    
    2005Revenues:Investment Services
    
    $
    151,660
    
    
    $
    149,277Insurance Services
    
    
    59,875
    
    
    
    56,397Total consolidated revenues
    
    $
    211,535
    
    
    $
    205,674Operating earnings for reportable segments:Investment Services
    
    $
    17,014
    
    
    $
    19,447Insurance Services
    
    
    10,587
    
    
    
    12,844Total
    
    $
    27,601
    
    
    $
    32,291Less reconciling items:Corporate expenses
    
    
    8,210
    
    
    
    9,169Litigation and regulatory settlements
(net of recoveries):Investment Services
    
    $
    
    
    
    $
    164Insurance Services
    
    
    363
    
    
    
    730Corporate
    
    
    1,377
    
    
    
    3,548Total litigation and regulatory
settlements
    
    $
    1,740
    
    
    $
    4,442Total consolidated operating earnings
    
    $
    17,651
    
    
    $
    18,680Operating margins:Investment Services
    
    
    11.2
    %
    
    
    13.0
    %Insurance Services
    
    
    17.7
    %
    
    
    22.8
    %
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Financial Condition
   Liquidity and Capital Resources
    27




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Three Months Ended
    
    Year EndedSeptember 30, 2006
    
    June 30, 2006Shares
    
    Cost
    
    Shares
    
    CostShare repurchase programs:$100 million, authorized
November 2003
    
    
    99
    
    
    $
    1,053
    
    
    
    76
    
    
    $
    1,140
 Critical Accounting Policies
  New Accounting Pronouncements
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Off-Balance Sheet Arrangements
  Forward-Looking Statements
   30




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    32




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ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    Changes in Internal Control Over Financial Reporting
  Managements Remediation Efforts
  1.
    
    Control environment.We have taken, and are developing further plans to take,
significant actions to improve our control environment and eliminate the material
weakness. The Company hired a new CFO in August 2005 to oversee the transition of
financial responsibilities, address staffing matters and implement improved controls
and procedures. Our CEO and CFO, together with other senior executives, are committed
to maintaining a strong control environment, high ethical standards and financial
reporting integrity. Several of these steps have been taken as of the date of this
filing but have not been in place for a sufficient period of time for management to
conclude that the material weakness has been remediated:
 
    
    Evaluated key financial positions and added senior management personnel focused
on financial accounting, financial reporting and financial controls, resulting in
the replacement of eight out of the ten most senior finance positions in the
Company including CFO, Controller, Vice President of Internal Audit, and Assistant
Controller. We continue to evaluate and take appropriate actions with
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respect to certain employees in management, internal audit and financial reporting
functions, which may include further training, supervision and/or reassignment.
    
    Created a direct reporting line from the business unit accountants to the
Corporate Controller in an effort to ensure the independence of accounting
decisions.
    
    Created new controller positions for each of our businesses.
    
    Continue to develop and revise our written accounting policies and procedures to
establish a comprehensive up-to-date accounting manual, including revenue and
expense recognition guidelines and processes.
    
    Establish enhanced quarterly accounting reviews and formal training programs for
financial staff in an effort to ensure all relevant personnel are familiar with our
accounting policies, control processes and have the necessary competency, training
and supervision for their assigned level of responsibility and the nature and
complexity of our business.
    
    Required all finance staff to complete ethics training.
    
    Engaged third party education material vendor to provide course material for
continuing education for all finance personnel.
    
    Continue to enhance our tone at the top and whistleblower procedures,
including the engagement of a third party vendor to provide an independent
whistleblower hotline service, to increase the likelihood that concerns related to
financial reporting or the control environment will be timely reported and properly
evaluated.
    
    Maintain and enhance a quarterly and annual sub-certification process requiring
written confirmations from business and finance managers as to the operating
effectiveness of our disclosure controls and procedures and internal control over
financial reporting.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.2.
    
    Controls over revenue recognition. The following are the actions we have taken
or plan on taking, to improve our controls over revenue recognition and eliminate the
material weakness:
 
    
    Implemented procedures to ensure new customer contracts are identified and
evaluated by the appropriate level of personnel within each operating division to
ensure proper recording of revenue and deferred revenue, with particular attention
given to contracts with up front payments terms, including conversion fees.
    
    Developed procedures to ensure the accounting for significant and unusual
contracts are reviewed by qualified, senior level personnel within the corporate
finance department.
    
    Continue to enhance contractual documentation requirements for all new and
existing business relationships to ensure proper accounting treatment and
disclosure.
    
    Implement procedures to enhance month-end closing procedures to ensure that
timely, effective and consistent reconciliations are performed and reviewed by
qualified personnel within the finance organization, with particular emphasis on
revenue recorded for services yet to be billed.
    
    Continue to add and retain technical accounting personnel and enhance
supervision with regard to, among other things, timely account analysis and review
and approval of significant revenue transactions.
    
    Continue to develop processing systems to provide more automation, accuracy and
control in invoicing and recording revenue transactions.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.3.
    
    Controls over insurance commissions payable. The following are the actions we
are taking, or plan on taking, to improve our controls over insurance commission
payables and eliminate the material weakness:
 
    
    Continue to develop processing systems to provide more automation, accuracy and
control in recording insurance commissions payable transactions.
    
    Continue to improve procedures for verifying and documenting insurance
commissions payable, including the review of account reconciliations, account
analyses and supporting documentation.
    
    Continue to implement procedures ensuring qualified, senior level personnel
within the finance organization review the impact of insurance commissions
receivable and commissions payable
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##### Table of Contents



transactions, including supporting documentation, and are responsible for the review
and approval of all related accounting considerations and schedules.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.4.
    
    Controls over segregation of duties at certain international locations.The
following are the actions we are taking, or plan on taking, to improve our controls
over certain international locations in our Hedge Fund Services business and eliminate
the material weakness:
 
    
    Continue to add technical accounting personnel and enhance supervision with
regard to, among other things, timely review and approval of all related accounting
considerations and schedules.
    
    Perform a comprehensive review of financial accounting processes and internal
controls to facilitate the development of more effective internal controls over
financial reporting, with particular emphasis on segregation of duties.
    
    Enhance our analytical and review procedures with respect to our international
locations, including but not limited to the utilization of outside professionals to
supplement our staff.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.
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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
 Legal Proceedings
     36




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Regulatory Investigations
    37




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   (c) Total Number
    
    (d) Approximateof Shares
    
    Dollar Value ofPurchased as Part
    
    Shares that May(a) Total Number
    
    
    
    
    
    of Publicly
    
    Yet Be Purchasedof Shares
    
    (b) Average Price
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    Paid per Share
    
    or Programs
    
    ProgramsJuly 2006
    
    
    4,588
    
    
    $
    13.32
    
    
    
    4,098,568
    
    
    
    39,479,332August 2006
    
    
    72,593
    
    
    
    9.89
    
    
    
    4,171,161
    
    
    
    38,761,264September 2006
    
    
    22,141
    
    
    
    12.39
    
    
    
    4,193,302
    
    
    
    38,487,011Total
    
    
    99,322
    
    
    
    10.61
  
 ITEM 6. EXHIBITS
 (a) Exhibits
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SIGNATURES
  THE BISYS GROUP, INC.Date: February 2, 2007
    By:
    /s/ Bruce D. DalzielBruce D. DalzielExecutive Vice President and Chief Financial Officer
(Duly Authorized Officer) 39




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THE BISYS GROUP, INC.
 
 EXHIBIT INDEX
  (31.1)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer(31.2)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer(32)
    
    Section 1350 Certifications
 40