**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 *(Mark
        One)*
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the
        quarterly period ended June 30, 2007**
 
 **OR**
 
 o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 __________________
 
 **Commission
        file number 000-23195**
 
 **TIER
        TECHNOLOGIES, INC.**
 **(Exact
        name
        of registrant as specified in its charter)**
 
 **Delaware**
              **94-3145844****(State
                  or other jurisdiction**
                **of
                  incorporation or organization)**
              **(I.R.S.
                  Employer**
                **Identification
                  No.)**
 
 **10780
        Parkridge Boulevard, Suite 400**
 **Reston,
        Virginia 20191**
 **(Address
        of
        principal executive offices)**
 
 **(571)
        382-1000**
 **(Registrant's
        telephone number, including area code)**
 
 **Not
        applicable**
 **(Former
        name, former address, and former fiscal year, if changed since last
        report)**
 
 
 Indicate
        by check
        mark whether the registrant (1) has filed all reports required to be filed
        by
        Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
        12 months (or for such shorter period that the registrant was required to
        file
        such reports), and (2) has been subject to such filing requirements for the
        past
        90 days.Yes x
        No o
  Indicate
        by check
        mark whether the registrant is a large accelerated filer, an accelerated
        filer,
        or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
        (Check one):
  Large
        accelerated
        filer o            Accelerated
        filer x     Non-accelerated
        filer o
   Indicate
        by check
        mark whether the registrant is a shell company (as defined in Rule 12b-2
        of the
        Exchange Act).
  Yes
o     No
        x
  At
        August 6, 2007,
        there were 20,402,356 shares of the Registrant's Common Stock
        outstanding.
  
 TIER
        TECHNOLOGIES,
        INC.
 **TABLE
        OF
        CONTENTS**




**Part
                I. Financial
                Information**
            **1****Item
                1. Consolidated Financial Statements
                (Unaudited)**
            **1**Consolidated
                Balance Sheets
            1Consolidated
                Statements of
                Operations
            2Consolidated
                Statements of Comprehensive
                Income
            3Consolidated
                Statement of Cash Flows
            4Notes
                to Consolidated Financial Statements
                (unaudited)
            6Note
                1 - Overview of Organization and Basis of
                Presentation
            6Note
                2 - Recent Accounting
                Pronouncements
            7Note
                3 - Customer Concentration and Risk
            7Note
                4 - Investments
            8Note
                5 - Goodwill and Other Intangible
                Assets
            10Note
                6 - (Loss) Earnings Per Share
            10Note
                7 - Segment Information
            12Note
                8 - Restructuring
            13Note
                9 - Contingencies and Commitments
            13Note
                10 - Related Party Transactions
            15Note
                11 - Share-based Payment
            15Note
                12 - Held-for-Sale
                Assets
            16Note
                  13 - Discontinued Operations
            17Note
                14 - Subsequent Events
            17**Item
                2. Management's Discussion and Analysis of Financial
                Condition and Results of Operations**
            **19****Item
                3. Quantitative and Qualitative Disclosures about
                Market Risk**
            **28****Item
                4. Controls and Procedures**
            **28****Part
                II. Other Information**
            **29****Item
                1. Legal
                Proceedings**
            **29****Item
                1A. Risk
                Factors**
            **29****Item
              5. Other Information**
            **34****Item
                6. Exhibits**
            **36****Signature**
            **37**


***Private
      Securities Litigation Reform Act Safe Harbor
      Statement***




Certain
      statements
      contained in this report, including statements regarding the future development
      of and demand for our services and our markets, anticipated trends in various
      expenses, expected costs of legal proceedings and other statements that are
      not
      historical facts, are forward-looking statements within the meaning of the
      federal securities laws.  These forward-looking statements relate to
      future events or our future financial and/or operating performance and can
      generally be identified as such because the context of the statement will
      include words such as "may," "will," "intends," "plans," "believes,"
      "anticipates," "expects," "estimates," "shows," "predicts," "potential,"
      "continue," or "opportunity," the negative of these words or words of similar
      import.  These forward-looking statements are subject to risks and
      uncertainties, including the risks and uncertainties described and referred
      to
      under *Item 1A—Risk Factors* beginning on page 29, which could cause
      actual results to differ materially from those anticipated as of the date of
      this report.  We undertake no obligation to publicly update or revise
      any forward-looking statements, whether as a result of new information, future
      events or otherwise.







**PART
      I.  FINANCIAL
      INFORMATION**




**ITEM
      1.  CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)**




**TIER
      TECHNOLOGIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**




*(in
                thousands)*
            
            June
                30,
              2007
            
            
            September 30,
                2006(unaudited)**ASSETS:**Current
                assets:Cash
                and cash
                equivalents
            
            $
            29,235
            
            
            $
            18,486Investments
                in
                marketable securities
            
            
            39,500
            
            
            
            36,950Accounts
                receivable, net
            
            
            2,525
            
            
            
            3,857Unbilled
                receivables
            
            
            560
            
            
            
            1,916Prepaid
                expenses and other current assets
            
            
            1,641
            
            
            
            1,623Current
                assets—held-for-sale
            
            
            29,668
            
            
            
            29,775Total
                current
                assets
            
            
            103,129
            
            
            
            92,607Property,
                equipment and software, net
            
            
            3,734
            
            
            
            3,781Goodwill
            
            
            29,531
            
            
            
            37,567Other
                intangible assets, net
            
            
            14,262
            
            
            
            16,395Restricted
                investments
            
            
            18,361
            
            
            
            12,287Investment
                in
                unconsolidated affiliate
            
            
            —
            
            
            
            3,978Other
                assets
            
            
            874
            
            
            
            2,934**Total
                assets**
            ****
            **$**
            **169,891**
            ****
            ****
            **$**
            **169,549****LIABILITIES
                AND SHAREHOLDERS’ EQUITY:**Current
                liabilities:Accounts
                payable
            
            $
            634
            
            
            $
            626Income
                taxes
                payable
            
            
            —
            
            
            
            7,326Accrued
                compensation liabilities
            
            
            4,313
            
            
            
            3,389Accrued
                subcontractor expenses
            
            
            364
            
            
            
            457Accrued
                discount fees
            
            
            4,738
            
            
            
            3,631Other
                accrued
                liabilities and deferred income
            
            
            5,051
            
            
            
            6,523Current
                liabilities—held-for-sale
            
            
            14,272
            
            
            
            12,054Total
                current
                liabilities
            
            
            29,372
            
            
            
            34,006Other
                liabilities
            
            
            213
            
            
            
            1,333**Total
                liabilities**
            
            ****
            **29,585**
            
            
            ****
            **35,339**Contingencies
                and commitments (Note 9)Shareholders’
                equity:Preferred
                stock, no par value; authorized shares:  4,579;
              no
                shares
                issued and outstanding
            
            
            —
            
            
            
            —Common
                stock
                and paid-in capital; shares authorized: 44,260;
              shares
                issued:
                20,402 and 20,383; shares outstanding: 19,518 and 19,499
            
            
            186,053
            
            
            
            184,387Treasury
                stock—at cost, 884 shares
            
            
            (8,684
            )
            
            
            (8,684
            )Notes
                receivable from related parties
            
            
            (106
            )
            
            
            (4,275
            )Accumulated
                other comprehensive loss
            
            
            (5
            )
            
            
            (33
            )Accumulated
                deficit
            
            
            (36,952
            )
            
            
            (37,185
            )**Total
                shareholders’ equity**
            
            ****
            **140,306**
            
            
            ****
            **134,210****Total
                liabilities and shareholders’ equity**
            
            **$**
            **169,891**
            
            
            **$**
            **169,549**




*See
      Notes to
      Consolidated Financial Statements*


1




**TIER
      TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


**(unaudited)**





**Three
                months ended**
              **June
                30,**
            
            
            **Nine
                months ended**
              **June
                30,***(in
                thousands, except per share data)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenues
            
            $
            57,660
            
            
            $
            56,269
            
            
            $
            140,651
            
            
            $
            133,625Costs
                and
                expenses:Direct
                costs
            
            
            42,246
            
            
            
            42,033
            
            
            
            102,584
            
            
            
            100,625General
                and
                administrative
            
            
            8,953
            
            
            
            11,748
            
            
            
            27,508
            
            
            
            27,530Selling
                and
                marketing
            
            
            3,737
            
            
            
            3,623
            
            
            
            9,163
            
            
            
            8,943Depreciation
                and amortization
            
            
            971
            
            
            
            1,306
            
            
            
            3,693
            
            
            
            3,950Impairment
                of
                goodwill and assets held-for-sale
            
            
            8,585
            
            
            
            —
            
            
            
            8,585
            
            
            
            —Total
                costs
                and expenses
            
            
            64,492
            
            
            
            58,710
            
            
            
            151,533
            
            
            
            141,048Loss
                from
                continuing operations before other income and income taxes
            
            
            (6,832
            )
            
            
            (2,441
            )
            
            
            (10,882
            )
            
            
            (7,423
            )Other
                income:Income
                from
                investment:Equity
                in net
                (loss) income in unconsolidated affiliate
            
            
            (511
            )
            
            
            35
            
            
            
            475
            
            
            
            556Realized
                foreign currency gain
            
            
            239
            
            
            
            —
            
            
            
            239
            
            
            
            —Gain
                on sale
                of unconsolidated affiliate
            
            
            80
            
            
            
            —
            
            
            
            80
            
            
            
            —Interest
                income, net
            
            
            820
            
            
            
            859
            
            
            
            2,304
            
            
            
            2,133Total
                other
                income
            
            
            628
            
            
            
            894
            
            
            
            3,098
            
            
            
            2,689Loss
                from
                continuing operations before income taxes
            
            
            (6,204
            )
            
            
            (1,547
            )
            
            
            (7,784
            )
            
            
            (4,734
            )Income
                tax
                (benefit) provision
            
            
            (7
            )
            
            
            40
            
            
            
            60
            
            
            
            45Net
                loss from
                continuing operations
            
            
            (6,197
            )
            
            
            (1,587
            )
            
            
            (7,844
            )
            
            
            (4,779
            )Income
                from
                discontinued operations, net
            
            
            478
            
            
            
            —
            
            
            
            8,077
            
            
            
            —Net
                (loss)
                income
            
            $
            (5,719
            )
            
            $
            (1,587
            )
            
            $
            233
            
            
            $
            (4,779
            )(Loss)
                earnings per share—Basic:From
                continuing operations
            
            $
            (0.32
            )
            
            $
            (0.08
            )
            
            $
            (0.40
            )
            
            $
            (0.25
            )From
                discontinued operations
            
            $
            0.03
            
            
            $
            —
            
            
            $
            0.41
            
            
            $
            —**(Loss)
                earnings per share—Basic**
            
            **$**
            **(0.29**
            **)**
            
            **$**
            **(0.08**
            **)**
            
            **$**
            **0.01**
            
            
            **$**
            **(0.25**
            **)**(Loss)
                earnings per share—Diluted:From
                continuing operations
            
            $
            (0.32
            )
            
            $
            (0.08
            )
            
            $
            (0.40
            )
            
            $
            (0.25
            )From
                discontinued operations
            
            $
            0.03
            
            
            $
            —
            
            
            $
            0.41
            
            
            $
            —**(Loss)
                earnings per share—Diluted**
            
            **$**
            **(0.29**
            **)**
            
            **$**
            **(0.08**
            **)**
            
            **$**
            **0.01**
            
            
            **$**
            **(0.25**
            **)**Weighted
                average common shares used in computing:Basic
                (loss)
                earnings per share
            
            
            19,511
            
            
            
            19,499
            
            
            
            19,505
            
            
            
            19,494Diluted
                (loss)
                earnings per share
            
            
            19,511
            
            
            
            19,499
            
            
            
            19,630
            
            
            
            19,494




*See
      Notes to
      Consolidated Financial Statements*


2





**TIER
      TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE
      INCOME**


**(unaudited)**








**Three
                months ended**
              **June
                30,**
            
            
            **Nine
                months ended**
              **June
                30,***(in
                thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                (loss)
                income
            
            $
            (5,719
            )
            
            $
            (1,587
            )
            
            $
            233
            
            
            $
            (4,779
            )Other
                comprehensive income (loss), net of tax:Unrealized
                (loss) gain on investments in marketable securities
            
            
            (2
            )
            
            
            1
            
            
            
            (3
            )
            
            
            55Foreign
                currency translation:Foreign
                currency translation adjustment
            
            
            (179
            )
            
            
            56
            
            
            
            (208
            )
            
            
            45Less
                impact of
                realized gains (transferred from AOCI into net (loss)
                income)
            
            
            239
            
            
            
            —
            
            
            
            239
            
            
            
            —Other
                comprehensive income
            
            
            58
            
            
            
            57
            
            
            
            28
            
            
            
            100Comprehensive
                (loss) income
            
            $
            (5,661
            )
            
            $
            (1,530
            )
            
            $
            261
            
            
            $
            (4,679
            )




*See
      Notes to
      Consolidated Financial Statements*


3


**TIER
      TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**





**Nine
                months ended June 30,***(in
                thousands)*
            
            **2007**
            
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
                (loss)
            
            $
            233
            
            
            $
            (4,779
            )Less:
                Income
                from discontinued operations, net
            
            
            8,077
            
            
            
            —Loss
                from
                continuing operations, net
            
            
            (7,844
            )
            
            
            (4,779
            )Non-cash
                items
                included in net income from continuing operations:Depreciation
                and amortization
            
            
            5,536
            
            
            
            6,725Loss
                on
                retirement of equipment and software
            
            
            6
            
            
            
            283Provision
                for
                doubtful accounts
            
            
            (26
            )
            
            
            957Equity
                in net
                income of unconsolidated affiliate
            
            
            (475
            )
            
            
            (556
            )Gain
                on sale
                of unconsolidated affiliate
            
            
            (80
            )
            
            
            —Foreign
                currency translation gain realized on sale of unconsolidated
                affiliate
            
            
            (239
            )
            
            
            —Share-based
                compensation
            
            
            1,451
            
            
            
            1,123Accrued
                forward loss on contracts
            
            
            (79
            )
            
            
            1,478Settlement
                of
                pension contract
            
            
            1,254
            
            
            
            —Impairment
                of
                goodwill and held-for-sale assets
            
            
            8,585
            
            
            
            —Net
                effect of
                changes in assets and liabilities:Accounts
                receivable and unbilled receivables
            
            
            4
            
            
            
            4,819Prepaid
                expenses and other assets
            
            
            2,931
            
            
            
            (2,345
            )Accounts
                payable and accrued liabilities
            
            
            2,658
            
            
            
            1,996Income
                taxes
                payable
            
            
            311
            
            
            
            (213
            )Deferred
                income
            
            
            148
            
            
            
            (2,750
            )Cash
                provided
                by operating activities from continuing operations
            
            
            14,141
            
            
            
            6,738Cash
                provided
                by discontinued operations:Income
                from
                discontinued operations, net
            
            
            8,077
            
            
            
            —Non-cash
                items
                included in income from discontinued operations, net:Reversal
                of
                income tax reserve
            
            
            (7,599
            )
            
            
            —Liquidation
                of
                Australian operations
            
            
            (478
            )
            
            
            —Cash
                provided
                by operating activities from discontinued operations
            
            
            —
            
            
            
            —Cash
                provided
                by operating activities
            
            
            14,141
            
            
            
            6,738**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchases
                of
                marketable securities
            
            
            (6,108
            )
            
            
            (45,950
            )Sales
                and
                maturities of marketable securities
            
            
            3,550
            
            
            
            37,164Purchase
                of
                restricted investments
            
            
            (19,272
            )
            
            
            (3,878
            )Sales
                and
                maturities of restricted investments
            
            
            13,398
            
            
            
            3,367Purchase
                of
                equipment and software
            
            
            (3,888
            )
            
            
            (3,688
            )Repayment
                of
                notes and accrued interest from related parties
            
            
            4,295
            
            
            
            —Proceeds
                from
                sale of unconsolidated affiliate
            
            
            4,784
            
            
            
            —Other
                investing activities
            
            
            (232
            )
            
            
            —Cash
                used in
                investing activities
            
            
            (3,473
            )
            
            
            (12,985
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Net
                proceeds
                from issuance of common stock
            
            
            89
            
            
            
            69Capital
                lease
                obligations and other financing arrangements
            
            
            3
            
            
            
            (80
            )Cash
                provided
                by (used in) financing activities
            
            
            92
            
            
            
            (11
            )Effect
                of
                exchange rate changes on cash
            
            
            (11
            )
            
            
            36Net
                increase
                (decrease) in cash and cash equivalents
            
            
            10,749
            
            
            
            (6,222
            )Cash
                and cash
                equivalents at beginning of period
            
            
            18,486
            
            
            
            27,843Cash
                and cash
                equivalents at end of period
            
            $
            29,235
            
            
            $
            21,621


4




**TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED SUPPLEMENTAL CASH
        FLOW INFORMATION**
 **(unaudited)**









**Nine
                months ended June 30,***(in
              thousands)*
            
            **2007**
            
            
            **2006****SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                paid
                during the period for:Interest
            
            $
            9
            
            
            $
            13Income
                taxes
                paid, net
            
            $
            128
            
            
            $
            189**SUPPLEMENTAL
                DISCLOSURES OF NON-CASH TRANSACTIONS:**Interest
                accrued on shareholder notes
            
            $
            126
            
            
            $
            206Equipment
                acquired under capital lease obligations and other financing
                arrangements
            
            $
            26
            
            
            $
            64


*See
      Notes to
      Consolidated Financial Statements*


5







**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)**




**NOTE
      1—OVERVIEW OF ORGANIZATION AND BASIS OF
      PRESENTATION**




*ORGANIZATION*




Tier
      Technologies,
      Inc. provides transaction processing services and software and systems
      integration services to federal, state, and local governments and other public
      sector clients.  We provide our services through three
      segments:




·
            *Electronic
                Payment Processing, or EPP*—provides electronic payment processing
                options, including payment of taxes, fees and other obligations owed
                to
                government entities, educational institutions, utilities, and other
                public
                sector clients;




**·**
            *Government
                Business Process Outsourcing, or GBPO*—focuses on child support
                payment processing, child support financial institution data match
                services, health and human services consulting, computer telephony
                and
                call centers, and other related systems integration services;
                and




·
            *Packaged
                Software and Systems Integration, or PSSI*—provides software and
                systems implementation services through practice areas in financial
                management systems, public pension administration systems, unemployment
                insurance administration systems, electronic government services,
                and
                systems integration services for the State of
                Missouri.




Our
      two principal
      subsidiaries, which are accounted for as part of our EPP and GBPO segments,
      include:




·
            *Official
                Payments Corporation, or OPC**—*provides proprietary
                telephone and Internet systems, transaction processing and settlement
                for
                electronic payments to federal, state, and municipal government agencies,
                educational institutions and other public sector clients;
                and




·
            *EPOS
                Corporation, or EPOS*—provides interactive communications and
                payment processing technologies to federal, state, and municipal
                government agencies, educational institutions and other public sector
                clients.




On
      June 29,
      2007 we sold our 46.96% investment in the outstanding common stock of CPAS
      Systems, Inc., or CPAS, a Canadian-based supplier of pension administration
      software systems, back to CPAS for $4.8 million (USD).  We had
      previously been reporting our investment in CPAS under the equity method of
      accounting.




*BASIS
      OF
      PRESENTATION*




Our
      Consolidated
      Financial Statements were prepared in accordance with accounting principles
      generally accepted in the United States of America for interim financial
      information and in accordance with Regulation S-X, Article 10, under the
      Securities Exchange Act of 1934, as amended.  They are unaudited and
      exclude some disclosures required for annual financial statements.  We
      believe we have made all necessary adjustments so that our Consolidated
      Financial Statements are presented fairly and that all such adjustments are
      of a
      normal recurring nature.




These
      Consolidated
      Financial Statements include the accounts of Tier Technologies, Inc. and its
      subsidiaries.  Intercompany transactions and balances were
      eliminated.  In April 2007, we began to seek buyers for certain
      portions of our business, including the majority of our PSSI and GBPO
      segments.  In accordance with Statement of Financial Accounting
      Standard No. 144—*Accounting for the Impairment of Long-Lived Assets*, we
      have recorded the associated assets and liabilities as
      held-for-sale.  We have also reclassified previously reported assets
      and liabilities for these operations to held-for-sale to conform to the current
      year presentation on the Consolidated Balance Sheets.




Preparing
      financial
      statements requires us to make estimates and assumptions that affect the amounts
      reported on our Consolidated Financial Statements and accompanying
      notes.  We believe that near-term changes could impact the following
      estimates: project costs and percentage of completion; effective tax


6




rates,
      deferred
      taxes and associated valuation allowances; collectibility of receivables;
      stock-based compensation and valuation of goodwill, intangibles and
      investments.  Although we believe the estimates and assumptions used
      in preparing our Consolidated Financial Statements and related notes are
      reasonable in light of known facts and circumstances, actual results could
      differ materially.






**NOTE
      2—RECENT ACCOUNTING PRONOUNCEMENTS**




*SFAS
      154—Accounting Changes and Error
      Corrections*.****In May 2005, the Financial
      Accounting Standards Board, or FASB, issued Statement of Financial Accounting
      Standard No. 154—*Accounting Changes and Error Corrections*, or SFAS 154,
      which changes the requirements for the accounting for, and reporting of, a
      change in accounting principle.  It also carries forward earlier
      guidance for the correction of errors in previously issued financial statements,
      as well as the guidance for changes in accounting estimate. SFAS 154 applies
      to
      all voluntary changes in accounting principles, as well as changes mandated
      by a
      standard-setting authority that do not include specific transition
      provisions.  For such changes in accounting principles, SFAS 154
      requires retrospective application to prior periods’ financial statements,
      unless it is impracticable to determine either period-specific or cumulative
      effects of the change.  SFAS 154 is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005.  We adopted this standard beginning in October
      2006.  Since this standard applies to both voluntary changes in
      accounting principles, as well as those that may be mandated by standard-setting
      authorities, it is not possible to estimate the impact that the adoption of
      this
      standard will have on our financial position and results of
      operations.




*FIN
      48—Accounting for Uncertainty in Income Taxes*.  In July 2006,
      FASB Interpretation No. 48—*Accounting for Uncertainty in Income
      Taxes*, or FIN 48, was issued.  FIN 48 clarifies the accounting
      for uncertainty in income taxes recognized in an enterprise’s financial
      statements in accordance with FASB Statement No. 109—*Accounting for Income
      Taxes*.  FIN 48 is effective for fiscal years beginning after
      December 15, 2006.  We expect to implement FIN 48 beginning on
      October 1, 2007.  We are evaluating the impact that adopting FIN 48
      will have on our financial position and results of operations.




*SFAS
      159—The
      Fair Value Option for Financial Assets and Financial
      Liabilities*.  In February 2007, FASB issued Statement of
      Financial Accounting Standard No. 159—*The Fair Value Option for Financial
      Assets and Financial Liabilities*, or SFAS 159, which allows companies to
      choose to measure many financial instruments and certain other items at fair
      value.  Entities that elect the fair value option will report
      unrealized gains and losses in earning at each subsequent reporting
      date.  The principle can be applied on an instrument by instrument
      basis, is irrevocable and must be applied to the entire
      instrument.  SFAS 159 amends previous guidance to extend the use of
      the fair value option to available-for-sale and held-to-maturity
      securities.  SFAS 159 also establishes presentation and disclosure
      requirements to help financial statement users understand the effect of the
      election.  SFAS 159 is effective as of the beginning of each reporting
      fiscal year beginning after November 15, 2007.  Currently, we are
      evaluating the impact that this new standard will have on our financial position
      and results of operations.




**NOTE
      3—CUSTOMER CONCENTRATION AND RISK**




We
      derive a
      significant portion of our revenue from a limited number of governmental
      customers.  Typically, the contracts allow these customers to
      terminate all or part of the contract for convenience or cause.  For
      the nine months ended June 30, 2007 and 2006, revenue from one customer
      totaled $30.2 million and $26.9 million, respectively, or 21.5% and
      20.1%, respectively, of total revenue.




As
      described in more
      detail below, we have several large accounts receivable and unbilled receivable
      balances.  A dispute, early contract termination or other collection
      issue with one of these key customers could have a material adverse impact
      on
      our financial condition and results of operations.




*Accounts
      receivable, net**.**Accounts receivable, net*, represents
      the short-term portion of receivables from our customers and other parties
      and
      retainers that we expect to receive within one year, less an allowance for
      accounts that we estimated would become uncollectible.  Our accounts
      receivable are comprised of the following three categories:




7




·
            Customer
                receivables—receivables from our
                clients;




·
            Mispost
                receivables—receivables from individuals to whom our payment
                processing centers made incorrect payments;
                and




·
            Not
                Sufficient Funds (“NSF”) receivables—receivables from individuals who
                paid their child support payment with a check that had insufficient
                funds.




We
      maintain a
      separate allowance for uncollectible accounts for each category of receivables,
      which we offset against the receivables on our Consolidated Balance
      Sheets.  As shown in the following table, at June 30, 2007 and
      September 30, 2006, the balance of our *Accounts receivable, net*
      was $2.5 million and $3.9 million, respectively.




*(in
                thousands)*
            
            **June
                30, 2007**
            
            
            **September
                30, 2006**Accounts
                receivable from:Customers
            
            $
            2,668
            
            
            $
            3,163Recipients
                of
                misposted payments
            
            
            349
            
            
            
            1,290Payers
                of NSF
                child support
            
            
            430
            
            
            
            769Total
                accounts
                receivable
            
            
            3,447
            
            
            
            5,222Allowance
                for
                uncollectible accounts receivable:Customer
            
            
            (419
            )
            
            
            (580
            )Mispost
            
            
            (349
            )
            
            
            (1,023
            )NSF
            
            
            (429
            )
            
            
            (751
            )Total
                allowance for uncollectible accounts
            
            
            (1,197
            )
            
            
            (2,354
            )Short-term
                accounts receivable retainer
            
            
            275
            
            
            
            989Accounts
                receivable, net
            
            $
            2,525
            
            
            $
            3,857




At
      June 30,
      2007 and September 30, 2006, one customer accounted for 24.7% and 20.1%,
      respectively, of total customer accounts receivable.




Certain
      of our
      contracts allow customers to retain a portion of the amounts owed to us until
      predetermined milestones are achieved or until the project is
      completed.  At June 30, 2007 and September 30, 2006,
*Accounts receivable, net* included $0.3 million and
      $1.0 million, respectively, of retainers that we expected to receive in one
      year.  In addition, there were $0.7 million and
      $2.8 million, respectively, of retainers that we expected to be outstanding
      more than one year, which are included in *Other assets* on our
      Consolidated Balance Sheets.




*Unbilled
      Receivables.*******Unbilled receivables
      represent revenues that we have earned for the work that has been performed
      to
      date that cannot be billed under the terms of the applicable contract until
      we
      have completed specific project milestones or the customer has accepted our
      work.  At June 30, 2007 and September 30, 2006, unbilled
      receivables, which are all expected to become billable in one year, were
      $0.6 million and $1.9 million, respectively.  At
      June 30, 2007, two customers accounted for 51.3% and 47.6%, respectively,
      of total unbilled receivables and at September 30, 2006, three customers
      accounted for 50.0%, 32.2%, and 17.9%, respectively, of unbilled
      receivables.




**NOTE
      4—INVESTMENTS**




*Debt
      and Equity
      Securities*




Investments
      are
      composed of available-for-sale debt securities as defined in SFAS
      No. 115—*Accounting for Certain Investments in Debt and Equity
      Securities*, or SFAS 115.  As of both June 30, 2007 and
      September 30, 2006 restricted investments totaling $12.3 million were
      pledged in connection with a security interest in cash collateral, performance
      bonds, insurance and real estate operating leases and will be restricted for
      the
      terms of the project performance periods and lease periods, the latest of which
      is estimated to end March 2010.  At June 30, 2007, a
      $6.1 million money market investment was also used as a compensating
      balance for a bank account used for certain operations.  These
      investments are reported as *Restricted investments* on the Consolidated
      Balance Sheets.


8




In
      accordance with
      SFAS No. 95—*Statement of Cash Flows*, unrestricted investments with
      remaining maturities of 90 days or less (as of the date that we purchased the
      securities) are classified as cash equivalents.  We exclude from cash
      equivalents certain investments, such as mutual funds and auction rate
      securities.  Securities such as these, and all other securities that
      would not otherwise be included in *Restricted investments* or *Cash
      and cash equivalents*, are classified on the Consolidated Balance Sheets as
*Investments in marketable securities*.  Except for our former
      investment in CPAS and our restricted investments, all other investments are
      categorized as available-for-sale.  As such, our securities are
      recorded at estimated fair value, based on quoted market
      prices.  Increases and decreases in fair value are recorded as
      unrealized gains and losses in other comprehensive income.




The
      following table
      shows the balance sheet classification, amortized cost and estimated fair values
      of investments included in cash equivalents, investments in marketable
      securities and restricted investments:




**June
                30, 2007**
            
            
            **September
                30, 2006***(in
                thousands)*
            
            **Amortized
                cost**
            
            
            **Unrealized
                loss**
            
            
            **Estimated**
              **fair
                value**
            
            
            **Amortized
                cost**
            
            
            **Unrealized
                loss**
            
            
            **Estimated
                fair value****Cash
                equivalents:**Money
                market
            
            $
            4,916
            
            
            $
            —
            
            
            $
            4,916
            
            
            $
            9,053
            
            
            $
            —
            
            
            $
            9,053Commercial
                paper
            
            
            4,472
            
            
            
            (3
            )
            
            
            4,469
            
            
            
            —
            
            
            
            —
            
            
            
            —**Total
                investments included in cash**
              **and cash equivalents**
            
            ****
            **9,388**
            
            
            ****
            **(3**
            **)**
            
            ****
            **9,385**
            
            
            ****
            **9,053**
            
            
            ****
            **—**
            
            
            ****
            **9,053****Investments
                in marketable securities:**Debt
                securities(Primarily state and local
                bonds/notes)
            
            
            39,500
            
            
            
            —
            
            
            
            39,500
            
            
            
            36,950
            
            
            
            —
            
            
            
            36,950**Total
                investments in marketable securities**
            
            ****
            **39,500**
            
            
            ****
            **—**
            
            
            ****
            **39,500**
            
            
            ****
            **36,950**
            
            
            ****
            **—**
            
            
            ****
            **36,950****Restricted
                investments:**Certificates
                of deposit
            
            
            8,941
            
            
            
            —
            
            
            
            8,941
            
            
            
            8,941
            
            
            
            —
            
            
            
            8,941Money
                market
            
            
            6,079
            
            
            
            —
            
            
            
            6,079
            
            
            
            —
            
            
            
            —
            
            
            
            —U.S.
                government sponsored enterprise obligations
            
            
            3,343
            
            
            
            (2
            )
            
            
            3,341
            
            
            
            3,348
            
            
            
            (2
            )
            
            
            3,346**Total
                restricted investments**
            
            ****
            **18,363**
            
            
            ****
            **(2**
            **)**
            
            ****
            **18,361**
            
            
            ****
            **12,289**
            
            
            ****
            **(2**
            **)**
            
            ****
            **12,287****Total
                investments**
            
            **$**
            **67,251**
            
            
            **$**
            **(5**
            **)**
            
            **$**
            **67,246**
            
            
            **$**
            **58,292**
            
            
            **$**
            **(2**
            **)**
            
            **$**
            **58,290**




At
      June 30,
      2007 and September 30, 2006, all of the debt securities that were included
      in marketable securities had remaining maturities in excess of ten
      years.




We
      evaluate certain
      available-for-sale investments for other-than-temporary impairment when the
      fair
      value of the investment is lower than its book value.  Factors that
      management considers when evaluating for other-than-temporary impairment
      include:  the length of time and the extent to which market value has
      been less than cost; the financial condition and near-term prospects of the
      issuer; interest rates; credit risk; the value of any underlying portfolios
      or
      investments; and our intent and ability to hold the investment for a period
      of
      time sufficient to allow for any anticipated recovery in the
      market.  We do not adjust the recorded book value for declines in fair
      value that we believe are temporary if we have the intent and ability to hold
      the associated investments for the foreseeable future and we have not made
      the
      decision to dispose of the securities as of the reported date.




If
      we determine that
      impairment is other-than-temporary, we reduce the recorded book value of the
      investment by the amount of the impairment and recognize a realized loss on
      the
      investment.  At June 30, 2007 and September 30, 2006, we did
      not believe any of our investments were other-than-temporarily
      impaired.






*Equity
      Investments*




In
      June 2007 we sold
      our 46.96% investment of the outstanding common stock of CPAS Systems, Inc.,
      or
      CPAS, a Canadian-based supplier of pension administration software systems,
      back
      to CPAS for $4.8 million (USD).  The sale price was approximately
      equal to the US-dollar equivalent of our book value in the CPAS investment
      as of
      June 30, 2007, plus estimated taxes and other disposal costs.  In


9




June 2007, we
      recorded a gain
      of $80,000 on the sale of this investment and realized a foreign currency gain
      on the investment of $239,000.






**NOTE
      5—GOODWILL AND OTHER INTANGIBLE ASSETS**




As
      of June 30,
      2007, goodwill for our operating units consisted of the following:




**Operating
                Segment***(in
                thousands)*
            
            **EPP**
            
            
            **GBPO**
            
            
            **PSSI**
            
            
            **Total**Balance
                of
                goodwill at September 30, 2006
            
            $
            14,323
            
            
            $
            5,711
            
            
            $
            17,533
            
            
            $
            37,567Reclassification
                of goodwill due to restructuring in October 2006
            
            
            203
            
            
            
            8,036
            
            
            
            (8,239
            )
            
            
            —Goodwill
                written off related to classification of assets as
                held-for-sale
            
            
            —
            
            
            
            (8,036
            )
            
            
            —
            
            
            
            (8,036
            )Balance
                at
                June 30, 2007
            
            $
            14,526
            
            
            $
            5,711
            
            
            $
            9,294
            
            
            $
            29,531




The
      above table also
      reflects $8.0 million of goodwill associated with a corporate restructuring
      that occurred at October 1, 2006.  At that time, our Voice and
      System Automation, or VSA, business was reclassified from our PSSI segment
      to
      our GBPO segment, to better align complementary product lines in the GBPO
      segment.  Although the VSA business previously had been assigned to
      the PSSI segment, it was not integrated into the segment and benefits from
      the
      VSA segment were not realized by the rest of the reporting unit.




In
      April 2007, we
      began to seek buyers for the majority of our GBPO and PSSI
      segments.  In accordance with Statement of Financial Accounting
      Standard No. 144—*Accounting for the Impairment of Long-Lived Assets*, we
      have recorded the associated assets and liabilities as “held-for-sale” for all
      reported periods.  Our GBPO and PSSI segments are each composed of a
      number of businesses that we currently believe may be sold
      separately.  These businesses were never fully integrated into the
      segment after their acquisition and the benefits of the acquired goodwill were
      not realized by the rest of the reporting unit.  Therefore, the
      goodwill associated with these businesses was included in the carrying amount
      of
      the individual businesses.  We analyzed these businesses for
      impairment using a fair value approach as required by SFAS 144 and SFAS
      142—*Goodwill and Other Intangible Assets*.  Of the
      $29.5 million of goodwill reported in the preceding table,
      $15.0 million relates to held-for-sale assets, of which $5.7 million
      related to goodwill for businesses in our GBPO segment and $9.3 million is
      related to goodwill for businesses in our PSSI segment.




As
      a general
      practice, we test goodwill for impairment during the fourth quarter of each
      fiscal year at the reporting unit level using a fair value approach in
      accordance with SFAS No. 142—*Goodwill and Other Intangible
      Assets*.  If an event occurs or circumstances change that would
      more likely than not reduce the fair value of a reporting unit below its
      carrying value, we would evaluate goodwill for impairment between annual
      tests.  Such an event occurred in April 2007 when we reclassified
      certain assets as held-for-sale.  At that time, we determined that the
      carrying value of certain business exceeded the fair value by $8.6 million,
      as a result of a change in the strategic direction of that
      business.  As a result, we recorded an impairment loss during the
      third quarter of fiscal 2007.  See *Note 12-Held-for-sale
      assets* for additional information on the goodwill and long-lived asset
      impairment for those portions of our business classified as held-for-sale on
      our
      Consolidated Balance Sheets.




At
      June 30,
      2007 and September 30, 2006, we also reclassified certain intangible assets
      to *Current assets—held-for-sale*on our Consolidated Balance
      Sheet.  Subsequent to April 2007, we are not recognizing any
      additional amortization on these assets while they are classified as
      held-for-sale.  At June 30, 2007 and September 30, 2006,
*Other intangible assets, net*, consisted of the following:


10




**June 30,
                2007**
            
            
            **September
                30, 2006***(in
                thousands)*
            **Amortization
                period**
            
            **Gross**
            
            
            **Accumulated
                amortization**
            
            
            **Net**
            
            
            **Gross**
            
            
            **Accumulated
                amortization**
            
            
            **Net**Client
                relationships
            10
                years
            
            $
            28,749
            
            
            $
            (13,226
            )
            
            $
            15,523
            
            
            $
            28,749
            
            
            $
            (11,176
            )
            
            $
            17,573Reclassed
                to
                held-for-sale
            
            
            
            (4,210
            )
            
            
            1,192
            
            
            
            (3,018
            )
            
            
            (4,210
            )
            
            
            983
            
            
            
            (3,227
            )24,539
            
            
            
            (12,034
            )
            
            
            12,505
            
            
            
            24,539
            
            
            
            (10,193
            )
            
            
            14,346Technology
                & research and development
            3-10
                years
            
            
            4,289
            
            
            
            (2,429
            )
            
            
            1,860
            
            
            
            4,289
            
            
            
            (1,986
            )
            
            
            2,303Reclassed
                to
                held-for-sale
            
            
            
            (3,990
            )
            
            
            2,257
            
            
            
            (1,733
            )
            
            
            (3,990
            )
            
            
            1,858
            
            
            
            (2,132
            )299
            
            
            
            (172
            )
            
            
            127
            
            
            
            299
            
            
            
            (128
            )
            
            
            171Trademarks
            7-10
                years
            
            
            3,214
            
            
            
            (1,584
            )
            
            
            1,630
            
            
            
            3,214
            
            
            
            (1,342
            )
            
            
            1,872Non-compete
                agreements
            2-3
                years
            
            
            615
            
            
            
            (584
            )
            
            
            31
            
            
            
            615
            
            
            
            (484
            )
            
            
            131Reclassed
                to
                held-for-sale
            
            
            
            (560
            )
            
            
            529
            
            
            
            (31
            )
            
            
            (560
            )
            
            
            435
            
            
            
            (125
            )55
            
            
            
            (55
            )
            
            
            —
            
            
            
            55
            
            
            
            (49
            )
            
            
            6Other
                intangible assets, net
            
            
            $
            28,107
            
            
            $
            (13,845
            )
            
            $
            14,262
            
            
            $
            28,107
            
            
            $
            (11,712
            )
            
            $
            16,395




As
      shown in the
      above table, a total of $4.8 million and $5.5 million, respectively, of
*Other intangible assets, net*, was reclassified as held-for-sale as of
      June 30, 2007 and September 30, 2006.  The remaining $14.3 million and
      $16.4 million, respectively, of *Other intangible assets, net* shown on
      our Consolidated Balance Sheets continues to be held and used by Tier. 
During the nine months ended June 30, 2007, amortization expense for other
      intangible assets totaled $2.8 million.






**NOTE
      6—(LOSS) EARNINGS PER SHARE**




The
      following table
      presents the computation of basic and diluted (loss) earnings per
      share:




**Three
                months ended**
              **June
                30,**
            
            
            **Nine
                months ended**
              **June
                30,***(in
                thousands, except per share amounts)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Numerator:**Net
                (loss)
                income from:Continuing
                operations, net of income taxes
            
            $
            (6,197
            )
            
            $
            (1,587
            )
            
            $
            (7,844
            )
            
            $
            (4,779
            )Discontinued
                operations
            
            
            478
            
            
            
            —
            
            
            
            8,077
            
            
            
            —Net
                (loss)
                income
            
            $
            (5,719
            )
            
            $
            (1,587
            )
            
            $
            233
            
            
            $
            (4,779
            )**Denominator:**Weighted-average
                common shares
                outstanding
            
            
            19,511
            
            
            
            19,499
            
            
            
            19,505
            
            
            
            19,494Effects
                of dilutive common stock
                options
            
            
            —
            
            
            
            —
            
            
            
            125
            
            
            
            —Adjusted
                weighted-average shares
            
            
            19,511
            
            
            
            19,499
            
            
            
            19,630
            
            
            
            19,494**(Loss)
                earnings per share—Basic:**From
                continuing
                operations
            
            $
            (0.32
            )
            
            $
            (0.08
            )
            
            $
            (0.40
            )
            
            $
            (0.25
            )From
                discontinued
                operations
            
            $
            0.03
            
            
            $
            —
            
            
            $
            0.41
            
            
            $
            —**(Loss)
                earnings per share—Basic**
            
            **$**
            **(0.29**
            **)**
            
            **$**
            **(0.08**
            **)**
            
            **$**
            **0.01**
            
            
            **$**
            **(0.25**
            **)****(Loss)
                earnings per share—Diluted:**From
                continuing
                operations
            
            $
            (0.32
            )
            
            $
            (0.08
            )
            
            $
            (0.40
            )
            
            $
            (0.25
            )From
                discontinued
                operations
            
            $
            0.03
            
            
            $
            —
            
            
            $
            0.41
            
            
            $
            —**(Loss)
                earnings per share—Diluted**
            
            **$**
            **(0.29**
            **)**
            
            **$**
            **(0.08**
            **)**
            
            **$**
            **0.01**
            
            
            **$**
            **(0.25**
            **)**




11


The
      following
      shares attributable to outstanding stock options were excluded from the
      calculation of diluted (loss) earnings per share because their inclusion would
      have been anti-dilutive:




**Three
                months ended**
              **June
                30,**
            
            
            **Nine
                months ended**
              **June
                30,***(in
                thousands, except per share amounts)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Weighted-average
                options excluded from computation of diluted earnings per
                share
            
            
            798
            
            
            
            1,807
            
            
            
            1,668
            
            
            
            2,184Range
                of
                exercise prices per share:High
            
            $
            20.70
            
            
            $
            20.70
            
            
            $
            20.70
            
            
            $
            20.70Low
            
            $
            6.85
            
            
            $
            6.96
            
            
            $
            5.91
            
            
            $
            6.96




In
      addition, 273,000
      for the three months ended June 30, 2007, and 95,000 and 118,000,
      respectively, for the three and nine months ended June 30, 2006, of common
      stock equivalents were excluded from the calculations of diluted (loss) earnings
      per share, since their effect would have been anti-dilutive.






**NOTE
      7—SEGMENT INFORMATION**




We
      evaluate the
      performance of our EPP, GBPO and PSSI operating segments based on revenues
      and
      direct costs.  Accordingly, we do not include the cost of shared
      services in our segment analyses, such as selling and marketing, general and
      administrative, depreciation and amortization expenses, interest, and income
      taxes.




Beginning
      October 1, 2006, we reclassified our Voice and Systems Automation practice
      area revenues and direct costs from our PSSI segment to our GBPO segment to
      align complementary product lines with the same operating
      segment.  Accordingly, the prior period revenues and direct costs for
      these segments have been reclassified to conform to the current
      presentation.




The
      following table
      presents financial information for the three reportable segments, including
      the
      elimination of revenues and costs associated electronic payment processing
      services that our EPP segment performed for our GBPO segment, which are
      disclosed in the Eliminations column below:




**Three
                months ended**
            
            
            **Nine
                months ended***(in
                thousands)*
            
            **EPP(1)**
            
            
            **GBPO(2)**
            
            
            **PSSI(3)**
            
            
            **Eliminations**
            
            
            **Total**
            
            
            **EPP(1)**
            
            
            **GBPO(2)**
            
            
            **PSSI(3)**
            
            
            **Eliminations**
            
            
            **Total****June
                30, 2007:**Revenues
            
            $
            38,380
            
            
            $
            11,102
            
            
            $
            8,284
            
            
            $
            (106
            )
            
            $
            57,660
            
            
            $
            81,109
            
            
            $
            35,718
            
            
            $
            24,093
            
            
            $
            (269
            )
            
            $
            140,651Direct
                costs
            
            $
            30,021
            
            
            $
            6,147
            
            
            $
            6,184
            
            
            $
            (106
            )
            
            $
            42,246
            
            
            $
            61,539
            
            
            $
            23,424
            
            
            $
            17,890
            
            
            $
            (269
            )
            
            $
            102,584**June
                30, 2006:**Revenues
            
            $
            33,912
            
            
            $
            12,613
            
            
            $
            9,787
            
            
            $
            (43
            )
            
            $
            56,269
            
            
            $
            64,485
            
            
            $
            40,564
            
            
            $
            28,677
            
            
            $
            (101
            )
            
            $
            133,625Direct
                costs
            
            $
            26,950
            
            
            $
            8,049
            
            
            $
            7,077
            
            
            $
            (43
            )
            
            $
            42,033
            
            
            $
            49,487
            
            
            $
            31,275
            
            
            $
            19,964
            
            
            $
            (101
            )
            
            $
            100,625(1)
                During the three and nine months ended June 30, 2007, the revenues
                from one customer produced 52.6% and 37.2%, respectively, of the
                revenues
                for the EPP segment. During the three and nine months ended
                June 30, 2006, the revenues from this customer produced 58.5% and
                41.7%, respectively, of the revenues for the EPP segment.
              (2)
                The revenues from one customer produced 31.2% and 31.0%, respectively,
                of
                the revenues for the GBPO segment during the three and nine months
                ended
                June 30, 2007, and produced 35.1% and 32.1%, respectively, of GBPO
                revenues during the three and nine months ended June 30,
                2006.
              The
                revenues
                from another customer produced 18.5% and 16.9%, respectively, of
                the GBPO
                revenues for the three and nine months ended June 30, 2007, while the
                revenues from this customer produced 15.2% and 14.0%, respectively,
                of
                GBPO revenues during the three and nine months ended June 30,
                2006. The contract with this customer expired on June 29,
                2007.
              (3)During the three and nine months ended June 30, 2007, the
                revenues from one customer produced 33.0% and 27.9%, respectively,
                of the
                revenues for the PSSI segment. During the three and nine months ended
                June 30, 2006, the revenues from this customer produced 27.6% and
                24.6%, respectively, of the revenues for the PSSI segment. The
                revenues from another customer produced 28.1% and 24.8%, respectively,
                of
                the PSSI revenues for the three and nine months ended June 30, 2007,
                while the revenues from this customer produced 19.3% and 16.1%,
                respectively, of the PSSI revenues during the three and nine months
                ended
                June 30, 2006.




Our
      total assets for
      each segment are shown in the following table:




*(in
                thousands)*
            
            **June
                30, 2007**
            
            
            **September
                30, 2006**EPP
            
            $
            95,523
            
            
            $
            85,236GBPO
            
            
            24,100
            
            
            
            39,795PSSI
            
            
            24,766
            
            
            
            25,894Corporate(1)
            
            
            25,502
            
            
            
            18,624Total
            
            $
            169,891
            
            
            $
            169,549(1)Represents
                assets that are not assignable to a specific segment




12


See
*Note
      12—Held-for-sale assets* for a breakdown of assets for each segment that are
      classified as held-for-sale.




**NOTE
      8—RESTRUCTURING**




During
      fiscal year
      2004, we incurred restructuring liabilities for facilities closure costs
      associated with the relocation of our administrative functions from Walnut
      Creek, California to Reston, Virginia.  We did not incur any
      restructuring expense during the nine months ended June 30,
      2007.




The
      following table
      summarizes the restructuring liabilities activity from September 30, 2006
      to June 30, 2007:




*(in
                thousands)*
            
            **Facilities
                closures**Balance
                at
                September 30, 2006
            
            $
            401Cash
                payments
            
            
            (163
            )Balance
                at
                June 30, 2007
            
            $
            238




As
      shown in the
      preceding table, we had $0.2 million of restructuring liabilities at
      June 30, 2007, all of which was included in *Other liabilities* in
      the Consolidated Balance Sheet.  We expect to pay $58,000 and $180,000
      of these liabilities during fiscal years 2007 and 2008,
      respectively.




**NOTE
      9—CONTINGENCIES AND COMMITMENTS**




*LEGAL
      ISSUES*




From
      time to time
      during the normal course of business, we are a party to litigation and/or other
      claims.  At June 30, 2007, none of these matters were expected to
      have a material impact on our financial position, results of operations or
      cash
      flows.  At June 30, 2007 and September 30, 2006, we had
      legal accruals of $1.0 million and $1.4 million, respectively, based
      upon estimates of key legal matters.  In November 2003, we were
      granted conditional amnesty in relation to a Department of Justice Antitrust
      Division investigation involving the child support payment processing
      industry.  We have cooperated, and continue to cooperate, with the
      investigation and, therefore, will continue to incur legal costs.




On
      May 31,
      2006, we received a subpoena from the Philadelphia District Office of the
      Securities and Exchange Commission requesting documents relating to financial
      reporting and personnel issues.  We have cooperated, and will continue
      to cooperate fully, in this investigation.




On
      November 20,
      2006, we were served with a purported class action lawsuit on behalf of
      purchasers of our common stock from November 29, 2001 to October 25,
      2006.  Subsequently, the complaint was amended to narrow the purported
      class period.  The suit alleges that Tier and certain of our former
      officers issued false and misleading statements from November 2001 to May 2006,
      but did not specify the damages being sought.  This case is pending in
      the United States District Court for the Eastern District of
      Virginia.  We believe we have minimal, if any, exposure associated
      with this complaint.  See *Note 14—Subsequent Events* for
      information on key recent events associated with this case.




*BANK
      LINES OF
      CREDIT*




Throughout
      the
      majority of fiscal 2006, the first quarter of fiscal 2007 and the majority
      of
      the second quarter of fiscal 2007, we had a credit facility that allowed us
      to
      obtain letters of credit up to a total of $15.0 million and also granted
      the lender a perfected security interest in cash collateral in an amount equal
      to all issued and to be issued letters of credit.  This credit
      facility was scheduled to mature on March 31, 2007.  On
      March 23, 2007, we elected to reduce the line of credit to $10.0 million
      and entered into an amendment to the credit facility.  The amendment
      continues to grant the lender a perfected security interest in cash and
      collateral in an amount equal to all issued and to be issued letters of
      credit.  The amended facility is scheduled to mature on
      September 30, 2007.  As of June 30, 2007, $8.9 million
      of letters of credit were outstanding under this credit
      facility.  These letters of credit were issued to secure performance
      bonds, insurance and a lease.  See *Note 14—Subsequent Events* for
      information about the release of certain of these letters of credit after June
      30, 2007.


13




*OTHER
      LETTERS OF
      CREDIT*




At
      both
      June 30, 2007 and September 30, 2006, we also had a $3.0 million
      letter of credit outstanding that was collateralized by certain securities
      in
      our investment portfolio.  This letter of credit was issued to secure
      a performance bond which was scheduled to expire in October 2007.  We
      report the investments used to collateralize this letter of credit as
*Restricted investments* on our Consolidated Balance
      Sheets.  This bond was released in June 2007 as a result of the early
      termination of the contract it supported.  The letter of credit
      securing this bond was released in July 2007.  See *Note 14—Subsequent
      Events* for information about the release of this letter of credit and the
      associated collateral thereto after June 30, 2007.




*CREDIT
      RISK*




We
      maintain our cash
      in bank deposit accounts which, at times, may exceed federally insured
      limits.  We have not experienced any losses in such accounts and
      believe that any associated credit risk is *de minimis*.




*GUARANTEES*




In
      conjunction with
      our participation as a subcontractor in a three-year contract for unemployment
      insurance-related services, we guaranteed the performance of the prime
      contractor on the project.  The contract does not establish a
      limitation to the maximum potential future payments under the guarantee;
      however, we estimate that the maximum potential undiscounted cost of the
      guarantee is $2.8 million.  In accordance with FASB Interpretation No.
      45—*Guarantor’s Accounting and Disclosure Requirements for Guarantees,
      Including Indirect Guarantees of Indebtedness of Others*, we valued this
      guarantee based upon the sum of probability-weighted present values of possible
      future cash flows.  As of June 30, 2007, the remaining liability
      was $89,000, which is being amortized over the term of the
      contract.  We believe that the probability is remote that the
      guarantee provision of this contract will be invoked.




*PERFORMANCE
      BONDS*




Under
      certain
      contracts, we are required to obtain performance bonds from a licensed surety
      and to post the performance bond with our customer.  Fees for
      obtaining the bonds are expensed over the life of each bond and are included
      in
*Direct costs* on our Consolidated Statements of
      Operations.  At June 30, 2007, we had $23.9 million of bonds
      posted with our customers.  There were no claims pending against any
      of these bonds as of June 30, 2007.




*EMPLOYMENT
      AGREEMENTS*




We
      have employment
      and change of control agreements with four executives, a former
      executive and certain other key managers.  If certain termination
      or change of control events were to occur under these contracts, we could be
      required to pay up to $4.9 million.  See *Note 14—Subsequent
      Events* for information regarding an employment agreement with a fifth
      executive that was executed August 2007.




In
      February 2007, we
      entered into agreements with 31 key employees under which these individuals
      will
      be entitled to receive three to twelve months of their base salaries over a
      one
      to two year period, after completing defined employment service
      periods.  During the remainder of fiscal 2007, we expect to recognize
      a maximum expense of $0.3 million for these agreements.  During
      fiscal 2008 and 2009, we expect to recognize a maximum expense of
      $0.9 million and $0.2 million, respectively, for these
      agreements.  In addition, we have agreements with 37 other individuals
      under which they may receive compensation of up to $2.6 million if certain
      change of control events were to occur.




*INDEMNIFICATION
      AGREEMENTS*




We
      have
      indemnification agreements with each of our directors and a number of key
      executives.  These agreements provide such persons with
      indemnification to the maximum extent permitted by our Articles of
      Incorporation, Bylaws and the General Corporation Law of the State of Delaware,
      against all expenses, claims, damages, judgments and other amounts (including
      amounts paid in settlement) for which such persons become liable as a result
      of
      acting in any capacity on our behalf, subject to certain
      limitations.  We are not able to estimate our maximum exposure under
      these agreements.


14




*FORWARD
      LOSSES*




Throughout
      the term
      of our customer contracts, we forecast revenues and expenses over the total
      life
      of the contract.  In accordance with generally accepted accounting
      principles, if we determine that the total expenses
      over the
      entire term of the contract will probably exceed the total forecasted revenues
      over the term of the contract, we record an accrual in the current period equal
      to the total forecasted losses over the term of the contract, less losses
      recognized to date, if any.  As of June 30, 2007 and
      September 30, 2006, accruals totaling $0.9 million and
      $1.0 million, respectively, were included in *Other accrued
      liabilities* on our Consolidated Balance Sheets.  Changes in the
      accrued forward loss are reflected in *Direct costs* on our Consolidated
      Statements of Operations.




**NOTE
      10—RELATED PARTY TRANSACTIONS**




*NOTES
      AND
      ACCRUED INTEREST RECEIVABLE*




At
      June 30,
      2007 and September 30, 2006, we had $106,000 and $4.3 million,
      respectively, of full-recourse notes and interest receivable from a former
      Chairman of the Board and Chief Executive Officer.  During the nine
      months ended June 30, 2007, the former Chairman paid $4.3 million in
      principal and interest on notes that matured during that
      period.  Approximately $2.2 million of these full-recourse notes
      were issued in connection with the exercise of options to purchase shares of
      Tier’s common stock.  The two remaining notes mature in July 2007 and
      bear interest rates of 6.99%.  See *Note 14—Subsequent Events* for
      information about the subsequent repayment of the principal and interest on
      these two remaining notes in July 2007.




These
      notes and the
      associated accrued interest are reported as *Notes receivable from related
      parties* in the shareholders’ equity section of our Consolidated Balance
      Sheets.  Interest earned on these notes is included in *Common
      stock and paid-in capital* in the shareholders’ equity section of our
      Consolidated Balance Sheets.




*OTHER
      RELATED-PARTY TRANSACTIONS*




*CPAS*




Throughout
      the
      majority of the third quarter of fiscal 2007, we owned a 46.96% interest in
      CPAS, a Canadian-based supplier of pension administration software
      systems.  We accounted for this investment using the equity
      method.  We sold our interest back to CPAS on June 29, 2007 for
      $4.8 million (USD), which resulted in an $80,000 gain on the disposition of
      our equity interest in CPAS and the realization of a $0.2 million gain on
      foreign currency translation.




During
      the nine
      months ended June 30, 2007, we recognized $137,000 in revenue related to a
      pension project in which we are a subcontractor to CPAS.  In addition,
      CPAS is a subcontractor on a pension project for which we are the prime
      contractor.




*Nuance
      Communications, Inc.*




During
      the nine
      months ended June 30, 2007, we purchased $116,000 of software licenses,
      maintenance and related services from Nuance Communications, Inc., a company
      affiliated with a member of our Board of Directors.




*ITC
      Deltacom,
      Inc.*




During
      the nine
      months ended June 30, 2007, we purchased $118,000 of telecom services from
      ITC Deltacom, Inc., a company affiliated with a member of our Board of
      Directors.




**NOTE
      11—SHARE-BASED PAYMENT**




Stock
      options are
      issued under the *Amended and Restated 2004 Stock Incentive Plan*, or the
      Plan.  The Plan provides our Board of Directors with discretion in
      creating employee equity incentives, including incentive and non-statutory
      stock
      options.  Generally, these options vest as to 20% of the underlying


15




shares
      each year on
      the anniversary of the date granted and expire in ten years.  At
      June 30, 2007, there were 2,306,022 shares of common stock reserved for
      future issuance under the Plan. Stock-based
      compensation expense for all stock-based compensation awards granted was based
      on the grant-date fair value using the Black-Scholes model.  We
      recognize compensation expense for stock option awards on a ratable basis over
      the requisite service period of the award.  For the three and nine
      months ended June 30, 2007, we recognized $0.3 million and
      $1.5 million, respectively, in stock-based compensation expense, compared
      with $0.4 million and $1.1 million, respectively, for the same periods
      last year.




The
      following table
      shows the weighted-average assumptions we used to calculate the fair value
      of
      share-based options, as well as the weighted-average fair value of options
      granted and the weighted-average intrinsic value of options
      exercised.




**Three
                months ended**
              **June
                30,**
            
            
            **Nine
                months ended**
              **June
                30,****2007(1)**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Weighted-average
                assumptions used in Black-Scholes model:Expected
                period that options will be outstanding *(in
                years)*
            
            
            —
            
            
            
            5.00
            
            
            
            5.00
            
            
            
            5.00Interest
                rate
                *(based on U.S. Treasury yields at time of grant)*
            
            
            —
            
            
            
            4.88
            %
            
            
            4.66
            %
            
            
            4.71
            %Volatility
            
            
            —
            
            
            
            46.99
            %
            
            
            47.54
            %
            
            
            47.64
            %Dividend
                yield
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Weighted-average
                fair value of options granted
            
            $
            —
            
            
            $
            4.11
            
            
            $
            3.53
            
            
            $
            4.07Weighted-average
                intrinsic value of options exercised *(in
                thousands)*
            
            $
            19
            
            
            $
            —
            
            
            $
            71
            
            
            $
            7(1)
                No options were granted during the three months ended June 30,
                2007.




We
      based expected
      volatilities on both the implied and historical volatility of our
      stock.  In addition, we used historical data to estimate employee
      forfeitures within the valuation model.




Stock
      option
      activity for the nine months ended June 30, 2007 is as
      follows:




**Weighted-average****Shares
                under option**
              **(000)**
            
            
            **Exercise
                price per share**
            
            
            **Remaining
                contractual term**
            
            
            **Aggregate
                intrinsic value**
              **($000)**Options
                outstanding at October 1, 2006
            
            
            2,237
            
            
            $
            8.45Granted
            
            
            240
            
            
            
            7.48Exercised
            
            
            (18
            )
            
            
            4.81Forfeitures
                or
                expirations
            
            
            (307
            )
            
            
            7.60Options
                outstanding at June 30, 2007
            
            
            2,152
            
            
            $
            8.49
            
            
            
            7.36
            
            
            $
            5,141Options
                exercisable at June 30, 2007
            
            
            1,294
            
            
            $
            9.37
            
            
            
            6.56
            
            
            $
            2,638




As
      of June 30,
      2007, we expect that $1.8 million of unrecognized compensation cost, net of
      estimated forfeitures, related to stock options will be recognized over a
      weighted-average period of approximately 3.5 years.




**NOTE
      12—HELD-FOR-SALE ASSETS**




In
      April 2007, we
      began to seek buyers for certain portions of our business, including the
      majority of our PSSI and GBPO segments.  The associated assets and
      liabilities of these businesses have been classified as held-for-sale in
      accordance with Statement of Financial Accounting Standard No.
      144—*Accounting for the Impairment of Long-Lived Assets,*or SFAS
      144.  The following table shows the carrying value of the assets and
      liabilities in the disposal group at June 30, 2007 and September 30,
      2006.


16




**June
                30, 2007**
            
            
            **September
                30, 2006***(In
                thousands)*
            
            **GBPO**
            
            
            **PSSI**
            
            
            **Total**
            
            
            **GBPO**
            
            
            **PSSI**
            
            
            **Total****Assets:**Current
                assets
            
            $
            5,840
            
            
            $
            7,771
            
            
            $
            13,611
            
            
            $
            8,521
            
            
            $
            5,104
            
            
            $
            13,625Property,
                equipment and software, net
            
            
            5,194
            
            
            
            5,747
            
            
            
            10,941
            
            
            
            5,863
            
            
            
            3,821
            
            
            
            9,684Intangible
                assets, net
            
            
            4,782
            
            
            
            —
            
            
            
            4,782
            
            
            
            5,484
            
            
            
            —
            
            
            
            5,484Other
                assets
            
            
            20
            
            
            
            314
            
            
            
            334
            
            
            
            23
            
            
            
            959
            
            
            
            982Total
                assets
            
            $
            15,836
            
            
            $
            13,832
            
            
            $
            29,668
            
            
            $
            19,891
            
            
            $
            9,884
            
            
            $
            29,775**Liabilities:**Current
                liabilities
            
            $
            6,065
            
            
            $
            7,824
            
            
            $
            13,889
            
            
            $
            5,211
            
            
            $
            6,254
            
            
            $
            11,465Other
                liabilities
            
            
            359
            
            
            
            24
            
            
            
            383
            
            
            
            513
            
            
            
            76
            
            
            
            589Total
                liabilities
            
            $
            6,424
            
            
            $
            7,848
            
            
            $
            14,272
            
            
            $
            5,724
            
            
            $
            6,330
            
            
            $
            12,054Net
                assets and
                liabilities of disposal group
            
            $
            9,412
            
            
            $
            5,984
            
            
            $
            15,396
            
            
            $
            14,167
            
            
            $
            3,554
            
            
            $
            17,721




We
      performed an
      impairment analysis as of June 30, 2007 of our held-for-sale assets in
      compliance with SFAS 144 and SFAS 142.  We determined that the
      carrying value of one of our operating units exceeded its determined fair
      value.  We recorded an impairment expense of $8.6 million in the
      current period for the impairment of the assets, of which $8.0 million
      relates to the goodwill impairment under SFAS 142 and $0.6 million relates
      to the long-lived asset impairment under SFAS 144.




**NOTE
      13—DISCONTINUED OPERATIONS**




In
      fiscal 2002, we
      disposed of most of our Australian operations and in fiscal 2003 we requested
      and received $6.5 million of federal income tax refunds associated with
      this disposal.  Although we received the refund in October 2003, we
      fully reserved the entire balance because of uncertainty about the final review
      and resolution of this transaction by the Internal Revenue
      Service.  Since October 2003, we increased our reserve by
      $1.1 million to recognize the potential interest and penalties we could
      have incurred if the Internal Revenue Service made an unfavorable
      decision.




In
      March 2007, we
      were notified by the Internal Revenue Service that its Joint Committee on
      Taxation had completed its review and had approved the $6.5 million
      refund.  As a result, during the second quarter of fiscal 2007, we
      reversed the $6.5 million of reserve for the refund and the
      $1.1 million reserve for potential interest and penalties.  This
      $7.6 million reversal has been recorded on our Consolidated Statements of
      Operations as *Income from discontinued operations* in accordance with
      Statement of Financial Accounting Standards No. 144—*Accounting for the
      Impairment or Disposal of Long-Lived Assets*.




In
      May 2007 we were
      notified by the Australian government that our operations in Australia, which
      were primarily disposed of in fiscal 2002, were able to be fully
      liquidated.  During the quarter ended June 30, 2007, we recorded net
      income of $0.5 million associated with the reversal of certain accruals
      that had been recorded in anticipation of costs, which did not actualize,
      associated with the final close-out of the Australian operations.




**NOTE
      14—SUBSEQUENT EVENTS**




*NOTES
      AND
      ACCRUED INTEREST RECEIVABLE*




On
      July 24, 2007, we
      received $107,000 as final payment from a former Chairman and Chief Executive
      Officer for two notes and the associated accrued interest that matured during
      July 2007.




*BANK
      LINES OF
      CREDIT*




In
      July 2007,
      $2.9 million of letters of credit were released under our current credit
      facility in connection with the release of several performance bonds that were
      fully collateralized by these letters of credit.


17




*OTHER
      LETTERS OF
      CREDIT*




In
      July 2007, a
      $3.0 million letter of credit that was collateralized by certain securities
      in our investment portfolio was released.  This letter of credit had
      been issued to secure a performance bond for a contract that expired in June
      2007.




PURPORTED
      CLASS ACTION LAWSUIT




On
      July 24, 2007,
      the United States District Court for the Eastern District of Virgnia entered
      an
      order denying the plaintiff's motion for class certification for the purported
      class action lawsuit described in Note 9—Contingencies and Commitments. 
The time to appeal the Court's order has expired without an appeal.  We
      believe that we have minimal, if any, exposure associated with this
      complaint.




*STOCKHOLDER
      RIGHTS PLAN*




On
      July 12,
      2007, we amended our Stockholder Rights Plan, or the Rights Plan.  The
      amendment increased the beneficial ownership threshold for an acquiring person
      from 10% to 15%.  The adoption of the Rights Plan was approved by our
      Board of Directors on January 10, 2006.  On that date, our Board
      of Directors declared a dividend distribution of one right for each outstanding
      share of our common stock to stockholders of record on the close of business
      on
      January 23, 2006.  Upon the occurrence of certain events, each
      right entitles the registered holder to purchase from us one one-thousandth
      of a
      share of Series A Junior Participating Preferred Stock, $0.01 par value per
      share, at a purchase price of $50.00 in cash, subject to
      adjustment.  The rights are intended to protect our stockholders in
      the event of an unfair or coercive offer to acquire us and to provide our Board
      of Directors with adequate time to evaluate unsolicited offers.


*EMPLOYMENT
      AGREEMENT*


On
        August 9, 2007,
        we entered into an employment agreement with Kevin Connell, Senior Vice
        President Sales and Marketing.  Under the terms of this two-year
        agreement, Mr. Connell will be entitled to an initial base salary of $250,000
        per annum and to participate in any Company incentive compensation plans,
        programs and/or arrangements applicable to senior-level executives up to
        75% of
        his base pay, assuming satisfaction of applicable performance
        goals.  In addition, Mr. Connell is entitled to participate in any
        equity-based plans and any executive fringe benefit plans, programs or
        arrangements applicable to senior-level executives.  In the event that
        Mr. Connell’s employment is terminated as a result of death, certain instances
        of disability, resignation for prescribed events of “Good Reason,” or without
        cause Mr. Connell will be entitled to, among other things one year’s base
        salary, plus twelve months of COBRA health continuation benefits.  If
        Mr. Connell were to be terminated by the company within one year after a
        change
        in control or if Mr. Connell resigns for prescribed events of “Good Reason”
within one year of a change of control, he is entitled to receive two times
        his
        base salary, plus the average annual bonus and sales commission paid to him
        during the past three years, plus 18 months of health insurance
        coverage.  In the event of a defined change of control and loss of
        employment, all options that would have vested within 18 months of the date
        of
        his termination will immediately vest.




18




**ITEM
      2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




*This
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations includes forward-looking statements.  We have based these
      forward-looking statements on our current plans, expectations and beliefs about
      future events.  Our actual performance could differ materially from
      the expectations and beliefs reflected in the forward-looking statements in
      this
      section and throughout this report, as a result of the risks, uncertainties
      and
      assumptions discussed under  Item 1A—Risk Factors of this Quarterly
      Report on Form 10-Q and other factors discussed in this
      section.*




The
      following
      discussion and analysis is intended to help the reader understand the results
      of
      operations and financial condition of Tier Technologies, Inc. This discussion
      and analysis is provided as a supplement to, and should be read in conjunction
      with, our financial statements and the accompanying notes to the financial
      statements.




*OVERVIEW*




We
      provide
      transaction processing services and software and systems integration services
      primarily to federal, state and local governments, as well as public sector
      clients.  We target industry sectors where we believe that demand for
      our services is less discretionary and is likely to provide us with recurring
      revenue streams through long-term contracts.  The forces driving the
      need for our services tend to involve federal- or state-mandated services,
      requiring collections and disbursements of funds, as well as a fundamental
      shift
      in consumer transaction preferences toward electronic payment methods instead
      of
      cash or paper checks.  Since the markets we serve are highly
      competitive, changes in our competitors' strategies or service offerings could
      have a significant impact on our profitability, unless we quickly and
      effectively adapt our business model to meet the changes in the
      marketplace.




We
      have derived, and
      expect to continue to derive, a significant portion of our revenues from a
      small
      number of large clients or their constituents.  For example, during
      the nine months ended June 30, 2007 and 2006, contracts with our three
      largest clients and their constituents generated 35.4% and 37.0%, respectively,
      of our total revenues.  During the nine months ended June 30,
      2007 and 2006, approximately 21.5% and 20.1%, respectively, of our total
      revenues resulted from a contract with one customer.  Substantially
      all of our contracts are terminable by the client following limited notice
      and
      without significant penalty to the client.  As a result,
      unsatisfactory performance or unanticipated difficulties in completing projects
      may result in client dissatisfaction, contractual or adjudicated monetary
      penalties or contract terminations—all of which could have a material adverse
      effect upon our business, financial condition and results of
      operations.




Our
      clients
      outsource portions of their business processes to us and rely on us for our
      industry-specific information technology expertise and
      solutions.  Nearly 77% of our revenues are generated by our
      transaction-based services including:  1) electronic payment
      processing services for federal, state and local government clients, which
      allow
      our clients to offer their constituents the ability to use credit cards, debit
      cards or electronic checks to pay taxes, fees and other obligations owed to
      government entities, educational institutions, utilities and other public
      sector clients; and 2) child support payment processing and related
      services for state government clients.  While many of these
      transactions occur on a monthly basis, there are seasonal and annual
      fluctuations in the volume of some transactions that we process, such as tax
      payments.  For example, each year the IRS rotates the order in which
      it lists the names of the two companies that provide payment processing
      services; because new consumers often opt to use the first listed payment
      processing provider more frequently than the second listed payment processing
      provider, the year in which we are listed second can result in reduced
      transaction volume.  We recognize revenues for transaction-based
      services at the time the services are performed.




Our
      packaged
      software and systems integration segment primarily integrates our proprietary
      software products and licensed third-party software products into our clients’
business operations.  We recognize these revenues on a time and
      material basis, percentage-of-completion basis or at the time delivery is made,
      depending upon the terms of the contract and the requirements of associated
      accounting standards.


19




*RECENT
      EVENTS*




During
      the quarter
      ended December 31, 2006, we commenced an initiative to evaluate our strategic
      direction and to identify how to best deploy our financial and management
      resources in order to better maximize shareholder value.  Because we
      have limited financial and management resources to fully optimize all of our
      business units, we intend to focus on our core competency in electronic payment
      processing and primarily explore growth opportunities within our Electronic
      Payment Processing, or EPP, segment and other synergistic electronic payment
      processing businesses.  As a result of this refocusing, we intend to
      redeploy assets from other business units that are not compatible with this
      direction.  In April 2007, we began to seek buyers for certain
      portions of our business, including the majority of our Packaged Software and
      Systems Integration, or PSSI, segment and Government Business Process
      Outsourcing, or GBPO, segment.  For all reported periods, the revenues
      and expenses for these operations continue to be reported as continuing
      operations on our Consolidated Statements of Operations.  However, we
      are reporting the associated assets and liabilities as held-for-sale on our
      Consolidated Balance Sheets for all reported periods.  See
      Note 12—*Held-for-Sale Assets*to our Consolidated Financial
      Statements for additional information.




*RESULTS
      OF
      OPERATIONS*




During
      the three and
      nine months ended June 30, 2007, we reported a net loss from continuing
      operations of $6.2 million and $7.8 million, respectively, which
      represents decreases of $4.6 million and $3.1 million, respectively,
      from the same periods last year.  For both periods, these losses were
      driven primarily by an $8.6 million impairment charge recorded in June 2007
      to reflect a decrease in the fair value of one of the business units in our
      GBPO
      segment.  These losses were partially offset in both periods by the
      absence of $1.2 million of depreciation and amortization on held-for-sale
      assets.  In addition, during the three and nine months ended
      June 30, 2007, we also benefited from the absence of $3.0 million and
      $3.5 million, respectively, of one-time legal and accounting costs
      associated with an earlier restatement and investigation conducted by the Audit
      Committee of the Board of Directors.




In
      addition, during
      the three and nine months ended June 30, 2007, we recorded net income of
      $0.5 million and $8.1 million, associated with the final liquidation
      of our Australia operations and the reversal of a federal tax reserve and
      associated interest and penalty accruals.  As shown in the following
      table, we reported a $5.7 million net loss for the three months ended
      June 30, 2007 and net income of $0.2 million for the nine months ended
      June 30, 2007.




**Three
                months ended**
              **June
                30,**
            
            
            **Variance**
            
            
            **Nine
                months ended June 30,**
            
            
            **Variance***(in
                thousands, except percentages)*
            
            **2007**
            
            
            **2006**
            
            
            **$
                Amount**
            
            
            **%**
            
            
            **2007**
            
            
            **2006**
            
            
            **$
                Amount**
            
            
            **%**Revenues
            
            $
            57,660
            
            
            $
            56,269
            
            
            $
            1,391
            
            
            
            2
            %
            
            $
            140,651
            
            
            $
            133,625
            
            
            $
            7,026
            
            
            
            5
            %Costs
                and
                expenses
            
            
            64,492
            
            
            
            58,710
            
            
            
            5,782
            
            
            
            10
            %
            
            
            151,533
            
            
            
            141,048
            
            
            
            10,485
            
            
            
            7
            %(Loss)
                gain
                before other income, income taxes
            
            
            (6,832
            )
            
            
            (2,441
            )
            
            
            (4,391
            )
            
            
            *
            
            
            
            (10,882
            )
            
            
            (7,423
            )
            
            
            (3,459
            )
            
            
            (47
            )%Other
                income
            
            
            628
            
            
            
            894
            
            
            
            (266
            )
            
            
            (30
            )%
            
            
            3,098
            
            
            
            2,689
            
            
            
            409
            
            
            
            15
            %(Loss)
                gain
                before income taxes
            
            
            (6,204
            )
            
            
            (1,547
            )
            
            
            (4,657
            )
            
            
            *
            
            
            
            (7,784
            )
            
            
            (4,734
            )
            
            
            (3,050
            )
            
            
            (64
            )%(Benefit)
                provision for income taxes
            
            
            (7
            )
            
            
            40
            
            
            
            (47
            )
            
            
            *
            
            
            
            60
            
            
            
            45
            
            
            
            15
            
            
            
            33
            %Net
                (loss)
                income from continuing operations
            
            
            (6,197
            )
            
            
            (1,587
            )
            
            
            (4,610
            )
            
            
            *
            
            
            
            (7,844
            )
            
            
            (4,779
            )
            
            
            (3,065
            )
            
            
            (64
            )%Net
                income
                from discontinued operations
            
            
            478
            
            
            
            —
            
            
            
            478
            
            
            
            *
            
            
            
            8,077
            
            
            
            —
            
            
            
            8,077
            
            
            
            *Net
                (loss)
                income
            
            $
            (5,719
            )
            
            $
            (1,587
            )
            
            $
            (4,132
            )
            
            
            *
            
            
            $
            233
            
            
            $
            (4,779
            )
            
            $
            5,012
            
            
            
            ***Not
                meaningful*




*Revenues*




During
      the three
      months ended June 30, 2007, our revenues were $57.7 million,
      which represents a $1.4 million, or 2%, increase over the same quarter last
      year.   The following table presents the revenues for each of our
      reportable segments for the three and nine months ended June 30, 2007 and
      2006:


20




**Three
                months ended**
              **June
                30,**
            
            
            **Variance**
            
            
            **Nine
                months ended**
              **June
                30,**
            
            
            **Variance***(in
                thousands, except percentages)*
            
            **2007**
            
            
            **2006**
            
            
            **$
                Amount**
            
            
            **%**
            
            
            **2007**
            
            
            **2006**
            
            
            **$
                Amount**
            
            
            **%**Revenue,
                by
                segment:EPP
            
            $
            38,380
            
            
            $
            33,912
            
            
            $
            4,468
            
            
            
            13
            %
            
            $
            81,109
            
            
            $
            64,485
            
            
            $
            16,624
            
            
            
            26
            %GBPO
            
            
            11,102
            
            
            
            12,613
            
            
            
            (1,511
            )
            
            
            (12
            )%
            
            
            35,718
            
            
            
            40,564
            
            
            
            (4,846
            )
            
            
            (12
            )%PSSI
            
            
            8,284
            
            
            
            9,787
            
            
            
            (1,503
            )
            
            
            (15
            )%
            
            
            24,093
            
            
            
            28,677
            
            
            
            (4,584
            )
            
            
            (16
            )%Eliminations(1)
            
            
            (106
            )
            
            
            (43
            )
            
            
            (63
            )
            
            
            *
            
            
            
            (269
            )
            
            
            (101
            )
            
            
            (168
            )
            
            
            *Total
                revenues
            
            $
            57,660
            
            
            $
            56,269
            
            
            $
            1,391
            
            
            
            2
            %
            
            $
            140,651
            
            
            $
            133,625
            
            
            $
            7,026
            
            
            
            5
            %(*1)**Represents
                elimination entry for revenues earned by our EPP segment for electronic
                payment processing services it provides to our GBPO
                segment.*
              **Not
                meaningful*




*Electronic
      Payment Processing Segment Revenues*—Our EPP segment provides electronic
      payment processing solutions, including payment of taxes, fees and other
      obligations owed to government entities, educational institutions, utilities
      and
      other public sector clients.  The revenues reported by our EPP segment
      reflect the number of contracts with clients, the volume of transactions
      processed under each contract and the rates that we charge for each transaction
      that we process.  We continue to benefit from increasing consumer
      preferences toward paying governmental obligations using electronic payment
      services.  This increasing consumer demand resulted in an increase in
      both the number of agencies that use our electronic payment processing
      alternatives and the volume of transactions processed through our pre-existing
      contracts during the fiscal periods reported herein.




During
        the three and
        nine months ended June 30, 2007, our EPP revenues grew to
        $38.4 million and $81.1 million, respectively.  This
        represents a $4.5 million, or 13%, increase for the three months ended
        June 30, 2007 and a $16.6 million, or 26%, increase for the nine
        months ended June 30, 2007 over the same periods last year.  The
        majority of these increases are attributable to a rise in revenue that we
        earned
        from processing property taxes, while increases in revenues we earned from
        processing federal and state income taxes and educational institutions further
        contributed to the rise in revenues.
  We
        anticipate
        continued revenue increases in the EPP segment for the foreseeable future,
        as
        more clients move toward electronic payment processing
        options.




*Government
      Business Process Outsourcing Segment Revenues**—*Our GBPO segment
      provides governmental clients with child support payment processing, child
      support financial institution data match services, health and human services
      consulting and other related systems integration services, including call center
      interactive voice response systems and support services.  Because of
      the importance that these clients place on receiving consistent and reliable
      service, the contracts with our GBPO customers are typically three to five
      years
      in duration and we may receive contract extensions or renewals based on our
      clients’ past experience with our company.




During
      the three
      months ended June 30, 2007, our GBPO segment generated $11.1 million
      of revenues, a $1.5 million, or 12%, decrease from the same quarter last
      year.  Contributing to this decrease was the absence of
      $1.1 million of revenue from a health and human services contract that
      expired earlier in fiscal 2007.  In addition, revenues in the three
      months ended June 30, 2007 declined $1.0 million from the same period
      last year because of the introduction of lower-cost, state-mandated electronic
      payment processing alternatives at another payment processing
      center.  These decreases were partially offset by
      a
      $0.7 million increase in revenues earned from a contract for a call center
      that we began to operate during the fourth quarter of fiscal 2006.




During
      the nine
      months ended June 30, 2007, our GBPO segment generated $35.7 million of
      revenues, a $4.8 million, or 12%, decrease from the same period last
      year.  Approximately $3.2 million of this decrease is
      attributable to the expiration of two payment processing center contracts in
      fiscal 2006 and early in fiscal 2007 and $1.4 million of the decrease is
      attributable to the expiration of the previously described health and human
      services contract.  Approximately $2.0 million of the decline was
      attributable to the previously described introduction of electronic payment
      processing alternatives at a payment processing center.  In addition,
      the completion and pending completion of a number of smaller projects in our
      GBPO segment resulted in a $0.8 million revenue reduction during the nine
      months ended June 30, 2007, compared with the same period last
      year.  These decreases were partially offset by a $2.2 million


21




increase
      in revenue
      earned from the previously described call center contract and a
      $0.4 million increase in revenue generated by a contract for a payment
      processing center that expired on June 29, 2007.  While the
      revenues from the payment processing center contract that expired in June 2007
      produced higher revenues during the first nine months of fiscal 2007, we
      anticipate that the absence of revenues from this contract will result in a
      decline in revenues of approximately $2.0 million per quarter during the
      remainder of fiscal 2007 and the first three quarters of fiscal
      2008.




*Packaged
      Software and Systems Integration Segment Revenues*—Our PSSI segment
      provides software and systems implementation services through practice areas
      in
      financial management systems, public pension administration systems,
      unemployment insurance administration systems, electronic government services,
      and systems integration services.  Since the services provided by our
      PSSI segment are generally project-oriented, the contracts with our clients
      typically have a one to three year contract term and may have subsequent
      maintenance and support phases.  The revenues reported by our PSSI
      segment in any given period reflect the size and volume of active contracts,
      as
      well as our current phase in the project life cycle of individual
      contracts.




During
      the three
      months ended June 30, 2007, our PSSI segment generated $8.3 million of
      revenue, which represents a $1.5 million, or 15%, decrease from the same
      quarter last year.  During the nine months ended June 30, 2007, our
      PSSI segment generated $24.1 million of revenue, which represents a
      $4.6 million, or 16%, decrease from the same period last
      year.  These decreases occurred primarily because the revenues earned
      during the three and nine months ended June 30, 2007 on new and ongoing
      contracts were less than those earned under contracts that have been completed
      or are nearing completion.




*Direct
      costs*




Direct
      costs, which
      represent costs directly attributable to providing services to clients, include:
      payroll and payroll-related costs; independent contractor/subcontractor costs;
      travel-related expenditures; credit card interchange fees and assessments;
      amortization of intellectual property; amortization and depreciation of
      project-related equipment, hardware and software purchases; and the cost of
      hardware, software and equipment sold to clients.  The following table
      summarizes changes in direct costs by segment.




**Three
                months ended**
              **June
                30,**
            
            
            **Variance**
            
            
            **Nine
                months ended**
              **June
                30,**
            
            
            **Variance***(in
                thousands, except percentages)*
            
            **2007**
            
            
            **2006**
            
            
            **$
                Amount**
            
            
            **%**
            
            
            **2007**
            
            
            **2006**
            
            
            **$
                Amount**
            
            
            **%**Direct
                cost,
                by segment:EPP
            
            $
            30,021
            
            
            $
            26,950
            
            
            $
            3,071
            
            
            
            11
            %
            
            $
            61,539
            
            
            $
            49,487
            
            
            $
            12,052
            
            
            
            24
            %GBPO
            
            
            6,147
            
            
            
            8,049
            
            
            
            (1,902
            )
            
            
            (24
            )%
            
            
            23,424
            
            
            
            31,275
            
            
            
            (7,851
            )
            
            
            (25
            )%PSSI
            
            
            6,184
            
            
            
            7,077
            
            
            
            (893
            )
            
            
            (13
            )%
            
            
            17,890
            
            
            
            19,964
            
            
            
            (2,074
            )
            
            
            (10
            )%Eliminations(1)
            
            
            (106
            )
            
            
            (43
            )
            
            
            (63
            )
            
            
            *
            
            
            
            (269
            )
            
            
            (101
            )
            
            
            (168
            )
            
            
            *Total
                direct
                costs
            
            $
            42,246
            
            
            $
            42,033
            
            
            $
            213
            
            
            
            1
            %
            
            $
            102,584
            
            
            $
            100,625
            
            
            $
            1,959
            
            
            
            2
            %(*1)**Represents
                elimination entry for revenues earned by our EPP segment for electronic
                payment processing services it provides to our GBPO
                segment.*




The
      following
      sections describe the key drivers that are causing the changes in
      direct costs for each of our segments.




*EPP
      Segment
      Direct Costs*—During the three months ended June 30, 2007, direct
      costs incurred by our EPP segment rose to $30.0 million, a
      $3.1 million or 11% increase over the same period last
      year.  This increase primarily reflects a $3.1 million increase
      in interchange fees that resulted from increases in the number of transactions
      and total dollars processed by our EPP segment.




During
      the nine
      months ended June 30, 2007, direct costs for our EPP segment rose to
      $61.5 million, which represents a $12.1 million, or 24%, increase over
      the same period last year.  This increase is attributable to an
      $11.7 million increse in interchange fees and a $0.4 million
      increase in other project related expenses that resulted from increases in
      the number of transactions and total dollars processed by our EPP
      segment.




*GBPO
      Segment
      Direct Costs*—During the quarter ended June 30, 2007, direct costs
      incurred by our GBPO segment declined to $6.1 million, which represents a
      $1.9 million, or 24%, decrease from the


22




same
      period last
      year.  In part, this decrease is attributable to the absence of
      $0.9 million of expenses from a health and human services contract that
      expired during the second quarter of fiscal 2007.  In addition, during
      the three months ended June 30, 2007, we did not record depreciation or
      amortization on GBPO assets that are categorized as held-for-sale; therefore,
      approximately $0.9 million of depreciation and amortization that was
      recorded during the three months ended June 30, 2006 was absent from the
      three months ended June 30, 2007.  In addition, the introduction
      of electronic payment processing alternatives in one payment processing center
      resulted in a $0.6 million reduction in postage and printing expenses,
      partially offset by a $0.2 million increase in interchange
      expense.  These decreases were partially offset by a $0.3 million
      net increase in direct costs incurred by our Voice and System Automation
      unit.




During
      the nine
      months ended June 30, 2007, direct costs incurred by our GBPO segment
      declined to $23.4 million, which represents a $7.9 million, or 25%,
      decrease from a year ago.  Approximately $3.6 million of this
      decrease is attributable to the previously described expiration of a health
      and
      human services contract and two payment center contracts.  In
      addition, the introduction of electronic payment processing alternatives in
      one
      payment processing center resulted in a $1.3 million reduction in postage
      and printing expenses, partially offset by a $0.7 million increase in
      interchange fees.  Our direct costs were also lower during the nine
      months ended June 30, 2007 because of the absences
      of:  $1.4 million of one-time reconciliation expenses incurred
      during fiscal 2006; $1.5 million of forward losses accrued on a GBPO
      project; and $0.8 million of depreciation and amortization on held-for sale
      assets.




*PSSI
      Segment
      Direct Costs*—During the quarter ended June 30, 2007, direct costs
      incurred by our PSSI segment declined to $6.2 million, which represents a
      $0.9 million, or 13%, decrease from the same quarter in fiscal
      2006.  The direct costs incurred by our Unemployment Insurance unit
      decreased by $0.5 million and the direct costs incurred by our State
      Systems Integration unit decreased by $0.3 million primarily because of the
      completion of a number of large contracts.  In addition, the receipt
      of a $0.2 million rebate from one of our vendors for the purchase of
      software also contributed to the quarter-over-quarter decrease in PSSI’s direct
      costs.




During
      the nine
      months ended June 30, 2007, direct costs incurred by our PSSI segment declined
      to $17.9 million, which represents a $2.1 million or 10% decrease from
      the same period last year. Decreases within our State Systems Integration unit
      of $1.2 million, our Financial Management Systems unit of
      $1.0 million, our Pension unit of $0.5 million, and our E-Gov unit of
      $0.3 million are attributable primarily to the completion or near
      completion of several large projects.  In addition, the previously
      described rebate from one of our software vendors reduced direct costs in the
      current period by $0.2 million.  These decreases were partially
      offset primarily by $1.1 million of direct costs associated with a new
      Information Verification and Validation unit project.




*General
      and
      Administrative Expenses*




General
      and
      administrative expenses consist primarily of payroll and payroll-related costs
      for general management, administrative, accounting, investor relations,
      compliance and legal functions and information systems.




General
      and
      administrative expenses for the three months ended June 30, 2007 decreased
      $2.8 million or 24% from the same period last year.  This
      decrease is primarily attributable to the absence of $3.0 million of
      one-time legal and accounting expenses that we incurred during fiscal 2006
      relating to the previous restatement of our financial statements
      and investigation by the Audit Committee of the Board of Directors, the
      absence of $0.8 million of severance-related costs primarily associated
      with the departure of a former executive and a $0.6 million decrease in
      other legal expenses.  These decreases are partially offset by a
      $0.7 million increase in labor and labor-related expenses following the
      initiation of a 401(k) matching program in January 2007; a $0.5 million
      increase in bonus expense associated with retention bonus plans implemented
      in
      February 2007; and a $0.5 million increase in consultant services
      attributable to our strategic growth initiatives.




General
      and
      administrative expenses for the nine months ended June 30, 2007 decreased
      $22,000 over the same period last year.  This decrease is primarily
      attributable to the absence of $3.5 million of one-time legal and
      accounting expenses that we incurred during fiscal 2006 relating to the
      previous


23




restatement
      of our
      financial statements and investigation by the Audit Committee of the Board
      of
      Directors, the absence of $0.6 million of severance related costs primarily
      associated with the departure of a former executive, a $0.8 million
      decrease in bad debt expense resulting from successful collection efforts;
      and a
      $0.7 million decrease in other miscellaneous legal
      expenses.  These decreases are offset primarily by: a
      $2.1 million increase in labor and labor related expenses due to increased
      research and development labor and the adoption of a 401(k) match program in
      January 2007; a $1.4 million increase in costs associated with a contract
      settlement in our PSSI segment; a $1.2 million increase in bonus expense
      associated with retention bonus plans implemented in February 2007; a
      $0.6 million increase in consultant services attributable to our strategic
      growth initiatives; and a $0.3 million increase in stock-based compensation
      expense associated with immediate vesting of options awarded to our Board of
      Directors in February and March 2007.




During
      the remainder
      of fiscal 2007, we expect to see a year-over-year reduction in general and
      administration costs because of the absence of one-time legal and accounting
      expenses that we incurred during fiscal 2006 attributable to the restatement
      of
      our historical financial statements and an investigation conducted by the Audit
      Committee of the Board of Directors.  In February 2007, we entered
      into retention agreements with a number of key employees under which these
      individuals will be entitled to receive three to twelve months of their base
      salaries over a one to two year period, after completing defined employment
      service periods.  During the remainder of fiscal 2007, we expect to
      recognize a maximum expense of $0.3 million for these
      agreements.  In addition, we expect to recognize a maximum expense of
      $0.9 million during fiscal 2008, and $0.2 million during fiscal 2009
      for these agreements.




*Selling
      and
      Marketing Expense*




Selling
      and
      marketing expenses consist primarily of payroll and payroll-related costs,
      commissions, advertising and marketing expenditures, and travel-related
      expenditures.  We expect selling and marketing expenses to fluctuate
      from quarter to quarter due to a variety of factors, such as increased
      advertising and marketing expenses incurred in anticipation of the April
      15th federal tax season.




Selling
      and
      marketing expenses increased 3% and 2%, respectively, to $3.7 million and
      $9.2 million, respectively, for the three and nine months ended
      June 30, 2007.  This increase is primarily attributable to an
      increase in advertising expense incurred by our EPP segment during the current
      period.  We expect selling and marketing expenses to decline during
      the remainder of fiscal 2007, as a result of our decision not to pursue new
      contracts in certain practice areas in our GBPO and PSSI segments.




*Depreciation
      and Amortization Expense*




Depreciation
      and
      amortization consists primarily of expenses associated with depreciation of
      equipment, software and leasehold improvements and amortization of intangible
      assets resulting from acquisitions and other intellectual property not directly
      attributable to client projects.  Project-related depreciation and
      amortization is included in direct costs.




During
      the three and
      nine months ended June 30, 2007, depreciation and amortization expenses
      decreased by $0.3 million and $0.3 million, respectively, or 26% and
      7%, respectively, from the same periods last year.  These decreases
      are primarily attributable to the classification of assets held-for sale beginning
      in April
      2007.  Statement of Financial Accounting Standards No.
      144—*Impairment or Disposal of Long-Lived Assets* requires assets in a
      held-for-sale status cease being depreciated or amortized while held for
      sale.




*Impairment
      of
      Assets Held-for-Sale*




In
      April 2007, we
      began to seek buyers for certain portions of our business, including the
      majority of our PSSI and GBPO segments.  In accordance with Statement
      of Financial Standard No. 144—*Accounting for the Impairment of Disposal or
      Long-Lived Assets*(SFAS 144), we classified all associated assets and
      liabilities as held-for-sale on our Consolidated Balance Sheets at the lower
      of
      carrying value or fair value less cost to sell.  Based upon the
      requisite fair value analyses under SFAS 144 and Statement of Financial
      Accounting Standard No. 142—*Goodwill and Other Intangible Assets*, we
      recognized a $8.6 million impairment loss on the carrying value of one of
      our businesses in our GBPO segment, of


24




which
      $8.0 million represented a write off of goodwill for this business
      unit.  The remaining $0.6 million is included in *Current
      assets—held-for-sale* on our Consolidated Balance Sheets.




*Other
      Income*




*Equity
      in net
      income of unconsolidated affiliate*—During the three months ended
      June 30, 2007 and 2006, we reported a net loss of $0.5 million and net
      income of $35,000, respectively.  During the nine months ended
      June 30, 2007 and 2006, we reported net income of $0.5 million and
      $0.6 million, respectively, representing our 46.96% share in the net income
      and losses incurred by our investment in CPAS.  During the three
      months ended June 30, 2007, CPAS recorded a management incentive payout
      associated with its fiscal year end results, which contributed to the
      $0.5 million decrease over the same period last year.  The
      $0.1 million year-to-date decrease in CPAS’ performance resulted primarily
      from the recognition of our portion of the management incentive payout mentioned
      above offset by CPAS’ successful contracting efforts primarily during the first
      quarter of fiscal 2007.




On
      June 29,
      2007 we sold our 46.96% equity interest in CPAS back to CPAS.  As a
      result of that transaction, we realized a $239,000 foreign currency gain, plus
      an $80,000 gain on the sale of this equity investment.




*Interest
      income, net—*Our interest income during the three and nine months ended
      June 30, 2007 was relatively unchanged because both interest rates and the
      daily balance of our investment portfolio have remained relatively constant
      during all reported periods.




*Provision
      for
      income taxes**—*During the nine months ended June 30, 2007
      and 2006, we recorded income tax expense of $60,000 and $45,000,
      respectively.  For both periods, this expense reflected expected
      minimum state tax payments.  We applied carryforward losses from
      earlier periods in the calculation of income taxes, which resulted in our tax
      expense in both periods being limited to expected state tax
      obligations.  In addition, in accordance with Statement of Financial
      Accounting Standards No. 109—*Accounting for Income Taxes*, we have
      continued to maintain a valuation allowance for the full amount of our deferred
      tax assets because of cumulative net losses incurred in recent
      years.




*Discontinued
      Operations*




*Income
      from
      discontinued operations*—In fiscal 2002, we disposed of most of our
      Australian operations and in fiscal 2003 requested and received
      $6.5 million of federal income tax refunds associated with this
      disposal.  Although we received the refund in October 2003, we fully
      reserved the entire balance because of uncertainty about the final review and
      resolution of this transaction by the Internal Revenue Service.  Since
      October 2003, we increased our reserve by $1.1 million to recognize the
      potential interest and penalties we could have incurred if the Internal Revenue
      Service made an unfavorable decision.




In
      March 2007, we
      were notified by the Internal Revenue Service that its Joint Committee on
      Taxation had completed its review and approved the $6.5 million
      refund.  As a result, during the second quarter of fiscal 2007, we
      reversed the $6.5 million of reserve for refunds and the $1.1 million
      reserved for potential interest and penalties.  This $7.6 million
      reversal has been recorded on our Consolidated Statements of Operations
      as
*Income from discontinued operations, net* in accordance with Statement
      of Financial Accounting Standards No. 144—*Accounting for the Impairment or
      Disposal of Long-Lived Assets*.




In
      May 2007 we were
      notified by the Australian government that our operations in Australia, which
      were primarily disposed of in fiscal 2002, were able to be fully
      liquidated.  For the three and nine months ended June 30, 2007,
      we recorded $0.5 million of net income associated with the reversal of
      certain accruals that had been recorded in anticipation of costs, which did
      not
      actualize, associated with the final close-out of the Australian
      operations.




*LIQUIDITY
      AND
      CAPITAL RESOURCES*




Our
      principal
      capital requirement is to fund working capital and to support our growth,
      including potential future acquisitions.  Under our Amended and
      Restated Credit and Security Agreement, as amended*,* with


25




our
      lender, we may
      obtain up to $10.0 million of letters of credit.  Furthermore,
      the agreement grants the lender a perfected security interest in cash collateral
      in an amount equal to all issued and to be issued letters of
      credit.  At June 30, 2007, we had $8.9 million of letters of
      credit outstanding under this credit facility, which are fully
      collateralized.  These letters of credit were issued to secure
      performance bonds, insurance and a lease.  During July 2007,
      $2.9 million of letters of credit were released that were used to secure
      performance bonds for several projects.




In
      addition to the
      letters of credit issued under the credit facility mentioned above, at
      June 30, 2007, we had a $3.0 million letter of credit outstanding,
      which was collateralized by certain securities in our investment
      portfolio.  This letter of credit was issued to secure a performance
      bond.




*Net
      Cash from
      Continuing Operations—Operating Activities*—During the nine months ended
      June 30, 2007, our operating activities provided $14.1 million of
      cash, including $7.8 million of net loss from continuing operations and
      $15.9 million of non-cash items.  During the nine months ended
      June 30, 2007, $2.9 million of cash was generated by a decrease in
      prepaid expenses and other assets, $2.6 million of cash was generated by an
      increase in accounts payable and accrued liabilities, primarily attributable
      to
      an increase in accrued compensation expenses, $0.3 million of cash was
      generated by an increase in estimated income tax liabilities and
      $0.2 million of cash was generated by an increase in deferred
      revenue.




During
      the nine
      months ended June 30, 2006, our operating activities provided
      $6.7 million of cash, including $4.8 million from net loss from
      continuing operations and $10.0 million of non-cash
      items.  During the nine months ended June 30, 2006,
      $4.8 million of cash was also generated by a decrease in the balance of
      accounts receivable, due to successful collection efforts, and $2.0 million
      of cash was generated by an increase in accounts payable and other accrued
      liabilities.  These increases were partially offset by our use of
      $2.3 million of cash to support prepaid expenses and other assets and a
      $2.8 million decrease of cash in deferred revenues.




*Net
      Cash from
      Continuing Operations—Investing Activities*.  During the nine
      months ended June 30, 2007, our operations used $3.5 million of cash
      for investing activities.  The purchase of equipment and software and
      funding of internally developed software used $3.9 million of
      cash.  In addition, $19.3 million of cash was used to purchase
      restricted investments and $6.1 million of cash was used to purchase
      marketable securities during the nine months ended June 30,
      2007.  Another $0.2 million of cash was used for other investing
      activities.  This use of funds was partially offset by
      $13.4 million of cash generated from the sale and maturities of restricted
      investments and $3.6 million of cash generated from the sale and maturities
      of marketable securities.  In addition, $4.3 million of cash was
      generated from the repayment of notes and accrued interest from a related party
      and $4.8 million of cash was generated from the sale of our unconsolidated
      affiliate, CPAS.




During
      the nine
      months ended June 30, 2006, our investing activities used
      $13.0 million of cash, of which $46.0 million of cash was used to
      purchase marketable securities and $37.2 million of cash was generated by
      sales and maturities of marketable securities.  During the nine months
      ended June 30, 2006, $3.4 million of cash was generated when
      restricted securities matured, while $3.9 million of cash was used to
      purchase restricted investments.  In addition, $3.7 million of
      cash was used to purchase equipment and software during the nine months ended
      June 30, 2006.




*Net
      Cash from
      Continuing Operations—Financing Activities*—During the nine months ended
      June 30, 2007, $92,000 of cash was provided by our financing
      activities.  The increase represents $89,000 of cash from issuance of
      our common stock and $3,000 of cash provided by a new capital lease
      agreement.




During
      the nine
      months ended June 30, 2006, $11,000 of cash was used in our financing
      activities.  The decrease represents $80,000 of cash used in capital
      lease obligations offset by $69,000 of cash from issuance of our common
      stock.




*Net
      Cash from
      Discontinued Operations*—During the nine months ended June 30,
      2007, we reversed a $7.6 million federal income tax reserve, which had
      initially been recorded in October 2003, pending an IRS review of a refund
      we
      received associated with the disposal of our former Australian operations. 
This reversal represents a non-cash adjustment that was reported in income
      from
      discontinued operations.  In


26




addition,
      we
      recorded a $0.5 million non-cash adjustment that was reported in income
      from discontinued operations associated with the liquidation of our Australian
      operations.




We
      expect to
      generate cash flows from operating activities over the long-term; however,
      we
      may experience significant fluctuations from quarter to quarter resulting from
      the timing of the billing and collection of large project
      milestones.  We anticipate that our existing capital resources,
      including our cash balances, cash that we anticipate will be provided by
      operating activities and our available credit facilities will be adequate to
      fund our operations for at least the next 12 months.  There can be no
      assurance that changes will not occur that would consume available capital
      resources before such time.  Our capital requirements and capital
      resources depend on numerous factors, including potential acquisitions;
      initiation of large child support payment processing contracts that typically
      require large cash outlays for capital expenditures and staff-up costs;
      contingent payments earned; new and existing contract requirements; the timing
      of the receipt of accounts receivable, including unbilled receivables; the
      timing and ability to sell investment securities held in our portfolio without
      a
      loss of principle; our ability to draw on our bank facility; and employee
      growth.  To the extent that our existing capital resources are
      insufficient to meet our capital requirements, we will have to raise additional
      funds.  There can be no assurance that additional funding, if
      necessary, will be available on favorable terms, if at all.  The
      raising of additional capital may dilute our shareholders’ ownership in
      us.




Due
      to the current
      economic climate, the performance bond market has changed significantly,
      resulting in reduced availability of bonds, increased cash collateral
      requirements and increased premiums.  Some of our government contracts
      require a performance bond, and future requests for proposal may also require
      a
      performance bond.  Our inability to obtain performance bonds,
      increased costs to obtain such bonds or a requirement to pledge significant
      cash
      collateral in order to obtain such bonds would adversely affect our business
      and
      our capacity to obtain additional contracts.  Increased premiums or a
      claim made against a performance bond could adversely affect our earnings and
      cash flow and impair our ability to bid for future contracts.




*CONTRACTUAL
      OBLIGATIONS*




Since
      September 30,
      2006, there has been no material change outside the ordinary course of business
      in the contractual obligations disclosed in our most recent annual report on
      Form 10-K.




*CRITICAL
      ACCOUNTING POLICIES*




The
      preparation of
      our results of operations and financial position requires us to make judgments
      and estimates that may have a significant impact upon our financial
      results.  We believe that of our accounting policies, the following
      require estimates and assumptions that require complex subjective judgments
      by
      management, which can materially impact reported results:  estimates
      of project costs and percentage of completion; estimates of effective tax rates,
      deferred taxes and associated valuation allowances; valuation of goodwill and
      intangibles; estimated share-based compensation; and valuation of assets and
      liabilities classified as held-for-sale.  Actual results could differ
      materially from management’s estimates.




For
      a full
      discussion of our critical accounting policies and estimates, see the
*Management’s Discussion and Analysis of Financial Condition and Results of
      Operations* in our Annual Report on Form 10-K for the fiscal year ended
      September 30, 2006.




In
      addition to the
      critical accounting policies disclosed in our Annual Report on Form 10-K for
      the
      fiscal year ended September 30, 2006, we believe the following critical
      accounting policy affects our more significant judgments and estimates used
      in
      preparing our Consolidated Financial Statements.




*Held-For-Sale
      Assets and Liabilities*.  Held-for-sale assets and liabilities
      are presented on our Consolidated Balance Sheet at the lower of their carrying
      value or fair value less costs to sell, once the criteria for held-for-sale
      status has been met.  In accordance with Statement of Financial
      Accounting Standards No. 144—*Impairment or Disposal of Long-Lived
      Assets*, or SFAS 144, assets are not depreciated or amortized while they are
      classified as held-for-sale.  At that time the asset group is
      classified as held-for-sale, we also evaluate goodwill for impairment at the
      segment level whenever the businesses classified as held-for-sale have been


27




fully
      integrated
      into the segment and the benefits of the acquired goodwill benefit the rest
      of
      the reporting unit.  Otherwise, the carrying value of the acquired goodwill
      is included in the carrying amount of the business to be disposed of in
      accordance with Statement of Accounting Standards No. 142—*Goodwill and Other
      Intangibles*.






**ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK**




We
      maintain a
      portfolio of cash equivalents and investments in a variety of securities
      including certificates of deposit, money market funds and government and
      non-government debt securities.  These available-for-sale securities
      are subject to interest rate risk and may decline in value if market interest
      rates increase.  If market interest rates increase immediately and
      uniformly by ten percentage points from levels at June 30, 2007, the
      fair value of the portfolio would decline by about $21,000.






**ITEM
      4.  CONTROLS AND PROCEDURES**




*EVALUATION
      OF
      DISCLOSURE CONTROLS AND PROCEDURES*




Our
      management, with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      evaluated the effectiveness of our disclosure controls and procedures (as
      defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
      June 30, 2007.  The term “disclosure controls and procedures”
means controls and other procedures that are designed to ensure that information
      required to be disclosed by a company in reports that it files or submits under
      the Exchange Act is recorded, processed, summarized and reported, within the
      time periods specified in the SEC’s rules and forms.  Disclosure
      controls and procedures include, without limitation, controls and procedures
      designed to ensure that such information is accumulated and communicated to
      the
      company’s management, including its principal executive and principal financial
      officers, as appropriate to allow timely decisions regarding required
      disclosure.  Management recognizes that any controls and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving their objectives and management necessarily applies its judgment
      in
      evaluating the cost-benefit relationship of possible controls and
      procedures.  Based on the evaluation of our disclosure controls and
      procedures as of June 30, 2007, our Chief Executive Officer and our Chief
      Financial Officer concluded that as of that date, our disclosure controls and
      procedures were effective at the reasonable assurance level.  There
      was no change in our internal control over financial reporting (as defined
      in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
      June 30, 2007 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.









28




**PART
      II.  OTHER INFORMATION**




**ITEM
      1.  LEGAL PROCEEDINGS**




On
      May 31,
      2006, we received a subpoena from the Philadelphia District Office of the
      Securities and Exchange Commission requesting documents relating to financial
      reporting and personnel issues.  We have cooperated, and will continue
      to cooperate fully, in this investigation.




On
      November 20,
      2006, we were served with a purported class action lawsuit on behalf of
      purchasers of our common stock from November 29, 2001 to October 25,
      2006.  Subsequently, the complaint was amended to narrow the purported
      class period.  The suit alleges that Tier and certain of our former
      officers issued false and misleading statements from November 2001 to May 2006,
      but did not specify the damages being sought.  This case is pending in
      the United States District Court for the Eastern District of
      Virginia.  On July 24, 2007, the Court entered an order denying
      plaintiff's motion for class certification.  The time within which to
      appeal the court's order has expired without an appeal.  We believe we have
      minimal, if any, exposure associated with this complaint.




**ITEM
      1A.  RISK FACTORS**




Investing
      in our
      common stock involves a degree of risk.  You should carefully consider
      the risks and uncertainties described below in addition to the other information
      included or incorporated by reference in this quarterly report.  If
      any of the following risks actually occur, our business, financial condition
      or
      results of operations would likely suffer.  In that case, the trading
      price of our common stock could fall.





An
      updated
      description of the risk factors associated with our business is set forth
      below.  These risk factors have been updated from those included in
      our Annual Report on Form 10-K to, among other things, delete the risk factor
      regarding regaining listing status on NASDAQ and add a risk factor regarding
      divestiture of certain assets and liabilities.




**We
      have
      incurred losses in the past and may not be profitable in the
      future.******We have incurred losses in the past and
      we may do so in the future.  While we reported net income from
      continuing operations in fiscal year 2005, we reported losses from continuing
      operations of $9.5 million during the fiscal year 2006, $63,000 in fiscal
      year 2004 and $5.4 million in fiscal year 2003.




**Our
      revenues
      and operating margins may decline and may be difficult to forecast, which could
      result in a decline in our stock price.**  Our revenues,
      operating margins and cash flows are subject to significant variation from
      quarter to quarter due to a number of factors, many of which are outside our
      control.  These factors include:




·
            economic
                conditions in the marketplace;




·
            our
                customers’
                budgets and demand for our
                services;




·
            seasonality
                of
                business;




·
            timing
                of
                service and product
                implementations;




·
            unplanned
                increases in costs;




·
            delays
                in
                completion of projects;




·
            intense
                competition;




·
            variability
                of
                software license revenues; and




·
            integration
                and costs of acquisitions.




29


The
      occurrence of
      any of these factors may cause the market price of our stock to decline or
      fluctuate significantly, which may result in substantial losses to
      investors.****We believe that period-to-period comparisons of
      our operating results are not necessarily meaningful and/or indicative of future performance.  From
      time to time, our operating results may fail to meet analysts’ and investors’
expectations, which could cause a significant decline in the market price of
      our
      stock.  Price fluctuations and trading volume of our stock may be
      rapid and severe and may leave investors little time to react.  Other
      factors that may affect the market price of our stock include announcements
      of
      technological innovations or new products or services by competitors and general
      economic or political conditions, such as recession, acts of war or
      terrorism.  Fluctuations in the price of our stock could cause
      investors to lose all or part of their investment.




**We
      may not
      be successful in divesting certain assets and liabilities and our anticipated
      divestiture could disrupt our operations.**We may not be able
      to obtain offers for the fair value of the portions of PSSI and GBPO assets
      and
      liabilities that we are marketing.  In that event, we may be required
      to recognize an impairment loss or to withdraw our planned
      divestiture.  Furthermore, our announced divestiture plan could result
      in a turnover of employees or could have an adverse impact on our ability to
      attract and retain customers, which, in turn, could have an adverse impact
      on
      the revenues generated by these businesses.  In addition, if our
      estimates of the fair value of these businesses are not accurate, we may incur
      additional impairment losses or other losses on the sale of these
      businesses.




**We
      rely on
      small numbers of projects, customers and target markets for significant portions
      of our revenues and our cash flow may decline significantly if we are unable
      to
      retain or replace these projects or clients.******We
      depend on a small number of clients to generate a significant portion of our
      revenues.  The completion or cancellation of a large project or a
      significant reduction in project scope could significantly reduce our revenues
      and cash flows.  Many of our contracts allow our clients to terminate
      the contract for convenience upon notice and without penalty.  If any
      of our large clients or prime contractors terminates its relationship with
      us,
      we will lose a significant portion of our revenues and cash
      flows.  Because of our specific market focus, adverse economic
      conditions affecting government agencies in these markets could also result
      in a
      reduction in our revenues and cash flows.  During the nine months
      ended June 30, 2007, our ten largest clients represented approximately
      54.2% of our total revenues, including one contract that generated over 21.5%
      of
      our total revenues.  Our operating results and cash flows could
      decline significantly if we cannot keep these clients, or replace them if
      lost.




**We
      operate
      in highly competitive markets.  If we do not compete effectively, we
      could face price reductions, reduced profitability and loss of market
      share.******Our business is focused on transaction
      processing and software systems solutions, which are highly competitive markets
      and are served by numerous international, national and local
      firms.  Many competitors have significantly greater financial,
      technical and marketing resources and name recognition than we do.  In
      addition, there are relatively low barriers to entry into these markets and
      we
      expect to continue to face additional competition from new entrants into our
      markets.  Parts of our business are subject to increasing pricing
      pressures from competitors, as well as from clients facing pressure to control
      costs.  Some competitors are able to operate at significant losses for
      extended periods of time, which increases pricing pressure on our products
      and
      services.  If we do not compete effectively, the demand for our
      products and services and our revenue growth and operating margins could
      decline, resulting in reduced profitability and loss of market
      share.




**Changes
      in
      accounting standards could significantly change our reported
      results.  Our accounting policies and methods are fundamental to how
      we record and report our financial condition and results of
      operations.******From time to time, the Financial
      Accounting Standards Board changes the financial accounting and reporting
      standards that govern the preparation of our financial statements. These changes
      can be hard to predict and can have a material effect on how we record and
      report our financial condition and results of operations. In some cases, we
      could be required to apply a new or revised standard retroactively, resulting
      in
      our restating prior period financial statements.




**Changes
      in
      laws and government and regulatory compliance requirements may result in
      additional compliance costs and may adversely impact our reported
      earnings.**Our business is subject to numerous federal, state
      and local laws, government regulations, corporate governance standards, industry
      association rules and public disclosure requirements, which are subject to
      change.


30




Changing
      laws,
      regulations and standards relating to corporate governance, accounting
      standards, and public disclosure, including the Sarbanes-Oxley Act of 2002,
      SEC
      regulations and Nasdaq Stock Market rules, are creating uncertainty for
      companies and increasing the cost of compliance.  To maintain high standards
      of
      corporate governance and public disclosure, we intend to invest all reasonably
      necessary resources to comply with evolving standards.  This
      investment may result in increased general
      and****administrative expenses for outside services and a
      diversion of management time and attention from revenue-generating
      activities.  New laws, regulations or industry standards may be
      enacted, or existing ones changed, which could
      negatively****impact our services and
      revenues.  Taxes or fees****may
      be****imposed or we could be subject to additional
      requirements in regard to privacy, security or qualification for doing
      business.  For our transaction processing services, we are subject to
      the rules of the National Automated Clearing House Association and the
      applicable credit/debit card association rules.  A change in such
      rules and regulations could restrict or eliminate our ability to provide
      services or accept certain types of transactions, and could increase costs,
      impair growth and make our services unprofitable.




**The
      revenues
      provided by our EPP segment from electronic payment processing may fluctuate
      and
      the ability to maintain profitability is
      uncertain.******Our EPP segment primarily provides
      credit and debit card and electronic check payment options for the payment
      of
      federal and state personal income taxes, real estate and personal property
      taxes, business taxes, fines for traffic violations and parking citations and
      educational and utility obligations.  The revenues earned by our EPP
      segment depend on consumers’ continued willingness to pay a convenience fee and
      our relationships with clients, such as government taxing authorities,
      educational institutions, public utilities and their respective
      constituents.  If consumers are not receptive to paying a convenience
      fee; if card associations change their rules or laws are passed that do not
      allow us to charge the convenience fees; or if credit or debit card issuers
      or
      marketing partners eliminate or reduce the value of rewards to consumers under
      their respective rewards programs, demand for electronic payment processing
      services could decline.  The processing fees charged by credit/debit
      card associations and financial institutions can be increased with little or
      no
      notice, which could reduce margins and harm our profitability.  Demand
      for electronic payment processing services could also be affected adversely
      by a
      decline in the use of the Internet or consumer migration to a new or different
      technology or payment method.  The use of credit and debit cards and
      electronic checks to make payments to government agencies is subject to
      increasing competition and rapid technological change.  If we are not
      able to develop, market and deliver competitive technologies, our market share
      will decline and our operating results and financial condition could
      suffer.




**Our
      ability
      to grow depends largely on our ability to attract, integrate and retain
      qualified personnel.  The success of our business is based largely on
      our ability to attract and retain talented and qualified employees and
      contractors.**The market for skilled workers in our industry is extremely
      competitive.  In particular, qualified project managers and senior
      technical and professional staff are in great demand.  If we are not
      successful in our recruiting efforts or are unable to retain key employees,
      our
      ability to staff projects and deliver products and services may be adversely
      affected.  We believe our success also depends upon the continued
      services of senior management and a number of key employees whose employment
      may
      terminate at any time.  If one or more key employees resigns to join a
      competitor or to form a competing company, the loss of such personnel and any
      resulting loss of existing or potential clients could harm our competitive
      position.




**We
      depend on
      third parties for our products and services.  Failure by these third
      parties to perform their obligations satisfactorily could hurt our reputation,
      operating results and competitiveness.******Our
      business is highly dependent on working with other companies and organizations
      to bid on and perform complex multi-party projects.  We may act as a
      prime contractor and engage subcontractors, or we may act as a subcontractor
      to
      the prime contractor.  We use third-party software, hardware and
      support service providers to perform joint engagements.  We depend on
      licensed software and other technology from a small number of primary
      vendors.  We also rely on a third-party co-location facility for our
      primary data center, use third-party processors to complete payment transactions
      and use third-party software providers for system solutions, security and
      infrastructure.  The failure of any of these third parties to meet
      their contractual obligations, our inability to obtain favorable contract terms,
      failures or defects attributable to these third parties or their products,
      or
      the discontinuation of the services of a key subcontractor or vendor could
      result in significant cost and liability, diminished profitability and damage
      to
      our reputation and competitive position.


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**Our
      fixed-price and transaction-based contracts require accurate estimates of
      resources and transaction volumes.  Failure to estimate these factors
      accurately could cause us to lose money on these
      contracts.******Our business relies on accurate
      estimates.  If we underestimate the resources, cost or
      time required for
      a project or overestimate the expected volume of transactions or transaction
      dollars processed, our costs could be greater than expected or our revenues
      could be less than expected.  Under fixed-price contracts, we
      generally receive our fee if we meet specified deliverables, such as completing
      certain components of a system installation.  For transaction-based
      contracts, we receive our fee on a per-transaction basis or as a percentage
      of
      dollars processed, such as the number of child support payments processed or
      tax
      dollars processed.  If we fail to prepare accurate estimates on
      factors used to develop contract pricing, such as labor costs, technology
      requirements or transaction volumes, we may incur losses on those contracts
      and
      our operating margins could decline.




**Our
      revenue
      is highly dependent on government funding. The loss or decline of existing
      or
      future government funding could cause our revenue and cash flows to
      decline.******A significant portion of our revenue is
      derived from federal and state mandated projects.  A large portion of
      these projects may be subject to a reduction or discontinuation of funding,
      which may cause early termination of projects, diversion of funds away from
      our
      projects or delays in implementation.  The occurrence of any of these
      conditions could have an adverse effect on our projected revenue, cash flows
      and
      profitability.




**Unauthorized
      data access and other security breaches could have an adverse impact on our
      business and our reputation.  Security breaches or improper access to
      data in our facilities, computer networks, or databases, or those of our
      suppliers, may cause harm to our business and result in liability and systems
      interruptions.******Despite security measures we have
      taken, our systems may be vulnerable to physical break-ins, computer viruses,
      attacks by hackers and similar problems causing interruption in service and
      loss
      or theft of data and information.  Our third-party suppliers also may
      experience security breaches involving the unauthorized access of proprietary
      information.  A security breach could result in theft, publication,
      deletion or modification of confidential information; cause harm to our business
      and reputation; and result in loss of clients and revenue.




**We
      could
      suffer material losses if our operations fail to perform
      effectively.  The potential for operational risk exposure exists
      throughout our organization.******Integral to our
      performance is the continued efficiency of our technical systems, operational
      infrastructure, relationships with third parties and key executives in our
      day-to-day and ongoing operations. Failure by any or all of these resources
      subjects us to risks that may vary in size, scale and scope. This includes
      but
      is not limited to operational or technical failures, ineffectiveness or exposure
      due to interruption in third-party support as expected, as well as the loss
      of
      key individuals or failure on the part of the key individuals to perform
      properly.  Our insurance may not be adequate to compensate us for all
      losses that may occur as a result of any such event, or any system, security
      or
      operational failure or disruption.




**At
      any given
      time, we are subject to a variety of claims and lawsuits. An adverse decision
      in
      any of these claims could have an adverse impact on our reputation and financial
      results.**  Adverse outcomes in a claim, lawsuit, government
      investigation, tax determination, or other liability matter could result in
      significant monetary damages, substantial costs, or injunctive relief against
      us
      that could adversely affect our ability to conduct our business.  We
      cannot guarantee that the disclaimers, limitations of warranty, limitations
      of
      liability and other provisions set forth in our contracts will be enforceable
      or
      will otherwise protect us from liability for damages.  The successful
      assertion of one or more claims against us may not be covered by, or may exceed
      our available insurance coverage.




In
      May 2003, we
      received a subpoena from a grand jury in the Southern District of New York
      to
      produce certain documents pursuant to an investigation by the Antitrust Division
      of the U.S. Department of Justice, or the DOJ, involving the child support
      payment processing industry.  We have cooperated, and intend to
      continue to cooperate, fully with the subpoena and with the DOJ’s
      investigation.  On November 20, 2003, the DOJ granted us
      conditional amnesty pursuant to the Antitrust Division’s Corporate Leniency
      Policy.  Consequently, the DOJ will not bring any criminal charges
      against us or our officers, directors and employees, as long as we continue
      to
      comply with the Corporate Leniency Policy, which requires, among other things,
      our full cooperation in the investigation and restitution payments if it is
      determined that parties were injured as a result of impermissible
      anticompetitive conduct.  We anticipate that we will incur additional
      expenses as we continue to cooperate with the investigation.  Such
      expenses and any


32




restitution
      payments
      could negatively impact our reputation, compromise our ability to compete and
      win new projects and result in financial losses.




In
      May 2006, we
      received a subpoena from the Philadelphia District Office of the SEC requesting
      documents relating to financial reporting and personnel issues.  If
      the SEC were to conclude that further investigative activities are merited
      or to
      take formal action against Tier, our reputation could be impaired.  We
      have cooperated, and intend to continue to cooperate, fully with this
      investigation.  We anticipate that we will incur additional legal and
      administrative expenses as we continue to cooperate with the SEC’s
      investigation.




On
      November 20,
      2006, we were served with a purported class action lawsuit on behalf of
      purchasers of our common stock from November 29, 2001 to October 25,
      2006.  Subsequently, the complaint was amended to narrow the purported
      class period.  The suit alleges that Tier and certain of our former
      officers issued false and misleading statements from November 2001 to May 2006,
      but did not specify the damages being sought.  This case is pending in
      the United States District Court for the Eastern District of
      Virginia.  We believe that we have minimal, if any, exposure
      associated with this complaint.




**If
      we are
      not able to protect our intellectual property, our business could suffer serious
      harm.  We protect our intellectual property rights through a variety
      of methods, such as use of nondisclosure and license agreements and use of
      trade
      secret, copyright and trademark laws.******Ownership
      of developed software and customizations to software are the subject of
      negotiation with individual clients.  Despite our efforts to safeguard
      and protect our intellectual property and proprietary rights, there is no
      assurance that these steps will be adequate to avoid the loss or
      misappropriation of our rights or that we will be able to detect unauthorized
      use of our intellectual property rights.  If we are unable to protect
      our intellectual property, competitors could market services or products similar
      to ours, and demand for our offerings could decline, resulting in an adverse
      impact on revenues.




**We
      may be
      subject to infringement claims by third parties, resulting in increased costs
      and loss of business.******From time to time we
      receive notices from others claiming we are infringing on their intellectual
      property rights.  Defending a claim of infringement against us could
      prevent or delay our providing products and services, cause us to pay
      substantial costs and damages, force us to redesign products or enter into
      royalty or licensing agreements on less favorable terms.  If we are
      required to enter into such agreements or take such actions, our operating
      margins could decline.




**If
      we are
      not able to obtain adequate or affordable insurance coverage or bonds, we could
      face significant liability claims and increased premium costs and our ability
      to
      compete for business could be compromised.******We
      maintain insurance to cover various risks in connection with our
      business.  Additionally, our business includes projects that require
      us to obtain performance and bid bonds from a licensed surety.  There
      is no guarantee that such insurance coverage or bonds will continue to be
      available on reasonable terms, or at all.  If we are unable to
      maintain adequate insurance and bonding coverage, potential liabilities
      associated with the risks discussed in this report could exceed our coverage,
      and we may not be able to obtain new contracts, which could result in decreased
      business opportunities and declining revenues.




**Our
      markets
      are changing rapidly.  If we are not able to adapt to changing
      conditions, we may lose market share and may not be able to compete
      effectively.******The markets for our products are
      characterized by rapid changes in technology, client expectations and evolving
      industry standards.  Our future success depends on our ability to
      innovate, develop, acquire and introduce successful new products and services
      for our target markets and to respond quickly to changes in the
      market.  If we are unable to address these requirements, or if our
      products do not achieve market acceptance, we may lose market share and our
      revenues could decline.




**We
      may not
      be successful in identifying acquisition candidates and, if we undertake
      acquisitions, they could be expensive, increase our costs or liabilities or
      disrupt our business.  One of our strategies is to pursue growth
      through acquisitions.**We may not be able to identify
      suitable acquisition candidates at prices that we consider appropriate or to
      finance acquisitions at favorable terms.  If we do identify an
      appropriate acquisition candidate, we may be unsuccessful in negotiating the
      terms of the acquisition, financing the acquisition or, if the acquisition
      occurs, integrating the acquired business


33




into
      our existing
      business.  Negotiations of potential acquisitions and the integration
      of acquired business operations could disrupt our business by diverting
      management attention away from day-to-day operations.  Acquisitions of
      businesses or other material operations may require additional debt or equity financing,
      resulting
      in leverage or dilution of ownership.  We also may not realize cost
      efficiencies or synergies that we anticipated
      when****selecting our acquisition candidates.  In
      addition, we may need to record write-downs from future impairments of
      identified intangible assets and goodwill, which could reduce our future
      reported earnings.  Acquisition candidates may have liabilities or
      adverse operating issues that we fail to discover through due diligence prior
      to
      the acquisition.  Any costs, liabilities or disruptions associated
      with any future acquisitions we may pursue could harm our operating
      results.




**Our
      business
      is subject to increasing performance requirements, which could result in reduced
      revenues and increased liability**. Our business involves projects
      that are critical to the operations of our clients' businesses.  The
      failure to meet client expectations could damage our reputation and compromise
      our ability to attract new business.  On certain projects we make
      performance guarantees, based upon defined operating specifications, service
      levels and delivery dates, which are sometimes backed by contractual guarantees
      and performance bonds.  Unsatisfactory performance or unanticipated
      difficulties or delays in starting or completing such projects may result in
      termination of the contract, a reduction in payment, liability for penalties
      and
      damages, or claims against a performance bond.  Client performance
      expectations or unanticipated delays could necessitate the use of more resources
      than we initially budgeted for a particular project, which could increase our
      project costs and make us less profitable.




**ITEM
      5.  OTHER INFORMATION**




*Executive
      Compensation*




At
      its June 12,
      2007 meeting, the Compensation Committee of our Board of Directors set certain
      compensation and benefits for Ronald L. Rossetti, President and Chief Executive
      Officer in conjunction with the expiration of Mr. Rossetti’s employment
      agreement on May 25, 2007.  This action was taken as an interim
      step in anticipation of a formal agreement that is currently being
      negotiated.  The Compensation Committee set Mr. Rossetti’s salary at
      $400,000 per year, effective May 26, 2007.  In addition, Mr.
      Rossetti became eligible to participate in fringe benefit programs that are
      available to our employees.




*Assets
      Held-For-Sale*




In
      April 2007, we
      began to seek buyers for certain portions of our business, including portions
      of
      our Packaged Software and Systems Integration, or PSSI, segment and our
      Government Business Process Outsourcing, or GBPO, segment.  At this
      time, we estimate we will incur approximately $1.6 million in costs
      associated with the sale of these businesses.  However, we can not
      estimate costs such as one-time termination benefits, contract termination
      costs
      or other associated exit costs, with these disposal activities at this
      time.




*Employment
        Agreement*
  On
        August
        9, 2007, we entered into an employment agreement with Kevin Connell, Senior
        Vice
        President Sales and Marketing.  Under the terms of this two-year
        agreement, Mr. Connell will be entitled to an initial base salary of $250,000
        per annum and to participate in any Company incentive compensation plans,
        programs and/or arrangements applicable to senior-level executives up to
        75% of
        his base pay, assuming satisfaction of applicable performance
        goals.  In addition, Mr. Connell is entitled to participate in any
        equity-based plans and any executive fringe benefit plans, programs or
        arrangements applicable to senior-level executives.  In the event that
        Mr. Connell’s employment is terminated as a result of death, certain instances
        of disability, resignation for prescribed events of “Good Reason,” or without
        cause Mr. Connell will be entitled to, among other things one year’s base
        salary, plus twelve months of COBRA health continuation benefits.  If
        Mr. Connell were to be terminated by the company within one year after a
        change
        in control or
        if Mr. Connell
        resigns for prescribed events of “Good Reason” within one year of a
 34
  change
        of
        control, he is entitled to receive two times his base salary, plus the average
        annual bonus and sales commission paid to him during the past three years,
        plus
        18 months of health insurance coverage.  In the event of a defined
        change of control and loss of employment, all options that would have vested
        within 18 months of the date of his termination will immediately
        vest.
  35




**ITEM
      6.  EXHIBITS**


**Exhibit**
              **Number**
            
            **Description**3.1
            
            Amended
                and
                Restated Bylaws of Tier Technologies, Inc., as amended.
                †10.1
            
            Share
                Repurchase Agreement between CPAS Systems, Inc., Tier Ventures Corporation
                and Tier Technologies, Inc. dated June 29,
                2007(1)10.2
            
            Employment
              Agreement between Tier Technologies, Inc. and Kevin Connell, dated
              August
              9, 2007†31.1
            
            Certification
                of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                promulgated under the Securities Exchange Act of 1934, as
                amended.†31.2
            
            Certification
                of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                promulgated under the Securities Exchange Act of 1934, as
                amended.†32.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                †32.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.††Filed
                herewith.
              (1)  Filed
                as an exhibit on current report Form 8-K, filed on June 29, 2007, and
                incorporated herein by reference.





36







**SIGNATURE**




Pursuant
      to the
      requirements of the Securities Exchange Act of 1934, the registrant has duly
      caused this report on Form 10-Q to be signed on its behalf by the undersigned
      thereunto duly authorized.
















**TIER
                TECHNOLOGIES, INC.**By:
            /s/
                David E.
                FountainName:
            **David
                E. Fountain**Title:
            Chief
                Financial Officer(Principal
                Financial and Accounting Officer)Dated:
                August
                9, 2007







37