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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2005



OR



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



Commission file number 000-23195



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TIER TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



Not applicable

(Former name, former address, and former fiscal year, if changed since last report)



(571) 382-1000

(Registrants telephone number, including area code)



---



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 ̈



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



At August 1, 2005, there were 20,373,631 shares of the Registrants Common Stock outstanding.



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##### Table of Contents

TIER TECHNOLOGIES, INC.



TABLE OF
CONTENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I.
FINANCIAL INFORMATION                                                                 |  | 1 
|                                                                                              | 
|Item 1.
Consolidated Financial Statements (unaudited)                                         |  | 1 
|                                                                                              | 
|Consolidated Balance Sheets                                                                   |  | 1 
|                                                                                              | 
|Consolidated Statements of Operations                                                         |  | 2 
|                                                                                              | 
|Consolidated Statements of Comprehensive Income (Loss)                                        |  | 3 
|                                                                                              | 
|Consolidated Statements of Cash Flows                                                         |  | 4 
|                                                                                              | 
|Notes to Consolidated Financial Statements (Unaudited)                                        |  | 5 
|                                                                                              | 
|Note 1Organization and Basis of Presentation                                                 |  | 5 
|Note 2Recent Accounting Pronouncements                                                       |  | 6 
|Note 3Customer Concentration and Risk                                                        |  | 7 
|Note 4Available-for-Sale Investments                                                         |  | 7 
|Note 5Goodwill and Other Acquired Intangible Assets                                          |  | 8 
|Note 6Income (Loss) per Share                                                                |  | 9 
|Note 7Segment Information                                                                    |  | 10
|Note 8Restructuring                                                                          |  | 10
|Note 9Discontinued Operations                                                                |  | 11
|Note 10Contingencies and Commitments                                                         |  | 11
|                                                                                              | 
|Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 12
|                                                                                              | 
|Overview                                                                                      |  | 12
|                                                                                              | 
|Results of Operations                                                                         |  | 14
|                                                                                              | 
|Liquidity and Capital Resources                                                               |  | 16
|                                                                                              | 
|Contractual Obligations and Commercial Commitments                                            |  | 18
|                                                                                              | 
|Critical Accounting Policies and Estimates                                                    |  | 18
|                                                                                              | 
|Factors That May Affect Future Results                                                        |  | 19
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures about Market Risk                            |  | 28
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 28
|                                                                                              | 
|PART II.
OTHER INFORMATION                                                                    |  | 30
|                                                                                              | 
|Item 4.
Submission of Matters to a Vote of Security Holders                                   |  | 30
|                                                                                              | 
|Item 6.
Exhibits                                                                              |  | 31
|                                                                                              | 
|SIGNATURE                                                                                     |  | 32



Private Securities Litigation
Reform Act Safe Harbor Statement



Certain statements contained in this
report, including statements regarding the 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 Factors That May Affect Future Results beginning on page 19, 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.



i



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



TIER TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ----------------- | - | ------- | -
|(in thousands)                                                                                                                                                                             |  | June 30,2005 |         |   | September 30,2004 |  
|                                                                                                                                                                                           |  | (unaudited)  |         |   |                   |  
|ASSETS                                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Current assets:                                                                                                                                                                            |  |              |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                  |  | $            | 22,425  |   |                   | $ | 30,993  |  
|Investments in marketable securities                                                                                                                                                       |  |              | 34,469  |   |                   |   | 35,225  |  
|Accounts receivable, net                                                                                                                                                                   |  |              | 18,690  |   |                   |   | 16,091  |  
|Unbilled receivables                                                                                                                                                                       |  |              | 7,880   |   |                   |   | 5,046   |  
|Short-term portion of notes and accrued interest receivable from related parties                                                                                                           |  |              | 484     |   |                   |   | 405     |  
|Prepaid expenses and other current assets                                                                                                                                                  |  |              | 7,469   |   |                   |   | 6,699   |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                       |  |              | 91,417  |   |                   |   | 95,459  |  
|                                                                                                                                                                                           |  |             
|Property, equipment and software (net of $21,935 and $22,941 depreciation and amortization at June 30, 2005 and September 30, 2004,
respectively)                                          |  |              | 13,480  |   |                   |   | 7,158   |  
|Long-term notes and accrued interest receivable from related parties, less current portion                                                                                                 |  |              | 2,255   |   |                   |   | 2,001   |  
|Goodwill                                                                                                                                                                                   |  |              | 40,594  |   |                   |   | 37,824  |  
|Other acquired intangible assets, net                                                                                                                                                      |  |              | 27,226  |   |                   |   | 30,761  |  
|Restricted investments                                                                                                                                                                     |  |              | 3,329   |   |                   |   | 3,329   |  
|Investment in unconsolidated affiliate                                                                                                                                                     |  |              | 674     |   |                   |   |        |  
|Other assets                                                                                                                                                                               |  |              | 1,738   |   |                   |   | 1,937   |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|Total assets                                                                                                                                                                               |  | $            | 180,713 |   |                   | $ | 177,469 |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                       |  |              |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                                       |  |              |         |   |                   |   |         |  
|Accounts payable                                                                                                                                                                           |  | $            | 1,661   |   |                   | $ | 2,626   |  
|Income taxes payable                                                                                                                                                                       |  |              | 7,252   |   |                   |   | 7,007   |  
|Accrued compensation liabilities                                                                                                                                                           |  |              | 5,480   |   |                   |   | 4,623   |  
|Accrued subcontractor expenses                                                                                                                                                             |  |              | 3,545   |   |                   |   | 2,478   |  
|Other accrued liabilities                                                                                                                                                                  |  |              | 7,187   |   |                   |   | 7,501   |  
|Deferred income                                                                                                                                                                            |  |              | 4,975   |   |                   |   | 5,269   |  
|Other current liabilities                                                                                                                                                                  |  |              | 113     |   |                   |   | 228     |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                                  |  |              | 30,213  |   |                   |   | 29,732  |  
|                                                                                                                                                                                           |  |             
|Other liabilities                                                                                                                                                                          |  |              | 2,065   |   |                   |   | 1,787   |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                          |  |              | 32,278  |   |                   |   | 31,519  |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|Commitments and contingencies (Note 10)                                                                                                                                                    |  |              |         |   |                   |   |         |  
|                                                                                                                                                                                           |  |             
|Shareholders equity:                                                                                                                                                                      |  |              |         |   |                   |   |         |  
|Common stock, no par value (Class B stock authorized: 42,600 shares; Class B stock issued and outstanding: 20,373 and 20,324 shares at June
30, 2005 and September 30, 2004, respectively) |  |              | 172,510 |   |                   |   | 172,136 |  
|Notes receivable from shareholders                                                                                                                                                         |  |              | (1,773  | ) |                   |   | (1,773  | )
|Accumulated other comprehensive loss                                                                                                                                                       |  |              | (43     | ) |                   |   | (258    | )
|Accumulated deficit                                                                                                                                                                        |  |              | (22,259 | ) |                   |   | (24,155 | )
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|Total shareholders equity                                                                                                                                                                 |  |              | 148,435 |   |                   |   | 145,950 |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                 |  | $            | 180,713 |   |                   | $ | 177,469 |  
|                                                                                                                                                                                           |  |              |         |   |                   |   |         |  



See Notes to
Consolidated Financial Statements



1



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##### Table of Contents

TIER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



(unaudited)



|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                      |  | Three Months EndedJune 30, |        |   | Nine Months EndedJune 30, |  
|(in thousands, except per share data)                                                 |  | 2005                       |        |   | 2004                      |   |        | 2005 |  |   | 2004    |  
|Net revenues                                                                          |  | $                          | 49,649 |   |                           | $ | 40,733 |      |  | $ | 116,605 |   |  | $ | 96,902 |  
|                                                                                      |  |                            |        |  
|Costs and expenses:                                                                   |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Direct costs                                                                          |  |                            | 35,521 |   |                           |   | 28,111 |      |  |   | 80,465  |   |  |   | 65,479 |  
|General and administrative                                                            |  |                            | 7,445  |   |                           |   | 6,951  |      |  |   | 21,196  |   |  |   | 19,543 |  
|Selling and marketing                                                                 |  |                            | 3,161  |   |                           |   | 2,003  |      |  |   | 8,753   |   |  |   | 5,136  |  
|Depreciation and amortization                                                         |  |                            | 1,504  |   |                           |   | 1,160  |      |  |   | 4,624   |   |  |   | 3,398  |  
|Restructuring and other charges                                                       |  |                            |       |   |                           |   | 1,847  |      |  |   |        |   |  |   | 3,108  |  
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Total costs and expenses                                                              |  |                            | 47,631 |   |                           |   | 40,072 |      |  |   | 115,038 |   |  |   | 96,664 |  
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Income before other income (loss), income taxes and loss from discontinued operations |  |                            | 2,018  |   |                           |   | 661    |      |  |   | 1,567   |   |  |   | 238    |  
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Other income (loss):                                                                  |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Equity in net loss of unconsolidated affiliate                                        |  |                            | (110   | ) |                           |   |       |      |  |   | (362    | ) |  |   |       |  
|Realized loss on impairment of investments                                            |  |                            | (494   | ) |                           |   |       |      |  |   | (494    | ) |  |   |       |  
|Net interest income                                                                   |  |                            | 479    |   |                           |   | 305    |      |  |   | 1,377   |   |  |   | 875    |  
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Total other income                                                                    |  |                            | (125   | ) |                           |   | 305    |      |  |   | 521     |   |  |   | 875    |  
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Income before income taxes and discontinued operations                                |  |                            | 1,893  |   |                           |   | 966    |      |  |   | 2,088   |   |  |   | 1,113  |  
|Provision for income taxes                                                            |  |                            | 172    |   |                           |   | 35     |      |  |   | 192     |   |  |   | 105    |  
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income from continuing operations                                                 |  |                            | 1,721  |   |                           |   | 931    |      |  |   | 1,896   |   |  |   | 1,008  |  
|                                                                                      |  |                            |        |  
|Loss from discontinued operations, net of income taxes                                |  |                            |       |   |                           |   | (17    | )    |  |   |        |   |  |   | (1,418 | )
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss)                                                                     |  | $                          | 1,721  |   |                           | $ | 914    |      |  |   | 1,896   |   |  | $ | (410   | )
|                                                                                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Income from continuing operations, net of income taxes:                               |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Per basic share                                                                       |  | $                          | 0.09   |   |                           | $ | 0.05   |      |  | $ | 0.10    |   |  | $ | 0.05   |  
|Per diluted share                                                                     |  | $                          | 0.09   |   |                           | $ | 0.05   |      |  | $ | 0.10    |   |  | $ | 0.05   |  
|                                                                                      |  |                            |        |  
|Income (loss) from discontinued operations, net of income taxes:                      |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Per basic share                                                                       |  | $                          |       |   |                           | $ |       |      |  | $ |        |   |  | $ | (0.08  | )
|Per diluted share                                                                     |  | $                          |       |   |                           | $ |       |      |  | $ |        |   |  | $ | (0.07  | )
|                                                                                      |  |                            |        |  
|Net income (loss):                                                                    |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Per basic share                                                                       |  | $                          | 0.09   |   |                           | $ | 0.05   |      |  | $ | 0.10    |   |  | $ | (0.02  | )
|Per diluted share                                                                     |  | $                          | 0.09   |   |                           | $ | 0.05   |      |  | $ | 0.10    |   |  | $ | (0.02  | )
|                                                                                      |  |                            |        |  
|Shares used in computing:                                                             |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic income (loss) per share                                                         |  |                            | 19,477 |   |                           |   | 19,030 |      |  |   | 19,463  |   |  |   | 18,846 |  
|Diluted income (loss) per share                                                       |  |                            | 19,578 |   |                           |   | 19,513 |      |  |   | 19,580  |   |  |   | 19,229 |  



See Notes to
Consolidated Financial Statements



2



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##### Table of Contents

TIER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



(unaudited)



|                                                    |  |                            |       |   |                           |   |      |      |  |   |       |   |  |   |      |  
|--------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                                    |  | Three Months EndedJune 30, |       |   | Nine Months EndedJune 30, |  
|(in thousands)                                      |  | 2005                       |       |   | 2004                      |   |      | 2005 |  |   | 2004  |  
|Net income (loss)                                   |  | $                          | 1,721 |   |                           | $ | 914  |      |  | $ | 1,896 |   |  | $ | (410 | )
|                                                    |  |                            |       |   |                           |   |      |      |  |   |       |   |  |   |      |  
|Other comprehensive income (loss):                  |  |                            |       |   |                           |   |      |      |  |   |       |   |  |   |      |  
|Unrealized loss on available-for-sale investments   |  |                            | (231  | ) |                           |   | (197 | )    |  |   | (309  | ) |  |   | (224 | )
|Impact of realized losses (transferred out of AOCI) |  |                            | 494   |   |                           |   |     |      |  |   | 494   |   |  |   |     |  
|Foreign currency translation adjustment             |  |                            | (54   | ) |                           |   | (10  | )    |  |   | 30    |   |  |   | 244  |  
|                                                    |  |                            |       |   |                           |   |      |      |  |   |       |   |  |   |      |  
|Other comprehensive income (loss)                   |  |                            | 209   |   |                           |   | (207 | )    |  |   | 215   |   |  |   | 20   |  
|                                                    |  |                            |       |   |                           |   |      |      |  |   |       |   |  |   |      |  
|Comprehensive income (loss)                         |  | $                          | 1,930 |   |                           | $ | 707  |      |  | $ | 2,111 |   |  | $ | (390 | )
|                                                    |  |                            |       |   |                           |   |      |      |  |   |       |   |  |   |      |  



See Notes to
Consolidated Financial Statements



3



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##### Table of Contents

TIER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



(unaudited)



|                                                                                    |  |                           |         |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                    |  | Nine Months EndedJune 30, |        
|(in thousands)                                                                      |  | 2005                      |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |                           |         |   |      |   |          |  
|Net income from continuing operations                                               |  | $                         | 1,896   |   |      | $ | 1,008    |  
|Non-cash items included in net income:                                              |  |                           |         |   |      |   |          |  
|Depreciation and amortization                                                       |  |                           | 6,579   |   |      |   | 5,081    |  
|Recognized loss on impairment of investments                                        |  |                           | 494     |   |      |   |         |  
|Goodwill and other assets impairment charge                                         |  |                           |        |   |      |   | 571      |  
|Stock options revision charge                                                       |  |                           |        |   |      |   | 552      |  
|Provision for doubtful accounts                                                     |  |                           | 689     |   |      |   | 482      |  
|Recognized loss from forgiveness of employees notes                                |  |                           | 34      |   |      |   | 8        |  
|Equity loss in 45%-owned unconsolidated affiliate                                   |  |                           | 362     |   |      |   |         |  
|                                                                                    |  |                          
|Net effect of changes in assets and liabilities:                                    |  |                           |         |   |      |   |          |  
|Accounts receivable                                                                 |  |                           | (3,288  | ) |      |   | 4,891    |  
|Prepaid expenses and other assets                                                   |  |                           | (3,774  | ) |      |   | (1,003   | )
|Accounts payable and accrued liabilities                                            |  |                           | 952     |   |      |   | 8,692    |  
|Deferred revenue                                                                    |  |                           | (294    | ) |      |   | (906     | )
|                                                                                    |  |                           |         |   |      |   |          |  
|Net cash from continuing operations provided by operating activities                |  |                           | 3,650   |   |      |   | 19,376   |  
|                                                                                    |  |                           |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |                           |         |   |      |   |          |  
|Maturities and sales of available-for-sale securities                               |  |                           | 32,013  |   |      |   | 84,120   |  
|Purchases of available-for-sale securities                                          |  |                           | (31,671 | ) |      |   | (103,638 | )
|Business combinations, net of cash acquired                                         |  |                           |        |   |      |   | (15,613  | )
|Purchase of equipment and software                                                  |  |                           | (8,832  | ) |      |   | (2,605   | )
|Investment in subsidiaries and unconsolidated affiliate                             |  |                           | (4,000  | ) |      |   |         |  
|Other                                                                               |  |                           | 135     |   |      |   | 27       |  
|                                                                                    |  |                           |         |   |      |   |          |  
|Net cash from continuing operations used in investing activities                    |  |                           | (12,355 | ) |      |   | (37,709  | )
|                                                                                    |  |                           |         |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |                           |         |   |      |   |          |  
|Borrowings under bank line of credit                                                |  |                           |        |   |      |   | 2,200    |  
|Repayments under bank line of credit                                                |  |                           |        |   |      |   | (2,200   | )
|Net proceeds from issuance of Class B common stock                                  |  |                           | 295     |   |      |   | 1,826    |  
|Capital lease obligations and other financing arrangements                          |  |                           | (64     | ) |      |   | (113     | )
|                                                                                    |  |                           |         |   |      |   |          |  
|Net cash from continuing operations provided by financing activities                |  |                           | 231     |   |      |   | 1,713    |  
|                                                                                    |  |                           |         |   |      |   |          |  
|Net cash used in continuing operations                                              |  |                           | (8,474  | ) |      |   | (16,620  | )
|Net cash (used in) provided by discontinued operations                              |  |                           | (94     | ) |      |   | 248      |  
|                                                                                    |  |                           |         |   |      |   |          |  
|Net decrease in cash and cash equivalents                                           |  |                           | (8,568  | ) |      |   | (16,372  | )
|Cash and cash equivalents at beginning of period                                    |  |                           | 30,993  |   |      |   | 26,178   |  
|                                                                                    |  |                           |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                          |  | $                         | 22,425  |   |      | $ | 9,806    |  
|                                                                                    |  |                           |         |   |      |   |          |  
|Supplemental disclosures of cash flow information:                                  |  |                           |         |   |      |   |          |  
|Cash paid during the period for:                                                    |  |                           |         |   |      |   |          |  
|Interest                                                                            |  | $                         | 43      |   |      | $ | 37       |  
|Income taxes refunded, net                                                          |  | $                         | (41     | ) |      | $ | (7,022   | )
|                                                                                    |  |                          
|Supplemental disclosures of non-cash transactions:                                  |  |                           |         |   |      |   |          |  
|Equipment acquired under capital lease obligations and other financing arrangements |  | $                         | 40      |   |      | $ |         |  
|Common Stock issued in lieu of acquisition cost for investment                      |  | $                         | 79      |   |      | $ |         |  
|Conversion of Class A common stock to Class B Common stock                          |  | $                         |        |   |      | $ | 761      |  
|Class B common stock issued in business combination                                 |  | $                         |        |   |      | $ | 4,447    |  



See Notes to
Consolidated Financial Statements



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Tier Technologies, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 1ORGANIZATION AND BASIS OF PRESENTATION



Organization



Tier
Technologies, Inc., (Tier or the Company), provides transaction processing services and software and systems integration services to federal, state and local government and other public sector clients. We provide our services
through three segments:



| |  |  | Government Business Process Outsourcing (GBPO)focuses on child support payment processing, child support financial institution data match services,
health and human services consulting and other related systems integration services;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Packaged Software and Systems Integration (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, computer telephony and call centers, systems integration services for the State of Missouri; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Electronic Payment Processing (EPP)provides electronic payment processing options, including payment of taxes, fees and other obligations owed to
government entities, educational institutions and other public sector clients.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Official Payments Corporation (OPC)provides proprietary telephone and Internet systems for electronic payment options to federal, state, and
municipal government agencies, educational institutions and other public sector clients; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | EPOS Corporation (EPOS)provides interactive communications and transaction processing technologies to federal, state and municipal government
agencies, educational institutions and other public sector clients.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In October, 2004, Tier purchased 45% of the common stock of CPAS Systems, Inc. (CPAS), a global supplier of pension administration software systems. The Company accounts for this investment using the
equity method of accounting.



Basis of Presentation



These consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and 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. Management believes it has made all necessary adjustments so that the financial statements are presented fairly and that all such adjustments are of a normal recurring nature.
Certain prior period amounts have been reclassified to conform to the current period presentation.



The results of operations for the three and nine months ended June 30, 2005 may not be indicative of future results. In addition, accounting principles
generally accepted in the United States require management to make estimates and assumptions that affect the amounts reported in consolidated financial statements and related notes for the periods presented. Material estimates in which management
believes near-term changes could reasonably occur include: estimates of project costs and percentage of completion; estimates of effective tax rates, deferred taxes and associated valuation allowances; and valuation of goodwill and intangibles.
Actual results could differ from managements estimates.



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NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS



SFAS 123RShare-Based Payment



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (Revised 2004)Share-Based Payment(SFAS 123R).This statement supersedes APB Opinion No. 25Accounting for Stock Issued to Employees and its related implementation guidance. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. The most significant change resulting from this statement is the requirement for public companies to expense employee share-based payments based on fair value, which was originally introduced, but not required, in
the original version of SFAS 123. Subsequently, on March 29, 2005, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 107Share-Based Payment (SAB 107), which provides publicly traded
companies with additional guidance on implementing SFAS 123R.



SFAS 123R is effective for public companies as of the beginning of their next fiscal year. Tier will adopt this statement effective October 1, 2005. Therefore, SFAS 123R will have no effect on Tiers financial results during fiscal
year 2005. Currently, Tier is evaluating the impact that the implementation of SFAS 123R and the guidance provided in SAB 107 will have on the Companys financial results in future years. The following table illustrates the effect on net income
(loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123, as amended by SFAS No. 148Accounting for Stock-Based CompensationTransition and Disclosure,to stock-based employee
compensation:



|                                                                                                                   |  |                            |       |      |                           |      |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ----- | ---- | ------------------------- | ---- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                                                   |  | Three months endedJune 30, |       |      | Nine months endedJune 30, |     
|(in thousands, except per share data)                                                                              |  | 2005                       |       | 2004 |                           |      | 2005 |  |   | 2004  |  
|Net income (loss), as reported                                                                                     |  | $                          | 1,721 |      | $                         | 914  |      |  | $ | 1,896 |   |  | $ | (410   | )
|Total stock-based compensation expense, determined under fair value-based method for all awards, net of tax effect |  |                            | 723   |      |                           | 962  |      |  |   | 1,988 |   |  |   | 2,214  |  
|                                                                                                                   |  |                            |       |      |                           |      |      |  |   |       |   |  |   |        |  
|Pro forma net income (loss)                                                                                        |  | $                          | 998   |      | $                         | (48  | )    |  | $ | (92   | ) |  | $ | (2,624 | )
|                                                                                                                   |  |                            |       |      |                           |      |      |  |   |       |   |  |   |        |  
|Net income (loss) per basic share:                                                                                 |  |                            |       |      |                           |      |      |  |   |       |   |  |   |        |  
|As reported                                                                                                        |  | $                          | 0.09  |      | $                         | 0.05 |      |  | $ | 0.10  |   |  | $ | (0.02  | )
|Pro forma                                                                                                          |  | $                          | 0.05  |      | $                         |     |      |  | $ |      |   |  | $ | (0.14  | )
|                                                                                                                   |  |                            |       |     
|Net income (loss) per diluted share:                                                                               |  |                            |       |      |                           |      |      |  |   |       |   |  |   |        |  
|As reported                                                                                                        |  | $                          | 0.09  |      | $                         | 0.05 |      |  | $ | 0.10  |   |  | $ | (0.02  | )
|Pro forma                                                                                                          |  | $                          | 0.05  |      | $                         |     |      |  | $ |      |   |  | $ | (0.14  | )



During its evaluation
of the financial impact of SFAS 123R, Tier is also evaluating a number of compensation alternatives that could be used to supplement and/or replace portions of its current share-based payment compensation. Therefore, the results shown in the above
table are not necessarily indicative of Tiers financial results upon implementation of SFAS 123R.



SFAS 154Accounting Changes and Error Corrections



In May 2005, FASB issued Statement of Financial Accounting Standards No. 154Accounting Changes and Error Corrections(SFAS 154).
This statement 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. Tier will adopt 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 Tiers financial position and results of operations.



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Tier Technologies, Inc.



FASB Interpretation No. 47Accounting for Conditional Asset Retirement Obligations



In March 2005, FASB Interpretation No.
47Accounting for Conditional Asset Retirement Obligations (FIN 47) was issued. FIN 47 provides interpretive guidance on the term conditional asset retirement obligation, which is used in SFAS
143Accounting for Asset Retirement Obligations.A conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event
that may or may not be in control of the entity. FIN 47 requires that the fair value of a liability for the conditional asset retirement obligation should be recognized when incurredgenerally upon acquisition, construction or development
and/or through the normal operation of the asset. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005, but earlier adoption is encouraged. Thus, Tier is required to adopt this interpretation no later than
September 30, 2006. The Company does not believe that the adoption of FIN 47 will have a material impact on Tiers financial position or results of operations. Tier expects to implement FIN 47 beginning in the quarter ending September 30, 2006.



NOTE 3CUSTOMER CONCENTRATION AND RISK



The Company derives a significant portion of its net revenues from a limited number of customers. For the nine months ended June 30, 2005 and 2004, revenue from one client totaled $17.5 million and $13.3 million,
respectively, which represented 35.2% and 13.7%, respectively, of total net revenues.



The Companys contracts with government agencies typically include a termination for convenience clause. The termination for convenience clause provides the agency with the right to terminate a contract, in whole
or in part, for any reason deemed to be in the publics best interest. Typically, the Companys contracts with government agencies also provide for termination for cause.



The Company has several large accounts receivable and unbilled receivable balances, and any dispute, early contract
termination or other collection issues could have a material adverse impact on its financial condition and results of operations. Unbilled receivables were $7.9 million and $5.0 million at June 30, 2005 and September 30, 2004, respectively. Amounts
will become billable upon completion of project milestones or customer acceptance. The entire unbilled receivables balance as of June 30, 2005 and September 30, 2004 was expected to become billable within one year. At June 30, 2005, two clients
accounted for 44.9% and 19.1%, respectively, of total unbilled receivables and 21.5% and 19.1%, respectively, of total net accounts receivable and unbilled receivables. At September 30, 2004, two clients accounted for 42.3% and 29.6%, respectively,
of total unbilled receivables and 30.9% and 10.0%, respectively, of total net accounts receivable and unbilled receivables.



At June 30, 2005 and September 30, 2004, accounts receivable and other assets included $2.8 million and $2.4 million, respectively, of retainers billed
to, but not yet paid by clients under contractual retainage provisions. Nearly all of the outstanding retainer balances are expected within two years.



NOTE 4AVAILABLE-FOR-SALE INVESTMENTS



Investments are comprised of available-for-sale debt and equity securities as defined in SFAS No. 115Accounting for Certain Investments in Debt and Equity Securities.Investments also include the
Companys ownership in equity investments in which it owns between 20% and 50% or has the ability to exercise significant influence, including the Companys equity investment in CPAS. Restricted investments totaling $3.3 million at both
June 30, 2005 and September 30, 2004, were pledged in connection with performance bonds 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
be through August 2007. These investments are reported as Restricted Investments on the consolidated statements of financial position.



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 Tier purchased the securities) are classified as cash equivalents. Beginning in March 2005, Tier changed its definition of cash equivalents to exclude certain investments from cash equivalents, 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 sheetsas Investments in marketable
securities. With the exception of its equity investment in CPAS, the Companys investments are categorized as available-for-sale under SFAS No. 115Accounting for



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Tier Technologies, Inc.



Certain Investments in Debt and Equity Securities. As such, the Companys 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 the other comprehensive income. The following table shows the balance sheet classification, amortized cost and
estimated fair values of available-for-sale investment securities at June 30, 2005:



|                                                        |  |               |        |                  |   |     |                     |  |   |       
|------------------------------------------------------- |  | ------------- | ------ | ---------------- | - | --- | ------------------- |  | - | ------
|(In thousands)                                          |  | AmortizedCost |        | Unrealized(Loss) |   |     | EstimatedFair Value
|Cash equivalents:                                       |  |               |        |                  |   |     |                     |  |   |       
|Commercial paper                                        |  | $             | 2,998  |                  | $ | (1  | )                   |  | $ | 2,997 
|Money market funds                                      |  |               | 2,805  |                  |   |    |                     |  |   | 2,805 
|                                                        |  |               |        |                  |   |     |                     |  |   |       
|Total investments included in cash and cash equivalents |  |               | 5,803  |                  |   | (1  | )                   |  |   | 5,802 
|                                                        |  |               |       
|Investments in marketable securities:                   |  |               |        |                  |   |     |                     |  |   |       
|Commercial paper                                        |  |               | 7,451  |                  |   | (4  | )                   |  |   | 7,447 
|Municipal bonds                                         |  |               | 5,816  |                  |   | (22 | )                   |  |   | 5,794 
|Mutual funds                                            |  |               | 3,760  |                  |   |    |                     |  |   | 3,760 
|U.S. government sponsored enterprise obligations        |  |               | 1,629  |                  |   | (11 | )                   |  |   | 1,618 
|Debt securities                                         |  |               | 14,850 |                  |   |    |                     |  |   | 14,850
|Equity securities                                       |  |               | 1,000  |                  |   |    |                     |  |   | 1,000 
|                                                        |  |               |        |                  |   |     |                     |  |   |       
|Total long-term investments                             |  |               | 34,506 |                  |   | (37 | )                   |  |   | 34,469
|                                                        |  |               |       
|Restricted investments:                                 |  |               |        |                  |   |     |                     |  |   |       
|U.S. government sponsored enterprise obligations        |  |               | 3,370  |                  |   | (41 | )                   |  |   | 3,329 
|                                                        |  |               |        |                  |   |     |                     |  |   |       
|Total U.S. government sponsored enterprise obligations  |  |               | 3,370  |                  |   | (41 | )                   |  |   | 3,329 
|                                                        |  |               |        |                  |   |     |                     |  |   |       
|Total investments available-for-sale  June 30, 2005    |  | $             | 43,679 |                  | $ | (79 | )                   |  | $ | 43,600
|                                                        |  |               |        |                  |   |     |                     |  |   |       



The Company evaluates
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 Tiers intent and
ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. Tier does not adjust the recorded book value for declines in fair value that it believes are temporary, if it has the intent and
ability to hold the associated investments for the foreseeable future and it has not made the decision to dispose of the securities as of the reported date.



If the Company determines impairment is other-than-temporary, it reduces the recorded book value of the investment by the amount of the impairment and
recognizes a realized loss on the investment. During the quarter ended June 30, 2005, the Company concluded that its investment in two mutual funds was other-than-temporarily impaired and realized a $0.5 million loss on these securities. This loss
is included in Realized loss on impairment of investments on the consolidated statements of operations.



NOTE 5GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS



During the nine months ended June 30, 2005, the PSSI segment recorded $2.9 million of goodwill associated with Tiers investment in CPAS. Tier also reduced goodwill in each of its segments to adjust for
previously estimated acquisition costs. The following table discloses changes in goodwill during the nine months ended June 30, 2005 for each of Tiers operating segments:



|                              |  |                                        |       |   |                                          |   |        |                              |  |   |        |   |  |   |        |  
|----------------------------- |  | -------------------------------------- | ----- | - | ---------------------------------------- | - | ------ | ---------------------------- |  | - | ------ | - |  | - | ------ | -
|                              |  | Operating Segment                      |       |   | Total                                    |  
|(in thousands)                |  | Government BusinessProcess Outsourcing |       |   | Packaged Software andSystems Integration |   |        | Electronic PaymentProcessing |  |  
|Balance at September 30, 2004 |  | $                                      | 5,298 |   |                                          | $ | 17,920 |                              |  | $ | 14,606 |   |  | $ | 37,824 |  
|Additions                     |  |                                        |      |   |                                          |   | 2,938  |                              |  |   | 21     |   |  |   | 2,959  |  
|Reductions                    |  |                                        | (14   | ) |                                          |   | (40    | )                            |  |   | (135   | ) |  |   | (189   | )
|                              |  |                                        |       |   |                                          |   |        |                              |  |   |        |   |  |   |        |  
|Balance at June 30, 2005      |  | $                                      | 5,284 |   |                                          | $ | 20,818 |                              |  | $ | 14,492 |   |  | $ | 40,594 |  
|                              |  |                                        |       |   |                                          |   |        |                              |  |   |        |   |  |   |        |  



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At June 30, 2005 and September 30, 2004, respectively, other acquired intangible assets, net,
consisted of the following:



|                                      |  |               |        |                         |   |         |     |  |       |        |                         |   |        |     |   |        |   |  |   |       
|------------------------------------- |  | ------------- | ------ | ----------------------- | - | ------- | --- |  | ----- | ------ | ----------------------- | - | ------ | --- | - | ------ | - |  | - | ------
|                                      |  | June 30, 2005 |        | September 30, 2004     
|(in thousands)                        |  | Gross         |        | AccumulatedAmortization |   |         | Net |  | Gross |        | AccumulatedAmortization |   |        | Net
|Client relationships                  |  | $             | 28,749 |                         | $ | (7,582  | )   |  | $     | 21,167 |                         | $ | 28,640 |     | $ | (5,429 | ) |  | $ | 23,211
|Trademarks                            |  |               | 3,200  |                         |   | (933    | )   |  |       | 2,267  |                         |   | 3,200  |     |   | (693   | ) |  |   | 2,507 
|Technology & research and development |  |               | 5,029  |                         |   | (1,635  | )   |  |       | 3,394  |                         |   | 4,920  |     |   | (812   | ) |  |   | 4,108 
|Backlog and acquired contracts        |  |               | 600    |                         |   | (600    | )   |  |       |       |                         |   | 675    |     |   | (238   | ) |  |   | 437   
|Non-compete agreements                |  |               | 615    |                         |   | (217    | )   |  |       | 398    |                         |   | 560    |     |   | (62    | ) |  |   | 498   
|                                      |  |               |        |                         |   |         |     |  |       |        |                         |   |        |     |   |        |   |  |   |       
|Other acquired intangible assets, net |  | $             | 38,193 |                         | $ | (10,967 | )   |  | $     | 27,226 |                         | $ | 37,995 |     | $ | (7,234 | ) |  | $ | 30,761
|                                      |  |               |        |                         |   |         |     |  |       |        |                         |   |        |     |   |        |   |  |   |       



NOTE 6INCOME (LOSS) PER SHARE



The following table sets forth the computation of basic and diluted income (loss) per share:



|                                                                 |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|---------------------------------------------------------------- |  | -------------------------- | ------ | ---- | ------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                 |  | Three Months EndedJune 30, |        |      | Nine Months EndedJune 30, |       
|(in thousands, except per share amounts)                         |  | 2005                       |        | 2004 |                           |        | 2005 |  | 2004 |       
|Numerator:                                                       |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Income (loss) from:                                              |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Continuing operations, net of income taxes                       |  | $                          | 1,721  |      | $                         | 931    |      |  | $    | 1,896  |  | $ | 1,008  |  
|Discontinued operations, net of income taxes                     |  |                            |       |      |                           | (17    | )    |  |      |       |  |   | (1,418 | )
|                                                                 |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Net income (loss)                                                |  | $                          | 1,721  |      | $                         | 914    |      |  | $    | 1,896  |  | $ | (410   | )
|                                                                 |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Denominator:                                                     |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Weighted-average common shares outstanding                       |  |                            | 19,477 |      |                           | 19,030 |      |  |      | 19,463 |  |   | 18,846 |  
|Effects of dilutive common stock options                         |  |                            | 101    |      |                           | 483    |      |  |      | 117    |  |   | 383    |  
|                                                                 |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Adjusted weighted-average shares                                 |  |                            | 19,578 |      |                           | 19,513 |      |  |      | 19,580 |  |   | 19,229 |  
|                                                                 |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Income from continuing operations, net of income taxes:          |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Per basic share                                                  |  | $                          | 0.09   |      | $                         | 0.05   |      |  | $    | 0.10   |  | $ | 0.05   |  
|Per diluted share                                                |  | $                          | 0.09   |      | $                         | 0.05   |      |  | $    | 0.10   |  | $ | 0.05   |  
|                                                                 |  |                            |        |     
|Income (loss) from discontinued operations, net of income taxes: |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Per basic share                                                  |  | $                          |       |      | $                         |       |      |  | $    |       |  | $ | (0.08  | )
|Per diluted share                                                |  | $                          |       |      | $                         |       |      |  | $    |       |  | $ | (0.07  | )
|                                                                 |  |                            |        |     
|Net income (loss):                                               |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Per basic share                                                  |  | $                          | 0.09   |      | $                         | 0.05   |      |  | $    | 0.10   |  | $ | (0.02  | )
|Per diluted share                                                |  | $                          | 0.09   |      | $                         | 0.05   |      |  | $    | 0.10   |  | $ | (0.02  | )



During the three and
nine months ended June 30, 2005, 152,500 and 813,737 options were granted. The following options to purchase shares of common stock are not included in the computation of diluted income (loss) per share because the exercise price is greater than the
average market price of the Companys common stock for the periods stated and therefore, the effect would be anti-dilutive:



|                                                                                      |  |                            |       |                           |   |       |  |      |       |  |   |      
|------------------------------------------------------------------------------------- |  | -------------------------- | ----- | ------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                      |  | Three Months EndedJune 30, |       | Nine Months EndedJune 30,
|(in thousands, except per share amounts)                                              |  | 2005                       |       | 2004                      |   | 2005  |  | 2004
|Weighted-average options excluded from computation of diluted income (loss) per share |  |                            | 1,960 |                           |   | 1,177 |  |      | 1,934 |  |   | 1,263
|                                                                                      |  |                            |       |                          
|Range of exercise prices per share:                                                   |  |                            |       |                           |   |       |  |      |       |  |   |      
|High                                                                                  |  | $                          | 20.70 |                           | $ | 20.70 |  | $    | 20.70 |  | $ | 20.70
|Low                                                                                   |  | $                          | 8.17  |                           | $ | 10.88 |  | $    | 8.30  |  | $ | 10.20



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NOTE 7SEGMENT INFORMATION



Tier evaluates the performance of its GBPO, PSSI and EPP operating segments based on net revenues and direct costs, while other operating costs are evaluated on a geographical basis. Accordingly, the Company does not include selling and
marketing expense, general and administrative expense, depreciation and amortization expense not attributable to state child support payment processing centers, net interest income, other income (loss) and income tax expense in segment
profitability. The table below presents financial information for the three reportable segments:



|               |  |                    |        |                   |   |        |  |              |        |  |       |      |      |  |      |        |     |   |              |  |   |        |  |   |        |  |   |        |   |  |   |        
|-------------- |  | ------------------ | ------ | ----------------- | - | ------ |  | ------------ | ------ |  | ----- | ---- | ---- |  | ---- | ------ | --- | - | ------------ |  | - | ------ |  | - | ------ |  | - | ------ | - |  | - | -------
|               |  | Three months ended |        | Nine months ended
|(in thousands) |  | GBPO               |        | PSSI              |   | EPP    |  | Eliminations |        |  | Total |      | GBPO |  | PSSI |        | EPP |   | Eliminations |  |   | Total 
|June 30, 2005: |  |                    |        |                   |   |        |  |              |        |  |       |      |      |  |      |        |     |   |              |  |   |        |  |   |        |  |   |        |   |  |   |        
|Net revenues   |  | $                  | 12,672 |                   | $ | 13,874 |  | $            | 23,516 |  | $     | (413 | )    |  | $    | 49,649 |     | $ | 33,800       |  | $ | 42,143 |  | $ | 45,532 |  | $ | (4,870 | ) |  | $ | 116,605
|Direct costs   |  | $                  | 9,313  |                   | $ | 8,990  |  | $            | 17,790 |  | $     | (572 | )    |  | $    | 35,521 |     | $ | 23,588       |  | $ | 27,040 |  | $ | 33,550 |  | $ | (3,713 | ) |  | $ | 80,465 
|               |  |                    |        |                   |   |        |  |              |        | 
|June 30, 2004: |  |                    |        |                   |   |        |  |              |        |  |       |      |      |  |      |        |     |   |              |  |   |        |  |   |        |  |   |        |   |  |   |        
|Net revenues   |  | $                  | 11,777 |                   | $ | 12,147 |  | $            | 16,809 |  | $     |     |      |  | $    | 40,733 |     | $ | 34,787       |  | $ | 29,680 |  | $ | 32,435 |  | $ |       |   |  | $ | 96,902 
|Direct costs   |  | $                  | 7,310  |                   | $ | 8,098  |  | $            | 12,703 |  | $     |     |      |  | $    | 28,111 |     | $ | 22,602       |  | $ | 19,986 |  | $ | 22,891 |  | $ |       |   |  | $ | 65,479 



NOTE 8RESTRUCTURING



During the fourth quarter of fiscal year 2003, the Company renewed its focus on its government services clients, while exiting unprofitable or marginal business operations. Goodwill and asset impairment charges of $1.3 million were incurred
during fiscal year ended September 30, 2004, of which $0.6 million was included in restructuring charges and $0.7 million was included in loss from discontinued operations.



At June 30, 2005, the Company had restructuring liabilities totaling $1.2 million, of which $0.6 million was recorded in
accrued liabilities. Nearly $0.6 million of restructuring liabilities was recorded in non-current other liabilities, of which $0.2 million is expected to be repaid each year during fiscal years 2006, 2007 and 2008. In addition, Tier included $21,000
of restructuring liabilities for discontinued operations in other current liabilities at June 30, 2005.



The following table summarizes the restructuring liabilities from September 30, 2004 to June 30, 2005:



|                                |  |                   |       |              |   |      |             |  |   |      
|------------------------------- |  | ----------------- | ----- | ------------ | - | ---- | ----------- |  | - | -----
|(in thousands)                  |  | September 30,2004 |       | CashPayments |   |      | June30,2005
|Facilities closure:             |  |                   |       |              |   |      |             |  |   |      
|Continuing operations           |  | $                 | 816   |              | $ | (158 | )           |  | $ | 658  
|Discontinued operations         |  |                   | 114   |              |   | (94  | )           |  |   | 20   
|                                |  |                   |       |              |   |      |             |  |   |      
|Total facilities closure        |  |                   | 930   |              |   | (252 | )           |  |   | 678  
|SeveranceContinuing operations |  |                   | 1,103 |              |   | (587 | )           |  |   | 516  
|                                |  |                   |       |              |   |      |             |  |   |      
|Total restructuring liabilities |  | $                 | 2,033 |              | $ | (839 | )           |  | $ | 1,194
|                                |  |                   |       |              |   |      |             |  |   |      



Except for the cash
payments shown in the above table, there were no other reductions or additions to Tiers restructuring liabilities.



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NOTE 9DISCONTINUED OPERATIONS



In 2003, Tier restructured and abandoned its U.S. Commercial Services and United Kingdom Operations business units. Accordingly, the financial position, results of operations and cash flows for these business units have been reported as
discontinued operations for each period presented. The operating results of the discontinued operations were as follows:



|                                                       |  |                                 |     |   |                                |   |        |  
|------------------------------------------------------ |  | ------------------------------- | --- | - | ------------------------------ | - | ------ | -
|(in thousands)                                         |  | Three Months EndedJune 30, 2004 |     |   | Nine Months EndedJune 30, 2004 |  
|Net revenues                                           |  | $                               | 53  |   |                                | $ | 1,780  |  
|                                                       |  |                                 |     |   |                                |   |        |  
|Loss from discontinued operations:                     |  |                                 |     |   |                                |   |        |  
|Before income taxes                                    |  | $                               | (17 | ) |                                | $ | (1,418 | )
|Less income taxes                                      |  |                                 |    |   |                                |   |       |  
|                                                       |  |                                 |     |   |                                |   |        |  
|Loss from discontinued operations, net of income taxes |  | $                               | (17 | ) |                                | $ | (1,418 | )
|                                                       |  |                                 |     |   |                                |   |        |  



There were no
additional revenues or losses from discontinued operations during the three or nine months ended June 30, 2005. At June 30, 2005 and September 30, 2004, the Company had net current liabilities of discontinued operations of $27,000 and $121,000,
respectively.



NOTE 10CONTINGENCIES AND COMMITMENTS



Legal Issues



In the normal course of
business, Tier is periodically a party to miscellaneous litigation and/or claim matters, none of which are expected to have a material impact on Tiers financial position, results of operations, or cash flows. Based upon managements
estimate of potential litigation costs, management has established a reserve of $0.4 million.



Bank Lines of Credit



At June 30, 2005, the Company had a $15.0 million revolving credit facility, all of which may be used for letters of credit. The credit facility has a maturity date of September 30, 2005. The credit facility is collateralized by first
priority liens and security interests in the Companys assets. Interest is based on either the adjusted LIBOR rate plus 2.25% or the lenders announced prime rate at the Companys option and is payable monthly. Among other provisions,
the credit facility requires the Company to maintain certain minimum financial ratios. As of June 30, 2005, the Company has not identified any financial ratios which failed to meet the line of credit covenants.



As of June 30, 2005, standby letters of credit totaling $1.7 million were
outstanding under this facility, including a $0.9 million standby letter of credit outstanding under the credit facility that was issued and used to guarantee the performance bond of CPAS required by a project contract that is anticipated to be
completed in August 2005. In accordance with FASB Interpretation No. 45 (FIN 45)Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Company
recorded the $0.9 million fair value of the standby letter of credit associated with the CPAS performance bond in accrued liabilities and with an offsetting receivable in prepaid expenses and other current assets. This entry will be reversed if the
Company is released from the risk upon expiration or settlement of the obligation.



In addition to the letters of credit issued under the credit facility, the Company had letters of credit totaling $3.2 million that were collateralized by certain securities in the Companys long-term investment
portfolio at June 30, 2005. The majority of these letters of credit were issued to secure performance bonds and to meet various facility lease requirements.



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



OVERVIEW



We provide transaction
processing services and software and systems integration services primarily to federal, state and local government and other public sector clients. Our clients outsource portions of their business processes to us and rely on us for our
industry-specific information technology expertise and solutions. Our transaction processing services consist primarily of: 1) child support payment processing and related services for state government clients; and 2) electronic payment processing
services for federal, state and local government clients, which allows those clients to offer their customers the ability to use credit cards, debit cards or electronic checks to pay taxes and other governmental obligations. Our software and systems
integration services primarily involve integrating our proprietary software products and licensed third-party software products into our clients business operations. During fiscal year 2005, we shifted our systems integration strategy from
custom-developed solutions toward implementation and modification of packaged softwarea strategy that we believe could increase profitability with a lower risk than building systems based on functional requirements.



During the three and nine months ended June 30, 2005, over 60% of our
revenues were derived from transaction processing based operations and the remainder was derived from software and systems integration services. Most of our services generate net revenues from fees received directly from our clients; however, the
majority of the revenues for our electronic payment processing services are derived from convenience fees paid by individual taxpayers or other end-users of our service.



We provide our services through the following three segments:



| |  |  | Government Business Process Outsourcing (GBPO)focuses on child support payment processing, child support financial institution data match services,
health and human services consulting and other related systems integration services;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Packaged Software and Systems Integration (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, computer telephony and call centers, systems integration services for the State of Missouri; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Electronic Payment Processing (EPP)provides electronic payment processing options, including payment of taxes, fees and other obligations owed to
government entities, educational institutions and other public sector clients.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We target industry sectors where we believe 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, such as child support payment, collection and disbursement, as well as a fundamental shift in consumer transaction preferences, such as the increased substitution of electronic payment
methods for cash or paper checks.



We derive net revenues
primarily from transaction and payment processing, systems design and integration, and maintenance and support services and bill clients primarily on per-transaction, fixed-price and time and materials bases. In accordance with accounting principles
generally accepted in the United States, we recognize revenues as follows:



| |  |  | Transaction-based contractsbased on fees charged on a per-transaction basis or fees charged as a percentage of dollars processed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fixed-price contractsrecognized when our clients accept the services we provide; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Other contractsrecognized based on contract type. Revenues for time and materials contracts are recognized when we perform services and incur expenses. Revenues
for delivery-based contracts are recognized when we have delivered, and the customer has accepted, the product or service. Revenues for software maintenance contracts are recognized on a straight-line basis over the contract term,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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typically one year. Revenues are recognized for software licenses that require significant
implementation and/or customization on a percentage-of-completion method of accounting, based on the ratio of costs incurred to total estimated project costs. Revenues are recognized for software licenses that do not require significant
implementation/customization upon delivery to the licensee when the fees are fixed and determinable, collection is probable and vendor specific objective evidence exists to determine the value of any undeliverable elements of the arrangement.



The following table shows the percentage of net revenues that
we generated on per-transaction, fixed-price and other bases.



|                |  |                            |   |  |                           |   |  |       |   |  |       |  
|--------------- |  | -------------------------- | - |  | ------------------------- | - |  | ----- | - |  | ----- | -
|                |  | Three months endedJune 30, |   |  | Nine months endedJune 30, |  
|                |  | 2005                       |   |  | 2004                      |   |  | 2005  |   |  | 2004  |  
|Contract basis: |  |                            |   |  |                           |   |  |       |   |  |       |  
|Per-transaction |  | 67.1                       | % |  | 66.5                      | % |  | 60.5  | % |  | 64.4  | %
|Fixed-price     |  | 18.9                       |   |  | 17.5                      |   |  | 22.7  |   |  | 17.8  |  
|Other           |  | 14.0                       |   |  | 16.0                      |   |  | 16.8  |   |  | 17.8  |  
|                |  |                            |   |  |                           |   |  |       |   |  |       |  
|Total           |  | 100.0                      | % |  | 100.0                     | % |  | 100.0 | % |  | 100.0 | %
|                |  |                            |   |  |                           |   |  |       |   |  |       |  



We believe the
proportion of total net revenues attributable to per-transaction and fixed-price contracts will continue to be significant. We have derived, and expect to continue to derive, a significant portion of our net revenues from a small number of large
clients or their constituents. For example, our contracts with the Internal Revenue Service (IRS) and the State of Missouri generated 25.7% and 7.1%, respectively, of our net revenues during the three months ended June 30, 2005 ;and generated 16.5%
and 8.6%, respectively, of our total net revenues during the nine months ended June 30, 2005.



Each year, the IRS rotates the order in which it lists the names of the two companies that provide payment processing services. Taxpayers often opt to use the first listed payment processing servicer more frequently
than the second payment processing servicer. Since Tier was the first payment service listed by the IRS in 2005, we expect that the proportion of our total net revenues attributable to our IRS arrangement may be higher in 2005 than it will be in
2006. However, the impact of this change will be mitigated somewhat as the IRS continues to expand the types of taxes that can be paid electronically.



In October 2004, Tier was awarded a five-year $85 million contract by the State of Michigan Child Support State Disbursement Unit. During the three and
nine months ended June 30, 2005, this contract contributed $3.3 million and $5.7 million, respectively, to our net revenues. We strive to continue to grow our company organically, by expanding our customer base and the array of services we offer.



From time-to-time, we negotiate the modification, termination,
renewal and/or other changes to contracts that may adjust the scope, duration or nature of the project, billing rates or price. If we significantly overestimate volumes for transaction-based contracts or underestimate the resources, expected
pricing, costs or time required for fixed-price or per-transaction based contracts, our financial condition and results of operations would be materially and adversely affected. Substantially, all of our contracts are terminable by the client
following limited notice and without significant penalty to the client. Thus, 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 operation.



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RESULTS OF OPERATIONS



Our net
income from continuing operations increased by $0.8 million or 85% during the three months ended June 30, 2005 and $0.9 million or 88% during nine months ended June 30, 2005 over the same periods last year. This growth is primarily attributable to
the acquisition of EPOS in June 2004 and the award of a new five-year contract with the State of Michigan. The following table provides an overview of changes in our results of operations for the three and nine months ended June 30, 2005 from the
same periods last year.



|                                                                     |  |                    |        |          |                   |   |        |          |  |   |              |          |              |      |    |          |   |         |  |   |        |   |  |   |        |   |  |     |   
|-------------------------------------------------------------------- |  | ------------------ | ------ | -------- | ----------------- | - | ------ | -------- |  | - | ------------ | -------- | ------------ | ---- | -- | -------- | - | ------- |  | - | ------ | - |  | - | ------ | - |  | --- | --
|                                                                     |  | Three Months Ended |        |          | Nine Months Ended |  
|                                                                     |  | June 30,2005       |        |          | June 30,2004      |   |        | Variance |  |   | June 30,2005 |          | June 30,2004 |      |    | Variance |  
|(in thousands, except percentages)                                   |  |                    |        | $ Amount |                   |   | %      |          |  |   |              | $ Amount |              |      | %  |         
|Net revenues                                                         |  | $                  | 49,649 |          |                   | $ | 40,733 |          |  | $ | 8,916        |          |              | 22   | %  |          | $ | 116,605 |  | $ | 96,902 |   |  | $ | 19,703 |   |  | 20  | % 
|Costs and expenses                                                   |  |                    | 47,631 |          |                   |   | 40,072 |          |  |   | 7,559        |          |              | 19   | %  |          |   | 115,038 |  |   | 96,664 |   |  |   | 18,374 |   |  | 19  | % 
|                                                                     |  |                    |        |          |                   |   |        |          |  |   |              |          |              |      |    |          |   |         |  |   |        |   |  |   |        |   |  |     |   
|Income before other income, income taxes and discontinued operations |  |                    | 2,018  |          |                   |   | 661    |          |  |   | 1,357        |          |              | 205  | %  |          |   | 1,567   |  |   | 238    |   |  |   | 1,329  |   |  | *   |   
|Other income (loss)                                                  |  |                    | (125   | )        |                   |   | 305    |          |  |   | (430         | )        |              | (141 | )% |          |   | 521     |  |   | 875    |   |  |   | (354   | ) |  | (40 | )%
|                                                                     |  |                    |        |          |                   |   |        |          |  |   |              |          |              |      |    |          |   |         |  |   |        |   |  |   |        |   |  |     |   
|Income before income taxes and discontinued operations               |  |                    | 1,893  |          |                   |   | 966    |          |  |   | 927          |          |              | 96   | %  |          |   | 2,088   |  |   | 1,113  |   |  |   | 975    |   |  | 88  | % 
|Provision for income taxes                                           |  |                    | 172    |          |                   |   | 35     |          |  |   | 137          |          |              | 391  | %  |          |   | 192     |  |   | 105    |   |  |   | 87     |   |  | 83  | % 
|                                                                     |  |                    |        |          |                   |   |        |          |  |   |              |          |              |      |    |          |   |         |  |   |        |   |  |   |        |   |  |     |   
|Income from continuing operations                                    |  |                    | 1,721  |          |                   |   | 931    |          |  |   | 790          |          |              | 85   | %  |          |   | 1,896   |  |   | 1,008  |   |  |   | 888    |   |  | 88  | % 
|Loss from discontinued operations, net of income taxes               |  |                    |       |          |                   |   | (17    | )        |  |   | 17           |          |              | *    |    |          |   |        |  |   | (1,418 | ) |  |   | 1,418  |   |  | *   |   
|                                                                     |  |                    |        |          |                   |   |        |          |  |   |              |          |              |      |    |          |   |         |  |   |        |   |  |   |        |   |  |     |   
|Net income (loss)                                                    |  | $                  | 1,721  |          |                   | $ | 914    |          |  | $ | 807          |          |              | 88   | %  |          | $ | 1,896   |  | $ | (410   | ) |  | $ | 2,306  |   |  | *   |   
|                                                                     |  |                    |        |          |                   |   |        |          |  |   |              |          |              |      |    |          |   |         |  |   |        |   |  |   |        |   |  |     |   

---

|* | Not meaningful
|- | --------------



Net Revenues



During
the three and nine months ended June 30, 2005, net revenues increased $8.9 million and $19.7 million, respectively, over the same periods last year. The following table presents the net revenues for each of our reportable segments for the three and
nine months ended June 30, 2005 and 2004:



|                                   |  |                    |        |              |                   |          |  |   |              |  |              |   |          |   |         |  |   |        |  |   |        |   |  |    |   
|---------------------------------- |  | ------------------ | ------ | ------------ | ----------------- | -------- |  | - | ------------ |  | ------------ | - | -------- | - | ------- |  | - | ------ |  | - | ------ | - |  | -- | --
|                                   |  | Three Months Ended |        |              | Nine Months Ended |         
|                                   |  | June 30,2005       |        | June 30,2004 |                   | Variance |  |   | June 30,2005 |  | June 30,2004 |   | Variance |  
|(in thousands, except percentages) |  |                    |        | $ Amount     |                   | %        |  |   |              |  | $ Amount     |   |          | % |        
|Net revenues, by segment           |  |                    |        |              |                   |          |  |   |              |  |              |   |          |   |         |  |   |        |  |   |        |   |  |    |   
|GBPO                               |  | $                  | 12,672 |              | $                 | 11,777   |  | $ | 895          |  | 8            | % |          | $ | 33,800  |  | $ | 34,787 |  | $ | (987   | ) |  | (3 | )%
|PSSI*                              |  |                    | 13,461 |              |                   | 12,147   |  |   | 1,314        |  | 11           | % |          |   | 37,273  |  |   | 29,680 |  |   | 7,593  |   |  | 26 | % 
|EPP                                |  |                    | 23,516 |              |                   | 16,809   |  |   | 6,707        |  | 40           | % |          |   | 45,532  |  |   | 32,435 |  |   | 13,097 |   |  | 40 | % 
|                                   |  |                    |        |              |                   |          |  |   |              |  |              |   |          |   |         |  |   |        |  |   |        |   |  |    |   
|Total net revenues                 |  | $                  | 49,649 |              | $                 | 40,733   |  | $ | 8,916        |  | 22           | % |          | $ | 116,605 |  | $ | 96,902 |  | $ | 19,703 |   |  | 20 | % 
|                                   |  |                    |        |              |                   |          |  |   |              |  |              |   |          |   |         |  |   |        |  |   |        |   |  |    |   

---

|* | Excludes revenues that are eliminated during the consolidation of our accounting results of $413 and $4,870, respectively, for the three and nine months ended June 30, 2005.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



GBPO net revenues increased $0.9 million and
decreased $0.9 million, respectively, during the three and nine months ended June 30, 2005. The completion of a project in the third quarter of 2004 caused a year over year decline to net revenues of $2.0 million and $5.5 million, respectively, for
the three and nine months ended June 30, 2005. These decreases were largely offset by $3.3 million and $5.6 million of additional revenue recognized in the quarter ending June 30, 2005, under our new five-year contract with the State of Michigan
Office of Child Support State Disbursement Unit.



The $1.3
million and $7.6 million increases in PSSI net revenues, during the three and nine months ended June 30, 2005, respectively, resulted primarily from net revenues earned by EPOS following its acquisition by Tier, partially offset by a decline in the
net revenues earned from the Pennsylvania State Employees Retirement System. The respective $6.7 million and $13.1 million increases in EPP net revenues during the three and nine months ended June 30, 2005, reflect increases of $5.2 million and $8.5
million, respectively, primarily from an increase in transaction and dollar volume of OPC payment processing services and $1.5 million and $4.6 million, respectively, from the EPOS acquisition.



Costs and Expenses



During the three and nine months ended June 30, 2005, costs and expenses rose by approximately 20% from the same periods
last year primarily because of increased costs associated with our EPOS acquisition, increased transaction and dollar volume of transactions processed by OPC, as well as additional compensation costs.



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The follow table provides an overview of our costs and expenses during the three and nine months
ended June 30, 2005, compared with the same periods in fiscal year 2004.



|                                   |  |                    |        |              |                   |          |   |   |              |   |              |          |          |  |   |         |  |   |        |  |   |        |   |  |    |  
|---------------------------------- |  | ------------------ | ------ | ------------ | ----------------- | -------- | - | - | ------------ | - | ------------ | -------- | -------- |  | - | ------- |  | - | ------ |  | - | ------ | - |  | -- | -
|                                   |  | Three Months Ended |        |              | Nine Months Ended |         
|                                   |  | June 30,2005       |        | June 30,2004 |                   | Variance |   |   | June 30,2005 |   | June 30,2004 |          | Variance | 
|(in thousands, except percentages) |  |                    |        | $ Amount     |                   |          | % |   |              |   |              | $ Amount |          |  | % |        
|Direct costs                       |  | $                  | 35,521 |              | $                 | 28,111   |   | $ | 7,410        |   |              | 26       | %        |  | $ | 80,465  |  | $ | 65,479 |  | $ | 14,986 |   |  | 23 | %
|General and administrative         |  |                    | 7,445  |              |                   | 6,951    |   |   | 494          |   |              | 7        | %        |  |   | 21,196  |  |   | 19,543 |  |   | 1,653  |   |  | 8  | %
|Selling and marketing              |  |                    | 3,161  |              |                   | 2,003    |   |   | 1,158        |   |              | 58       | %        |  |   | 8,753   |  |   | 5,136  |  |   | 3,617  |   |  | 70 | %
|Depreciation and amortization      |  |                    | 1,504  |              |                   | 1,160    |   |   | 344          |   |              | 30       | %        |  |   | 4,624   |  |   | 3,398  |  |   | 1,226  |   |  | 36 | %
|Restructuring and other charges    |  |                    |       |              |                   | 1,847    |   |   | (1,847       | ) |              | *        |          |  |   |        |  |   | 3,108  |  |   | (3,108 | ) |  | *  |  
|                                   |  |                    |        |              |                   |          |   |   |              |   |              |          |          |  |   |         |  |   |        |  |   |        |   |  |    |  
|Total costs and expenses           |  | $                  | 47,631 |              | $                 | 40,072   |   | $ | 7,559        |   |              | 19       | %        |  | $ | 115,038 |  | $ | 96,664 |  | $ | 18,374 |   |  | 19 | %
|                                   |  |                    |        |              |                   |          |   |   |              |   |              |          |          |  |   |         |  |   |        |  |   |        |   |  |    |  

---

* Not meaningful.



The following sections provide additional insight on the causes of
significant increases and decreases shown in the above table.



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;
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. For our state child support payment processing
center operations, direct costs also include facility, depreciation and amortization expense and direct overhead costs. For our EPP segment, direct costs consist primarily of credit and debit card interchange fees, processing fees, telecommunication
costs and other third-party costs. Two changes led to the year-over-year in direct cost increases of $7.4 million and $15.0 million, respectively, for the three and nine months ended June 30, 2005. First, the inclusion of direct costs from
acquisition of EPOS caused our direct costs during the three and nine months ended June 30, 2005 to rise by $2.3 million and $7.2 million, respectively, over the same periods last year. Second, a year-over-year rise in transaction and dollar volumes
processed by OPC resulted in an increase of $4.4 million and $7.5 million, respectively, for the three and nine month periods.



General and administrative. General and administrative expenses consist primarily of payroll and payroll-related costs for general management,
administrative, accounting, investor relations, compliance and legal functions, as well as OPCs engineering, client implementation, client service and customer service departments and information systems. General and administrative expenses
for the three and nine months ended June 30, 2005 increased $0.5 million and $1.7 million, respectively, from the same periods last year. The increase in both periods was primarily attributable to additional general administrative expenses incurred
by EPOS, which was acquired in June 2004, as well as additional expenditures associated with compliance Sarbanes-Oxley, higher accounting and finance personnel costs, additional legal expenses partially due to our Delaware reincorporation, and
recruitment and severance expenses.



Selling and marketing.Selling and marketing expenses consist primarily of payroll and payroll-related costs, commissions, advertising and marketing expenditures, and travel-related expenditures. Selling and marketing expenses increased 58% to $3.2 million for the
three months ended June 30, 2005 and increased 70% to $8.8 million for the nine months ended June 30, 2005, from the same periods last year. These increases primarily resulted from compensation-related increases of $1.4 million and $1.8 million,
respectively, during the three and nine months ended June 30, 2005, which primarily reflect the addition of sales staff from the EPOS acquisition, an increase in PSSIs direct sales force and bonuses associated with the successful sales efforts
that resulted in a significant new state project. The remainder of the increases primarily reflects other selling and marketing costs associated with our EPOS acquisition. We expect selling and marketing expenses to fluctuate from quarter to quarter
due to a variety of factors such as increased advertising and marketing expense in anticipation of the April 15thfederal tax season.



Depreciation and amortization.
Depreciation and amortization consists primarily of expenses associated with depreciation of equipment and leasehold improvements and amortization of other 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. For EPP, no depreciation and amortization expense is included in direct costs. During the three and nine months ended June 30, 2005,
depreciation and amortization expenses rose by $0.3 million and $1.2 million, respectively, or 30% and 36%, over prior year results. These increases resulted from depreciation and amortization associated with the EPOS acquisition.



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Restructuring and other charges.We did not incur any restructuring or other charges during
the nine months ended June 30, 2005. However, during the three and nine months ended June 30, 2004, we incurred the following restructuring charges:



|                                                   |  |                                 |       |                                |   |      
|-------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | -----
|(in thousands)                                     |  | Three months endedJune 30, 2004 |       | Nine months endedJune 30, 2004
|Asset impairment charge                            |  | $                               | 436   |                                | $ | 571  
|Severance charge resulting from restructuring      |  |                                 | 558   |                                |   | 1,461
|Office closure charge resulting from restructuring |  |                                 | 853   |                                |   | 1,076
|                                                   |  |                                 |       |                                |   |      
|Total costs and expenses                           |  | $                               | 1,847 |                                | $ | 3,108
|                                                   |  |                                 |       |                                |   |      



The asset impairment
and office closure charges represents costs associated with the closure of our Walnut Creek office. The severance charge represents the severance costs resulting from the signing of a termination agreement with our former chief executive officer,
including a $0.6 million charge due to the modification of his stock options based on the price of our Class B common stock on April 1, 2004.



Other Income



Equity in Net Loss of Unconsolidated Affiliate. Our results for the three and nine months ended June 30, 2005 included losses of $0.1 million and
$0.4 million, respectively, representing a 45% share in the loss of CPAS, which was purchased in October 2004.



Realized loss on impairment of investments.During the quarter ended June 30, 2005, Tier recognized a $0.5 million other than temporary impairment
on two mutual funds that are included in our portfolio of investments in marketable securities.



Net Interest Income.During the three and nine months ended June 30, 2005, net interest income rose $0.2 million and $0.5 million, respectively, or
57% and 57%, respectively, over the same periods last year. This increase reflects a shift in the current fiscal year from tax-free investments, which typically yield a lower interest rate, to taxable investments that typically yield higher
interest.



Provision for Income Taxes



During both the three and nine months ended June 30, 2005 and 2004, we
reported $0.2 million income tax expense, which represented expected minimum state tax payments. In accordance with Statement of Financial Accounting Standards No. 109Accounting for Income Taxes (SFAS No. 109), we
established a valuation allowance for the full amount of our deferred tax assets because of cumulative net losses incurred in recent years. As a result, no net provisions for federal income taxes are reflected on our consolidated statements of
operation at the present time.



Discontinued Operations



There were no discontinued operations for the three or nine months ended
June 30, 2005. However, during the three and nine months ended June 30, 2004, Tiers discontinued operations incurred losses of $17,000 and $1.4 million, respectively. These results represent the historical operating results of our U.S.
Commercial Services and United Kingdom segments and the asset impairment and restructuring charges recorded as a result of discontinuing these segments.



LIQUIDITY AND CAPITAL RESOURCES



Our principal capital requirement is to fund working capital to support our growth, including potential future acquisitions and potential contingent payments due to prior acquisitions. We maintain a $15.0 million revolving credit facility,
all of which may be used for letters of credit. This credit facility has a maturity date of September 30, 2005, and bears interest at the adjusted LIBOR rate plus 2.25% or the lenders announced prime rate at our option. At June 30, 2005, there
were $1.7 million of standby letters of credit outstanding under this facility. The credit facility is collateralized by first priority liens and security interests on our assets. The credit facility contains certain restrictive covenants including,
but not limited to, limitations on the amount of loans we may extend to officers and employees, the payment of dividends, the repurchase of common stock and the incurrence of



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additional debt. The credit facility requires the maintenance of certain financial covenants, including a minimum
quarterly net income requirement, minimum tangible net worth, a minimum ratio of debt to tangible net worth and a minimum ratio of liquid assets to current liabilities. During the nine months ending June 30, 2005, we were in compliance with all the
covenants of the credit facility.



In April 2004, we issued a
letter of credit in the amount of $935,000, which was used to guarantee CPAS performance bond, required by a project contract that is anticipated to be completed in August 2005. In conjunction with this guarantee, we entered into an
indemnification agreement with the third party that pledges to hold us harmless, indemnify and make us whole from and against any and all amounts actually claimed or withdrawn and other business related consideration. In accordance with FASB
Interpretation No. 45Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we recorded a liability for the $935,000 fair value in accrued liabilities and an
equal receivable in prepaid expenses and other current assets. The recorded amounts will be eliminated if we are released from the risk upon expiration or settlement of the obligation.



In addition to the letters of credit issued under the credit facility mentioned above, we had letters of credit totaling
approximately $3.2 million, which were collateralized by certain securities in our long-term investment portfolio at June 30, 2005. The majority of these letters of credit were issued to secure performance bonds and to meet various facility lease
requirements.



Net cash from continuing operations provided by
operating activities was $3.7 million and $19.4 million in the nine months ended June 30, 2005 and 2004, respectively, a decrease of $15.7 million. This decrease in net cash from continuing operations provided by operating activities is largely
attributable to increases in accounts receivable and prepaid expenses, partially offset by decreases in accounts payable.



During the nine months ended June 30, 2005, our investing activities from continuing operations used $12.4 million of net cash, of which $8.8 million was
used primarily to purchase equipment and software for our Michigan operations, $4.0 million was used primarily for the purchase of 45% of CPAS stock and our acquisition in MyLocalGov, and $0.4 million was generated from the net sales of our
marketable securities. During the nine months ended June 30, 2004, our investing activities from continuing operations used $37.7 million, primarily because of the acquisition of EPOS.



The cash from continuing operations provided by financing activities declined from $1.7 million during the nine months ended
June 30, 2004 to $0.2 million during the nine months ended June 30, 2005, due to a decline in the number of employee stock options that were exercised because of the current level of our stock price.



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, particularly for our pension software systems projects. 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 facility, 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 which typically require large cash outlays for capital expenditures and staff-up cost; 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 principal; our ability to draw on our bank facility and employee growth. To the extent that our existing capital resources are not
sufficient 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.



In 2003, we renewed our
focus on our core Government Services businesses and exited unprofitable businesses or marginally profitable business operations. Additional goodwill and intangible asset impairment charges of approximately $1.3 million were incurred for the nine
months ended June 30, 2004, of which approximately $0.6 million was included in restructuring charges and approximately $0.8 million was included in loss from discontinued operations. Additional severance of $2.3 million, of which approximately $1.5
million resulted from the signing of a termination agreement with our former chief executive officer, was included in



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restructuring and other charges and approximately $0.8 million was included in loss from discontinued operations.
Also included in restructuring charges for the nine months ended June 30, 2004 was $1.1 million related to estimated closure costs for an office and the consolidation of our Walnut Creek, California and Reston, Virginia offices (net of estimated
sublease income of $1.5 million).



Due to the current economic
climate, the performance bond market has substantially changed, 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 proposals 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 AND COMMERCIAL COMMITMENTS



As of June 30, 2005, we had not entered into any derivative transactions. Our contractual cash obligations decreased by 3.4% or $0.5 million from September 30, 2004 to June 30, 2005. This decrease primarily reflects
the continuing payoff of our remaining restructuring liabilities, partially offset by an increase in our operating lease obligations. Our other commercial commitments decreased by $2.1 million or 6.7% primarily because we were released from a
performance bond requirement at the conclusion of our project with the State of New Jersey.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of our financial 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; and valuation of goodwill and intangibles. Actual results could differ materially from managements estimates.



A key element of our revenue recognition policy is to recognize all net
revenues we earn. We evaluate each revenue arrangement to determine whether to record revenue gross, as principle, or net, as an agent or subcontractor. Generally, we record revenues on a gross basis when most of the following conditions exist: we
are primarily obligated to complete the arrangement; we have latitude in pricing; we maintain credit risk or the risk of return; and we perform the service or have discretion in the supplier performing the service. We record revenues on a net basis
when the preponderance of the above criteria does not exist.



We have several engagements that provide a combination of services from several delivery offerings as a part of the overall project. For these multiple element arrangements, we allocate revenue to each element based on the fair value of the
delivery offering. In establishing fair value, we use prices charged on similar contracts. For multiple element contracts entered into beginning on July 1, 2003, we have followed the provisions of the Financial Accounting Standards Boards
Emerging Issues Task Force Abstract 00-21Revenue Arrangements with Multiple Deliverables (EITF 00-21). For these multiple element arrangements, we account for each unit of the contract as a separate unit when each unit
provides value to the customer on a standalone basis and there is evidence of the fair value of the standalone unit. The implementation of EITF 00-21 does not have a material effect on our recognition of revenue.



For additional details about our revenue recognition policies and a full
discussion of our other 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, 2004.



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FACTORS THAT MAY AFFECT FUTURE RESULTS



The following factors and other risk factors could cause our actual results to differ materially from those contained in forward-looking statements in this Form 10-Q.



Our quarterly net revenues, operating results and cash flows are volatile, may fluctuate significantly from quarter to quarter and may be
difficult to forecast, which may cause the market price of our common stock to fluctuate.



Our net revenues, operating results 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. Among other things, these factors
include:



| |  |  | the number, size and scope of projects in which we are engaged;
| | - |  | ---------------------------------------------------------------



| |  |  | economic conditions in the markets we serve;
| | - |  | --------------------------------------------



| |  |  | demand for our services generated by strategic partnerships and certain prime contractors;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | our consultant utilization rates and the number of billable days in a particular quarter which may be significantly impacted by increased vacations and public holidays;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the seasonality of OPCs business, due primarily to the fact that the majority of federal and state personal income tax payments are made in March and April and real estate and
personal property tax payments may be made annually or semi-annually in many jurisdictions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes to processing fees charged to our EPP segment by its credit/debit card partners and financial institutions for processing payment transactions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the contractual terms and degree of completion of projects;
| | - |  | -----------------------------------------------------------



| |  |  | any delays or costs incurred in connection with, or early termination of a project;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the amount and timing of costs related to our sales and marketing and other initiatives;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | variability of software license fee revenue in a particular quarter;
| | - |  | --------------------------------------------------------------------



| |  |  | start-up costs incurred in connection with the initiation of large projects;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the integration of acquisitions, without disruption to our other business activities; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our ability to staff projects with our own salaried employees rather than hourly employees, hourly independent contractors and sub-contractors.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



The timing and realization of opportunities in our sales pipeline make the
timing and variability of net revenues difficult to forecast. A high percentage of our operating expenses, particularly personnel, facility and depreciation and amortization, are relatively fixed in advance. Because of the variability of our
quarterly operating results, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, should not be relied upon as indications of future performance and may result in volatility and declines in the price
of our common stock. In addition, our operating results may fall below analysts and investors expectations, which could also cause the market price of our common stock to decline significantly.



Our common stock price and trading volume have been and could continue to be volatile,
which could result in substantial losses for investors in our common stock.



Our common stock price and trading volume have been and could continue to be volatile. These price fluctuations may be rapid and severe and may leave investors little time to react. Factors that affect the market
price of our common stock include:



| |  |  | quarterly variations in operating results;
| | - |  | ------------------------------------------



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| |  |  | developments with respect to specific projects;
| | - |  | -----------------------------------------------



| |  |  | announcements of technological innovations or new products or services by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | general conditions in the information technology industry or the industries in which our clients compete;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | changes in earnings estimates by securities analysts or us;
| | - |  | -----------------------------------------------------------



| |  |  | purchases of large blocks of our common stock by an individual investor or a related group of investors;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | general economic and political conditions such as recessions and acts of war or terrorism; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | integration of acquired assets and companies.
| | - |  | ---------------------------------------------



Fluctuations in the price of our common stock could cause investors to lose all or part of their investment.



We rely on a small numbers of projects, customers and target markets for significant
portions of our net revenues, and our operating results and cash flows may decline significantly if we cannot keep or replace these projects or clients or if conditions in our target markets deteriorate.



We have derived, and believe that we will continue to derive, a significant
portion of our net revenues from a limited number of clients. The completion or cancellation of a large project or a significant reduction in its scope would significantly reduce our net revenues and cash flows. Many of our contracts include
provisions that allow our clients to terminate the contract with little, if any, penalty. If any of our large clients or prime contractors terminates its relationship with us, we will lose a significant portion of our net revenues and cash flows.
Because of our specific market focus, economic and other conditions that affect the companies and government agencies in these markets could also result in a reduction in our net revenues and cash flows.



For the nine months ended June 30, 2005, our ten largest clients represented
60.7% of our total net revenues, including one contract that generated 15.0% of our total net revenues. In addition, the volume of work performed for specific clients or prime contractors is likely to vary from period to period, and a client or
prime contractor in one period may elect not to use our services in a subsequent period. The premature termination of any of our significant contracts or subcontracts would reduce our net revenues and cash flows.



Because we derive a significant portion of our net revenues from a limited
number of clients, our accounts receivable likewise tend to be concentrated with a few customers at June 30, 2005 we had five clients with accounts receivable, retainers and unbilled balances totaling $16.1 million or 55% of our total balance.
Unanticipated delays by these clients in remitting the amounts they owe could adversely affect our cash flow.



Our markets are highly competitive; if we do not compete effectively for any reason, we could face price reductions, reduced profitability and loss of market share.



The information technology, transaction processing and consulting services
markets are highly competitive and served by numerous international, national and local firms. We may not be able to compete effectively in these markets. Market participants include systems consulting and integration firms, including international
consulting firms and related entities, the internal information systems groups of our prospective clients, professional services companies, hardware and application software vendors and divisions of large integrated technology companies and
outsourcing companies. Many of these competitors have significantly greater financial, technical and marketing resources; generate greater net revenues; and have greater name recognition. In addition, there are relatively low barriers to entry into
the information technology and consulting services markets, and we have faced, and expect to continue to face, additional competition from new entrants into the information technology and consulting services markets.



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We believe that our ability to compete also depends in part on a number of competitive factors
outside our control, including:



| |  |  | the ability of our clients or competitors to hire, retain and motivate project managers and other senior technical staff;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the ownership by competitors of software used by potential clients;
| | - |  | -------------------------------------------------------------------



| |  |  | the price at which others offer comparable services;
| | - |  | ----------------------------------------------------



| |  |  | the ability of our clients to perform the services themselves; and
| | - |  | ------------------------------------------------------------------



| |  |  | the extent of our competitors responsiveness to client needs.
| | - |  | --------------------------------------------------------------



If we do not compete effectively on one or more of these competitive factors, our revenue growth and operating margins could decline and our ability to
execute our business strategy will be impaired.



If we fail to estimate
accurately the resources necessary to meet our obligations under fixed-price contracts or the volume of transactions or transaction dollars processed under our transaction-based contracts, we may incur losses on these contracts.



Underestimating the resources, costs or time required for a fixed-price
project or a transaction-based contract or overestimating the expected volume of transactions or transaction dollars processed under a transaction-based contract would cause our costs under fixed-price contracts to be greater than expected and our
fees under transaction-based contracts to be less than expected, and our related profit, if any, to be less. 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. To earn a profit on these
contracts, we rely upon accurately estimating costs involved and assessing the probability of meeting the specified objectives or realizing the expected number or average dollar amounts of transactions within the contracted time period. A failure by
a client to adequately disclose in their request for proposal their existing systems, current interfaces, complete functional requirements and historical payment and transaction volumes could result in our underestimating the work required to
complete a project. If we fail to estimate accurately the factors upon which we base our contract pricing, or we are unable to successfully obtain change orders, we may incur losses on those contracts or be unable to complete our performance
obligations.



If we encounter difficulties in attracting or retaining
qualified accounting staff, we may not be able to remedy identified weaknesses in our accounting function.



In connection with the audit of our financial statements for fiscal 2004, our independent registered public accounting firm during that period advised us
that we had a material weakness in our internal controls over financial reporting related to insufficient personnel resources and technical accounting expertise within our accounting function. As a result of the relocation of our accounting function
from Walnut Creek, California to Reston, Virginia, we had to restaff many of the positions in that function, and have not yet filled all open positions. As of June 30, 2005, nearly all vacant positions have been filled including the Chief Financial
Officer and Controller positions. However, the current employment market for qualified individuals with accounting backgrounds is very tight, and we may encounter difficulties retaining existing staff or identifying and attracting such individuals
in the future. If we are unsuccessful in our staffing efforts, our ability to fully remedy the identified material weakness could be delayed.



We may discover other material weaknesses in our internal controls over financial reporting and our independent auditors may not be able to certify as to the
effectiveness of our internal controls, which could have a significant and adverse effect on our business.



We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent auditors to attest to, our
internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we collectively refer to as Section 404. Currently, we are performing the system and
process evaluation and testing of our controls, which is required to comply



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with the Section 404 management assessment and auditor certification requirements, which initially will apply to us
as of September 30, 2005. In the course of our ongoing Section 404 evaluation, we may identify significant deficiencies or material weaknesses in internal controls that we must remediate. If we are unable to remediate any identified weaknesses on a
timely basis, our independent auditors may issue an adverse opinion on our internal controls. If this were to occur, investor confidence could be harmed and our stock price could decline.



Compliance with new or changed laws and regulations may result in additional expenses and may impair our ability to provide services.



Changing laws, regulations and standards relating to
corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules, are creating uncertainty for companies. 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.



In addition, we are
subject to numerous federal, state and local laws, regulations and rules in connection with our services. New laws, regulation or industry practices may be enacted, or existing ones changed, which could negatively impact services and revenues. Taxes
or fees may be imposed, or we could be subject to additional requirements in regard to privacy, security, qualification and government compliance. For our processing services, we are also subject to the rules of the National Automated Clearing House
Association and the applicable credit/debit card association rules. A change in these laws, regulations or rules could restrict or eliminate our ability to provide services, as well as increase costs, impair growth and make our services
unprofitable.



An investigation involving the child support payment
processing industry could force us to incur unusual expenses and may negatively affect our business reputation.



In June 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 Department of Justice (DOJ) involving the child support payment processing industry. We have fully 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 and 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, any restitution payments that we are required to make and any negative publicity in
connection with the investigation could compromise our financial results and damage our reputation. Additionally, we cannot estimate what impact, if any, that our involvement in this investigation will have on our ability to compete and win new
child support payment processing opportunities.



Within our EPP segment,
OPCs business model is continuing to evolve; therefore, it is difficult to evaluate OPCs business and its ability to maintain profitability.



At the end of July 2002, we acquired OPC, which had a history of losses. Although OPC has cumulatively increased revenues since the acquisition, has
reduced certain operating expenses as we integrated this acquisition and is currently profitable, there can be no assurance that OPC will maintain profitability in the future.



The use of credit and debit cards and electronic checks to make payments to government agencies is still relatively new and
evolving. To date, OPCs business has primarily provided credit and debit card payment options for the payment of federal and state personal income taxes, real estate and personal property taxes, business taxes and fines for traffic violations
and parking citations. Payment by electronic check is an additional payment option that OPC has implemented for electronic transactions. OPCs business model is based on consumers willingness to pay a convenience fee, in addition to their
required government or other payment, for the use of OPCs credit or debit card and electronic check payment option. Our success with respect to OPC will depend on maintaining OPCs relationship with the IRS and on maintaining existing,
and developing additional relationships with state and local government agencies, especially state taxing authorities, and their respective constituents. In addition, if



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consumers are not receptive to paying a convenience fee, card associations could change their rules and not allow us
to charge the convenience fees; or credit or debit card issuers could eliminate or reduce the value of rewards obtained under their respective rewards programs, which could cause the demand for OPCs services to stagnate or diminish. OPC is
charged processing fees by its credit/debit card partners and financial institutions for processing payments. The processing fees OPC is charged can be changed with little or no notice. Any increase in the fees charged to OPC would raise costs,
reduce margins and harm our profitability.



Currently, OPC
processes credit and debit card payments on behalf of VISA issuing banks for tax payments under a VISA tax pilot program that was created in March 2002. The pilot program has been extended to April 2008 and expanded to include additional tax types.
The agreement can be terminated by any party upon written notice. VISA is currently evaluating the status of the program, and whether it will be continued. If VISA does not continue the tax pilot program or make it a permanent program, OPC would be
limited in its ability to accept VISA cards, which would cause us to lose business and hurt our revenue and cash flow.



Demand for OPCs services could also be adversely affected by a decline in the use of the Internet. Factors that could reduce the level of Internet
usage or electronic commerce include the actual or perceived lack of security or privacy of information, traffic congestion or other Internet access delays, excessive government regulation, increases in access costs, or the unavailability of
cost-effective high speed service.



Our ability to grow our business will
suffer if we are unable to attract, integrate and retain qualified personnel and key employees.



If we are unable to attract, retain, train, manage and motivate skilled employees, particularly project managers and other senior technical personnel, our
ability to adequately manage and staff our existing projects and to bid for or obtain new projects could be impaired. There is significant competition for employees with the skills required to perform the services we offer. In particular, qualified
project managers and senior technical and professional staff are in great demand worldwide. In addition, we require that many of our employees travel to client sites to perform services on our behalf, which may make a position with us less
attractive to potential employees. We may not be able to identify and successfully recruit and integrate a sufficient number of skilled employees into our operations, which would compromise our ability to pursue our growth strategy. Our success also
depends upon the continued services of a number of key employees, including our chief executive officer and the leaders of our strategic business units. Any of our employees may terminate their employment at any time.



The loss of the services of any key employee could significantly disrupt our
operations. In addition, if one or more of our 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 to any such competitor could harm our
competitive position.



Because we sometimes work with third parties and use
third-party software in providing products and services to clients, any failure by these third parties to satisfactorily perform their obligations could hurt our reputation, operating results and competitiveness.



We frequently join with other organizations to bid and perform an
engagement. In these engagements, we may engage subcontractors or we may act as a subcontractor to the prime contractor of the engagement. We also use third-party software or technology providers to jointly bid and perform engagements. Our ability
to service some of our clients depends to a large extent on our use of various software programs that we license from a small number of primary software vendors. In these situations, we depend on the software, resources and technology of these third
parties in order to perform work under the engagement. We also rely on a third-party co-location facility for our primary data center and we utilize third-party processors to complete payment transactions and third party software providers for
system, security and infrastructure facilities. Failure of third parties to meet their contractual obligations or other actions or failures attributable to these third parties or their products or to the prime contractor or subcontractor could
adversely impact a project, damage our reputation and compromise our ability to attract new business. In addition, the inability to negotiate terms of a contract with a third party, the refusal or inability of these third parties to permit continued
use of their software, services or technology by us, our inability to gain access to software that has been placed in escrow by third parties, or the discontinuance or termination by the client or prime contractor of our services or the services of
a key subcontractor, would harm our operating results and the competitiveness of our products and services and may adversely affect our ability to serve new clients. If we are unable to meet our contractual requirements with our clients, we could be
subjected to claims by our clients.



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We have completed numerous acquisitions and may complete others, which could increase our costs or be disruptive
to our business.



One component of our business strategy
is to expand our presence in new or existing markets by acquiring additional businesses. Acquisitions involve a number of special risks, including:



| |  |  | failure to realize the value of the acquired assets, businesses or projects;
| | - |  | ----------------------------------------------------------------------------



| |  |  | diversion of managements attention;
| | - |  | ------------------------------------



| |  |  | failure to retain key personnel;
| | - |  | --------------------------------



| |  |  | entrance into markets in which we have limited or no prior experience;
| | - |  | ----------------------------------------------------------------------



| |  |  | increased general and administrative expenses;
| | - |  | ----------------------------------------------



| |  |  | client dissatisfaction or performance problems with acquired assets, businesses or projects;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | write-offs due to impairment of goodwill and other intangible assets and other charges against earnings;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | assumption of unknown liabilities;
| | - |  | ----------------------------------



| |  |  | the potentially dilutive issuance of our common stock, the use of significant amounts of cash or the incurrence of substantial amounts of debt; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other unanticipated events or circumstances.
| | - |  | --------------------------------------------



We may not be able to identify, acquire or profitably manage additional businesses or integrate successfully any acquired businesses without substantial
expense, delay or other operational or financial problems. Without additional acquisitions, we are unlikely to maintain historical growth rates.



If our EPP segments clients or credit/debit card issuers cease to publicize our services or adversely change the manner in which our services are promoted,
consumer use of our services may slow, and we may suffer a large increase in advertising costs.



Currently, our EPP segments clients and credit/debit card issuers provide a significant portion of the publicity for our services at no charge to
us. If clients or credit/debit card issuers cease to publicize our services or charge us for this publicity, advertising costs will increase substantially, which could adversely affect our profitability. While the EPP segment endeavors in its client
agreements to require such clients to undertake such advertising activities, many of the clients and payment card issuers have no obligation to continue to provide this publicity, and there are no assurances that they will continue to do so. In
addition, the clients may publicize other services, including those of competitors, which would cause our revenues to decline.



Also, OPC and its credit/debit card partners advertise under co-operative advertising programs. If OPCs credit/debit card partners fail to
contribute to a co-operative advertising program, OPCs ability to advertise may be compromised.



We depend on government agencies for our net revenues and the loss or decline of existing or future government agency funding could cause our net revenues and cash flows to decline.



A significant portion of our revenues are derived from federally mandated
child support transaction processing services fees, as well as from convenience fees earned by our EPP segment with respect to payments made by constituents primarily to government agencies. The balance of our net revenues is derived from other
services provided to government agencies. Some of these net revenues may be subject to budget cuts and constraints, a reduction or discontinuation of funding or changes in the political or regulatory environment that may



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cause government agencies to terminate projects, divert funds or delay implementation. These government agencies may
terminate most of these contracts at any time without cause. In addition, revisions to, or repeals of, mandated statutes and regulations, including changes to the timing of required compliance, may cause government agencies to divert funds. A
significant reduction in funds available for government agencies to purchase professional services or business solutions would significantly reduce our net revenues and cash flows. The loss of a major government client, or any significant reduction
or delay in orders from such a client, would also significantly reduce our net revenues and cash flows. Additionally, government contracts are generally subject to audits and investigations by government agencies. If the results of these audits or
investigations are negative, our reputation could be damaged, contracts could be terminated or significant penalties could be assessed. If a contract is terminated for any reason, our ability to fully recover certain amounts may be impaired.



Our failure to deliver error-free products and services could result in
reduced payments, significant financial liability or additional costs to us, as well as negative publicity.



Many of our engagements involve projects that are critical to the operations of our clients businesses and provide benefits that may be difficult to
quantify. The failure by us, or by third parties on an engagement in which we are a subcontractor, to meet a clients expectations in the performance of the engagement could damage our reputation and compromise our ability to attract new
business. We have undertaken, and may in the future undertake, projects in which we guarantee performance based upon defined operating specifications or guaranteed delivery dates. We also have undertaken, and may in the future undertake, projects
that require us to obtain a performance bond from a licensed surety and to post the performance bond with the client. Unsatisfactory performance or unanticipated difficulties or delays in starting or completing such projects may result in
termination of the contract, client dissatisfaction and a reduction in payment to us, payment of material penalties or material damages by us as a result of litigation or otherwise, or claims by a client against the performance bond posted by us. In
addition, unanticipated delays could necessitate the use of more resources than we initially budgeted for a particular project, which could increase our project costs.



Our EPP segments electronic payment services and our GBPO segments child support payment processing services are
designed to provide payment management functions and, in the case of some of our child support payment processing contracts, serve to limit our clients risk of fraud or loss in effecting transactions with their constituents. As electronic
services become more critical to our clients, we may be subjected to claims or fines regarding our alleged liability for the processing of fraudulent or erroneous transactions. Our services depend on hardware, software and supporting infrastructure
that is internally developed, purchased and licensed from third parties. Although we conduct extensive testing, software may contain defects or programming errors, or may not properly interface with third party systems, particularly when first
introduced or when new versions are released. In addition, we may experience disruptions in service from third-party providers. To the extent that defects or errors are undetected by us in the future or cannot be resolved satisfactorily or in a
timely manner once detected, our business could suffer. If one or more liability claims were brought against us, even if unsuccessful, their defense would likely be time consuming, costly and potentially damaging to our reputation.



The software products we provide compete in markets that are changing rapidly and we must
develop, acquire and introduce new products and technologies to grow our net revenues and remain competitive.



The markets for products we provide are characterized by rapid technological change, changes in client demands and evolving industry standards. As a
result, our future success will continue to depend on our ability to develop new products or product enhancements that address the future needs of our target markets and to respond to these changing standards and practices. We may not be successful
in developing, introducing and marketing new products or product enhancements on a timely and cost effective basis, or at all, and our new products and product enhancements may not adequately meet the requirements of the marketplace or achieve
market acceptance. If we are unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or client requirements, or if new
products or new versions of existing products do not achieve market acceptance, our business would be seriously harmed. In addition, our ability to develop new products and product enhancements is dependent upon the products of other software
vendors. If the products of such vendors have design defects or flaws, or if such products are unexpectedly delayed in their introduction, our business could be seriously harmed. Software products as complex as those offered by us may contain
undetected defects or errors particularly when first introduced or as new versions are released. Although we have not experienced significant adverse effects resulting from software errors, we cannot be



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certain that, despite testing by us and our clients, defects or errors will not be found in new products or
enhancements after general release, resulting in loss of or delay in market acceptance, which could seriously harm our business.



If we are unable to obtain adequate or affordable insurance coverage or sufficient performance bonds for any reason, we could face significant liability claims and
increased premium costs and our inability to compete for business could be compromised.



We maintain insurance to cover a variety of different business risks including, but not limited to, errors and omissions, directors and officers, general liability and workers compensation policies. There can be
no assurance that we can maintain the same scope and amount of insurance coverage on reasonable terms or obtain such insurance at all. Our inability to renew policies or maintain the same level of coverage would increase our risk exposure and could
expose us to significant liability claims in the future. Any claims against our policies may impact our ability to obtain such insurance on reasonable terms, if at all. Increased premiums or a claim made against a policy could cause our financial
results to suffer and impair our ability to bid for future contracts.



We have undertaken, and may in the future undertake, projects that require us to obtain a performance bond from a licensed surety and post the performance bond with the client. There can be no assurance that such performance bonds will
continue to be available on reasonable terms, if at all. Our inability to obtain performance bonds or a reduction in our bonding capacity would compromise our capacity to obtain additional contracts. Increased premiums or a claim made against a
performance bond could hurt our earnings and cash flow and limit our ability to bid for future contracts.



A decline in the economic climate could adversely affect our net revenues and cash flows.



There are some parts of our business that experience increasing pricing pressures from competitors as well as from clients facing pressure to control
costs. We continue to see clients reduce or defer their expenditures or defer the start of work already contracted. Some of our competitors are capable of operating at significant losses for extended periods of time, increasing pricing pressure on
our products and services. If we do not maintain competitive pricing, the demand for our products and services, as well as our market share, may decline, having an adverse effect on our business. From time to time, in responding to competitive
pressures, we lower the prices of our products and services. If we are unable to reduce our costs or improve operating efficiencies when we offer such lower prices, our net revenues and margins will be adversely affected.



Our EPP segments net revenues are generated primarily based on
convenience fees charged as a percentage of dollars processed for income taxes and other payments. Income taxes are dependent on the amount of income earned by taxpaying citizens and the prevailing tax rates. A decline in economic conditions could
reduce the per capita income of citizens, and thus reduce the amount of income tax payments consumers remit to government entities, which may reduce revenues from convenience fees. A reduction in income tax rates may also reduce the amount of income
tax payments consumers remit to government entities, which may reduce revenues from convenience fees. In addition, a decline in the economy may result in a reduction in consumer spending, particularly for non-essential goods and services, which may
result in a reduction in consumers use of our services. If the economy declines, our results of operations and cash flows could be adversely affected.



We could suffer material losses if our systems, security or operations fail or are disrupted.



Any system failure, including network, security software or hardware failure or operations disruptions, whether caused by
us, a third party service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortage, capacity constraints, health epidemics or terrorist attacks, could cause interruptions, outages, delays in our business,
loss of data or damage to our reputation. Any system failure, disruption or outage in our EPP units business, particularly during income tax season, could significantly harm our reputation and cause our results of operations and financial
condition to suffer. In addition, if our mail, communications or utilities are disrupted or fail, our operations, including our child support transaction processing, could be suspended or interrupted, and we could incur contractual penalties. There
can be no assurance that our security measures or procedures will be effective to prevent security breaches or failures. Compromise, circumvention or failure of security systems or procedures may result in losses, including system outages, fraud,
inadvertent disclosure or misappropriation of confidential and personally identifiable information, any of which would have a material



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adverse effect on our reputation and could result in significant remedial costs and liability. Our property insurance
and business interruption insurance may not be adequate to compensate us for all losses that may occur as a result of any system, security or operational failure or disruption.



If we fail to adapt our business to changes in economic or business conditions, our financial results could suffer.



Personnel expenses represent a significant percentage of our operating
expenses and are relatively fixed in advance of any particular quarter. We manage our personnel utilization rates by carefully monitoring our needs and anticipating personnel increases based on specific project requirements. To the extent net
revenues do not increase at a rate commensurate with these additional expenses, or we fail to align our operating expenses with prevailing economic or business conditions, our financial results would suffer.



Capacity constraints could compromise our ability to process transactions, which could
harm our reputation and cause us to lose business.



A
constraint in our capacity to process transactions could impair the quality and availability of service. Capacity constraints may cause unanticipated system disruptions, impair quality and lower the level of service, which could lead to damage to
our reputation and lost sales. Although we believe that there is sufficient capacity to accommodate anticipated future growth, there are no assurances that we will not suffer capacity constraints caused by sharp increases in the use of our services.
Due to the large number of tax payments made in March and April, there is an increased risk that our OPC subsidiary will suffer a capacity constraint during that period.



We could become subject to other lawsuits that could result in material liabilities to us or cause us to incur material costs.



Any failure in a clients system or failure to meet
a material deliverable could result in a claim against us for substantial damages, regardless of our responsibility for such failure. 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. Any claim by a shareholder or derivative action brought by a shareholder could result in a material liability to us. Our insurance, which
includes coverage for errors or omissions and directors and officers liability, may not continue to be available on reasonable terms or in sufficient amounts to cover one or more claims, and the insurer may disclaim coverage as to any
future claim. The successful assertion of one or more claims against us that exceed available insurance coverage or changes in insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, would
significantly harm our financial results.



If we are unable to protect our
intellectual property and proprietary rights, demand for our products and services could be reduced.



The steps we take to protect our intellectual property rights may be inadequate to avoid the loss or misappropriation of that information, or to detect
unauthorized use of such information. If we are unable to protect our intellectual property, competitors could market services or products similar to ours, which could reduce demand for our offerings. We rely on a combination of trade secrets,
nondisclosure agreements, licensing agreements and other contractual arrangements, and copyright and trademark laws to protect our intellectual property rights. We also enter into non-disclosure agreements with our employees, subcontractors and the
parties we team with for contracts and generally require that our clients enter into such agreements. We also control and limit access to our proprietary information.



We have proprietary software that is licensed to clients pursuant to licensing agreements and other contractual
arrangements. Issues relating to the ownership of, and rights to use, software and application frameworks can be complicated, and there can be no assurance that disputes will not arise that affect our ability to resell or reuse such software and
application frameworks. A portion of our business also involves the development of software applications for specific client engagements or the customization of an existing software product for a specific client. Ownership of the developed software
and the customizations to the existing software are the subject of negotiation with each particular client and is typically assigned to the client. We also develop software application frameworks and may retain ownership or marketing rights to these
application frameworks, which may



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be adapted through further customization for future client projects. Some of our clients have prohibited us from
marketing the software and application frameworks developed specifically for them for a specified period of time or to specified third parties, and others may demand similar or other restrictions in the future.



Infringement claims may be asserted against us in the future that may not be
successfully defended. The loss or misappropriation of our intellectual property or the unsuccessful defense of any claim of infringement could prevent or delay our providing our products and services, cause us to become liable for substantial
damages, or force us to enter into royalty or licensing agreements.



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 securities are subject to interest rate risk and may decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by ten percentage
points from levels at June 30, 2005, we estimate that the fair value of the portfolio would decrease by approximately $0.8 million. We anticipate having the ability to hold our fixed-income investments until maturity and, therefore, do not expect
our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.



ITEM 4. 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, 2005. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2005, our disclosure controls and procedures were not effective. This conclusion was based on the existence of the
material weakness in our internal control over financial reporting previously disclosed and discussed below.



Other than the steps we took to remediate the material weakness, as described below, no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



As previously disclosed, in connection with the audit of our financial
statements for the fiscal year ended September 30, 2004, by PricewaterhouseCoopers LLP, or PwC, our independent registered public accounting firm during that period, PwC informed the Audit Committee and management on December 15, 2004 that they had
identified a deficiency in our internal control structure that was considered a material weakness, as defined under standards of the American Institute of Certified Public Accountants. We believe that this material weakness began after
we closed our books with respect to the quarter ended June 30, 2004, with the help of certain key members of our Walnut Creek staff acting as consultants, and continued to exist at June 30, 2005, the end of the period covered by this Form 10-Q.



We believe this situation is due primarily to the relocation
of our accounting function from Walnut Creek, California to Reston, Virginia and the resulting need to eventually restaff all accounting positions. As previously disclosed, we relocated our accounting, financial planning, information technology,
legal, human resources and facilities management functions to Reston during the quarter ended June 30, 2004, and closed our Walnut Creek facility effective at the end of that quarter. Accordingly, during the quarters ended September 30, 2004,
December 31, 2004, March 31, 2005, and June 30, 2005 we were engaged in an effort to fill those positions with new personnel.



Members of our new accounting staff in Reston closed our books with respect to the quarter ended June 30, 2004 with the help of several key members of our
Walnut Creek staff, including our former Controller, who agreed to continue to work with us on a temporary consulting basis to help close the quarter ended June 30, 2004.



The turnover of the entire accounting staff, other than the then-current Chief Financial Officer, during the quarter ended
September 30, 2004, resulted in the loss of significant knowledge of and experience with our accounting policies and procedures. This loss of experience, coupled with the incompleteness of our accounting



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staff, was greater than anticipated and led to increases in the time required to perform control procedures and to
develop and analyze information in connection with the closing of our books for the quarter and year ended September 30, 2004. The increase in the time required to close our books caused delays in finalizing our financial statements, which prevented
the filing of our Form 10-K for the fiscal year ended September 30, 2004 by December 14, 2004, the filing deadline. PwC advised us that the insufficient personnel resources and technical accounting expertise within our accounting function that
caused the delays reflected a material weakness in our internal controls over financial reporting.



On December 15, 2004, we timely filed a Form 12b-25 that provided an extension until December 29, 2004 for the filing of the Form 10-K. We then filed the
Form 10-K on December 28, 2004, within the extension period. The Form 10-K included an unqualified audit opinion from PwC with respect to our consolidated financial statements included therein.



Our management and our Audit Committee developed a plan to remediate the
material weakness, which we are in the process of implementing. This plan involved hiring additional qualified personnel to fill open positions within the accounting, financial planning and compliance functions, and to increase the level of
accounting expertise of current personnel by means of training, as well as ensuring that all of our accounting and finance staff are thoroughly trained in the application of our accounting policies and procedures and internal controls.



We have filled all of the nearly accounting positions, including the Chief
Financial Officer and Controller positions; however, the staff in all accounting positions is still becoming familiar with their responsibilities and with our policies and procedures.



While our new accounting staff becomes familiar with Tiers accounting procedures and processes we continue to perform
additional periodic monitoring, including: financial reviews of each operating segment analyzing actual against projected performance; balance sheet accounting reconciliation reviews to identify any unusual items or items that have been outstanding
for more than the current period; income statement reviews focusing on variances to plan, forecast and the prior year; and consulting appropriate authoritative accounting literature for any new accounting issues that may arise to ensure that the
financial statements are presented fairly in accordance with accounting principles generally accepted in the United States.



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PART II. OTHER INFORMATION



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



The Annual Meeting of Shareholders of Tier Technologies, Inc. was held on June 30, 2005. The following matters were voted upon at this meeting.



| | 1. | The election of seven directors to serve for the ensuing year and until successors are elected;
| | -- | -----------------------------------------------------------------------------------------------



| | 2. | The approval of our Amended and Restated 2004 Stock Incentive Plan;
| | -- | -------------------------------------------------------------------



| | 3. | The approval of our reincorporation from California to Delaware by means of a merger with and into our wholly owned Delaware subsidiary, and the approval and adoption of the
Agreement and Plan of Merger, which provides for such merger;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The approval and restatement of the Companys Articles of Incorporation to remove references to the Companys Class A Common Stock, which will only be effective if the
shareholders do not approve the reincorporation of the Company;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | The ratification of our selection of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2005.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



The number of shares of common stock present or
represented by proxy and entitled to vote at the annual meeting was 18,962,556. The results of the votes on each of the matters presented to the shareholders at our annual meeting are set forth below.



|       |  |                                                                                                                                                                                                                                         |  |               |  |             |  |        
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ----------- |  | -------
|Matter |  | Votes For                                                                                                                                                                                                                               |  | VotesWithheld |  | Abstentions
|1.     |  | Election of Directors:                                                                                                                                                                                                                  |  |               |  |             |  |        
|       |  | Charles W. Berger                                                                                                                                                                                                                       |  | 16,773,952    |  | 2,188,604   |  |        
|       |  | Samuel Cabot III                                                                                                                                                                                                                        |  | 16,773,952    |  | 2,188,604   |  |        
|       |  | Morgan P. Guenther                                                                                                                                                                                                                      |  | 17,147,046    |  | 1,815,510   |  |        
|       |  | Ronald L. Rossetti                                                                                                                                                                                                                      |  | 17,110,107    |  | 1,852,449   |  |        
|       |  | T. Michael Scott                                                                                                                                                                                                                        |  | 17,004,377    |  | 1,958,179   |  |        
|       |  | Bruce R. Spector                                                                                                                                                                                                                        |  | 17,158,126    |  | 1,804,430   |  |        
|       |  | James R. Weaver                                                                                                                                                                                                                         |  | 16,545,338    |  | 2,417,218   |  |        
|       |  |                                                                                                                                                                                                                                         |  |              
|2.     |  | Approval of our Amended and Restated 2004 Stock Incentive Plan                                                                                                                                                                          |  | 9,984,538     |  | 5,695,599   |  | 117,284
|       |  |                                                                                                                                                                                                                                         |  |              
|3.     |  | Approval of reincorporation from California to Delaware, and approval and adoption of the Agreement and Plan of Merger                                                                                                                  |  | 12,146,706    |  | 3,649,590   |  | 1,125  
|       |  |                                                                                                                                                                                                                                         |  |              
|4.     |  | The approval and restatement of the Companys Articles of Incorporation to remove references to the Companys Class A Common Stock, which will only be effective if the
shareholders do not approve the reincorporation of the Company; |  | 15,742,164    |  | 52,364      |  | 2,893  
|       |  |                                                                                                                                                                                                                                         |  |              
|5.     |  | The ratification of our selection of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2005                                                                         |  | 17,632,653    |  | 1,329,203   |  | 700    



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ITEM 6. EXHIBITS



|               |  |                                                                                                                                                                    
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                        
|2.1            |  | Agreement and Plan of Merger, dated as of July 1, 2005 between Tier Technologies, Inc. and Tier Reincorporation, Inc., its wholly-owned subsidiary.(1)             
|               | 
|3.1            |  | Restated Certificate of Incorporation of Tier Technologies, Inc.(2)                                                                                                
|               | 
|3.2            |  | Amended and Restated Bylaws of Tier Technologies, Inc.(2)                                                                                                          
|               | 
|4.1            |  | Specimen Common Stock Certificate of Tier Technologies, Inc.(2)                                                                                                    
|               | 
|10.1           |  | Senior Vice PresidentHuman Resources Compensation Summary, dated May 3, 2005.(3)*                                                                                 
|               | 
|10.2           |  | Management Incentive Plan for fiscal year 2005.(3) *                                                                                                               
|               | 
|10.3           |  | Third Amendment to Credit and Security Agreement, dated as of June 28, 2005 among Tier Technologies, Inc., Official Payments Corporation and City National Bank.(1)
|               | 
|10.4           |  | Letter Agreement, dated as of June 28, 2005, between Tier Technologies, Inc. and City National Bank.(1)                                                            
|               | 
|10.5           |  | Amended and Restated 2004 Stock Incentive Plan of Tier Technologies, Inc.(1)*                                                                                      
|               | 
|10.6           |  | Form of Incentive Stock Option Agreement under the Amended and Restated 2004 Stock Incentive Plan of Tier Technologies, Inc.(1)*                                   
|               | 
|10.7           |  | Form of Nonstatutory Stock Option Agreement under the Amended and Restated 2004 Stock Incentive Plan of Tier Technologies, Inc.(1)*                                
|               | 
|10.8           |  | Form of Restricted Stock Agreement under the Amended and Restated 2004 Stock Incentive Plan of Tier Technologies, Inc.(1)*                                         
|               | 
|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.                

---

|* | Management contract or compensatory plan required to be filed as an exhibit to this report.
|- | -------------------------------------------------------------------------------------------

| | Filed herewith.
|- | ---------------

|(1) | Filed as an exhibit to Form 8-K filed on July 5, 2005, and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------

|(2) | Filed as an exhibit to Form 8-K filed on July 19, 2005, and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------

|(3) | Filed as an exhibit to Form 8-K filed on May 27, 2005, and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------





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SIGNATURE



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



|                      |  |                         |  |                                             
|--------------------- |  | ----------------------- |  | --------------------------------------------
|                      |  | TIER TECHNOLOGIES, INC.
|                      |  |                        
|Dated: August 8, 2005 |  |                         |  |                                             
|                      |  |                        
|                      |  | By:                     |  | /s/ David E. Fountain                       
|                      |  |                         |  | David E. Fountain                           
|                      |  |                         |  | Chief Financial Officer                     
|                      |  |                         |  | (Principal Financial and Accounting Officer)



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