**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 *(Mark
        One)*
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the quarterly period ended** **December
        31, 2006**
 
 **OR**
 
 o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 __________________
 
 **Commission
        file number 000-23195**
 
 **TIER
        TECHNOLOGIES, INC.**
 **(Exact
        name of registrant as specified in its charter)**
 
 **Delaware**
              **94-3145844****(State
                  or other jurisdiction**
                **of
                  incorporation or organization)**
              **(I.R.S.
                  Employer**
                **Identification
                  No.)**
 
 **10780
        Parkridge Boulevard, Suite 400**
 **Reston,
        Virginia 20191**
 **(Address
        of principal executive offices)**
 
 **(571)
        382-1000**
 **(Registrant's
        telephone number, including area code)**
 
 **Not
        applicable**
 **(Former
        name, former address, and former fiscal year, if changed since last report)**
 
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an accelerated filer,
        or a
        non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). (Check
        one):
  Large
        accelerated filer o  Accelerated
        filer x Non-accelerated
        filer o
   Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
  Yes o No x
  
  At
        February 2,
        2007, there were 20,383,606 shares of the Registrant's Common Stock
        outstanding.
 
 
  
  TIER
        TECHNOLOGIES,
        INC.
 **TABLE
        OF CONTENTS**
 
  
 **Part
                      I. Financial
                      Information**
                  **1****Item
                      1. Consolidated Financial Statements
                      (unaudited)**
                  **1**Consolidated
                      Balance Sheets
                  1Consolidated
                      Statements of
                      Income
                  2Consolidated
                      Statements of Comprehensive
                      Income
                  3Consolidated
                      Statement of Cash Flows
                  4Notes
                      to Consolidated Financial Statements
                      (unaudited)
                  5Note
                      1 - Overview of Organization and Basis of
                      Presentation
                  5Note
                      2 - Recent Accounting
                      Pronouncements
                  6Note
                      3 - Customer Concentration and Risk
                  6Note
                      4 - Investments
                  7Note
                      5 - Goodwill and Other Intangible
                      Assets
                  8Note
                      6 - Earnings Per Share
                  9Note
                      7 - Segment Information
                  10Note
                      8 - Restructuring
                  10Note
                      9 - Contingencies and Commitments
                  11Note
                      10 - Related Party Transactions
                  12Note
                      11 - Share-based Payments
                  13Note
                      12 - Subsequent Events
                  14**Item
                      2. Management's Discussion and Analysis of Financial
                      Condition and Results of Operations**
                  **15****Item
                      3. Quantitative and Qualitative Disclosures
                      about Market Risk**
                  **21****Item
                      4. Controls and
                      Procedures**
                  **21****Part
                      II. Other Information**
                  **22****Item
                      1 - Legal
                      Proceedings**
                  **22****Item
                      1A - Risk Factors**
                  **22****Item
                      6. Exhibits**
                  **27****Signature**
                  **28**
  ***Private
        Securities Litigation Reform Act Safe Harbor
        Statement***
  Certain
        statements contained in this report, including statements regarding the future
        development of and demand for our services and our markets, anticipated trends
        in various expenses, expected costs of legal proceedings and other statements
        that are not historical facts, are forward-looking statements within the
        meaning
        of the federal securities laws. These forward-looking statements relate to
        future events or our future financial and/or operating performance and can
        generally be identified as such because the context of the statement will
        include words such as "may", "will", "intends", "plans", "believes",
        "anticipates", "expects", "estimates", "shows", "predicts", "potential",
        "continue", or "opportunity", the negative of these words or words of similar
        import. These forward-looking statements are subject to risks and uncertainties,
        including the risks and uncertainties described and referred to under *Item
        1A—Risk Factors* beginning on page 22, 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
   **PART
        I. FINANCIAL INFORMATION**
  **ITEM
        1.****CONSOLIDATED
        FINANCIAL STATEMENTS (unaudited)**
  **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
  *(in
                  thousands)*
              
              December 31,
                  2006
              
              September 30,
                  2006(unaudited)**ASSETS:**Current
                  assets:Cash
                  and cash equivalents
              
              $
              21,658
              
              $
              18,486Investments
                  in marketable securities
              
              
              36,950
              
              
              36,950Accounts
                  receivable, net
              
              
              15,229
              
              
              15,035Unbilled
                  receivables
              
              
              3,591
              
              
              2,918Prepaid
                  expenses and other current assets
              
              
              2,928
              
              
              3,067Total
                  current assets
              
              
              80,356
              
              
              76,456Property,
                  equipment and software, net
              
              
              13,280
              
              
              13,466Goodwill
              
              
              37,567
              
              
              37,567Other
                  intangible assets, net
              
              
              20,814
              
              
              21,879Restricted
                  investments
              
              
              12,235
              
              
              12,287Investment
                  in unconsolidated affiliate
              
              
              4,739
              
              
              3,978Other
                  assets
              
              
              4,019
              
              
              3,916**Total
                  assets**
              
              **$**
              **173,010**
              
              **$**
              **169,549****LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              777
              
              $
              871Income
                  taxes payable
              
              
              7,307
              
              
              7,288Accrued
                  compensation liabilities
              
              
              5,447
              
              
              5,325Accrued
                  subcontractor expenses
              
              
              2,413
              
              
              2,360Accrued
                  discount fees
              
              
              5,698
              
              
              4,013Other
                  accrued liabilities
              
              
              6,746
              
              
              7,810Deferred
                  income
              
              
              6,060
              
              
              5,750Total
                  current liabilities
              
              
              34,448
              
              
              33,417Other
                  liabilities
              
              
              1,779
              
              
              1,922**Total
                  liabilities**
              
              
              **36,227**
              
              
              **35,339**Commitments
                  and contingencies (Note 9)Shareholders’
                  equity:Preferred
                  stock, no par value; authorized shares: 4,579;no
                  shares issued and outstanding
              
              
              —
              
              
              —Common
                  stock and paid-in capital; shares authorized: 44,260;
                shares
                  issued: 20,383 and 20,383; shares outstanding: 19,499 and
                  19,499
              
              
              184,857
              
              
              184,387Treasury
                  stock—at cost, 884 shares
              
              
              (8,684
              )
              
              (8,684
              )Notes
                  receivable from related parties
              
              
              (4,346
              )
              
              (4,275
              )Accumulated
                  other comprehensive loss
              
              
              (73
              )
              
              (33
              )Accumulated
                  deficit
              
              
              (34,971
              )
              
              (37,185
              )**Total
                  shareholders’ equity**
              
              
              **136,783**
              
              
              **134,210****Total
                  liabilities and shareholders’ equity**
              
              **$**
              **173,010**
              
              **$**
              **169,549**
  *See
        Notes to Consolidated Financial Statements*
 
 
 1
  **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF****INCOME**
 **(unaudited)**
 
 **Three
                  months ended**
                **December
                  31,***(in
                  thousands, except per share data)*
              
              **2006**
              
              **2005**Revenues
              
              $
              42,720
              
              $
              39,882Costs
                  and expenses:Direct
                  costs
              
              
              30,628
              
              
              27,896General
                  and administrative
              
              
              7,623
              
              
              6,923Selling
                  and marketing
              
              
              2,522
              
              
              2,580Depreciation
                  and amortization
              
              
              1,359
              
              
              1,319Total
                  costs and expenses
              
              
              42,132
              
              
              38,718Income
                  before other income and income taxes
              
              
              588
              
              
              1,164Other
                  income:Equity
                  in net income of unconsolidated affiliate
              
              
              809
              
              
              59Interest
                  income, net
              
              
              877
              
              
              591Total
                  other income
              
              
              1,686
              
              
              650Income
                  before income taxes
              
              
              2,274
              
              
              1,814Provision
                  for income taxes
              
              
              60
              
              
              5Net
                  income
              
              $
              2,214
              
              $
              1,809Basic
                  and diluted earnings per share
              
              $
              0.11
              
              $
              0.09Weighted
                  average common shares used in computing:Basic
                  earnings per share
              
              
              19,499
              
              
              19,490Diluted
                  earnings per share
              
              
              19,591
              
              
              19,627
 
 *See
        Notes to Consolidated Financial Statements*
  2
  
 **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME******
 **(unaudited)**
 **Three
                  months ended December 31,***(in
                  thousands)*
              
              **2006**
              
              **2005**Net
                  income
              
              $
              2,214
              
              $
              1,809Other
                  comprehensive (loss) income, net of tax:Unrealized
                  (loss) gain on investments in marketable securities
              
              
              (1
              )
              
              30Foreign
                  currency translation adjustment
              
              
              (39
              )
              
              (20
              )Other
                  comprehensive (loss) income
              
              
              (40
              )
              
              10Comprehensive
                  income
              
              $
              2,174
              
              $
              1,819
 
 *See
        Notes to Consolidated Financial Statements*
  3
  
 **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  **(unaudited)**
 **Three
                  months ended**
                **December
                  31***(in
                  thousands)*
              
              **2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  income
              
              $
              2,214
              
              $
              1,809Non-cash
                  items included in net income:Depreciation
                  and amortization
              
              
              2,264
              
              
              2,262Loss
                  on retirement of equipment and software
              
              
              1
              
              
              7Provision
                  for doubtful accounts
              
              
              (128
              )
              
              342Equity
                  in net income of unconsolidated affiliate
              
              
              (809
              )
              
              (59
              )Share-based
                  compensation
              
              
              399
              
              
              407Accrued
                  forward loss on contract
              
              
              211
              
              
              (52
              )Net
                  effect of changes in assets and liabilities:Accounts
                  receivable and unbilled receivables
              
              
              (739
              )
              
              (4,975
              )Prepaid
                  expenses and other assets
              
              
              36
              
              
              433Accounts
                  payable and accrued liabilities
              
              
              356
              
              
              1,432Income
                  taxes payable
              
              
              19
              
              
              (92
              )Deferred
                  income
              
              
              310
              
              
              100Cash
                  provided by operating activities
              
              
              4,134
              
              
              1,614**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchases
                  of marketable securities
              
              
              ―
              
              
              (31,650
              )Sales
                  and maturities of marketable securities
              
              
              ―
              
              
              21,326Purchase
                  of restricted investments
              
              
              (3,260
              )
              
              ―Sales
                  and maturities of restricted investments
              
              
              3,312
              
              
              ―Purchase
                  of equipment and software
              
              
              (999
              )
              
              (1,316
              )Other
                  investing activities
              
              
              (1
              )
              
              (1
              )Cash
                  used in investing activities
              
              
              (948
              )
              
              (11,641
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Net
                  proceeds from issuance of common stock
              
              
              ―
              
              
              9Capital
                  lease obligations and other financing arrangements
              
              
              (8
              )
              
              (7
              )Cash
                  (used in) provided by financing activities
              
              
              (8
              )
              
              2Effect
                  of exchange rate changes on cash
              
              
              (6
              )
              
              (19
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              3,172
              
              
              (10,044
              )Cash
                  and cash equivalents at beginning of period
              
              
              18,486
              
              
              27,843Cash
                  and cash equivalents at end of period
              
              $
              21,658
              
              $
              17,799**SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                  paid during the period for:Interest
              
              $
              3
              
              $
              4Income
                  taxes paid, net
              
              $
              33
              
              $
              61**SUPPLEMENTAL
                  DISCLOSURES OF NON-CASH TRANSACTIONS:**Interest
                  accrued on shareholder notes
              
              $
              71
              
              $
              67
 
 *See
        Notes to Consolidated Financial Statements*
  4
 
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (UNAUDITED)**
  **NOTE
        1—OVERVIEW OF ORGANIZATION AND****BASIS OF
        PRESENTATION**
  *ORGANIZATION*
  Tier
        Technologies,
        Inc. provides transaction processing services and software and systems
        integration services to federal, state, and local governments and other public
        sector clients. We provide our services through three segments:
  ·
            *Electronic
                Payment Processing, or EPP*—provides electronic payment processing
                options, including payment of taxes, fees and other obligations owed
                to
                government entities, educational institutions and other public sector
                clients;  **·**
            *Government
                Business Process Outsourcing, or GBPO*—focuses on child support
                payment processing, child support financial institution data match
                services, health and human services consulting and other related
                systems
                integration services; and  ·
            *Packaged
                Software and Systems Integration, or PSSI*—provides software and
                systems implementation services through practice areas in financial
                management systems, public pension administration systems, unemployment
                insurance administration systems, electronic government services,
                computer
                telephony and call centers, and systems integration services for
                the State
                of Missouri.   Our
        two
        principal subsidiaries, which are accounted for as part of our EPP and GBPO
        segments, include:
  ·
            *Official
                Payments Corporation, or OPC**—*provides proprietary
                telephone and Internet systems transaction processing and settlement
                for
                electronic payment options to federal, state, and municipal government
                agencies, educational institutions and other public sector clients;
                and  ·
            *EPOS
                Corporation, or EPOS*—provides interactive communications and
                transaction processing technologies to federal, state and municipal
                government agencies, educational institutions and other public sector
                clients.   We
        also
        own 46.96% of the outstanding common stock of CPAS Systems, Inc., or CPAS,
        a
        global supplier of pension administration software systems.
   *BASIS
        OF PRESENTATION*
  Our
        Consolidated Financial Statements were prepared in accordance with accounting
        principles generally accepted in the United States of America for interim
        financial information and in accordance with Regulation S-X, Article 10,
        under
        the Securities Exchange Act of 1934, as amended. They are unaudited and exclude
        some disclosures required for annual financial statements. We believe we
        have
        made all necessary adjustments so that our Consolidated Financial Statements
        are
        presented fairly and that all such adjustments are of a normal recurring
        nature.
   These
        Consolidated Financial Statements include the accounts of Tier Technologies,
        Inc. and its subsidiaries. Intercompany transactions and balances were
        eliminated. We account for our 46.96% investment in CPAS (an investment in
        which
        we exercise significant influence, but do not control and are not the primary
        beneficiary) using the equity method, under which our share of CPAS’ net income
        (loss) is recognized in the period in which it is earned by CPAS. As of December
        31, 2006, our Consolidated Balance Sheet reflects $4.7 million in *Investment
        in unconsolidated affiliate,* which
        represents our $2.0 million equity in the underlying assets of CPAS and
        $2.7 million of goodwill.
   Preparing
        financial statements requires us to make estimates and assumptions that affect
        the amounts reported on our Consolidated Financial Statements and accompanying
        notes. We believe that near-term changes could impact the following estimates:
        project costs and percentage of completion; effective tax rates, deferred
        taxes
        and associated valuation allowances; collectibility of receivables; stock-based
        compensation and valuation of goodwill, intangibles and investments. Although
        we
        believe the estimates
 5
  and
        assumptions used in preparing our Consolidated Financial Statements and related
        notes are reasonable in light of known facts and circumstances, actual results
        could differ materially. ****
   **NOTE
        2—RECENT ACCOUNTING PRONOUNCEMENTS**
   *SFAS
        154—Accounting Changes and Error
        Corrections*.****In May 2005, the Financial
        Accounting Standards Board, or FASB, issued Statement of Financial Accounting
        Standard No. 154—*Accounting Changes and Error Corrections*, or SFAS 154,
        which changes the requirements for the accounting for, and reporting of,
        a
        change in accounting principle. It also carries forward earlier guidance
        for the
        correction of errors in previously issued financial statements, as well as
        the
        guidance for changes in accounting estimate. SFAS 154 applies to all voluntary
        changes in accounting principles, as well as changes mandated by a
        standard-setting authority that do not include specific transition provisions.
        For such changes in accounting principles, SFAS 154 requires retrospective
        application to prior periods’ financial statements, unless it is impracticable
        to determine either period-specific or cumulative effects of the change.
        SFAS
        154 is effective for accounting changes and corrections of errors made in
        fiscal
        years beginning after December 15, 2005. We adopted this standard beginning
        in
        October 2006. Since this standard applies to both voluntary changes in
        accounting principles, as well as those that may be mandated by standard-setting
        authorities, it is not possible to estimate the impact that the adoption
        of this
        standard will have on our financial position and results of
        operations.
  *FIN
          48—Accounting for Uncertainty in Income Taxes* . In
          July
          2006, FASB Interpretation No. 48— *Accounting
          for Uncertainty in Income Taxes* ,
          or
          FIN 48, was issued. FIN 48 clarifies the accounting for uncertainty in
          income
          taxes recognized in an enterprise’s financial statements in accordance with FASB
          Statement No. 109—*Accounting for Income Taxes*. FIN 48 is effective for
          fiscal years beginning after December  15,
          2006. We expect to implement FIN 48 beginning on October 1, 2007. We are
          evaluating the impact that adopting FIN 48 will have on our financial position
          and results of operations.
   **NOTE****3—CUSTOMER
        CONCENTRATION AND
        RISK**
  We
        derive a significant portion of our revenue from a limited number of
        governmental customers. Typically, the contracts allow these customers to
        terminate all or part of the contract for convenience or cause. For the three
        months ended December 31, 2006 and 2005, revenue from one customer totaled
        $4.4 million and $4.3 million, respectively, or 10.4% and 10.8%,
        respectively, of total revenues.
   As
        described in more detail below, we have several large accounts receivable
        and
        unbilled receivable balances. A dispute, early contract termination or other
        collection issue with one of these key customers could have a material adverse
        impact on our financial condition and results of operations.
   *Accounts
        receivable, net* *.*  *Accounts
        receivable, net* , represents
        the short-term portion of receivables from our customers and other parties
        and
        retainers that we expected to receive within one year, less an allowance
        for
        accounts that we estimated would become uncollectible. Our accounts receivable
        are comprised of the following three categories:
   ·
            Customer
                receivables—receivables from our
                clients;   ·
            Mispost
                receivables—receivables from individuals to whom our payment
                processing centers made incorrect payments;
                and   ·
            Not
                Sufficient Funds (“NSF”) receivables—certain receivables from
                individuals who paid their child support payment with a check that
                had
                insufficient funds.   We
        maintain a separate allowance for uncollectible accounts for each category
        of
        receivables, which we offset against the receivables on our Consolidated
        Balance
        Sheets. As shown in the following table, at December 31, 2006 and September
        30,
        2006, the balance of our *Accounts receivable, net* was
        $15.2 million and $15.0 million, respectively.
   6
    *(in
                  thousands)*
              
              **December
                  31, 2006**
              
              **September
                  30, 2006**Accounts
                  receivable from:Customers
              
              $
              14,404
              
              $
              14,719Recipients
                  of
                  misposted payments
              
              
              1,182
              
              
              1,445Payers
                  of NSF
                  child support
              
              
              808
              
              
              769Total
                  accounts
                  receivable
              
              
              16,394
              
              
              16,933Allowance
                  for
                  uncollectible accounts receivable:Customer
              
              
              (639
              )
              
              (1,037
              )Mispost
              
              
              (967
              )
              
              (1,171
              )NSF
              
              
              (787
              )
              
              (751
              )Total
                  allowance for uncollectible accounts
              
              
              (2,393
              )
              
              (2,959
              )Short-term
                  accounts receivable retainer
              
              
              1,228
              
              
              1,061Accounts
                  receivable, net (in current assets)
              
              $
              15,229
              
              $
              15,035
  At
        December 31, 2006 and September 30, 2006, one customer accounted for 8.8%
        and
        20.0%, respectively, of total customer accounts receivable.
   Certain
        of our
        contracts allow customers to retain a portion of the amounts owed to us until
        predetermined milestones are achieved or until the project is completed.
        At
        December 31, 2006 and September 30, 2006, *Accounts receivable, net*
        included $1.2 million and $1.1 million, respectively, of retainers
        that we expected to receive in one year. In addition, there were
        $3.8 million and $3.7 million, respectively, of retainers that we
        expected to be outstanding more than one year, which are included in *Other
        assets* on our Consolidated Balance Sheets.
   *Unbilled
        Receivables.* Unbilled receivables represent revenues that we have
        earned for the work that has been performed to-date that cannot be billed
        under
        the terms of the respective contract until we have completed specific project
        milestones or the customer has accepted our work. At December 31, 2006 and
        September 30, 2006, unbilled receivables, which are all expected to become
        billable in one year, were $3.6 million and $2.9 million,
        respectively. At December 31, 2006, two customers accounted for 33.7%
        and 30.2%, respectively, of total unbilled receivables and at September 30,
        2006, four customers accounted for 32.5%, 28.8%, 21.2% and 11.8%, respectively,
        of unbilled receivables.
   **NOTE****4—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*, or SFAS 115. Restricted investments totaling $12.2 million
        and $12.3 million, respectively, at December 31, 2006 and
        September 30, 2006 were pledged in connection with performance bonds,
        insurance and real estate operating leases and will be restricted for the
        terms
        of the project performance periods and lease periods, the latest of which
        is
        estimated to end September 2008. These investments are reported as
*Restricted investments* on the Consolidated Balance Sheets.
   In
        accordance with
        SFAS No. 95—*Statement of Cash Flows*, unrestricted investments with
        remaining maturities of 90 days or less (as of the date that we purchased
        the
        securities) are classified as cash equivalents. We exclude from cash equivalents
        certain investments, such as mutual funds and auction rate securities.
        Securities such as these, and all other securities that would not otherwise
        be
        included in *Restricted investments* or *Cash and cash
        equivalents*, are classified on the Consolidated Balance Sheets as
*Investments in marketable securities*. Except for our investment in CPAS
        and our restricted investments, all other investments are categorized as
        available-for-sale under SFAS No. 115. As such, our securities are recorded
        at
        estimated fair value, based on quoted market prices. Increases and decreases
        in
        fair value are recorded as unrealized gains and losses in other comprehensive
        income.
   The
        following table
        shows the balance sheet classification, amortized cost and estimated fair
        values
        of investments included in cash equivalents, investments in marketable
        securities and restricted investments:
   7
   
  **December
                  31, 2006**
              
              **September
                  30, 2006***(in
                  thousands)*
              
              **Amortized
                  cost**
              
              **Unrealized
                  loss**
              
              **Estimated**
                **fair
                  value**
              
              **Amortized
                  cost**
              
              **Unrealized
                  loss**
              
              **Estimated
                  fair value****Cash
                  equivalents:**Money
                  market
              
              $
              8,498
              
              $
              —
              
              $
              8,498
              
              $
              9,053
              
              $
              —
              
              $
              9,053**Total
                  investments included in cash**
                **and
                  cash equivalents**
              
              
              **8,498**
              
              
              **—**
              
              
              **8,498**
              
              
              **9,053**
              
              
              **—**
              
              
              **9,053****Investments
                  in marketable securities:**Debt
                  securities:Other
                  (Primarily state and local bonds/notes)
              
              
              36,950
              
              
              —
              
              
              36,950
              
              
              36,950
              
              
              —
              
              
              36,950**Total
                  marketable securities**
              
              
              **36,950**
              
              
              **—**
              
              
              **36,950**
              
              
              **36,950**
              
              
              **—**
              
              
              **36,950****Restricted
                  investments****:**U.S.
                  government sponsored enterprise obligations
              
              
              3,297
              
              
              (3
              )
              
              3,294
              
              
              3,348
              
              
              (2
              )
              
              3,346Certificates
                  of deposit
              
              
              8,941
              
              
              —
              
              
              8,941
              
              
              8,941
              
              
              —
              
              
              8,941**Total
                  restricted investments**
              
              
              **12,238**
              
              
              **(3**
              **)**
              
              **12,235**
              
              
              **12,289**
              
              
              **(2**
              **)**
              
              **12,287****Total
                  investments**
              
              **$**
              **57,686**
              
              **$**
              **(3**
              **)**
              **$**
              **57,683**
              
              **$**
              **58,292**
              
              **$**
              **(2**
              **)**
              **$**
              **58,290**
  At
        December 31, 2006 and September 30, 2006, all of the debt securities that
        were
        included in marketable securities had remaining maturities in excess of ten
        years.
   We
        evaluate certain
        available-for-sale investments for other-than-temporary impairment when the
        fair
        value of the investment is lower than its book value. Factors that management
        considers when evaluating for other-than-temporary impairment include: the
        length of time and the extent to which market value has been less than cost;
        the
        financial condition and near-term prospects of the issuer; interest rates;
        credit risk; the value of any underlying portfolios or investments; and our
        intent and ability to hold the investment for a period of time sufficient
        to
        allow for any anticipated recovery in the market. We do not adjust the recorded
        book value for declines in fair value that we believe are temporary, if we
        have
        the intent and ability to hold the associated investments for the foreseeable
        future and we have not made the decision to dispose of the securities as
        of the
        reported date.
   If
        we determine
        that impairment is other-than-temporary, we reduce the recorded book value
        of
        the investment by the amount of the impairment and recognize a realized loss
        on
        the investment. At December 31, 2006 and September 30, 2006, we did not
        believe any of our investments were other-than-temporarily impaired.
   **NOTE****5—GOODWILL
        AND OTHER INTANGIBLE
        ASSETS**
  We
        did
        not incur any changes to the carrying amount of goodwill during the quarter
        ended December 31, 2006. The balance of goodwill at December 31, 2006
        and September 30, 2006 was $37.6 million.
   We
        test goodwill
        for impairment during the fourth quarter of each fiscal year at the reporting
        unit level using a fair value approach, in accordance with SFAS No.
        142—*Goodwill and Other Intangible Assets*. This annual testing
        identified no impairment to goodwill in fiscal year 2006. If an event occurs
        or
        circumstances change that would more likely than not reduce the fair value
        of a
        reporting unit below its carrying value, we would evaluate goodwill for
        impairment between annual tests. No such events occurred during the three
        months
        ended December 31, 2006.
   8
   
   At
        December 31, 2006 and September 30, 2006, *Other
        intangible assets, net* ,
        consisted of the following :
  **December
                  31, 2006**
              
              **September
                  30, 2006***(in
                  thousands)*
              
              **Amortization
                  period**
              
              **Gross**
              
              **Accumulated
                  amortization**
              
              **Net**
              
              **Gross**
              
              **Accumulated
                  amortization**
              
              **Net**Client
                  relationships
              
              
              10
                  years
              
              $
              28,749
              
              $
              (11,894
              )
              $
              16,855
              
              $
              28,749
              
              $
              (11,176
              )
              $
              17,573Technology
                  & research and development
              
              
              3-10
                  years
              
              
              4,289
              
              
              (2,200
              )
              
              2,089
              
              
              4,289
              
              
              (1,986
              )
              
              2,303Trademarks
              
              
              7-10
                  years
              
              
              3,214
              
              
              (1,422
              )
              
              1,792
              
              
              3,214
              
              
              (1,342
              )
              
              1,872Non-compete
                  agreements
              
              
              2-3
                  years
              
              
              615
              
              
              (537
              )
              
              78
              
              
              615
              
              
              (484
              )
              
              131Other
                  intangible assets, net
              
              
              
              
              $
              36,867
              
              $
              (16,053
              )
              $
              20,814
              
              $
              36,867
              
              $
              (14,988
              )
              $
              21,879
  Amortization
        expense for other intangible assets was $1.1 million for the three months
        ended December 31, 2006.
   **NOTE****6—EARNINGS
        PER
        SHARE**
  The
        following table presents the computation of basic and diluted earnings per
        share:
  **Three
                  months ended**
                **December
                  31,***(in
                  thousands, except per share amounts)*
              
              **2006**
              
              **2005****Numerator:**Net
                  income
              
              $
              2,214
              
              $
              1,809**Denominator:**Weighted-average
                  common shares outstanding
              
              
              19,499
              
              
              19,490Effects
                  of dilutive common stock options
              
              
              92
              
              
              137Adjusted
                  weighted-average shares
              
              
              19,591
              
              
              19,627**Earnings
                  per share:**Basic
              
              $
              0.11
              
              $
              0.09Diluted
              
              $
              0.11
              
              $
              0.09
  The
        following options to purchase shares of common stock are not included in
        the
        computation of diluted earnings per share because the exercise price is greater
        than the average market price of our common stock for the periods stated;
        therefore, the effect would be anti-dilutive:
  **Three
                  months ended**
                **December
                  31,***(in
                  thousands, except per share amounts)*
              
              **2006**
              
              **2005**Weighted-average
                  options excluded from computation of diluted earnings per
                  share
              
              
              1,793
              
              
              2,379Range
                  of exercise prices per share:High
              
              $
              20.70
              
              $
              20.70Low
              
              $
              5.91
              
              $
              6.96
   9
  **NOTE****7—SEGMENT
        INFORMATION**
  We
        evaluate the performance of our EPP, GBPO and PSSI operating segments based
        on
        revenues and direct costs, while other operating costs are evaluated on a
        geographical basis. Accordingly, we do 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 and income tax expense in segment profitability.
   Beginning
        October
        1, 2006, we reclassified our Voice and Systems Automation practice area revenues
        and direct costs from our PSSI segment to our GBPO segment to align
        complementary product lines with the
        same operating
        segment. Accordingly, the prior period revenues and direct costs for these
        segments have been reclassified to conform to the current
        presentation.
   The
        following table
        presents financial information for the three reportable segments, including
        the
        elimination of revenues and costs associated with the purchase and installation
        of a call center from one of our subsidiaries, which have been eliminated
        and
        are disclosed in the Eliminations column below**:**
  **Three
                  months ended***(in
                  thousands)*
              
              **EPP****(1)**
              
              **GBPO****(2)**
              
              **PSSI****(3)**
              
              **Eliminations**
              
              **Total**December
                  31, 2006Revenues
              
              $
              22,169
              
              $
              12,026
              
              $
              8,525
              
              $
              —
              
              $
              42,720Direct
                  costs
              
              $
              16,404
              
              $
              8,764
              
              $
              5,581
              
              $
              (121
              )
              $
              30,628December
                  31, 2005Revenues
              
              $
              15,051
              
              $
              14,448
              
              $
              10,383
              
              $
              —
              
              $
              39,882Direct
                  costs
              
              $
              11,074
              
              $
              10,635
              
              $
              6,318
              
              $
              (131
              )
              $
              27,896*(1)**During
                  the three months ended December 31, 2006 and 2005, the revenues
                  from one
                  customer produced 19.1% and 15.4%, respectively, of the revenues
                  reported
                  for the EPP segment.*
                *(2)**During
                  the three months ended December 31, 2006 and 2005, the revenues
                  from one
                  customer produced 31.9% and 29.8%, respectively, of the revenues
                  for the
                  GBPO segment. During the three months ended December 31, 2006 and
                  2005,
                  the revenues from another customer produced 15.9% and 13.0%, respectively,
                  of the revenues for the GBPO segment.*
                *(3)**During
                  the three months ended December 31, 2006 and 2005, the revenues
                  from one
                  customer produced 23.4% and 27.6%, respectively, of the revenues
                  reported
                  for the PSSI segment. During the three months ended December 31,
                  2006,
                  another customer produced 22.6% of the revenues for the PSSI
                  segment.*
  Many
        of
        our assets are either corporate assets or are shared by multiple segments.
        As
        such, we do not separately account for total assets by business
        segment.
   **NOTE****8—RESTRUCTURING**
  During
        fiscal year 2004, we incurred restructuring liabilities for facilities closure
        costs associated with the relocation of our administrative functions from
        Walnut
        Creek, California to Reston, Virginia. We did not incur any restructuring
        expense for the three months ended December 31, 2006.
   The
        following table
        summarizes the restructuring liabilities activity from September 30, 2006
        to December 31, 2006:
  *(in
                  thousands)*
              
              **Facilities
                  closures**Balance
                  at September 30, 2006
              
              $
              401Cash
                  payments
              
              
              (54
              )Balance
                  at December 31, 2006
              
              $
              347
  As
        shown in the
        preceding table, we had $0.3 million of restructuring liabilities at
        December 31, 2006, of which $0.2 million was included in *Other
        liabilities* and the remainder was included in *Other accrued
        liabilities* in the Consolidated Balance Sheet. We expect to pay $168,000
        and $179,000 of these liabilities during fiscal years 2007 and 2008,
        respectively.
 10
   **NOTE****9—CONTINGENCIES
        AND
        COMMITMENTS**
  *LEGAL
        ISSUES*
  From
        time to time during the normal course of business, we are a party to litigation
        and/or other claims. At December 31, 2006, none of these matters were expected
        to have a material impact on our financial position, results of operations
        or
        cash flows. At December 31, 2006 and 2005, we had legal accruals of
        $1.0 million and $0.6 million, respectively, based upon estimates of
        key legal matters. In November 2003, we were granted conditional amnesty
        in
        relation to a Department of Justice Antitrust Division investigation involving
        the child support payment processing industry. We have cooperated, and will
        continue to cooperate, with the investigation and, therefore, will continue
        to
        incur legal costs. On May 31, 2006,
        we received a
        subpoena from the Philadelphia District Office of the Securities and Exchange
        Commission requesting documents relating to financial reporting and personnel
        issues. We have cooperated, and will continue to cooperate fully, in this
        investigation.
   On
        November 20,
        2006, we were served with a class action lawsuit on behalf of purchasers
        of our
        common stock from November 29, 2001 to October 25, 2006. The suit alleges
        that
        Tier and certain of our former and/or current officers violated the Securities
        Exchange Act of 1934, but did not identify the damages being sought. This
        case
        is pending in the United States District Court for the Eastern District of
        Virginia. We are not able to estimate the probability or level of exposure
        associated with this complaint.
   *SYSTEM
        OUTAGE*
  Between
        October 2, 2006 and October 5, 2006, an outage occurred with one of the systems
        we use to serve one of our large customers. Because of this outage, we may
        incur
        penalties under the provisions of the related contract. We are not able to
        determine the amount of penalties, if any, that will be assessed; however,
        we
        preliminarily estimate that the penalties could range from zero to $0.2
        million.
   *BANK
        LINES OF CREDIT*
  At
        December 31, 2006, we had a credit facility that allowed us to obtain letters
        of
        credit up to a total of $15.0 million and also granted the lender a
        perfected security interest in cash collateral in an amount equal to all
        issued
        and to be issued letters of credit. This credit facility is scheduled to
        mature
        on March 31, 2007. As of December 31, 2006, $8.9 million of letters of
        credit were outstanding under this credit facility. These letters of credit
        were
        issued to secure performance bonds, insurance and a lease.
   *OTHER
        LETTERS OF CREDIT*
  At
        both
        December 31, 2006 and September 30, 2006, we also had a $3.0 million letter
        of credit outstanding that was collateralized by certain securities in our
        investment portfolio. This letter of credit was issued to secure a performance
        bond for a project scheduled to complete in April 2007. We report the
        investments used to collateralize these letters of credit as *Restricted
        investments* on our Consolidated Balance Sheets.
   *CREDIT
        RISK*
  We
        maintain our
        cash in bank deposit accounts which, at times, may exceed federally insured
        limits. We have not experienced any losses in such accounts and believe that
        any
        associated credit risk is *de minimis*.
   *GUARANTEES*
  In
        conjunction with
        our participation as a subcontractor in a three-year contract for unemployment
        insurance-related services, we guaranteed the performance of the prime
        contractor on the project. The contract does not establish a limitation to
        the
        maximum potential future payments under the guarantee; however, we estimate
        that
        the maximum potential undiscounted cost of the guarantee is $2.8 million.
        In
        accordance with FASB Interpretation No. 45—*Guarantor’s Accounting and
        Disclosure Requirements for Guarantees, Including Indirect Guarantees of
        Indebtedness of Others*, we valued this guarantee based upon the sum of
        probability-weighted present values of possible future cash flows. As of
        December 31,
 11
 2006, the remaining
        liability
        was $140,000, which is being amortized over the term of the contract. We
        believe
        that the probability is remote that the guarantee provision of this contract
        will be invoked.
   *PERFORMANCE
        BONDS*
  Under
        certain contracts, we are required to obtain performance bonds from a licensed
        surety and to post the performance bond with our customer. Fees for obtaining
        the bonds are expensed over the life of each
        bond and are
        included in *Direct costs* on our Consolidated Statements of Income. At
        December 31, 2006, we had $20.7 million of bonds posted with our
        customers. There were no claims pending against any of these bonds as of
        December 31, 2006.
   *EMPLOYMENT
        AGREEMENTS*
  At
        December 31,
        2006, four executives had employment agreements with us that entitled them
        to
        severance payments ranging from 0.5 to 3.0 years of base salary, and in one
        case
        a bonus corresponding to the severance period, if they are terminated without
        cause or if certain events occur in connection with a change of
        control of Tier. As of December 31, 2006, we would have been required to
        pay out
        up to a maximum of $2.7 million to these four executives if these events
        had occurred.  We also have employment and security agreements with four
        other executives and certain key managers. Under the terms of the
        agreements, if certain pre-defined events were to occur as a result of a
        change
        in control of our company, the individuals covered by these agreements would
        be
        entitled to severance payment ranging from six to twelve months of their
        current
        base salaries. If these events had occurred on December 31, 2006, we would
        have
        been obligated to pay up to $3.4 million under these agreements.  See
        Note 12**—***Subsequent
        Events* for details about other employment related agreements that we
        entered into after December 31, 2006.
   *INDEMNIFICATION
        AGREEMENTS*
  As
        of
        December 31, 2006, we had entered into indemnification agreements with each
        of
        our directors and a number of key executives. These agreements provide such
        persons with indemnification to the maximum extent permitted by our Articles
        of
        Incorporation or Bylaws or by the Delaware General Corporation Law, against
        all
        expenses, claims, damages, judgments and other amounts (including amounts
        paid
        in settlement) for which such persons become liable as a result of acting
        in any
        capacity on our behalf, subject to certain limitations. We are not able to
        estimate our maximum exposure under these agreements.
   *FORWARD
        LOSSES*
  Throughout
        the term
        of our customer contracts, we forecast revenues and expenses over the total
        life
        of the contract. In accordance with generally accepted accounting principles,
        if
        we determine that the total expenses over the entire term of the contract
        will
        probably exceed the total forecasted revenues over the term of the contract,
        we
        record an accrual in the current period equal to the total forecasted losses
        over the term of the contract, less losses recognized to date, if any. As
        of
        December 31, 2006 and September 30, 2006, accruals totaling
        $1.2 million and $1.0 million, respectively, were included in
*Other accrued liabilities* on our Consolidated Balance Sheets. Changes
        in the accrued forward loss are reflected in *Direct costs* on our
        Consolidated Statements of Income.
   **NOTE****10—RELATED
        PARTY
        TRANSACTIONS**
  *NOTES
        AND ACCRUED INTEREST RECEIVABLE*
  At
        both
        December 31, 2006 and September 30, 2006, we had $4.3 million of
        full-recourse notes and interest receivable from a former Chairman of the
        Board
        and Chief Executive Officer. These notes mature during 2007 and bear interest
        at
        rates ranging from 6.54% to 7.18%. The former Chairman pledged 387,490 shares
        of
        Tier common stock, with a market value of $2.5 million at December 31,
        2006 as
        collateral for these notes. Approximately $2.2 million of these full-recourse
        notes were issued in connection with the exercise of options to purchase
        shares
        of Tier’s common stock.
 12
   These
        notes and the
        associated accrued interest are reported as *Notes receivable from related
        parties* in the shareholders’ equity section of our Consolidated Balance
        Sheets. Interest earned on these notes is included in *Common stock and
        paid-in capital* in the shareholders’ equity section of our Consolidated
        Balance Sheets.
   *OTHER
        RELATED-PARTY TRANSACTIONS*
  We
        own
        a 46.96% interest in CPAS Systems, Inc., or CPAS, a Canadian entity that
        we
        account for using the equity method. During the three months ended
        December 31, 2006, we recognized $137,000 in revenue related to a pension
        project in which we are a subcontractor to CPAS. During the three months
        ended
        December 31, 2006, we paid $22,000 for software licenses in connection with
        a subcontract agreement we have with CPAS for another pension project.
   During
        the three
        months ended December 31, 2006 we purchased $3,300 of software licenses,
        maintenance and related services from Nuance Communications, Inc., a company
        affiliated with a member of our Board of Directors.
   **NOTE
        1****1—SHARE-BASED
        PAYMENT**
  Stock
        options are
        issued under the *Amended and Restated 2004 Stock Incentive Plan*, or the
        Plan. The Plan provides our Board of Directors discretion in creating employee
        equity incentives, including incentive and non-statutory stock options.
        Generally, 20% of these options vest each year on the anniversary of the
        date
        granted and expire in ten years. At December 31, 2006 there were 2,400,631
        shares of common stock reserved for future issuance under the Plan.
   Stock-based
        compensation expense for all stock-based compensation awards granted was
        based
        on the grant-date fair value using the Black-Scholes model. We recognize
        compensation expense for stock option awards on a ratable basis over the
        requisite service period of the award. During both the three months ended
        December 31, 2006 and 2005, we recognized $0.4 million in stock-based
        compensation expense.
  The
        following table
        shows the weighted-average assumptions we used to calculate fair value of
        share-based options, as well as the weighted-average fair value of options
        granted and the weighted-average intrinsic value of options
        exercised.
  **Three
                  months ended December 31,****2006**
              
              **2005**Weighted-average
                  assumptions used in Black-Scholes model:Expected
                  period that options will be outstanding *(in
                  years)*
              
              
              5.00
              
              
              5.00Interest
                  rate *(based on U.S. Treasury yields at time of
                  grant)*
              
              
              4.50
              %
              
              4.38
              %Volatility
              
              
              49.56
              %
              
              49.07
              %Dividend
                  yield
              
              
              —
              
              
              —Weighted-average
                  fair value of options granted
              
              $
              3.39
              
              $
              4.06Weighted-average
                  intrinsic value of options exercised *(in
                  thousands)*
              
              $
              —
              
              $
              1
  We
        based expected volatilities on both the implied and historical volatility
        of our
        stock. In addition, we used historical data to estimate employee forfeitures
        within the valuation model.
 13
   Stock
        option
        activity for the three months ended December 31, 2006 is as
        follows:
  **Weighted-average****Shares**
                **under
                  option**
                **($000)**
              ****
              **Exercise
                  price per share**
              ****
              **Remaining
                  contractual term**
              ****
              **Aggregate
                  intrinsic value ($000)**Options
                  outstanding at October 1, 2006
              
              
              2,237
              
              $
              8.45Granted
              
              
              72
              
              
              6.99Exercised
              
              
              —
              
              
              —Forfeitures
                  or expirations
              
              
              (203
              )
              
              7.77Options
                  outstanding at December 31, 2006
              
              
              2,106
              
              $
              8.46
              
              
              7.69
                  years
              
              $
              575Options
                  exercisable at December 31, 2006
              
              
              1,169
              
              $
              9.46
              
              
              6.59
                  years
              
              $
              343
  As
        of
        December 31, 2006, we expect that $2.3 million of unrecognized compensation
        cost, net of estimated forfeitures, related to stock options will be recognized
        over a weighted-average period of approximately 2.4 years.
   **NOTE
        1****2—SUBSEQUENT
        EVENTS**
  One
        of
        our GBPO segment contracts will expire in mid-2007, which will necessitate
        the
        closure of one of our facilities.  On January 11, 2007, we provided general
        guidance to the staff of the facility about retention and severance packages
        that we expect to offer to encourage continued service by the facilities’
employees through the end of the contract. As of January 31, 2007, the maximum
        amount that could be paid out under these retention packages was $0.2
        million.  In addition, in January 2007, we were notified that another GBPO
        segment contract, for which we are acting as a subcontractor, would be
        terminated effective February 28, 2007.
  In
        February 2007, we
        entered into employment agreements with 33 key employees, under which these
        individuals will be entitled to receive three to twelve months of their base
        salaries over a one to two year period, upon meeting defined employment service
        periods.  During the remainder of fiscal 2007, we expect to recognize a
        maximum of $1.5 million, or $0.5 million during each of the three remaining
        quarters in fiscal 2007, for these retention plans.  In addition, during
        fiscal 2008, we expect to recognize a maximum of $0.9 million, or $225,000
        per
        quarter.  In addition, we entered into agreements with 43 other individuals
        under which they may receive compensation of up to $3.0 million if certain
        change of control events were to occur.
   14
   **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
  *This
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations includes forward-looking statements. We have based these
        forward-looking statements on our current plans, expectations and
        belie**fs about future events. Our actual performance could differ
        materially from the expectations and beliefs reflected in the forward-looking
        statements in this section and throughout this report, as a result of the
        risks,
        uncertainties and assumptions discussed under Item 1A—Risk
        Factors of
        this Quarterly Report on Form 10-Q and other factors discussed in this section.
        For more information regarding what constitutes a forward-looking statement,
        refer to the “Risk Factors” section.*
   The
        following discussion and analysis is intended to help the reader understand
        the
        results of operations and financial condition of Tier Technologies, Inc.
        This
        discussion and analysis is provided as a supplement to, and should be read
        in
        conjunction with, our financial statements and the accompanying notes to
        the
        financial statements.
   *OVERVIEW*
  We
        provide transaction processing services and software and systems integration
        services primarily to federal, state and local government, as well as public
        sector clients. We target industry sectors where we believe that demand for
        our
        services is less discretionary and is likely to provide us with recurring
        revenue streams through long-term contracts. The forces driving the need
        for our
        services tend to involve federal- or state-mandated services, such as child
        support payments, collections and disbursements, as well as a fundamental
        shift
        in consumer transaction preferences toward electronic payment methods instead
        of
        cash or paper checks. Since the markets we serve are highly competitive,
        changes
        in our competitors' strategies or service offerings could have a significant
        impact on our profitability, unless we quickly and effectively adapt our
        business model to meet the changes in the marketplace.
   We
        have
        derived, and expect to continue to derive, a significant portion of our revenues
        from a small number of large clients or their constituents. For example,
        during
        the three months ended December 31, 2006 and 2005, contracts with our three
        largest clients and their constituents generated 25% and 24%, respectively,
        of
        our total revenues. During the three months ended December 31, 2006 and 2005,
        approximately 10% and 11%, respectively, of our total revenues resulted
        from a contract with one customer. Substantially all of our contracts are
        terminable by the client following limited notice and without significant
        penalty to the client. As a result, unsatisfactory performance or unanticipated
        difficulties in completing projects may result in client dissatisfaction,
        contractual or adjudicated monetary penalties or contract terminations—all of
        which could have a material adverse effect upon our business, financial
        condition and results of operations.
   Our
        clients outsource portions of their business processes to us and rely on
        us for
        our industry-specific information technology expertise and solutions. Nearly
        73%
        of our revenues are generated by our transaction-based services including:
        1) electronic payment processing services for federal, state and local
        government clients, which allow our clients to offer their constituents the
        ability to use credit cards, debit cards or electronic checks to pay taxes
        and
        other governmental obligations; and 2) child support payment processing and
        related services for state government clients. While many of these transactions
        occur on a monthly basis, there are seasonal and annual fluctuations in the
        volume of some transactions that we process, such as tax payments. For example,
        each year the IRS rotates the order in which it lists the names of the two
        companies that provide payment processing services; because taxpayers often
        opt
        to use the first listed payment processing provider more frequently than
        the
        second listed payment processing provider, the year in which we are listed
        second can result in reduced transaction volume. We recognize revenues for
        transaction-based services at the time the services are performed.
   Our
        packaged software and systems integration segment primarily integrates our
        proprietary software products and licensed third-party software products
        into
        our clients’ business operations. We recognize these revenues on a time and
        material basis, percentage-of-completion basis or at the time delivery is
        made,
        depending upon the terms of the contract and the requirements of associated
        accounting standards.
 15
  During
        the quarter ended
        December 31, 2006, we commenced an initiative to evaluate our strategic
        direction and have engaged the services of consultants and investment bankers
        in
        this initiative. The objective of this initiative is to identify how to best
        deploy our company’s financial and management resources in
        order to better maximize
        shareholder value.  Because we have limited financial and management
        resources to fully optimize all of our business units, we intend to focus
        on our core competency in electronic payment processing and only explore
        growth
        opportunities within our EPP segment and other synergistic electronic payment
        processing businesses.  As a result of this refocusing, we intend to
        redeploy assets from other business units that are not compatible with this
        direction.  It is likely that we will incur significant one-time charges in
        connection with these activities.
    *RESULTS
        OF OPERATIONS*
  The
        following table provides an overview of our results of operations for the
        three
        months ended December 31, 2006 and 2005:
  **Three
                  months ended**
                **December
                  31,**
              
              **Variance***(in
                  thousands, except percentages)*
              
              **2006**
              
              **2005**
              
              $
                  Amount
              
              %Revenues
              
              $
              42,720
              
              $
              39,882
              
              $
              2,838
              
              
              7
              %Costs
                  and expenses
              
              
              42,132
              
              
              38,718
              
              
              3,414
              
              
              9
              %Income
                  before other income, income taxes
              
              
              588
              
              
              1,164
              
              
              (576
              )
              
              (49
              )%Other
                  income
              
              
              1,686
              
              
              650
              
              
              1,036
              
              
              *Income
                  before income taxes
              
              
              2,274
              
              
              1,814
              
              
              460
              
              
              25
              %Provision
                  for income taxes
              
              
              60
              
              
              5
              
              
              55
              
              
              *Net
                  income
              
              $
              2,214
              
              $
              1,809
              
              $
              405
              
              
              22
              %**
                  Not meaningful*
  *Revenues*
  Our
        revenues increased $2.8 million, or 7%, over the same period last year.
        This quarter-over-quarter increase primarily reflects a 47% increase in revenues
        earned by our Electronic Payment Processing segment, or EPP, as a result
        of
        increased transaction volume from pre-existing contracts in that segment.
        The
        increase in EPP revenues is offset by a 17% decrease in revenues by our
        Government Business Process Outsourcing segment, or GBPO, and an 18% decrease
        in
        revenues by our Packaged Software and Systems Integration segment, or PSSI,
        primarily due to the completion of projects in both segments during the
        previous fiscal year.
   The
        following table presents the revenues for each of our reportable segments
        for
        the three months ended December 31, 2006 and 2005:
  **Three
                  months ended**
                **December
                  31,**
              
              **Variance***(in
                  thousands, except percentages)*
              
              **2006**
              
              **2005**
              
              **$
                  Amount**
              ****
              **%**EPP
              
              $
              22,169
              
              $
              15,051
              
              $
              7,118
              
              
              47
              %GBPO
              
              
              12,026
              
              
              14,448
              
              
              (2,422
              )
              
              (17
              )%PSSI
              
              
              8,525
              
              
              10,383
              
              
              (1,858
              )
              
              (18
              )%Total
                  revenues
              
              $
              42,720
              
              $
              39,882
              
              $
              2,838
              
              
              7
              %
  *Electronic
        Payment Processing Segment***—**Our EPP segment provides
        electronic payment processing options, including payment of taxes, fees and
        other obligations owed to government entities, educational institutions and
        other public sector clients. The revenues reported by our EPP segment reflect
        the number of contracts with clients, as well as the volume of transactions
        processed under each contract and the rates that we charge for each transaction
        that we process.
   During
        the quarter
        ended December 31, 2006, the revenues generated by our EPP segment rose to
        $22.2 million, which represents a $7.1 million, or 47%, increase over
        the same period last year. New contracts and a rise in the volume of
        transactions processed by our EPP segment added $7.1 million of revenues,
        including $1.9 million of additional revenues we earned during the current
        fiscal quarter as a result of an increase in the volume of tax
        return
        processing for the Internal Revenue Service.
 16
  We
        believe that
        these increases are attributable primarily to a changing consumer preference
        toward using electronic payments to pay their obligations to federal, state
        and
        local governments. We anticipate continued revenue increases
        throughout fiscal year 2007, as more state and local taxing jurisdictions
        move
        towards electronic payment processing options.
   *Government
        Business Process Outsourcing Segment****—***Our GBPO
        segment provides governmental clients with child support payment
        processing, child support financial institution data match services, health
        and
        human services consulting and other related systems integration services,
        including call center interactive voice response systems and support services.
        Because of the importance that these clients place on receiving consistent
        and
        reliable service, the contracts with our GBPO customers are typically 3-5
        years
        in duration and we may receive contract extensions or renewals based on our
        clients’ past experience with our company.
   During
        the quarter
        ended December 31, 2006, our GBPO segment generated $12.0 million in
        revenues, which represents a $2.4 million, or 17%, decrease over the same
        period last year.  This decrease in revenues is primarily attributable
        to the absence of $3.0 million of revenues from contracts that were
        completed during fiscal year 2006.  Of the $3.0 million decrease,
        $1.6 million is attributable to the completion of two state contracts
        during the prior fiscal year and $0.9 million is attributable to other
        one-time contracts.  In addition, lower rates and transaction volume at one
        of our child support payment processing centers resulted in a decline of
        $0.5 million in revenues over the same period last year. These decreases
        were partially offset by the addition of several new contracts for the GBPO
        segment, which generated $1.2 million in revenues during the period ended
        December 31, 2006.  We expect to continue to see a decline in GBPO revenues
        over the same periods last year as a result of the contracts that terminated
        throughout fiscal 2006. In addition, two of our major GBPO segment contracts
        will expire in mid-2007 and will result in further reduction in revenues
        for
        fiscal year 2007. These two contracts contributed $3.0 million of revenues
        during the quarter ended December 31, 2006 and contribute approximately
        $12.0 million of revenues annually.
     *Packaged
        Software and Systems Integration Segment***—**Our PSSI
        segment provides software and systems implementation services through practice
        areas in financial management systems, public pension administration systems,
        unemployment insurance administration systems, electronic government services,
        and systems integration services. Since the services provided by our PSSI
        segment are generally project-oriented, the contracts with our clients typically
        have a 1-3 year contract term, and may have subsequent maintenance and support
        phases. The revenues reported by our PSSI segment in any given period reflect
        the size and volume of active contracts, as well as our current phase in
        the
        project life cycle of individual contracts.
   During
        the quarter
        ended December 31, 2006, our PSSI segment generated $8.5 million in
        revenues, which represents a decline of $1.9 million, or 18%, over the same
        period last year. This decrease reflects a $2.9 million decline
        resulting from the completion, or near completion, of several PSSI contracts,
        including two contracts that represented $2.4 million of the decline. We
        also had an overall decline of $0.8 million in revenues from our
        contracts with one large PSSI customer. These declines were partially offset
        by
        a $1.1 million increase in revenues from a state contract
        that****commenced in November 2005. In addition, new
        contracts contributed $0.7 million in increased revenue during the current
        period.
 17
   *Costs
        and Expenses*
   During
        the three months ended December 31, 2006, we incurred $42.3 million of costs
        and
        expenses, a $3.6 million, or 9%, increase over the same period last year.
        This increase is primarily due to increased interchange fees directly associated
        with increased revenues in our EPP segment and an increase in payroll and
        payroll-related expenses associated with our overhead and administrative
        functions. The following table provides an overview of operating costs and
        expenses for the three months ended December 31, 2006 and 2005:
  **Three
                  months ended**
                **December
                  31,**
              
              **Variance***(in
                  thousands, except percentages)*
              
              **2006**
              
              **2005**
              
              **$
                  Amount**
              %Direct
                  costs
              
              $
              30,628
              
              $
              27,896
              
              $
              2,732
              
              
              10
              %General
                  and administrative
              
              
              7,623
              
              
              6,923
              
              
              700
              
              
              10
              %Selling
                  and marketing
              
              
              2,522
              
              
              2,580
              
              
              (58
              )
              
              (2
              )%Depreciation
                  and amortization
              
              
              1,359
              
              
              1,319
              
              
              40
              
              
              3
              %Total
                  costs and expenses
              
              $
              42,132
              
              $
              38,718
              
              $
              3,414
              
              
              9
              %
  *Direct
        costs.*****Direct costs, which represent costs
        attributable directly to providing services to clients, include: payroll
        and
        payroll-related costs; independent contractor/subcontractor costs;
        travel-related expenditures;
        credit card interchange fees and assessments; amortization of intellectual
        property; amortization and depreciation of project-related equipment, hardware
        and software purchases; and the cost of hardware, software and equipment
        sold to
        clients.
   Direct
        costs for
        the three months ended December 31, 2006 increased $2.7 million, or 10%,
        over the same period last year. This increase primarily reflects a
        $4.8 million increase in interchange fees, which is in direct
        correlation to the increase in EPP transaction-based revenue. Telephone costs
        increased $0.3 million due to the addition of a call center project during
        the second quarter of fiscal 2006. In addition, our accrued forward loss
        increased $0.3 million during the three months ended December 31, 2006, due
        to adjustments to our loss accruals for two contracts. These expense
        increases were primarily offset by decreases resulting from: the absence
        of $1.0
        million of one-time expenses for outside services attributable to the
        reconciliation of certain account balances during fiscal 2006; a
        $0.6 million decrease in printing and postage costs associated with our
        GBPO segment due to a decline in volume at two of our payment processing
        centers
        and the completion of one project; a $0.7 million decrease in payroll and
        payroll-related expenses; and a $0.5 million reduction in other minor
        project-related expenses, such as office supplies and travel, due to several
        completed projects in our GBPO and PSSI segments. During the remainder of
        fiscal
        2007, we expect direct costs will decline from those incurred during fiscal
        2006, because of the completion or near completion of a number of contracts
        in
        our GBPO and PSSI segments.
   *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 and information systems.
   General
        and
        administrative expenses for the three months ended December 31, 2006
        increased $0.7 million, or 10%, from the same period last year. This
        increase is primarily a result of: a $0.7 million increase in payroll and
        payroll-related expenses; and a $0.3 million increase in bonuses paid to
        executives and administrative employees, primarily under our management and
        executive compensation plans. These increases in administrative and general
        expenses are offset by a $0.4 million reduction in bad debt expense,
        resulting primarily from our successful collection efforts, and a
        $0.1 million decrease in legal fees. The remaining $0.1 million
        increase resulted from increases in office supplies and other minor administrative
        costs. During the remainder of fiscal 2007, we expect to see a year-over-year
        reduction in general and administration costs because of the absence of one-time
        legal and accounting expenses that we
        incurred during
        fiscal 2006 attributable to the restatement of our historical financial
        statements and an investigation conducted by the Audit Committee of the Board
        of
        Directors.  In February 2007, we entered into employment agreements with 33
        key employees, under which these individuals will be entitled to receive
        three
        to twelve months of their base salaries over a one to two year period, upon
        meeting defined employment service periods.  During the remainder of fiscal
        2007, we expect to recognize a maximum of $1.5 million, or $0.5 million during
        each of the three remaining quarters in fiscal 2007, for these
        retention
 18
   plans. 
In
        addition, during fiscal 2008, we expect to recognize a maximum of $0.9 million
        or $225,000 during each of the quarters in fiscal 2008.
  *Selling
        and
        marketing.*******Selling and marketing
        expenses consist primarily of payroll and payroll-related costs, commissions,
        advertising and marketing expenditures, and travel-related expenditures.
        We
        expect selling and marketing expenses to fluctuate from quarter to quarter
        due
        to a variety of factors, such as increased advertising and marketing expenses
        incurred in anticipation of the April 15th federal tax season.
   Selling
        and
        marketing expenses decreased 2% to $2.5 million for the three months ended
        December 31, 2006. This decrease is primarily attributable to a
        decrease in the total commissions paid to our sales and marketing staff.
        We
        expect selling and marketing expenses to continue to decline during the
        remainder of fiscal 2007, as a result of our decision not to pursue new
        contracts in certain practice areas in our GBPO and PSSI segments.
   *Depreciation
        and amortization.* Depreciation and amortization consists primarily
        of expenses associated with depreciation of equipment, software and leasehold
        improvements and amortization of intangible assets resulting from acquisitions
        and other intellectual property not directly attributable to client projects.
        Project-related depreciation and amortization is included in direct costs.
   During
        the three
        months ended December 31, 2006, depreciation and amortization expenses increased
        by $40,000, or 3% from prior year results. This increase is primarily
        attributable to depreciation expense in the current period associated with
        assets acquired throughout the prior fiscal year.
   *Other
        Income*
   *Equity
        in net income of unconsolidated affiliate* . During
        the three months ended December 31, 2006 and 2005, we reported income of
        $809,000 and $59,000, respectively, representing our 46.96% share in the
        net
        income and losses incurred by our investment in CPAS. The $750,000 improvement
        in CPAS’ performance resulted primarily from CPAS’ successful contracting
        efforts during the three months ended December 31, 2006.
   *Interest
        income, net.* **  During
        the three months ended December 31, 2006, net interest income rose
        $0.3 million, or 48%, over the same period last year. This increase
        reflects higher interest rates and an increase in the average daily balance
        of
        our investment portfolio.
   *Provision
        for income taxes.* **  During
        the three months ended December 31, 2006 and 2005, we recorded income tax
        expense of $60,000 and $5,000, respectively. For both periods, this expense
        reflected expected alternate minimum federal tax payments and minimum state
        tax
        payments. We applied carryforward losses from earlier periods in the calculation
        of income taxes, which resulted in our tax expense in both periods being
        limited
        to expected minimum federal and state tax obligations. In addition, in
        accordance with Statement of Financial Accounting Standards No. 109— *Accounting
        for Income Taxes* ,
        we
        have continued to maintain valuation allowance for the full amount of our
        deferred tax assets because of cumulative net losses incurred in recent
        years.
   *LIQUIDITY
        AND CAPITAL RESOURCES*
  Our
        principal
        capital requirement is to fund working capital and to support our growth,
        including potential future acquisitions. Under our Amended and Restated Credit
        and Security Agreement with our lender, we may obtain up to $15.0 million
        of
        letters of credit. Furthermore, the agreement grants the lender a
        perfected security interest in cash collateral in an amount equal to all
        issued
        and to be issued letters of credit. At December 31, 2006, we had
        $8.9 million of letters of credit outstanding under this credit facility,
        which are fully collateralized. These letters of credit were issued to secure
        performance bonds, insurance and a lease.
  In
        addition to the
        letters of credit issued under the credit facility mentioned above, at December
        31, 2006, we had a $3.0 million letter of credit outstanding, which was
        collateralized by certain securities in our investment portfolio. This letter
        of
        credit was issued to secure a performance bond.
 19
  *Net
        Cash
        from Operating Activities*.****During the three
        months ended December 31, 2006, our operating activities provided
        $4.1 million of cash, including $2.2 million of net income and
        $1.9 million of non-cash items included in net income. During the three
        months ended December 31, 2006, $0.4 million of cash was generated by an
        increase in the balance of accounts payable and accrued liabilities and $0.3
        million of cash was generated by an increase in deferred revenue. These
        increases were partially offset by our use of $0.7 million of cash to
        support higher accounts receivable levels from increased sales.
   During
        the three
        months ended December 31, 2005, our operating activities provided
        $1.6 million of cash, including $1.8 million of net income and $2.9
        million of non-cash items included in net income. During the three months
        ended
        December 31, 2005, $1.4 million of cash was generated by an increase in the
        balance of accounts payable and accrued liabilities and $0.4 million was
        generated by decrease in prepaid expenses and other assets. These increases
        were
        partially offset by our use of $5.0 million of cash to support higher
        accounts receivable levels from increased sales.
   *Net
        Cash
        from Investing Activities*.****During the three
        months ended December 31, 2006, our operations used $0.9 million of
        cash for investing activities, of which $1.0 million was used to purchase
        equipment and software, and fund internally developed software. In addition,
        a
        total of $3.3 million of cash was used to purchase investments during the
        three months ended December 31, 2006. This use of funds was partially offset
        by
        $3.3 million of cash generated from the sale and maturities of
        investments.
   During
        the three
        months ended December 31, 2005, our operations used $11.6 million for
        investing activities, of which $1.3 million was used to purchase equipment
        and software, primarily for our Michigan operations. In addition, a total
        of
        $31.7 million was used to purchase investments during the three months
        ended December 31, 2005.  This use of funds was partially offset by $21.3
        million of cash generated from the sale and maturities of
        investments.
   *Net
        Cash
        from Financing Activities*.****During the three
        months ended December 31, 2006, $8,000 of cash was used by our financing
        activities for our capital lease obligations. During the three months ended
        December 31, 2005, $0.2 million of cash was provided by our financing
        activities from the issuance of common stock of $0.9 million, which was
        offset by $0.7 million of cash used for our capital lease
        obligations.
   We
        expect to
        generate cash flows from operating activities over the long-term; however,
        we
        may experience significant fluctuations from quarter to quarter resulting
        from
        the timing of the billing and collection of large project milestones. We
        anticipate that our existing capital resources, including our cash balances,
        cash that we anticipate will be provided by operating activities and our
        available credit facilities will be adequate to fund our operations for at
        least
        the next 12 months. There can be no assurance that changes will not occur
        that
        would consume available capital resources before such time. Our capital
        requirements and capital resources depend on numerous factors, including
        potential acquisitions; initiation of large child support payment processing
        contracts that typically require large cash outlays for capital expenditures
        and
        staff-up costs; contingent payments earned; new and existing contract
        requirements; the timing of the receipt of accounts receivable, including
        unbilled receivables; the timing and ability to sell investment securities
        held
        in our portfolio without a loss of principle; our ability to draw on our
        bank
        facility; and employee growth. To the extent that our existing capital resources
        are insufficient to meet our capital requirements, we will have to raise
        additional funds. There can be no assurance that additional funding, if
        necessary, will be available on favorable terms, if at all. The raising of
        additional capital may dilute our shareholders’ ownership in us.
   Due
        to the current
        economic climate, the performance bond market has changed significantly,
        resulting in reduced availability of bonds, increased cash collateral
        requirements and increased premiums. Some of our government contracts require
        a
        performance bond, and future requests for proposal may also require a
        performance bond. Our inability to obtain performance bonds, increased costs
        to
        obtain such bonds or a requirement to pledge significant cash collateral
        in
        order to obtain such bonds would adversely affect our business
        and our
        capacity to obtain additional contracts. Increased premiums or a claim made
        against a performance bond could adversely affect our earnings and cash flow
        and
        impair our ability to bid for future contracts.
 20
  *CONTRACTUAL
          OBLIGATIONS*
  Since
          September 30, 2006, there have been no material changes outside the ordinary
          course of business in the contractual obligations disclosed in our most
          recent
          annual report.
 *CRITICAL
        ACCOUNTING POLICIES*
  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;
        valuation of goodwill and intangibles; and estimated share-based compensation.
        Actual results could differ materially from management’s estimates.
   For
        a full
        discussion of our critical accounting policies and estimates, see the
*Management’s Discussion and Analysis of Financial Condition and Results of
        Operations* in our Annual Report on Form 10-K for the fiscal year ended
        September 30, 2006.
   **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK******
  We
        maintain a
        portfolio of cash equivalents and investments in a variety of securities
        including certificates of deposit, money market funds and government and
        non-government debt securities. These available-for-sale securities are subject
        to interest rate risk and may decline in value if market interest rates
        increase. If market interest rates increase immediately and uniformly by
        ten percentage points from levels at December 31, 2006, the fair value
        of the portfolio would decline by about $14,500.
   **ITEM
        4. CONTROLS AND PROCEDURES**
  *EVALUATION
        OF DISCLOSURE CONTROLS AND PROCEDURES*
  Our
        management,
        with the participation of our Chief Executive Officer and Chief Financial
        Officer, evaluated the effectiveness of our disclosure controls and procedures
        (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
        December 31, 2006. The term “disclosure controls and procedures” means controls
        and other procedures that are designed to ensure that information required
        to be
        disclosed by a company in reports that it files or submits under the Exchange
        Act is recorded, processed, summarized and reported, within the time periods
        specified in the SEC’s rules and forms. Disclosure controls and procedures
        include, without limitation, controls and procedures designed to ensure
        that such information is accumulated and communicated to the company’s
        management, including its principal executive and principal financial officers,
        as appropriate to allow timely decisions regarding required disclosure.
        Management recognizes that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        their
        objectives and management necessarily applies its judgment in evaluating
        the
        cost-benefit relationship of possible controls and procedures. Based on the
        evaluation of our disclosure controls and procedures as of December 31,
        2006, our Chief Executive Officer and our Chief Financial Officer concluded
        that
        as of that date, our disclosure controls and procedures were effective at
        the
        reasonable assurance level. There was no change in our internal control
        over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
        the
        Exchange Act) during the quarter ended December 31, 2006 that has
        affected, or is reasonably likely to materially affect, our internal
        control over financial reporting.
   21
  **PART
        II. OTHER INFORMATION**
  **ITEM
        1—LEGAL PROCEEDINGS**
  On
          November 20, 2006, we were served with a class action lawsuit on behalf
          of
          purchasers of our common stock from November 29, 2001 to October 25,
          2006. The suit alleges that Tier and certain of our former and/or current
          officers violated the Securities Exchange Act of 1934, but did not identify
          the
          damages being sought. This case is pending in the United States District
          Court
          for the Eastern District of Virginia. We are not able to estimate the
          probability or level of exposure associated with this
          complaint.
  **ITEM
        1A—RISK FACTORS**
  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.
   **If
        we fail
        to regain our listing status on Nasdaq, the value of our stock may continue
        to
        be depressed, we may have difficulties attracting and retaining customers
        and
        employees and our****company may be susceptible to takeover
        attempts.** Effective at the open of business on May 25, 2006,
        our common stock was delisted from the Nasdaq National Market (now the Nasdaq
        Global Market). Although we have applied for re-listing, we may not be
        successful in having our common stock listed on the Nasdaq Global
        Market.
   **We
        have
        incurred losses in the past and may not be profitable in the
        future.******We have incurred losses in the past and
        we may do so in the future. While we reported net income from continuing
        operations in fiscal year 2005, we reported losses from continuing operations
        of
        $9.5 million during the fiscal year 2006, $63,000 in fiscal year 2004 and
        $5.4
        million in fiscal year 2003.
   **Our
        revenues and operating margins may decline and may be difficult to forecast,
        which could result in a decline in our stock price.** Our revenues,
        operating margins and cash flows are subject to significant variation from
        quarter to quarter due to a number of factors, many of which are outside
        our
        control. These factors include:
   ·
            economic
                conditions in the marketplace;   ·
            our
                customers’ budgets and demand for our services;   ·
            seasonality
                of business;   ·
            timing
                of
                service and product implementations;   ·
            unplanned
                increase in costs;   ·
            delay
                in
                completion of projects;   ·
            intense
                competition;   ·
            variability
                of software license revenues; and   ·
            integration
                and costs of acquisitions.   The
        occurrence of
        any of these factors may cause the market price of our stock to decline or
        fluctuate significantly, which may result in substantial losses to
        investors.****We believe that period-to-period comparisons of
        our operating results are not necessarily meaningful and/or indicative of
        future
        performance. From time to time, our operating results may fail to meet analysts’
and investors’ expectations, which could cause a significant decline in the
        market price of our stock. Price fluctuations and trading volume of our stock
        may be rapid and severe and may leave investors little time to react. Other
        factors that may affect the market price of our stock include announcements
        of
        technological innovations or new products or services by competitors and
        general
        economic or political conditions, such as recession, acts of war or terrorism.
        Fluctuations in the price of our stock could cause investors to lose all
        or part
        of their investment.
 22
   **We
        rely on
        small numbers of projects, customers and target markets for significant portions
        of our revenues and our cash flow may decline significantly if we are unable
        to
        retain or replace these projects or
        clients.** ****We depend on a small number of
        clients to generate a significant portion of our revenues. The completion
        or
        cancellation of a large project or a significant reduction in project scope
        could significantly reduce our revenues and cash flows. Many of our contracts
        allow our clients to terminate the contract for convenience upon notice and
        without penalty. If any of our large clients or prime
        contractors
        terminates its relationship with us, we will lose a significant portion of
        our
        revenues and cash
        flows. Because
        of our specific market focus, adverse economic conditions affecting government
        agencies in these markets could also result in a reduction in our revenues
        and
        cash flows. During the period ended December 31, 2006, our ten largest clients
        represented approximately 48% of our total revenues, including one contract
        that
        generated over 10% of our total revenues. Our operating results and cash
        flows
        could decline significantly if we cannot keep these clients, or replace them
        if
        lost.
   **We
        operate
        in highly competitive markets. If we do not compete effectively, we could
        face
        price reductions, reduced profitability and loss of market
        share.******Our business is focused on transaction
        processing and software systems solutions, which are highly competitive markets
        and are served by numerous international, national and local firms. Many
        competitors have significantly greater financial, technical and marketing
        resources and name recognition than we do. In addition, there are relatively
        low
        barriers to entry into these markets and we expect to continue to face
        additional competition from new entrants into our markets. Parts of our business
        are subject to increasing pricing pressures from competitors, as well as
        from
        clients facing pressure to control costs. Some competitors are able to operate
        at significant losses for extended periods of time, which increases pricing
        pressure on our products and services. If we do not compete effectively,
        the
        demand for our products and services and our revenue growth and operating
        margins could decline, resulting in reduced profitability and loss of market
        share.
   **Changes
        in
        accounting standards could significantly change our reported results. Our
        accounting policies and methods are fundamental to how we record and report
        our
        financial condition and results of
        operations.******From time to time, the Financial
        Accounting Standards Board changes the financial accounting and reporting
        standards that govern the preparation of our financial statements. These
        changes
        can be hard to predict and can have a material effect on how we record and
        report our financial condition and results of operations. In some cases,
        we
        could be required to apply a new or revised standard retroactively, resulting
        in
        our restating prior period financial statements.
   **Changes
        in
        laws and government and regulatory compliance requirements may result in
        additional compliance costs and may adversely impact our reported earnings.**Our business is subject to numerous federal, state and local laws,
        government regulations, corporate governance standards, industry association
        rules and public disclosure requirements, which are subject to change. Changing
        laws, regulations and standards relating to corporate governance, accounting
        standards, and public disclosure, including the Sarbanes-Oxley Act of 2002,
        SEC
        regulations and Nasdaq Stock Market rules, are creating uncertainty for
        companies and increasing the cost of compliance. To maintain high standards
        of
        corporate governance and public disclosure, we intend to invest all reasonably
        necessary resources to comply with evolving standards. This investment may
        result in increased general and****administrative expenses
        for outside services and a diversion of management time and attention from
        revenue-generating activities. New laws, regulations or industry standards
        may
        be enacted, or existing ones changed, which could
        negatively****impact our services and revenues. Taxes or
        fees****may be****imposed or we could be
        subject to additional requirements in regard to privacy, security or
        qualification for doing business. For our transaction processing services,
        we
        are subject to the rules of the National Automated Clearing House Association
        and the applicable credit/debit card association rules. A change in such
        rules
        and regulations could restrict or eliminate our ability to provide services
        or
        accept certain types of transactions, and could increase costs, impair growth
        and make our services unprofitable.
   **The
        revenues provided by our EPP segment from electronic payment processing may
        fluctuate and the ability to maintain profitability is
        uncertain.******Our EPP segment primarily provides
        credit and debit card and electronic check payment options for the payment
        of
        federal and state personal income taxes, real estate and personal property
        taxes, business taxes, fines for traffic violations and parking citations
        and
        educational and utility obligations. The revenues earned by our EPP segment
        depend on consumers’ continued willingness to pay a convenience fee and our
        relationships with clients, such as
 23
 government
        taxing
        authorities, educational institutions, public utilities and their respective
        constituents. If consumers are not receptive to paying a convenience fee;
        if
        card associations change their rules or laws are passed that do not allow
        us to
        charge the convenience fees; or if credit or debit card issuers or marketing
        partners eliminate or reduce the value of rewards to consumers under their
        respective rewards programs, demand for electronic payment processing services
        could decline. The processing fees charged by credit/debit card associations
        and
        financial institutions can be increased with little or no notice,
        which could
        reduce margins and harm our profitability. Demand for electronic payment
        processing services
        could also
        be affected adversely by a decline in the use of the Internet or consumer
        migration to a new or different technology or payment method. The use of
        credit
        and debit cards and electronic checks to make payments to government agencies
        is
        subject to increasing competition and rapid technological change. If we are
        not
        able to develop, market and deliver competitive technologies, our market
        share
        will decline and our operating results and financial condition could
        suffer.
   **Our
        ability
        to grow depends largely on our ability to attract, integrate and retain
        qualified personnel. The success of our business is based largely on our
        ability
        to attract and retain talented and qualified employees and
        contractors.** The market for skilled workers in our industry is
        extremely competitive. In particular, qualified project managers and senior
        technical and professional staff are in great demand. If we are not successful
        in our recruiting efforts or are unable to retain key employees, our ability
        to
        staff projects and deliver products and services may be adversely affected.
        We
        believe our success also depends upon the continued services of senior
        management and a number of key employees whose employment may terminate at
        any
        time. If one or more key employees resigns to join a competitor or to form
        a
        competing company, the loss of such personnel and any resulting loss of existing
        or potential clients could harm our competitive position.
   **We
        depend
        on third parties for our products and services. Failure by these third parties
        to perform their obligations satisfactorily could hurt our reputation, operating
        results and competitiveness.******Our business is
        highly dependent on working with other companies and organizations to bid
        on and
        perform complex multi-party projects. We may act as a prime contractor and
        engage subcontractors, or we may act as a subcontractor to the prime contractor.
        We use third-party software, hardware and support service providers to perform
        joint engagements. We depend on licensed software and other technology from
        a
        small number of primary vendors. We also rely on a third-party co-location
        facility for our primary data center, use third-party processors to complete
        payment transactions and use third-party software providers for system
        solutions, security and infrastructure. The failure of any of these third
        parties to meet their contractual obligations, our inability to obtain favorable
        contract terms, failures or defects attributable to these third parties or
        their
        products, or the discontinuation of the services of a key subcontractor or
        vendor could result in significant cost and liability, diminished profitability
        and damage to our reputation and competitive position.
   **Our
        fixed-price and transaction-based contracts require accurate estimates of
        resources and transaction volumes. Failure to estimate these factors accurately
        could cause us to lose money on these
        contracts.******Our business relies on accurate
        estimates. If we underestimate the resources, cost or time required for a
        project or overestimate the expected volume of transactions or transaction
        dollars processed, our costs could be greater than expected or our revenues
        could be less than expected. Under fixed-price contracts, we generally receive
        our fee if we meet specified deliverables, such as completing certain components
        of a system installation. For transaction-based contracts, we receive our
        fee on
        a per-transaction basis or as a percentage of dollars processed, such as
        the
        number of child support payments processed or tax dollars processed. If we
        fail
        to prepare accurate estimates on factors used to develop contract pricing,
        such
        as labor costs, technology requirements or transaction volumes, we may incur
        losses on those contracts and our operating margins could decline.
   **Our
        revenue
        is highly dependent on government funding. The loss or decline of existing
        or
        future government funding could cause our revenue and cash flows to
        decline.******A significant portion of our revenue is
        derived from federal and state mandated projects. A large portion of these
        projects may be subject to a reduction or discontinuation of funding, which
        may
        cause early termination of projects, diversion of funds away from our projects
        or delays in implementation. The occurrence of any of these conditions could
        have an adverse effect on our projected revenue, cash flows and
        profitability.
 24
   **Unauthorized
        data access and other security breaches could have an adverse impact on our
        business and our reputation. Security breaches or improper access to data
        in our
        facilities, computer networks, or databases, or those of our suppliers, may
        cause harm to our business and result in liability and systems
        interruptions.******Despite security measures we have
        taken, our systems may be vulnerable to physical break-ins, computer viruses,
        attacks by hackers and similar problems causing interruption in service and
        loss
        or theft of data and information. Our third-party suppliers also may
        experience
        security breaches involving the unauthorized access of proprietary information.
        A security
        breach
        could result in theft, publication, deletion or modification of confidential
        information; cause harm to our business and reputation; and result in loss
        of
        clients and revenue.
   **We
        could
        suffer material losses if our operations fail to perform effectively. The
        potential for operational risk exposure exists throughout our
        organization.******Integral to our performance is the
        continued efficiency of our technical systems, operational infrastructure,
        relationships with third parties and key executives in our day-to-day and
        ongoing operations. Failure by any or all of these resources subjects us
        to
        risks that may vary in size, scale and scope. This includes but is not limited
        to operational or technical failures, ineffectiveness or exposure due to
        interruption in third-party support as expected, as well as the loss of key
        individuals or failure on the part of the key individuals to perform properly.
        Our insurance may not be adequate to compensate us for all losses that may
        occur
        as a result of any such event, or any system, security or operational failure
        or
        disruption.
   **At
        any
        given time, we are subject to a variety of claims and lawsuits. An adverse
        decision in any of these claims could have an adverse impact on our reputation
        and financial results.** Adverse outcomes in a claim, lawsuit, government
        investigation, tax determination, or other liability matter could result
        in
        significant monetary damages, substantial costs, or injunctive relief against
        us
        that could adversely affect our ability to conduct our business. We cannot
        guarantee that the disclaimers, limitations of warranty, limitations of
        liability and other provisions set forth in our contracts will be enforceable
        or
        will otherwise protect us from liability for damages. The successful assertion
        of one or more claims against us may not be covered by, or may exceed our
        available insurance coverage.
   In
        May 2003, we
        received a subpoena from a grand jury in the Southern District of New York
        to
        produce certain documents pursuant to an investigation by the Antitrust Division
        of the U.S. Department of Justice, or the DOJ, involving the child support
        payment processing industry. We have cooperated, and intend to continue to
        cooperate, fully with the subpoena and with the DOJ’s investigation. On
        November 20, 2003, the DOJ granted us conditional amnesty pursuant to the
        Antitrust Division’s Corporate Leniency Policy. Consequently, the DOJ will not
        bring any criminal charges against us or our officers, directors and employees,
        as long as we continue to comply with the Corporate Leniency Policy, which
        requires, among other things, our full cooperation in the investigation and
        restitution payments if it is determined that parties were injured as a result
        of impermissible anticompetitive conduct. We anticipate that we will incur
        additional expenses as we continue to cooperate with the investigation. Such
        expenses and any restitution payments could negatively impact our reputation,
        compromise our ability to compete and win new projects and result in financial
        losses.
   In
        May 2006, we
        received a subpoena from the Philadelphia District Office of the SEC requesting
        documents relating to financial reporting and personnel issues. If the SEC
        were
        to conclude that further investigative activities are merited or to take
        formal
        action against Tier, our reputation could be impaired. We have cooperated,
        and
        intend to continue to cooperate, fully with this investigation. We anticipate
        that we will incur additional legal and administrative expenses as we continue
        to cooperate with the SEC’s investigation.
   On
        November 20,
        2006, we were served with a class action lawsuit on behalf of purchasers
        of our
        common stock from November 29, 2001 to October 25, 2006, related to compliance
        with the Securities Exchange Act of 1934. We anticipate that we will incur
        legal
        and administrative expenses to defend this claim. In addition, significant
        adverse verdicts or settlements could exceed the levels of our insurance
        coverage.
   **If
        we are
        not able to protect our intellectual property, our business could suffer
        serious
        harm. We protect our intellectual property rights through a variety of methods,
        such as use of nondisclosure and license agreements and use of trade secret,
        copyright and trademark laws.******Ownership of
 25
 developed
        software
        and customizations to software are the subject of negotiation with individual
        clients. Despite our efforts to safeguard and protect our intellectual property
        and proprietary rights, there is no assurance that these steps will be adequate
        to avoid the loss or misappropriation of our rights or that we will be able
        to
        detect unauthorized use of our intellectual property rights. If we are unable
        to
        protect our intellectual
        property, competitors could market services or products similar to ours,
        and
        demand for our offerings could decline, resulting in an adverse impact on
        revenues.
  **We
        may be
        subject to infringement claims by third parties, resulting in increased costs
        and loss of business.******From time to time we
        receive notices from others claiming we are infringing on their intellectual
        property rights. Defending a claim of infringement against us could prevent
        or
        delay our providing products and services, cause us to pay substantial costs
        and
        damages, force us to redesign products or enter into royalty or licensing
        agreements on less favorable terms. If we are required to enter into such
        agreements or take such actions, our operating margins could
        decline.
   **If
        we are
        not able to obtain adequate or affordable insurance coverage or bonds, we
        could
        face significant liability claims and increased premium costs and our ability
        to
        compete for business could be compromised.******We
        maintain insurance to cover various risks in connection with our business.
        Additionally, our business includes projects that require us to obtain
        performance and bid bonds from a licensed surety. There is no guarantee that
        such insurance coverage or bonds will continue to be available on reasonable
        terms, or at all. If we are unable to maintain adequate insurance and bonding
        coverage, potential liabilities associated with the risks discussed in this
        report could exceed our coverage, and we may not be able to obtain new
        contracts, which could result in decreased business opportunities and declining
        revenues.
   **Our
        markets
        are changing rapidly. If we are not able to adapt to changing conditions,
        we may
        lose market share and may not be able to compete
        effectively.******The markets for our products are
        characterized by rapid changes in technology, client expectations and evolving
        industry standards. Our future success depends on our ability to innovate,
        develop, acquire and introduce successful new products and services for our
        target markets and to respond quickly to changes in the market. If we are
        unable
        to address these requirements, or if our products do not achieve market
        acceptance, we may lose market share and our revenues could
        decline.
   **We
        may not
        be successful in identifying acquisition candidates and, if we undertake
        acquisitions, they could be expensive, increase our costs or liabilities
        or
        disrupt our business. One of our strategies is to pursue growth through
        acquisitions.**We may not be able to identify suitable acquisition
        candidates at prices that we consider appropriate or to finance acquisitions
        at
        favorable terms. If we do identify an appropriate acquisition candidate,
        we may
        be unsuccessful in negotiating the terms of the acquisition, finance the
        acquisition or, if the acquisition occurs we may be unsuccessful in integrating
        the acquired business into our existing business. Negotiations of potential
        acquisitions and the integration of acquired business operations could disrupt
        our business by diverting management attention away from day-to-day operations.
        Acquisitions of businesses or other material operations may require additional
        debt or equity financing, resulting in leverage or dilution of ownership.
        We
        also may not realize cost efficiencies or synergies that we anticipated
        when****selecting our acquisition candidates. In addition, we
        may need to record write-downs from future impairments of identified intangible
        assets and goodwill, which could reduce our future reported earnings.
        Acquisition candidates may have liabilities or adverse operating issues that
        we
        fail to discover through due diligence prior to the acquisition. Any costs,
        liabilities or disruptions associated with any future acquisitions we may
        pursue
        could harm our operating results.
   **Our
        business is subject to increasing performance requirements, which could result
        in reduced revenues and increased liability.******Our
        business involves projects that are critical to the operations of our clients'
        businesses. The failure to meet client expectations could damage our reputation
        and compromise our ability to attract new business. On certain projects we
        make
        performance guarantees, based upon defined operating specifications, service
        levels and delivery dates, which are sometimes backed by contractual guarantees
        and performance bonds. Unsatisfactory performance or unanticipated difficulties
        or delays in starting or completing such projects may result in termination
        of
        the contract, a reduction in payment, liability for penalties and damages,
        or
        claims against a performance bond. Client performance expectations or
        unanticipated delays could necessitate the use of more resources than
        we
 26
 initially
        budgeted for a particular project, which could increase our project costs
        and
        make us less profitable.
  **Item
        6. Exh****ibits**
  Exhibit
                    Number
                Description31.1
                Certification
                    of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                    promulgated under the Securities Exchange Act of 1934, as
                    amended.†31.2
                Certification
                    of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                    promulgated under the Securities Exchange Act of 1934, as
                    amended.†32.1
                Certification
                    of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†32.2
                Certification
                    of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.††Filed
                    herewith.
 
 
  27
   **SIGNATURE**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report on Form 10-Q to be signed on its behalf by the
        undersigned thereunto duly authorized.
  
 
 Tier
                  Technologies, Inc.Dated:
                  February 8, 2007By:/s/
                  David E. Fountain**David
                  E. Fountain****Chief
                  Financial Officer****(Principal
                  Financial and Accounting
                  Officer)**


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