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 March 31,
2009




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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes o No o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer," "accelerated
filer," and "smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):




Large
      accelerated filer o
            Accelerated
      filer xNon-accelerated
      filer o
            Smaller
      reporting company o(Do
      not check if a smaller reporting company)




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
April 30, 2009 there were 19,522,463 shares of the Registrant's Common Stock
outstanding.














TIER TECHNOLOGIES,
INC.




TABLE
OF CONTENTS


PART
      I.  FINANCIAL INFORMATION
              1Item
      1.  Consolidated Financial Statements
(unaudited)
              1Consolidated
      Balance Sheets
              1Consolidated
      Statements of Operations
              2Consolidated
      Statements of Comprehensive Loss
              3Consolidated
      Statements of Cash Flows
              4Consolidated
      Supplemental Cash Flow Information
              5Notes
      to Consolidated Financial Statements (unaudited)
              6Note
      1—Nature of Operations and Basis of Presentation
              6Note
      2—Recent Accounting Pronouncements
              7Note
      3—Investments
              8Note
      4—Fair Value Measurements
              10Note
      5—Customer Concentration and Risk
              11Note
      6—Goodwill and Other Intangible Assets
              12Note
      7—Income Taxes
              13Note
      8—Contingencies and Commitments
              14Note
      9—Related Party Transactions
              16Note
      10—Restructuring
              16Note
      11—Shareholders’ Equity
              16Note
      12—Segment Information
              16Note
      13—Share-based Payment
              19Note
      14—Discontinued Operations
              21Note
      15—(Loss)/Earnings per Share
              22Note
      16—Acquisition
              22Item
      2.  Management's Discussion and Analysis of Financial
      Condition
                and
      Results of Operations
              24Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
              35Item
      4.  Controls and Procedures
              35PART
      II.  OTHER INFORMATION
              37Item
      1.  Legal Proceedings
              37Item
      1A.  Risk Factors
              37Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
              43Item
      4.  Submission of Matters to a Vote of Security
      Holders
              43Item
      6.  Exhibits
              45SIGNATURE
              46











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, expectations for the
divestitures of certain assets, 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 generally can be
identified as such because the context of the statement includes words such as
"may," "will," "intends," "plans," "believes," "anticipates," "expects,"
"estimates," "shows," "predicts," "potential," "continue," or "opportunity," the




i


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 37, 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.











ii




PART I.  FINANCIAL INFORMATION




ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)




TIER
TECHNOLOGIES, INC.




CONSOLIDATED BALANCE SHEETS




(in
      thousands)
                    
                    March
      31,
                      2009
                    
                    
                    September 30,
                      2008(unaudited)ASSETS:Current
      assets:Cash
      and cash equivalents
                    
                    $
                    29,845
                    
                    
                    $
                    47,735Investments
      in marketable securities
                    
                    
                    9,995
                    
                    
                    
                    2,415Accounts
      receivable, net
                    
                    
                    9,301
                    
                    
                    
                    4,209Prepaid
      expenses and other current assets
                    
                    
                    2,782
                    
                    
                    
                    1,863Current
      assets—held-for-sale
                    
                    
                    —
                    
                    
                    
                    11,704Total
      current assets
                    
                    
                    51,923
                    
                    
                    
                    67,926Property,
      equipment and software, net
                    
                    
                    6,289
                    
                    
                    
                    4,479Goodwill
                    
                    
                    17,298
                    
                    
                    
                    14,526Other
      intangible assets, net
                    
                    
                    14,554
                    
                    
                    
                    13,455Investments
      in marketable securities
                    
                    
                    31,226
                    
                    
                    
                    28,821Restricted
      investments
                    
                    
                    7,361
                    
                    
                    
                    7,861Other
      assets
                    
                    
                    776
                    
                    
                    
                    283Total
      assets
                    
                    $
                    129,427
                    
                    
                    $
                    137,351LIABILITIES
      AND SHAREHOLDERS’ EQUITY:Current
      liabilities:Accounts
      payable
                    
                    $
                    1,618
                    
                    
                    $
                    918Accounts
      payable escrow
                    
                    
                    8,399
                    
                    
                    
                    —Accrued
      compensation liabilities
                    
                    
                    2,821
                    
                    
                    
                    4,289Accrued
      discount fees
                    
                    
                    4,978
                    
                    
                    
                    5,243Other
      accrued liabilities
                    
                    
                    6,924
                    
                    
                    
                    4,667Deferred
      income
                    
                    
                    1,181
                    
                    
                    
                    1,790Current
      liabilities—held-for-sale
                    
                    
                    —
                    
                    
                    
                    9,061Total
      current liabilities
                    
                    
                    25,921
                    
                    
                    
                    25,968Other
      liabilities
                    
                    
                    133
                    
                    
                    
                    136Total
      liabilities
                    
                    
                    26,054
                    
                    
                    
                    26,104Commitments
      and contingencies (Note 8)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: 20,619 and 20,619; shares outstanding: 19,622 and
      19,735
                    
                    
                    190,877
                    
                    
                    
                    190,099Treasury
      stock—at cost, 997 and 884 shares
                    
                    
                    (9,323
                    )
                    
                    
                    (8,684
                    )Accumulated
      other comprehensive loss
                    
                    
                    (2
                    )
                    
                    
                    (2,504
                    )Accumulated
      deficit
                    
                    
                    (78,179
                    )
                    
                    
                    (67,664
                    )Total
      shareholders’ equity
                    
                    
                    103,373
                    
                    
                    
                    111,247Total
      liabilities and shareholders’ equity
                    
                    $
                    129,427
                    
                    
                    $
                    137,351




See Notes to Consolidated Financial
Statements




1




TIER
TECHNOLOGIES, INC.




CONSOLIDATED STATEMENTS OF OPERATIONS




(unaudited)







Three
      months ended
                      March
      31,
                    
                    
                    Six
      months ended
                      March
      31,(in
      thousands, except per share data)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenues
                    
                    $
                    28,608
                    
                    
                    $
                    25,961
                    
                    
                    $
                    58,348
                    
                    
                    $
                    54,916Costs
      and expenses:Direct
      costs
                    
                    
                    20,771
                    
                    
                    
                    19,518
                    
                    
                    
                    43,189
                    
                    
                    
                    41,752General
      and administrative
                    
                    
                    7,512
                    
                    
                    
                    6,873
                    
                    
                    
                    14,142
                    
                    
                    
                    13,982Selling
      and marketing
                    
                    
                    1,912
                    
                    
                    
                    2,005
                    
                    
                    
                    3,228
                    
                    
                    
                    4,119Depreciation
      and amortization
                    
                    
                    1,624
                    
                    
                    
                    1,330
                    
                    
                    
                    3,084
                    
                    
                    
                    2,625Total
      costs and expenses
                    
                    
                    31,819
                    
                    
                    
                    29,726
                    
                    
                    
                    63,643
                    
                    
                    
                    62,478Loss
      from continuing operations before other income/(loss) and income
      taxes
                    
                    
                    (3,211
                    )
                    
                    
                    (3,765
                    )
                    
                    
                    (5,295
                    )
                    
                    
                    (7,562
                    )Other
      income/(loss):Gain/(loss)
      on investment
                    
                    
                    13
                    
                    
                    
                    —
                    
                    
                    
                    (99
                    )
                    
                    
                    —Interest
      income, net
                    
                    
                    240
                    
                    
                    
                    824
                    
                    
                    
                    544
                    
                    
                    
                    1,790Total
      other income
                    
                    
                    253
                    
                    
                    
                    824
                    
                    
                    
                    445
                    
                    
                    
                    1,790Loss
      from continuing operations
                      before
      income taxes
                    
                    
                    (2,958
                    )
                    
                    
                    (2,941
                    )
                    
                    
                    (4,850
                    )
                    
                    
                    (5,772
                    )Income
      tax provision
                    
                    
                    1
                    
                    
                    
                    12
                    
                    
                    
                    1
                    
                    
                    
                    28Loss
      from continuing operations
                    
                    
                    (2,959
                    )
                    
                    
                    (2,953
                    )
                    
                    
                    (4,851
                    )
                    
                    
                    (5,800
                    )(Loss)/income
      from discontinued operations, net
                    
                    
                    (2,402
                    )
                    
                    
                    (584
                    )
                    
                    
                    (5,664
                    )
                    
                    
                    832Net
      loss
                    
                    $
                    (5,361
                    )
                    
                    $
                    (3,537
                    )
                    
                    $
                    (10,515
                    )
                    
                    $
                    (4,968
                    )(Loss)/earnings
      per share—Basic and diluted:From
      continuing operations
                    
                    $
                    (0.15
                    )
                    
                    $
                    (0.15
                    )
                    
                    $
                    (0.24
                    )
                    
                    $
                    (0.29
                    )From
      discontinued operations
                    
                    $
                    (0.12
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.29
                    )
                    
                    $
                    0.04Loss
      per share—Basic and diluted
                    
                    $
                    (0.27
                    )
                    
                    $
                    (0.18
                    )
                    
                    $
                    (0.53
                    )
                    
                    $
                    (0.25
                    )Weighted
      average common shares used in computing:Basic
      and diluted (loss)/earnings per share
                    
                    
                    19,711
                    
                    
                    
                    19,551
                    
                    
                    
                    19,723
                    
                    
                    
                    19,547




See
Notes to Consolidated Financial Statements




2








TIER
TECHNOLOGIES, INC.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS




(unaudited)




Three
      months ended
                              March
      31,
                            
                            
                            Six
      months ended
                              March
      31,(in
      thousands)
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Net
      loss
                            
                            $
                            (5,361
                            )
                            
                            $
                            (3,537
                            )
                            
                            $
                            (10,515
                            )
                            
                            $
                            (4,968
                            )Other
      comprehensive (loss)/income, net of tax:Unrealized
      loss on investment in
                              marketable
      securities
                            
                            
                            (3
                            )
                            
                            
                            (1,414
                            )
                            
                            
                            (2
                            )
                            
                            
                            (1,414
                            )Impact
      of unrealized loss transferred
                              from
      AOCI into net loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,504
                            
                            
                            
                            —Other
      comprehensive (loss)/income
                            
                            
                            (3
                            )
                            
                            
                            (1,414
                            )
                            
                            
                            2,502
                            
                            
                            
                            (1,414
                            )Comprehensive
      loss
                            
                            $
                            (5,364
                            )
                            
                            $
                            (4,951
                            )
                            
                            $
                            (8,013
                            )
                            
                            $
                            (6,382
                            )




See
Notes to Consolidated Financial Statements




3




TIER
TECHNOLOGIES, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS




(unaudited)




Six
      months ended
                          March
      31,(in
      thousands)
                        
                        2009
                        
                        
                        2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                        
                        $
                        (10,515
                        )
                        
                        $
                        (4,968
                        )Less:
      (Loss)/income from discontinued operations, net
                        
                        
                        (5,664
                        )
                        
                        
                        832Loss
      from continuing operations, net
                        
                        
                        (4,851
                        )
                        
                        
                        (5,800
                        )Non-cash
      items included in net loss:Depreciation
      and amortization
                        
                        
                        3,131
                        
                        
                        
                        2,697Provision
      for doubtful accounts
                        
                        
                        116
                        
                        
                        
                        31Accrued
      forward loss on contract
                        
                        
                        14
                        
                        
                        
                        107Share-based
      compensation
                        
                        
                        838
                        
                        
                        
                        1,415Loss
      on trading investments
                        
                        
                        99
                        
                        
                        
                        —Other
                        
                        
                        (7
                        )
                        
                        
                        48Net
      effect of changes in assets and liabilities:Accounts
      receivable, net
                        
                        
                        (5,078
                        )
                        
                        
                        1,098Prepaid
      expenses and other assets
                        
                        
                        (85
                        )
                        
                        
                        125Accounts
      payable and accrued liabilities
                        
                        
                        8,516
                        
                        
                        
                        (1,434
                        )Income
      taxes receivable
                        
                        
                        (61
                        )
                        
                        
                        28Deferred
      income
                        
                        
                        (609
                        )
                        
                        
                        (544
                        )Cash
      provided by (used in) operating activities from continuing
      operations
                        
                        
                        2,023
                        
                        
                        
                        (2,229
                        )Cash
      (used in) provided by operating activities from discontinued
      operations
                        
                        
                        (4,822
                        )
                        
                        
                        4,628Cash
      (used in) provided by operating activities
                        
                        
                        (2,799
                        )
                        
                        
                        2,399CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of available-for-sale securities
                        
                        
                        (21,460
                        )
                        
                        
                        (7,325
                        )Maturities
      of available-for-sale securities
                        
                        
                        13,878
                        
                        
                        
                        32,615Maturities
      of restricted investments
                        
                        
                        500
                        
                        
                        
                        —Purchase
      of equipment and software
                        
                        
                        (1,283
                        )
                        
                        
                        (921
                        )ChoicePay,
      Inc. asset purchase, net of cash acquired
                        
                        
                        (6,896
                        )
                        
                        
                        —Proceeds
      from sale of discontinued operations
                        
                        
                        1,255
                        
                        
                        
                        —Cash
      (used in) provided by investing activities from continuing
      operations
                        
                        
                        (14,006
                        )
                        
                        
                        24,369Cash
      used in investing activities from discontinued operations
                        
                        
                        (437
                        )
                        
                        
                        (2,716
                        )Cash
      (used in) provided by investing activities
                        
                        
                        (14,443
                        )
                        
                        
                        21,653CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from issuance of common stock
                        
                        
                        —
                        
                        
                        
                        96Purchase
      of company stock
                        
                        
                        (639
                        )
                        
                        
                        —Capital
      lease obligations and other financing arrangements
                        
                        
                        (9
                        )
                        
                        
                        (26
                        )Cash
      (used in) provided by financing activities from continuing
      operations
                        
                        
                        (648
                        )
                        
                        
                        70Cash
      used in financing activities from discontinued operations
                        
                        
                        —
                        
                        
                        
                        (3
                        )Cash
      (used in) provided by financing activities
                        
                        
                        (648
                        )
                        
                        
                        67Net
      (decrease)/increase in cash and cash equivalents
                        
                        
                        (17,890
                        )
                        
                        
                        24,119Cash
      and cash equivalents at beginning of period
                        
                        
                        47,735
                        
                        
                        
                        16,516Cash
      and cash equivalents at end of period
                        
                        $
                        29,845
                        
                        
                        $
                        40,635





4




TIER
TECHNOLOGIES, INC.




CONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION




(unaudited)






Six
      months ended
                  March
      31,(in
      thousands)
                
                2009
                
                
                2008SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW
      INFORMATION:Cash
      paid during the period for:Interest
                
                $
                3
                
                
                $
                6Income
      taxes paid, net
                
                $
                62
                
                
                $
                —SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Equipment
      acquired under capital lease obligations and other financing
      arrangements
                
                $
                —
                
                
                $
                28Fair
      value of ARS Rights
                
                $
                3,227
                
                
                $
                —Notes
      receivable from third parties
                
                $
                1,021
                
                
                $
                —Transfer
      from available-for-sale to trading securities, at par
value
                
                $
                31,325
                
                
                $
                —Decrease
      in fair value of trading securities
                
                $
                824
                
                
                $
                —Purchase
      price of ChoicePay acquisition
                
                $
                7,566
                
                
                $
                —Fair
      value of net assets acquired
                
                $
                4,794
                
                
                $
                —Goodwill
      from ChoicePay acquisition
                
                $
                2,772
                
                
                $
                —




See
Notes to Consolidated Financial Statements




5
 Tier
Technologies, Inc.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)




NOTE
1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION




NATURE OF
OPERATIONS




Tier
Technologies, Inc., or Tier or the Company, provides federal, state and local
government and other public sector clients with electronic payment and other
transaction processing services, as well as software and systems integrations
services.  Our core business is Electronic Payment Solutions, or EPS
(previously referred to as Electronic Payment Processing, or
EPP).  EPS services are provided by our wholly owned subsidiary
Official Payments Corporation, or OPC.  We operate in the following
biller direct markets:




·
            Federal,
      state and local governments;




·
            Property
      tax—real and personal;




·
            Education—higher
      and K-12;




·
            Insurance;




·
            Utilities;




·
            Court
      fees and fines; and




·
            Property
      management.




We also
operate in two other business areas which we are winding down.  These
are portions of our former Government Business Process Outsourcing, or GBPO, and
Packaged Software Systems Integration, or PSSI, operations that we expect to
wind-down over a four-year period because they are neither compatible with our
long-term strategic direction nor complementary with the other businesses that
we were divesting.  These operations include:




·
            Voice and Systems
      Automation (formerly part of GBPO)—provides call center
      interactive voice response systems and support services, including
      customization, installation and maintenance;
  and




·
            Public Pension
      Administration Systems (formerly part of PSSI)—provides services to support the design,
      development and implementation of pension applications for state, county
      and city
governments.




For
additional information about our EPS and Wind-down Operations, see Note
12—Segment Information.




For
additional information about businesses in which we no longer operate, and have
divested, see Note 14—Discontinued Operations.




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.




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




6
 Tier
Technologies, Inc.


NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS




SFAS
160—Noncontrolling Interests in Consolidated Financial
Statements.  In December 2007, FASB issued Statement of
Financial Accounting Standard No. 160—Noncontrolling Interests in
Consolidated Financial Statements, or SFAS 160, which requires companies
to measure noncontrolling interests in subsidiaries at fair value and to
classify them as a separate component of equity.  SFAS 160 is
effective as of each reporting fiscal year beginning after December 15,
2008, and applies only to transactions occurring after the effective
date.  We will adopt SFAS 160 beginning October 1,
2009.  We do not believe that the adoption of SFAS 160 will have a
material effect on our financial position or results of operations.




SFAS
141(R)—Business Combinations.  In December 2007, FASB
issued Statement of Financial Accounting Standard No. 141(R)—Business Combinations, or
SFAS 141(R), which will require companies to measure assets acquired and
liabilities assumed in a business combination at fair value.  In
addition, liabilities related to contingent consideration are to be re-measured
at fair value in each subsequent reporting period.  SFAS 141(R) will
also require the acquirer in pre-acquisition periods to expense all
acquisition-related costs.  SFAS 141(R) is effective for fiscal years
beginning after December 15, 2008, and is applicable only to transactions
occurring after the effective date.  We will adopt SFAS 141(R)
beginning October 1, 2009.  We are currently evaluating the
effect the adoption of SFAS 141(R) will have on our financial position and
results of operations.




FSP FAS
142-3—Determination of the Useful Life of Intangible
Assets.  In April 2008, FASB issued FASB Staff Position FAS
142-3—Determination of the
Useful Life of Intangible Assets, or FSP 142-3.  This FSP
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FAS 142.  FSP 142-3 improves the consistency between the useful
life of a recognized intangible asset under FAS 142 and the period of expected
cash flows used to measure the fair value of the asset under other applicable
accounting literature. We will adopt FSP 142-3 beginning on October 1,
2009.  We are currently evaluating the impact FSP 142-3 will have on
our financial position and results of operations.




In
April 2009, the FASB issued three related staff positions to clarify the
application of SFAS 157 to fair value measurements in the current economic
environment, modify the recognition of other-than-temporary impairments of debt
securities, and require companies to disclose the fair value of financial
instruments in interim periods. The final staff positions are effective for
interim and annual periods ending after June 15, 2009.




·
            FSP
      FAS 157-4—Determining
      Fair Value When the Volume and Level of Activity for the Asset or
      Liability has Significantly Decreased and Identifying Transactions That
      Are Not Orderly,which provides guidance on how to determine the
      fair value of assets and liabilities under SFAS 157 in the current
      economic environment and reemphasizes that the objective of a fair value
      measurement remains the price that would be received to sell an asset or
      paid to transfer a liability at the measurement
  date.




·
            FSP
      FAS 115-2 and SFAS 124-2—Recognition and Presentation
      of Other-Than-Temporary Impairments, which modifies the
      requirements for recognizing other-than-temporarily impaired debt
      securities and significantly changes the existing impairment model for
      such securities. It also modifies the presentation of other-than-temporary
      impairment losses and increases the frequency of and expands already
      required disclosures about other-than-temporary impairment for debt and
      equity securities.




·
            FSP
      FAS 107-1 and APB 28-1—Interim Disclosures about Fair
      Value of Financial Instruments, which requires disclosures of the
      fair value of financial instruments within the scope of SFAS 107 in
      interim financial statements, adding to the current requirement to make
      those disclosures in annual financial statements. The staff position also
      requires that companies disclose the method or methods and significant
      assumptions used to estimate the fair value of financial instruments and a
      discussion of changes, if any, in the method or methods and significant
      assumptions during the period.




7
 Tier
Technologies, Inc.


We will
adopt the new staff positions as of July 1, 2009. We are currently evaluating
the impact these FSPs will have on our financial position and results of
operations.






NOTE 3—INVESTMENTS


We own
investments in marketable securities designated as available-for-sale or trading
securities as defined in Statement of Financial Accounting Standards No
115—Accounting for Certain
Investments in Debt and Equity Securities, or SFAS
115.  Restricted investments totaling $1.4 million at
March 31, 2009, and $1.9 million at September 30, 2008 were
pledged in connection with performance bonds and real estate operating leases
and will be restricted for the terms of the project performance periods and
lease periods, the latest of which is estimated to end in March
2010.  At both March 31, 2009 and September 30, 2008, we
used a $6.0 million money market investment as a compensating balance for
bank accounts used with our Automated Clearing House
processing.  These investments are reported as Restricted investments on the
Consolidated Balance Sheets.




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.




At
March 31, 2009 and September 30, 2008, our investment portfolio included
$31.3 million par value of municipal bonds that were collateralized with
student loans.  These municipal bonds are bought and sold in the
marketplace through a bidding process sometimes referred to as a “Dutch
Auction.”  After the initial issuance of the securities, the interest
rate on the securities is reset at prescribed intervals (typically every 28
days), based upon the market demand for the securities on the reset
date.  We refer to these securities as auction rate securities, or
ARS.  Beginning in February 2008, some of the auctions for these
securities were unsuccessful.  Our investments are rated AAA, the
issuers are current on all of their payment obligations, and we continue to earn
interest on our auction rate security investments at the pre-determined
contractual rate.  As a result of the unsuccessful auctions and the
uncertainty in the credit market, the estimated fair value of the investments no
longer approximates par value.  During the fiscal year ended
September 30, 2008, we recorded an unrealized loss of $2.5 million,
which is included in Accumulated other comprehensive
loss on our Consolidated Balance Sheets, to write down the book value of
the investments to fair market value.  We determined fair market value
of our investments using a discounted cash flow approach.  During
fiscal 2008 we reclassified these securities from current Investments in marketable
securities to long-term Investments in marketable
securities on our Consolidated Balance Sheets as a result of the lack of
liquidity due to current market conditions.




On
November 11, 2008, we accepted an offer from our investment manager, UBS
AG, or UBS, providing us with rights related to our ARS, or ARS
Rights.  The ARS Rights (which have features that operate like put
options) were covered in a prospectus dated October 7, 2008.  The
ARS Rights entitle us to sell our existing ARS to UBS for a price equal to the
par value plus accrued but unpaid interest, at any time during the period
June 30, 2010 through July 2, 2012.  The ARS Rights also
grant to UBS the sole discretion and right to sell or otherwise dispose of our
eligible ARS at any time until July 2, 2012, without prior notification, so
long as we receive a payment of par value.  We expect to sell our ARS
under the Rights offering.  If the ARS Rights are not exercised before
July 2, 2012, they will expire and UBS will have no further rights or
obligation to buy our ARS.  So long as we hold our ARS, they will
continue to accrue and pay interest as determined by the auction process or the
terms of the ARS if the auction process fails.




The ARS
Rights represent a firm agreement in accordance with Statement of Financial
Accounting Standards No. 133—Accounting for Derivative
Instruments and Hedging Activities, which defines a firm agreement as an
agreement with an unrelated party, binding on both parties and usually legally




8
 Tier
Technologies, Inc.


enforceable,
with the following characteristics: (a) the agreement specifies all significant
terms, including the quantity to be exchanged, the fixed price, and the timing
of the transaction, and (b) the agreement includes a disincentive for
nonperformance that is sufficiently large to make performance
probable.




The
issuance of a prospectus and the settlements UBS executed with the Securities
and Exchange Commission and other state regulatory authorities provide the
assurance that the settlement agreement is legally enforceable.  The
terms of the settlement agreement have been communicated to the public and our
rights under the settlement are spelled out in the prospectus.




The ARS
Rights between Tier and UBS relate to the ARS held by us, but are not embedded
in or attached to the ARS.  Rather, the ARS Rights are freestanding
instruments that must be accounted for separately from the
ARS.  Statement of Financial Accounting Standards No. 150—Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity defines a
freestanding financial instrument as a “financial instrument that is entered
into separately and apart from any of the entity’s other financial instruments
or equity transactions, or that is entered into in conjunction with some other
transaction that is legally detachable and separately
exercisable.”  The ARS Rights are contractual arrangements entered
into between UBS and Tier, are legally separate from the ARS, and can be
exercised independently of any other instrument or event.




We have
elected to measure the ARS Rights at fair value under Statement of Financial
Accounting Standards No. 159—The Fair Value Option for Financial
Assets and Financial Liabilities, which permits an entity to elect the
fair value option for recognized financial assets, in order to match the changes
in the fair value of the ARS.  As a result, unrealized gains and
losses have been included in earnings and will continue to be included in future
periods.  At March 31, 2009 we recorded the fair value of the
Rights as $3.2 million with a credit to Other income/(loss)in our
Consolidated Statements of Operations.  We expect that future changes
in the fair value of the Rights will approximate fair value movements in the
related ARS.




Prior
to accepting the UBS offer, we recorded our ARS as investments
available-for-sale.  We recorded unrealized gains and losses on our
available-for-sale debt securities in Accumulated other comprehensive
loss in the shareholders’ equity section of our Consolidated Balance
Sheets.  Such an unrealized loss did not reduce net income for the
applicable accounting period.  In connection with our acceptance of
the UBS offer in November 2008, we transferred our ARS from investments
available-for-sale to trading securities in accordance with SFAS
115.  The transfer to trading securities reflects management’s intent
to exercise our ARS Rights during the period June 30, 2010 through
July 2, 2012.  Prior to our agreement with UBS, our intent was to
hold the ARS until the market recovered.  The transfer to trading
securities resulted in recognizing a loss of $3.3 million in Other income/(loss) in our
Consolidated Statements of Operations, an increase of $0.8 million compared
to the unrealized loss of $2.5 million at September 30,
2008.




The
funds associated with failed auctions will not be accessible until a successful
auction occurs, the issuer calls or restructures the underlying security, we
exercise our ARS Rights, the underlying security matures and is paid (all of our
securities have maturities in excess of ten years) or a buyer outside the
auction process emerges.  We do not believe the unsuccessful auctions
experienced to date are the result of the deterioration of the underlying credit
quality of these securities, since our securities are municipal bonds
collateralized with student loans.  Securities collateralized with
student loans are guaranteed by the issuing state and the Federal Family
Education Loan Program.  Under the Higher Education Act, student loans
cannot be cancelled (discharged) due to bankruptcy.  UBS has also
decided to participate in the US Treasury's Temporary Guarantee
Program.  Even with these assurances, we intend to convert our
investments in auction rate securities to other investments as liquidity returns
and conditions permit.




In
accordance with SFAS No. 95—Statement of Cash Flows,
unrestricted investments with original maturities of 90 days or less (as of the
date that we purchased the securities) are classified as cash
equivalents.  Except for our restricted investments, ARS, and ARS
Rights, all other investments are categorized as available-for-sale under SFAS
115.  These securities are recorded at estimated fair value, based on
quoted market prices or pricing methodologies.  Increases and
decreases in fair value are




9
 Tier
Technologies, Inc.


recorded
as unrealized gains and losses in other comprehensive income.  As
explained above ARS and ARS Rights are classified as trading securities with
changes in fair value recorded in current earnings.




The
following table shows the balance sheet classification, amortized cost and
estimated fair value of investments included in current and long-term
investments in marketable securities:




March
      31, 2009
                                  
                                  
                                  September
      30, 2008(in
      thousands)
                                  
                                  Amortized
      cost
                                  
                                  
                                  Unrealized
      loss
                                  
                                  
                                  Net
      loss
                                    impact
                                  
                                  
                                  Estimated
      fair value
                                  
                                  
                                  Amortized
      cost
                                  
                                  
                                  Unrealized
      loss
                                  
                                  
                                  Estimated
      fair valueInvestments
      in marketable securities:Commercial
paper
                                  
                                  $
                                  9,996
                                  
                                  
                                  $
                                  (1
                                  )
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  9,995
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —Certificates
      of deposit
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,415
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,415Total
      marketable securities
                                  
                                  
                                  9,996
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  9,995
                                  
                                  
                                  
                                  2,415
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,415Long-term
      investments in marketable securities:Trading
      investments:Debt
      securities (State and local bonds)
                                  
                                  
                                  31,325
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3,326
                                  )
                                  
                                  
                                  27,999
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Auction
      rate securities Rights Series
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  3,227
                                  
                                  
                                  
                                  3,227
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
      trading investments
                                  
                                  
                                  31,325
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (99
                                  )
                                  
                                  
                                  31,226
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Available-for-sale
      investments:Debt
      securities (State and local bonds)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  31,325
                                  
                                  
                                  
                                  (2,504
                                  )
                                  
                                  
                                  28,821Total
      available-for-sale investments
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  31,325
                                  
                                  
                                  
                                  (2,504
                                  )
                                  
                                  
                                  28,821Total
      investments
                                  
                                  $
                                  41,321
                                  
                                  
                                  $
                                  (1
                                  )
                                  
                                  $
                                  (99
                                  )
                                  
                                  $
                                  41,221
                                  
                                  
                                  $
                                  33,740
                                  
                                  
                                  $
                                  (2,504
                                  )
                                  
                                  $
                                  31,236




As of
March 31, 2009, all of the debt securities that were included in marketable
securities had remaining maturities within one year.  As of March 31,
2009, all the debt securities included as trading investments have maturities in
excess of ten years.  While all of these trading securities have
long-term maturities, they are all auction rate securities with interest rates
that typically reset every 28 days.






NOTE 4—FAIR VALUE MEASUREMENTS




We
adopted Statement of Financial Accounting Standards No. 157—Fair Value Measurements, or
SFAS 157, on October 1, 2008.  SFAS 157 defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles, and enhances disclosures about fair value
measurements.  Fair value is defined under SFAS 157 as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date.  Valuation techniques used to measure fair value
under SFAS 157 must maximize the use of observable inputs and minimize the use
of unobservable inputs.  The standard describes a fair value hierarchy
based on three levels of inputs that may be used to measure fair value as
follows:






Level
1—Quoted prices in active markets for identical assets or
liabilities.




Level
2—
            Inputs
      other than quoted prices in active markets, that are observable, either
      directly or indirectly, such as quoted prices for similar assets or
      liabilities; quoted prices in markets that are not active; or other inputs
      that are observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.




Level
      3—
            Unobservable
      inputs, for which there is little or no market data for the assets or
      liabilities.




In
accordance with SFAS 157, the following table represents the fair value
hierarchy for our financial assets, comprised of cash equivalents and
investments, measured at fair value on a recurring basis as of March 31,
2009.




10
 Tier
Technologies, Inc.




Fair value measurements as of March 31,
      2009(in
      thousands)
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3
                        
                        
                        TotalCash
      equivalents:Money
      market
                        
                        $
                        1,887
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        1,887U.S.
      Treasury bills
                        
                        
                        4,998
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        4,998Investments
      in marketable securities:Commercial
      paper
                        
                        
                        9,995
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        9,995Debt
      securities
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        27,999
                        
                        
                        
                        27,999Auction
      Rate Securities Rights
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,227
                        
                        
                        
                        3,227Restricted
      investments:Money
      market
                        
                        
                        6,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        6,000Certificates
      of deposit
                        
                        
                        —
                        
                        
                        
                        1,361
                        
                        
                        
                        —
                        
                        
                        
                        1,361Total
                        
                        $
                        22,880
                        
                        
                        $
                        1,361
                        
                        
                        $
                        31,226
                        
                        
                        $
                        55,467




We
value ARS using a discounted cash flow approach.  The assumptions used
in preparing the discounted cash flow model included estimates of the amount and
timing of future interest and principal payments, projections of interest rate
benchmarks, probability of full repayment of the principal considering the
credit quality of the issuers, and the rate of return required by investors to
own ARS given the current liquidity risk.  The ARS Rights are a free
standing asset separate from the ARS.  In order to value the ARS
Rights, we considered the intrinsic value, time value of money, and the
creditworthiness of UBS.




Changes
in fair value measurements of our securities are included in Gain/(loss) on investment on
our Consolidated Statements of Operations.  The following table
presents a reconciliation of all assets and liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level
3):




(in
      thousands)
                
                Significant
      unobservable inputs (Level 3)Balance
      at October 1, 2008
                
                $
                28,821Change
      in temporary valuation adjustment included in Accumulated other
      comprehensive loss
                
                
                2,504Loss
      included in earnings
                
                
                (3,326
                )Recognition
      of ARS rights
                
                
                3,227Balance
      at March 31, 2009
                
                $
                31,226






NOTE
5—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.  During the six months ended March 31, 2009, our contract with
the Internal Revenue Service contributed revenues of $8.8 million, or 15.1%
of our revenues from Continuing Operations.  During the six months
ended March 31, 2008, this same contract contributed revenues of $10.5million,
or 19.0% of our revenues from Continuing Operations.




Accounts
receivable, net.  As of March 31,
2009 and September 30, 2008, we reported $9.3 million and
$4.2 million, respectively, in Accounts receivable, neton
our Consolidated Balance Sheets.  This item represents theshort-term portion of
receivables from our customers and other parties and retainers that we expect to
receive.  As of March 31, 2009, the Accounts receivable, net
balance is predominantly made up of EPS operations customer
receivables.  At September 30, 2008, approximately 32.7% of the
balances reported in Accounts
receivable, net were attributable to operations that we intend to
wind-down during the course of the next four years (See Note 12—Segment
Information, for additional information about our Wind-down
Operations).  As of March 31, 2009 and September 30, 2008,
none of our customers had receivables that exceed 10% of our total receivable
balance.  As of both March 31, 2009 and September 30, 2008,
Accounts receivable,
net included an allowance for uncollectible accounts of




11
 Tier
Technologies, Inc.


$0.3 million,
which represents the balance of receivables that we believe are likely to become
uncollectible.




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.  As of March 31, 2009 and September 30, 2008,
Accounts receivable, netincluded $0.3 million and $0.4 million, respectively, of
retainers that we expected to receive in one year.






NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS




GOODWILL




In
January 2009 we purchased substantially all of the assets of ChoicePay,
Inc.  As a result of this transaction, we recorded $2.8 million
in goodwill during the three months ended March 31, 2009.  The
following table summarizes changes in the carrying amount of goodwill for the
six months ended March 31, 2009:




Operating
      Segment(in
      thousands)
                
                EPS
                
                
                Wind-down
                
                
                TotalBalance
      at September 30, 2008
                
                $
                14,526
                
                
                $
                —
                
                
                $
                14,526ChoicePay,
      Inc. Asset Purchase
                
                
                2,772
                
                
                
                —
                
                
                
                2,772Balance
      at March 31, 2009
                
                $
                17,298
                
                
                $
                —
                
                
                $
                17,298




As a
general practice, we test goodwill for impairment during the fourth quarter of
each fiscal year at the reporting unit level using a fair value approach in
accordance with SFAS 142—Goodwill and Other Intangible
Assets.  If an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying value, we would evaluate goodwill for impairment between annual
tests.  One such triggering event is when there is a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of.  During
fiscal 2008 we tested our former PSSI and GBPO businesses within our
Discontinued Operations for impairment.  As of September 30,
2008, the remaining business units within Discontinued Operations were deemed to
have no remaining goodwill.




OTHER INTANGIBLE ASSETS,
NET




Currently,
all of our other intangible assets are included in our Continuing
Operations.  As such, we test impairment of these assets on an annual
basis during the fourth quarter of our fiscal year, unless an event occurs or
circumstances change that would more likely than not reduce the fair value of
the assets below the carrying value.  The following table summarizes
Other intangible assets,
net, for our Continuing Operations:




12
 Tier
Technologies, Inc.




March
      31, 2009
                              
                              
                              September
      30, 2008(in
      thousands)
                              Amortization
      period
                              
                              Gross
                              
                              
                              Accumulated
      amortization
                              
                              
                              Net
                              
                              
                              Gross
                              
                              
                              Accumulated
      amortization
                              
                              
                              NetClient
      relationships
                              8-16
      years
                              
                              $
                              28,408
                              
                              
                              $
                              (18,591
                              )
                              
                              $
                              9,817
                              
                              
                              $
                              28,408
                              
                              
                              $
                              (16,829
                              )
                              
                              $
                              11,579Add:
      ChoicePay, Inc.
                              
                              
                              
                              1,629
                              
                              
                              
                              (17
                              )
                              
                              
                              1,612
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Client
                                relationships
                              
                              
                              
                              30,037
                              
                              
                              
                              (18,608
                              )
                              
                              
                              11,429
                              
                              
                              
                              28,408
                              
                              
                              
                              (16,829
                              )
                              
                              
                              11,579Technology
      and
                                research
      and development
                              5
      years
                              
                              
                              3,966
                              
                              
                              
                              (3,754
                              )
                              
                              
                              212
                              
                              
                              
                              3,966
                              
                              
                              
                              (3,317
                              )
                              
                              
                              649Add:
      ChoicePay, Inc.
                              
                              
                              
                              1,652
                              
                              
                              
                              (59
                              )
                              
                              
                              1,593
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Technology
                                andresearch
                                and
                                development
                              
                              
                              
                              5,618
                              
                              
                              
                              (3,813
                              )
                              
                              
                              1,805
                              
                              
                              
                              3,966
                              
                              
                              
                              (3,317
                              )
                              
                              
                              649Trademarks
                              6-10
      years
                              
                              
                              3,200
                              
                              
                              
                              (2,133
                              )
                              
                              
                              1,067
                              
                              
                              
                              3,200
                              
                              
                              
                              (1,973
                              )
                              
                              
                              1,227Add:
      ChoicePay, Inc.
                              
                              
                              
                              263
                              
                              
                              
                              (10
                              )
                              
                              
                              253
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Trademarks
                              
                              
                              
                              3,463
                              
                              
                              
                              (2,143
                              )
                              
                              
                              1,320
                              
                              
                              
                              3,200
                              
                              
                              
                              (1,973
                              )
                              
                              
                              1,227Other
                                intangible
                                assets,
      net
                              
                              
                              $
                              39,118
                              
                              
                              $
                              (24,564
                              )
                              
                              $
                              14,554
                              
                              
                              $
                              35,574
                              
                              
                              $
                              (22,119
                              )
                              
                              $
                              13,455




During
the six months ended March 31, 2009, we recognized $2.4 million of
amortization expense on our other intangible assets.






NOTE 7—INCOME TAXES




We
reported income tax provisions of $1,000 for the three and six months ended
March 31, 2009, and $12,000 and $28,000, respectively, for the three and
six months ended March 31, 2008.  The provision for income taxes
represents state tax obligations incurred by our EPS operations.  Our
Consolidated Statements of
Operations for the six months ended March 31, 2009 and 2008 do not
reflect a federal tax provision because of offsetting adjustments to our
valuation allowance.  Our effective tax rates differ from the federal
statutory rate due to state and foreign income taxes, tax-exempt interest income
and the charge for establishing a valuation allowance on our net deferred tax
assets.  Our future tax rate may vary due to a variety of factors,
including, but not limited to:  the relative income contribution by
tax jurisdiction; changes in statutory tax rates; the amount of tax exempt
interest income generated during the year; changes in our valuation allowance;
our ability to utilize foreign tax credits and net operating losses and any
non-deductible items related to acquisitions or other nonrecurring
charges.




FIN 48




On
October 1, 2007, we adopted FASB Interpretation No. 48—Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109, or FIN 48, which
provides a financial statement recognition threshold and measurement attribute
for a tax position taken or expected to be taken in a tax
return.  Under FIN 48, we may recognize the tax benefit from an
uncertain tax position only if it is more-likely-than-not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position.  The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement.  FIN 48 also provides guidance on derecognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, and income tax disclosures.




As of
March 31, 2009, we had approximately $43,000 of unrecognized tax
benefits.  Our policy is to include interest and penalties related to
unrecognized tax benefits in income tax expense.  Interest totaled
$9,000 at March 31, 2009.  There were $1,000 of unrecognized tax
benefits for the six months ended March 31, 2009.  We do not
believe within the next twelve months there will be a significant change in the


13
 Tier
Technologies, Inc.


total
amount of unrecognized tax benefits as of March 31, 2009.  The
following table summarizes our unrecognized tax benefits.




(in
      thousands)Balance
      at September 30, 2008
                
                $
                42Increases
      for tax positions related to prior years
                
                
                1Balance
      at March 31, 2009
                
                $
                43




We file
tax returns with the IRS and in various states in which the statute of
limitations may go back to the tax year ended September 30,
2004.  As of March 31, 2009, we were not engaged in any federal
or state audits.






NOTE
8—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 March 31, 2009, none of these matters
was expected to have a material impact on our financial position, results of
operations or cash flows.  At March 31, 2009 and
September 30, 2008, we had legal accruals of $1.6 million and
$0.8 million, respectively, based upon estimates of key legal
matters.




On
May 31, 2006, we received a subpoena, and in January 2009 one current
employee and several former employees received additional subpoenas 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.




BANK LINES OF
CREDIT




At
March 31, 2009, we had a credit facility that allowed us to obtain letters
of credit up to a total of $7.5 million.  This credit facility,
which is scheduled to mature on September 30, 2009, grants the lender a
perfected security interest in cash collateral in an amount equal to all issued
and to be issued letters of credit.  We pay 0.75% per annum for
outstanding letters of credit, but are not assessed any fees for the unused
portion of the line.  As of March 31, 2009, $1.4 million of
letters of credit were outstanding under this credit facility.  These
letters of credit were issued to secure performance bonds and a facility
lease.




ACCOUNTS PAYABLE
ESCROW




Accounts payable escrow on
our Consolidated Balance Sheets consists of payments due primarily to utility
companies and other public sector clients.  As individuals and
businesses settle their obligations to our various clients, we generate a
receivable from the credit or debit card company and a payable to the
client.  Once we receive confirmation the funds have been received by
the credit card company, we settle the liabilities to the
client.  This process may take several business days to complete and
can result in unsettled funds at the end of any given reporting
period.




CREDIT
RISK




We
maintain our cash in bank deposit accounts, certificates of deposit and money
market accounts.  Typically, the balance in a number of these accounts
significantly exceeds federally insured limits.  We have not
experienced any losses in such accounts and believe that any associated credit
risk is de
minimis.




At
March 31, 2009, our investment portfolio included $28.0 million, fair
value, of AAA-rated auction rate municipal bonds that were collateralized with
student loans.  These municipal bonds are bought and sold in the
marketplace through a bidding process sometimes referred to as a “Dutch
Auction.”  After the initial issuance of the securities, the interest
rate on the securities is reset at a prescribed interval (typically every 28
days), based upon the demand for these securities, which we refer to as auction
rate securities.  As a result of concerns in the sub-prime mortgage
market and overall credit market issues, we continue to experience unsuccessful
auctions, as there are insufficient buyers for the securities at the reset date
for our auction rate securities.  The unsuccessful auctions and lack
of liquidity has caused a decrease in the


14
 Tier
Technologies, Inc.


fair
value of these securities.  All of our securities are collateralized
with student loans.  Securities collateralized with student loans are
guaranteed by the issuing state and the Federal Family Education Loan
Program.  Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy.  Because of this, we
continue to believe the credit quality of these securities is high and the
principal collectible.




In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager.  This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest.  Our investment banker has the right to
sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer.  Until liquidity in the market returns, or
our investment banker sells or disposes of the securities, we may be unable to
liquidate these investments in a timely manner at par value.




PERFORMANCE AND GUARANTEE
PAYMENT BONDS




Under
certain contracts, we are required to obtain performance bonds from a licensed
surety and to post the performance bonds with our customers.  Fees for
obtaining the bonds are expensed over the life of each bond.  At
March 31, 2009, we had $18.2 million of bonds posted with
clients.  There were no claims pending against any of these
bonds.




Pursuant
to the terms of money transmitter licenses we obtain with individual states, we
are required to provide guarantee payment bonds from a licensed
surety.  At March 31, 2009, we had $4.5 million of bonds
posted with 23 states.  There were no claims pending against any of
these bonds.




EMPLOYMENT
AGREEMENTS




As of
March 31, 2009, we had employment and change of control agreements with
five executives and 15 other key managers.  If certain termination or
change of control events were to occur under the 20 contracts as of
March 31, 2009, we could be required to pay up to
$5.9 million.




As of
March 31, 2009, we also had agreements with three key employees under which
these individuals would be entitled to receive predefined amounts after
completing defined employment service periods.  We expect to recognize
a maximum expense of $143,000 through December 31, 2009 for these
agreements.




In
December 2008, the Compensation Committee of our Board of Directors adopted the
Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU
Plan.  Executives nominated and approved by our Chief Executive
Officer are eligible to participate.  Under the PSU Plan, up to
800,000 Performance Stock Units, or PSUs, have been approved for
issuance.  The PSUs will be awarded upon the achievement and
maintenance for a period of 60 days of specific share performance targets of
$8.00, $9.50, $11.00, and $13.00 per share.  We intend to pay the PSUs
in cash in the pay period in which the PSUs become fully vested.  As
of March 31, 2009, 580,000 PSUs have been issued to key
executives.  As of March 31, 2009 we expect to recognize
$0.6 million in expense related to the PSUs, of which $115,000 will be
recognized during the remaining six months of fiscal year 2009, $229,000 will be
recognized during fiscal years 2010 and 2011 and $38,000 will be recognized
during fiscal year 2012.  See Note
13—Share-based Payment for additional information regarding the
valuation of the PSUs.




INDEMNIFICATION
AGREEMENTS




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




15
 Tier
Technologies, Inc.


NOTE 9—RELATED PARTY TRANSACTIONS




EDGAR, DUNN &
COMPANY




During
the six months ended March 31, 2009, we purchased $128,000 of consultancy
services relating to our EPS operations from Edgar, Dunn & Company, a
company affiliated with a member of our Board of Directors.




ITC DELTACOM,
INC.




During
the six months ended March 31, 2009, we purchased $128,000 of telecom
services from ITC Deltacom, Inc., a company affiliated with a member of our
Board of Directors.






NOTE 10—RESTRUCTURING




During
the six months ended March 31, 2009, we recorded $1.0 million of
restructuring liabilities relating to severance and facility closing costs as
part of our consolidation of certain operational functions within our EPS
operations and the wind down of our VSA operations.




The
following table summarizes restructuring liabilities activity associated with
Continuing Operations for the six months ended March 31, 2009:




(in
      thousands)
                
                Severance
                
                
                Facilities
      closures
                
                
                TotalBalance at
      September 30, 2008
                
                $
                596
                
                
                $
                —
                
                
                $
                596Additions
                
                
                480
                
                
                
                497
                
                
                
                977Cash
      payments
                
                
                (602
                )
                
                
                (172
                )
                
                
                (774
                )Balance
      at March 31, 2009
                
                $
                474
                
                
                $
                325
                
                
                $
                799




At
March 31, 2009, we had $0.8 million of restructuring liabilities
associated with our Continuing Operations which is included in Other current liabilities on
our Consolidated Balance Sheets and $25,000 of liabilities included in Other liabilities on our
Consolidated Balance Sheets.  At September 30, 2008, we had
$0.6 million of restructuring liabilities associated with our Continuing
Operations which is included in Other current liabilities on
our Consolidated Balance Sheets.  We expect to pay $0.8 million
of the liability during fiscal year 2009, and the remaining $25,000 during
fiscal year 2010.






NOTE 11—SHAREHOLDERS’ EQUITY




COMMON STOCK REPURCHASE
PROGRAM




In
January 2009, our Board of Directors authorized the repurchase of up to
$15.0 million of our common stock in the open market.  Through
March 31, 2009, we purchased 112,400 shares of common stock for
$0.6 million under this repurchase program.  We also participated
in a previous repurchase program authorized by our Board of Directors in October
2003 in which we purchased 884,400 shares of common stock for
$8.7 million.  As of March 31, 2009, we have repurchased 996,800
shares of common stock for $9.3 million under the two plans, which are
reported as Treasury
stock on our Consolidated Balance Sheets.






NOTE
12—SEGMENT INFORMATION




Our business
consists of two reportable segments: Continuing Operations and Discontinued
Operations.  Within our Continuing Operations segment, we allocate
resources to and assess the performance of our EPS Operations and Wind-down
Operations.  Our Discontinued Operations includes businesses within our
former GBPO and PSSI operations that have been sold.  Information regarding
our Discontinued Operations can be found in Note 14—Discontinued
Operations.


16
 Tier
Technologies, Inc.


The
following table presents the results of operations for our EPS Operations and
our Wind-down Operations for the three and six months ended March 31, 2009
and 2008.




(in
      thousands)
                      
                      EPS
                      
                      
                      Wind-
                        down
                      
                      
                      TotalThree
      months ended March 31, 2009:Revenues
                      
                      $
                      27,268
                      
                      
                      $
                      1,340
                      
                      
                      $
                      28,608Costs
      and expenses:Direct
      costs
                      
                      
                      20,149
                      
                      
                      
                      622
                      
                      
                      
                      20,771General
      and administrative
                      
                      
                      7,092
                      
                      
                      
                      420
                      
                      
                      
                      7,512Selling
      and marketing
                      
                      
                      1,909
                      
                      
                      
                      3
                      
                      
                      
                      1,912Depreciation
      and amortization
                      
                      
                      1,147
                      
                      
                      
                      477
                      
                      
                      
                      1,624Total
      costs and expenses
                      
                      
                      30,297
                      
                      
                      
                      1,522
                      
                      
                      
                      31,819Loss
      from continuing operations before other income and income
      taxes
                      
                      
                      (3,029
                      )
                      
                      
                      (182
                      )
                      
                      
                      (3,211
                      )Other
      income:Gain
      on investment
                      
                      
                      13
                      
                      
                      
                      —
                      
                      
                      
                      13Interest
      income, net
                      
                      
                      240
                      
                      
                      
                      —
                      
                      
                      
                      240Total
      other income
                      
                      
                      253
                      
                      
                      
                      —
                      
                      
                      
                      253Loss
      from continuing operations before taxes
                      
                      
                      (2,776
                      )
                      
                      
                      (182
                      )
                      
                      
                      (2,958
                      )Income
      tax provision
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      1Loss
      from continuing operations
                      
                      $
                      (2,777
                      )
                      
                      $
                      (182
                      )
                      
                      $
                      (2,959
                      )




Three
      months ended March 31, 2008:Revenues
                    
                    $
                    24,432
                    
                    
                    $
                    1,529
                    
                    
                    $
                    25,961Costs
      and expenses:Direct
      costs
                    
                    
                    18,736
                    
                    
                    
                    782
                    
                    
                    
                    19,518General
      and administrative
                    
                    
                    6,480
                    
                    
                    
                    393
                    
                    
                    
                    6,873Selling
      and marketing
                    
                    
                    1,942
                    
                    
                    
                    63
                    
                    
                    
                    2,005Depreciation
      and amortization
                    
                    
                    975
                    
                    
                    
                    355
                    
                    
                    
                    1,330Total
      costs and expenses
                    
                    
                    28,133
                    
                    
                    
                    1,593
                    
                    
                    
                    29,726Loss
      from continuing operations before other income and income
      taxes
                    
                    
                    (3,701
                    )
                    
                    
                    (64
                    )
                    
                    
                    (3,765
                    )Other
      income:Interest
      income, net
                    
                    
                    824
                    
                    
                    
                    —
                    
                    
                    
                    824Total
      other income
                    
                    
                    824
                    
                    
                    
                    —
                    
                    
                    
                    824Loss
      from continuing operations before taxes
                    
                    
                    (2,877
                    )
                    
                    
                    (64
                    )
                    
                    
                    (2,941
                    )Income
      tax provision
                    
                    
                    12
                    
                    
                    
                    —
                    
                    
                    
                    12Loss
      from continuing operations
                    
                    $
                    (2,889
                    )
                    
                    $
                    (64
                    )
                    
                    $
                    (2,953
                    )







17
 Tier
Technologies, Inc.




(in
      thousands)
                          
                          EPS
                          
                          
                          Wind-
                            down
                          
                          
                          TotalSix
      months ended March 31, 2009:Revenues
                          
                          $
                          55,509
                          
                          
                          $
                          2,839
                          
                          
                          $
                          58,348Costs
      and expenses:Direct
      costs
                          
                          
                          41,987
                          
                          
                          
                          1,202
                          
                          
                          
                          43,189General
      and administrative
                          
                          
                          13,382
                          
                          
                          
                          760
                          
                          
                          
                          14,142Selling
      and marketing
                          
                          
                          3,223
                          
                          
                          
                          5
                          
                          
                          
                          3,228Depreciation
      and amortization
                          
                          
                          2,126
                          
                          
                          
                          958
                          
                          
                          
                          3,084Total
      costs and expenses
                          
                          
                          60,718
                          
                          
                          
                          2,925
                          
                          
                          
                          63,643Loss
      from continuing operations before other income/(loss) and income
      taxes
                          
                          
                          (5,209
                          )
                          
                          
                          (86
                          )
                          
                          
                          (5,295
                          )Other
      income/(loss):Loss
      on investment
                          
                          
                          (99
                          )
                          
                          
                          —
                          
                          
                          
                          (99
                          )Interest
      income, net
                          
                          
                          544
                          
                          
                          
                          —
                          
                          
                          
                          544Total
      other income
                          
                          
                          445
                          
                          
                          
                          —
                          
                          
                          
                          445Loss
      from continuing operations before taxes
                          
                          
                          (4,764
                          )
                          
                          
                          (86
                          )
                          
                          
                          (4,850
                          )Income
      tax provision
                          
                          
                          1
                          
                          
                          
                          —
                          
                          
                          
                          1Loss
      from continuing operations
                          
                          $
                          (4,765
                          )
                          
                          $
                          (86
                          )
                          
                          $
                          (4,851
                          )Six
      months ended March 31, 2008:Revenues
                          
                          $
                          52,241
                          
                          
                          $
                          2,675
                          
                          
                          $
                          54,916Costs
      and expenses:Direct
      costs
                          
                          
                          39,854
                          
                          
                          
                          1,898
                          
                          
                          
                          41,752General
      and administrative
                          
                          
                          13,136
                          
                          
                          
                          846
                          
                          
                          
                          13,982Selling
      and marketing
                          
                          
                          3,937
                          
                          
                          
                          182
                          
                          
                          
                          4,119Depreciation
      and amortization
                          
                          
                          1,899
                          
                          
                          
                          726
                          
                          
                          
                          2,625Total
      costs and expenses
                          
                          
                          58,826
                          
                          
                          
                          3,652
                          
                          
                          
                          62,478Loss
      from continuing operations before other income and income
      taxes
                          
                          
                          (6,585
                          )
                          
                          
                          (977
                          )
                          
                          
                          (7,562
                          )Other
      income:Interest
      income, net
                          
                          
                          1,790
                          
                          
                          
                          —
                          
                          
                          
                          1,790Total
      other income
                          
                          
                          1,790
                          
                          
                          
                          —
                          
                          
                          
                          1,790Loss
      from continuing operations before taxes
                          
                          
                          (4,795
                          )
                          
                          
                          (977
                          )
                          
                          
                          (5,772
                          )Income
      tax provision
                          
                          
                          28
                          
                          
                          
                          —
                          
                          
                          
                          28Loss
      from continuing operations
                          
                          $
                          (4,823
                          )
                          
                          $
                          (977
                          )
                          
                          $
                          (5,800
                          )




Our
total assets for each of these businesses are shown in the following
table:




(in
      thousands)
                    
                    March
      31, 2009
                    
                    
                    September
      30, 2008Continuing
      operations:EPS
                    
                    $
                    125,844
                    
                    
                    $
                    120,715Wind-down
                    
                    
                    3,583
                    
                    
                    
                    4,932Assets
      for continuing operations
                    
                    
                    129,427
                    
                    
                    
                    125,647Assets
      held-for-sale
                    
                    
                    —
                    
                    
                    
                    11,704Total
      assets
                    
                    $
                    129,427
                    
                    
                    $
                    137,351




See
Note 14—Discontinued Operations for a breakdown of assets that are
classified as held-for-sale.




18
 Tier
Technologies, Inc.


NOTE 13—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, these options vest as to 20% of the underlying
shares each year on the anniversary of the date granted and expire in ten
years.  At March 31, 2009, there were 966,299 shares of common
stock reserved for future grants under the Plan.




STOCK
OPTIONS




Stock-based
compensation expense for all option 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.  Stock-based compensation expense was
$0.2 million and $0.6 million, respectively, for the three and six
months ended March 31, 2009.  During the three and six months
ended March 31, 2008, we recognized $0.6 million and
$1.4 million, respectively, in stock based compensation expense, of which
$0.5 million was attributable to the December 10, 2007 acceleration of
vesting in full of options issued to our independent Board of Director members
on August 24, 2006.




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




Three
      months ended
                    March
      31,
                  
                  
                  Six
      months ended
                    March
      31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted-average
      assumptions used in Black-Scholes model:Expected
      period that options will be outstanding (in
    years)
                  
                  
                  5.00
                  
                  
                  
                  5.00
                  
                  
                  
                  5.00
                  
                  
                  
                  5.00Interest
      rate (based on U.S.
      Treasury yields at time of grant)
                  
                  
                  1.75
                  %
                  
                  
                  2.76
                  %
                  
                  
                  1.98
                  %
                  
                  
                  3.56
                  %Volatility
                  
                  
                  45.69
                  %
                  
                  
                  42.03
                  %
                  
                  
                  45.37
                  %
                  
                  
                  41.72
                  %Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Weighted-average
      fair value of options granted
                  
                  $
                  2.51
                  
                  
                  $
                  3.17
                  
                  
                  $
                  1.93
                  
                  
                  $
                  4.14Weighted-average
      intrinsic value of options exercised (in
      thousands)
                  
                  $
                  —
                  
                  
                  $
                  7
                  
                  
                  $
                  —
                  
                  
                  $
                  19




Expected
volatilities are based on historical volatility of our stock.  In
addition, we used historical data to estimate option exercise and employee
termination within the valuation model.




Stock
option activity for the six months ended March 31, 2009 is as
follows:




Weighted-average(in
      thousands, except per share data)
                
                Shares
      under option
                
                
                Exercise
      price
                
                Remaining
                  contractual
      term
                
                Aggregate
      intrinsic valueOptions
      outstanding at October 1, 2008
                
                
                2,702
                
                
                $
                9.07Granted
                
                
                460
                
                
                
                4.62Exercised
                
                
                —
                
                
                
                —Forfeitures
      or expirations
                
                
                (353
                )
                
                
                10.01Options
      outstanding at March 31, 2009
                
                
                2,809
                
                
                $
                8.23
                
                7.73
      years
                
                $
                —Options
      vested and expected to vest at
                  March
      31, 2009
                
                
                2,671
                
                
                $
                8.27
                
                7.07
      years
                
                $
                —Options
      exercisable at March 31, 2009
                
                
                1,362
                
                
                $
                8.77
                
                6.37years
                
                $
                —




As of
March 31, 2009, a total of $3.2 million of unrecognized compensation
cost related to stock options, including estimated forfeitures, was expected to
be recognized over a 3.7 year weighted-average period.




RESTRICTED STOCK
UNITS




On
April 30, 2008, we granted 550,000 restricted stock units which vest when
both the price target is achieved and the required service period is
met.  In January 2009 we granted another 150,000 restricted stock
units which vest when both the price target is achieved and the required service
period is met.  Pursuant to the Plan, 500,000 shares can be payable in
shares of our common stock.  The remaining


19
 Tier
Technologies, Inc.


200,000
shares may be payable in cash and are recorded at their fair value as Other liabilities on our
Consolidated Balance Sheets.  We used a Monte Carlo simulation option
pricing model to estimate the grant-date fair value using the following
assumptions:




March
      31, 2009Payable
      in shares
                
                
                Payable
      in cashWeighted-average
      assumptions used in Monte Carlo simulation:Expected
      period that units will be outstanding (in
    years)
                
                
                2.78
                
                
                
                2.08Interest
      rate (based on U.S.
      Treasury yield)
                
                
                1.98
                %
                
                
                0.84
                %Volatility
                
                
                39.53
                %
                
                
                40.14
                %Dividend
      yield
                
                
                —
                
                
                
                —Weighted-average
      fair value of options granted
                
                $
                3.50
                
                
                $
                0.16




Restricted
stock unit activity for the equity portion of the awards for the six months
ended March 31, 2009 is as follows:




Restricted
      shares (in
      thousands)
                  
                  SharesRestricted
      at October 1, 2008
                  
                  
                  500Granted
      (1)
                  
                  
                  —Vested
                  
                  
                  —Forfeited
                  
                  
                  —Restricted
      at March 31, 2009
                  
                  
                  500(1) Of
      the 700,000 restricted stock units awarded, 500,000 are payable in
      shares.




For the
three and six months ended March 31, 2009 we recorded $0.1 million and
$0.3 million, respectively, in expense related to the award.  As
of March 31, 2009, we have $1.3 million in unrecognized compensation
cost, expected to be recognized through April 2011.




PERFORMANCE STOCK
UNITS




In
December 2008, the Compensation Committee of our Board of Directors adopted the
Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU
Plan.  Executives nominated and approved by our Chief Executive
Officer are eligible to participate.  Under the PSU Plan, up to
800,000 Performance Stock Units, or PSUs, have been approved for
issuance.  The PSUs will be awarded upon the achievement and
maintenance for a period of 60 days of specific share performance targets of
$8.00, $9.50, $11.00, and $13.00 per share.  We intend to pay the PSUs
in cash in the pay period in which the PSUs become fully vested.  The
executives will receive a cash payment equal to (x) the price of a share of our
common stock as of the close of market on the date of vesting, but not more than
$15.00, multiplied by (y) the number of PSUs that have been awarded to the
executive.




As of
March 31, 2009, 580,000 PSUs have been issued under the PSU
Plan.  As of March 31, 2009, these shares are recorded at their
fair value of $0.1 million, as Other liabilities on our
Consolidated Balance Sheets.  We used a Monte Carlo simulation option
pricing model to estimate the grant-date fair value using the following
assumptions:




Payable
      in cashWeighted-average
      assumptions used in Monte Carlo simulation:Expected
      period that units will be outstanding (in
    years)
                
                
                2.68Interest
      rate (based on U.S.
      Treasury yield)
                
                
                1.04
                %Volatility
                
                
                41.98
                %Dividend
      yield
                
                
                —Weighted-average
      fair value of options granted
                
                $
                1.19




For the
three and six months ended March 31, 2009 we recorded $0.1 million in
expense related to these awards.  As of March 31, 2009, we have
$0.6 million in unrecognized compensation cost, expected to be recognized
through December 2011.




20
 Tier
Technologies, Inc.


NOTE 14—DISCONTINUED OPERATIONS




DIVESTITURES




On
November 30, 2008, we completed the sale of the assets, operations and
certain liabilities of our Financial Management Systems, or FMS,
business.  The sale was completed pursuant to an Asset Purchase
Agreement dated November 4, 2008 for a purchase price of $0.8 million,
subject to a working capital adjustment, of which $0.2 million was payable
in cash and the remaining $0.6 million is secured with an interest bearing
note payable over 18 months.




In
February 2009, we completed the sale of our Unemployment Insurance, or UI,
business.  The sale was completed pursuant to an Asset Purchase
Agreement dated February 6, 2009 for a purchase price of $1.5 million
payable as follows, $1,050,000 due at closing, $300,000 due in July 2009, and
$150,000 due upon assignment of three contracts.  In addition, if the
purchaser is awarded a named contract, the purchaser will pay Tier 5% of service
related revenue.




SFAS
No. 144 requires that a long-lived asset group classified as held-for-sale be
measured at the lower of its carrying value or fair value less cost to
sell.  As a result of this analysis, we determined operations within
our former GBPO and PSSI operations had carrying values which exceeded their
fair value.  During the three and six months ended March 31, 2009
and 2008, we recorded the following impairment expense, which is included in
(Loss)/ income from
discontinued operations, net:




Three
      months ended
                    March
      31,
                  
                  
                  Six
      months ended
                    March
      31,(in
      thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Impairment
      expenseGoodwill
      impairment
                  
                  $
                  —
                  
                  
                  $
                  1,357
                  
                  
                  $
                  —
                  
                  
                  $
                  1,730Long-lived
      asset impairment
                  
                  
                  —
                  
                  
                  
                  1,685
                  
                  
                  
                  2,594
                  
                  
                  
                  1,771Total
      impairment expense
                  
                  $
                  —
                  
                  
                  $
                  3,042
                  
                  
                  $
                  2,594
                  
                  
                  $
                  3,501




SUMMARY OF REVENUE AND
(LOSS)/INCOME BEFORE TAXES—DISCONTINUED OPERATIONS




Except
for minor transitional activities, we do not have any ongoing involvement or
cash flows from former GBPO and PSSI businesses that we divested during fiscal
2008 and fiscal 2009.  The following table summarizes our revenue and
pre-tax income, prior to any gain/(loss) on sale, generated by these operations
during the three and six months ended March 31, 2009 and 2008.




Three
      months ended
                        March
      31,
                      
                      
                      Six
      months ended
                        March
      31,(in
      thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Revenues
      (Discontinued operations):GBPO
                      
                      $
                      —
                      
                      
                      $
                      7,074
                      
                      
                      $
                      —
                      
                      
                      $
                      14,207PSSI
                      
                      
                      308
                      
                      
                      
                      7,032
                      
                      
                      
                      4,777
                      
                      
                      
                      13,641Total
      revenues
                      
                      $
                      308
                      
                      
                      $
                      14,106
                      
                      
                      $
                      4,777
                      
                      
                      $
                      27,848(Loss)/income
      before taxes (Discontinued operations):GBPO
                      
                      $
                      (5
                      )
                      
                      $
                      3,217
                      
                      
                      $
                      (57
                      )
                      
                      $
                      4,946PSSI
                      
                      
                      (1,611
                      )
                      
                      
                      (4,051
                      )
                      
                      
                      (4,378
                      )
                      
                      
                      (4,446
                      )Other/eliminations
                      
                      
                      —
                      
                      
                      
                      239
                      
                      
                      
                      —
                      
                      
                      
                      321Total
      (loss)/income before taxes
                      
                      $
                      (1,616
                      )
                      
                      $
                      (595
                      )
                      
                      $
                      (4,435
                      )
                      
                      $
                      821





21
 Tier
Technologies, Inc.


NOTE
15—(LOSS)/EARNINGS PER SHARE




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




Three
      months ended
                    March
      31,
                  
                  
                  Six
      months ended
                    March
      31,(in
      thousands, except per share data)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Numerator:
                    (Loss)/income
      from:Continuing
      operations, net of income taxes
                  
                  $
                  (2,959
                  )
                  
                  $
                  (2,953
                  )
                  
                  $
                  (4,851
                  )
                  
                  $
                  (5,800
                  )Discontinued
      operations, net of income taxes
                  
                  
                  (2,402
                  )
                  
                  
                  (584
                  )
                  
                  
                  (5,664
                  )
                  
                  
                  832Net
      loss
                  
                  $
                  (5,361
                  )
                  
                  $
                  (3,537
                  )
                  
                  $
                  (10,515
                  )
                  
                  $
                  (4,968
                  )Denominator:Weighted-average
      common shares outstanding
                  
                  
                  19,711
                  
                  
                  
                  19,551
                  
                  
                  
                  19,723
                  
                  
                  
                  19,547Effects
      of dilutive common stock options
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Adjusted
      weighted-average shares
                  
                  
                  19,711
                  
                  
                  
                  19,551
                  
                  
                  
                  19,723
                  
                  
                  
                  19,547(Loss)/earnings
      per basic and diluted shareFrom
      continuing operations
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.24
                  )
                  
                  $
                  (0.29
                  )From
      discontinued operations
                  
                  
                  (0.12
                  )
                  
                  
                  (0.03
                  )
                  
                  
                  (0.29
                  )
                  
                  
                  0.04Loss
      per basic and diluted share
                  
                  $
                  (0.27
                  )
                  
                  $
                  (0.18
                  )
                  
                  $
                  (0.53
                  )
                  
                  $
                  (0.25
                  )




The
following options were not included in the computation of diluted
(loss)/earnings per share because the exercise price was greater than the
average market price of our common stock for the periods stated and, therefore,
the effect would be anti-dilutive:




Three
      months ended
                    March
      31,
                  
                  
                  Six
      months ended
                    March
      31,(in
      thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted-average
      options excluded from computation of diluted (loss)/earnings per
      share
                  
                  
                  2,197
                  
                  
                  
                  2,005
                  
                  
                  
                  2,557
                  
                  
                  
                  1,550




The
following common stock equivalents were excluded from the calculation of diluted
(loss)/earnings per share, since their effect would have been
anti-dilutive:




Three
      months ended
                    March
      31,
                  
                  
                  Six
      months ended
                    March
      31,(in
      thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Common
      stock equivalents excluded from computation of diluted (loss)/earnings per
      share
                  
                  
                  64
                  
                  
                  
                  222
                  
                  
                  
                  5
                  
                  
                  
                  291




At
March 31, 2009, we have also excluded 500,000 shares of restricted stock from
the computation of diluted (loss)/earnings per share since their effect would
have been anti-dilutive.






NOTE 16—ACQUISITION




On
January 27, 2009, we completed the acquisition of substantially all of the
assets of ChoicePay,Inc. for $7.5 million in cash at closing and a
potential earn out, based upon a percentage of the profitability of future
defined new client business, not to exceed $2.0 million.  The
total cost of the acquisition was allocated to the assets acquired and
liabilities assumed based on their estimated respective fair values, in
accordance with Statement of Financial Accounting Standards No. 141—Business
Combinations.


22
 Tier
Technologies, Inc.


The
following table summarizes the fair values of the assets acquired and
liabilities assumed of ChoicePay, Inc. at the acquisition date:




(in
      thousands)
                  
                  As
      of January 27, 2009AssetsCash
      and cash equivalents
                  
                  $
                  4,552Accounts
      receivable, net
                  
                  
                  248Prepaid
      assets
                  
                  
                  140Property,
      equipment and software, net
                  
                  
                  1,250Other
      intangible assets, net
                  
                  
                  3,544Total
      assets acquired
                  
                  $
                  9,734LiabilitiesAccounts
      payable, escrow
                  
                  $
                  3,892Other
      accrued liabilities
                  
                  
                  1,048Total
      liabilities assumed
                  
                  
                  4,940Net
      assets acquired
                  
                  $
                  4,794




The
fair value of identifiable assets acquired and liabilities assumed of
$4.8 million, was less than the purchase price of $7.5 million,
resulting in $2.7 million of goodwill recorded as a result of the
acquisition.




The
unaudited pro forma financial information in the table below combines the
historical results for Tier and the historical results for ChoicePay for the six
months ended March 31, 2009 and 2008.  This pro forma information
is provided for illustrative purposes only and does not purport to be indicative
of the actual results that would have been achieved by the combined operations
for the periods presented or that will be achieved by the combined operations in
the future.




Six
      months ended(in
      thousands, except per share data)
                          
                          March
      31, 2009
                          
                          
                          March
      31, 2008Revenues
                          
                          $
                          60,574
                          
                          
                          $
                          57,852Net
      loss from continuing operations
                          
                          $
                          (5,164
                          )
                          
                          $
                          (7,611
                          )Net
      loss
                          
                          $
                          (10,828
                          )
                          
                          $
                          (6,779
                          )Basic/diluted
      loss per share—continuing operations
                          
                          $
                          (0.26
                          )
                          
                          $
                          (0.39
                          )Basic/diluted
      loss per share
                          
                          $
                          (0.55
                          )
                          
                          $
                          (0.35
                          )






23
 Tier
Technologies, Inc.




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




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements.  We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events.  Our actual performance could differ materially from
the expectations and beliefs reflected in the forward-looking statements in this
section and throughout this report, as a result of the risks, uncertainties and
assumptions discussed under Item 1A—Risk Factors of this Quarterly Report on
Form 10-Q and other factors discussed in this section.  For more
information regarding what constitutes a forward-looking statement, refer to
Private Securities Litigation Reform Act Safe Harbor Statement on page 
i.




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 federal, state and local governments, educational institutions, utility
companies and other public sector clients with biller direct electronic payment
and other transaction processing services.  Since April 2007 we have
been involved in a strategic initiative to focus on our core business—Electronic
Payment Solutions, or EPS.  As of March 31, 2009 we have divested
all operations which we deemed to be incompatible with our EPS
business.  With the divestitures complete, we are able to focus our
efforts on managing and expanding our core business.




KEY EVENTS IN FISCAL
2009




In
November 2008, we completed the divestiture of our Financial Management Systems,
or FMS, operations, which was part of our former Packaged Software Systems
Integration, or PSSI, segment.  In January 2009 we completed the
acquisition of ChoicePay, Inc., or ChoicePay, a leading ePayments solution
provider.  We believe the acquisition of ChoicePay will enhance our
technology platform.  In February 2009, we sold our Unemployment
Insurance, or UI, operations, which was part of our former PSSI
segment.  This sale completed our divestiture initiative.




SUMMARY
OF OPERATING RESULTS




The
following table provides a summary of our operating results for the three and
six months ended March 31, 2009 for our Continuing and Discontinued
Operations:




Three
      months ended
                        March
      31, 2009
                      
                      
                      Six
      months ended
                        March
      31, 2009(in
      thousands, except per share)
                      
                      Net
      loss
                      
                      
                      Loss
      per share
                      
                      
                      Net
      loss
                      
                      
                      Loss
      per shareContinuing
      Operations:EPS
                      
                      $
                      (2,777
                      )
                      
                      $
                      (0.14
                      )
                      
                      $
                      (4,765
                      )
                      
                      $
                      (0.24
                      )Wind-down
                      
                      
                      (182
                      )
                      
                      
                      (0.01
                      )
                      
                      
                      (86
                      )
                      
                      
                      —Total
      Continuing Operations
                      
                      $
                      (2,959
                      )
                      
                      $
                      (0.15
                      )
                      
                      $(4,851)
                      
                      
                      $
                      (0.24
                      )Total
      Discontinued Operations
                      
                      $
                      (2,402
                      )
                      
                      $
                      (0.12
                      )
                      
                      $
                      (5,664
                      )
                      
                      $
                      (0.29
                      )Net
      loss
                      
                      $
                      (5,361
                      )
                      
                      $
                      (0.27
                      )
                      
                      $
                      (10,515
                      )
                      
                      $
                      (0.53
                      )


24
 Tier
Technologies, Inc.


Our
Continuing Operations consists of our Electronic Payment Solutions, or EPS,
Operations, and certain operations we intend to wind down over the next four
years.  Revenues from our EPS Operations were $27.3 million for
the three months ended March 31, 2009 and $55.5 million for the six
months ended March 31, 2009.  Transaction volume and total
dollars processed continue to grow when compared to the same periods last
year.  As our revenues continue to grow for our EPS Operations, our
direct costs grow as well, however at a lower rate than our
revenue.  This is primarily due to strategic cost savings initiatives
we have implemented.  We continue to seek new methods to provide the
same quality of service to our clients at lower costs.  Despite the
increase in revenues, our EPS Operations reported a net loss of
$2.8 million for the three months ended March 31, 2009 and
$4.8 million for the six months ended March 31,
2009.  Contributing to the net loss were (i) restructuring and
severance payments as we continue to implement our strategic initiative to focus
on EPS Operations and streamline our general and administrative expenses and
(ii) an increase in legal fees associated with the filing of our
proxy.




Our
Wind-down Operations reported a net loss of $0.2 million for the three
months ended March 31, 2009 and $0.1 million for the six months ended
March 31, 2009.  We continue to make efforts to streamline our
costs associated with supporting our Wind-down Operations.




Our
Discontinued Operations consists of businesses we have divested through
March 31, 2009.  Our Discontinued Operations reported a net loss
of $2.4 million for the three months ended March 31, 2009 and
$5.7 million for the six months ended March 31, 2009.






EXPECTATIONS
AND STRATEGY FOR 2009




During
fiscal 2007, management and the board undertook a comprehensive strategic
planning process to determine the most effective means to maximize shareholder
value.  At the conclusion of this strategic review, it was decided to
divest or wind-down all operating units and focus on our EPS
business.  As noted earlier, we have completed our planned
divestitures allowing the company to focus exclusively on providing electronic
payment solutions to merchants who provide services directly to customers, which
we refer to as the biller-direct space.  During fiscal 2009, we have
established five key priorities:




·
            Complete
      the divestitures of non-strategic
assets;




·
            Build
      a new management team;




·
            Develop
      our marketing capabilities;




·
            Build
      share in the biller direct market by increasing transactions, developing
      new markets, which we refer to as verticals, and reducing our client
      concentration; and




·
            Consolidate
      our platforms to reduce costs and accelerate and expand the development
      and rollout of new products and
features.




We are
actively managing each of these priorities.  The status of each is as
follows:




·
            Divestitures:
      In November 2008, we completed the divestiture of FMS, which was part of
      our former PSSI segment.  In February 2009, we sold our UI
      operations, also part of our former PSSI segment.  These sales
      completed the last of our seven planned divestitures.  All
      planned divestitures are now
completed.




·
            Management:  Ronald
      W. Johnston joined us in April, 2008 as Chief Financial
      Officer.  In July, 2008, Keith S. Kendrick assumed the role of
      Senior Vice President, Strategic Marketing.  Our new Chief
      Operating Officer, Nina K. Vellayan began her assignment in October,
      2008.  During December and January, management reviewed our
      expense levels, undertook cost containment programs in light of the
      current economic environment, and streamlined the senior management team
      accordingly.




·
            Marketing:  As
      a part of the strategic review, we started an ongoing upgrade of our
      strategic information systems to allow us to establish direct
      relationships with end-users of our services to




25
 Tier
Technologies, Inc.


grow
      transactions across verticals and deepen the strength of the primary
      brand, Official Payments.  We are launching programs to increase
      customer adoption and utilization through expanded cross-selling
      capabilities and enhanced My Account
      functionality.  My Account is a
      personal registration function offered through our subsidiary, Official
      Payments Corporation. As our new consolidated platform becomes available,
      we will launch new e-commerce products and payment services for partners
      and direct biller clients including additional payment channels such as
      mobile, walk-up payment, and
kiosks.




·
            Build
      share:  We have increased resources and marketing programs
      directed at our fastest growing verticals:  Higher Education and
      Utilities.  In January 2009 we completed the acquisition of
      ChoicePay, a leading ePayments solution provider.  We believe
      the acquisition of ChoicePay will enhance our technology platform and
      provide us with a significant expansion of our utilities
      vertical.




·
            Platform
      Consolidation:  In the first fiscal quarter of 2009 we began an
      extensive analysis of our operating platforms and began a consolidation of
      our processing platforms and infrastructure to improve efficiency and
      reduce costs while providing the capacity for future
      growth.  Based on our current plan, we expect to complete the
      consolidation of our current EPS technology platforms in early calendar
      year 2010.  To date, we have completed the consolidation of some
      of our EPS operations, facilities, departments and positions in San Ramon,
      California with our operations in Auburn, Alabama.  We expect
      this operations consolidation to increase efficiencies, reduce costs,
      reduce overhead, and eliminate duplicative operations and
      functions.




We
anticipate minimal revenue growth during fiscal 2009 as we believe the current
macroeconomic climate will reduce the average payment size in key vertical
categories including federal tax and real property tax
payments.  Nevertheless, for the remainder of fiscal 2009 we expect to
see continued transaction growth in our EPS business driven by increasing
consumer demand for electronic payment options, and we intend to pursue key
strategic initiatives that leverage our lead position in the biller direct space
and are designated to facilitate growth and maximize efficiencies.






RESULTS
OF OPERATIONS




The
following table provides an overview of our results of operations for the three
and six months ended March 31, 2009 and 2008:




Three months
      ended
                
                
                VarianceMarch
      31,
                
                
                2009 vs.
      2008(in
      thousands, except percentages)
                
                2009
                
                
                2008
                
                
                $
                
                
                
                %Revenues
                
                $
                28,608
                
                
                $
                25,961
                
                
                $
                2,647
                
                
                
                10.2
                %Costs
      and expenses:Direct
      costs
                
                
                20,771
                
                
                
                19,518
                
                
                
                1,253
                
                
                
                6.4
                %General
      and administrative
                
                
                7,512
                
                
                
                6,873
                
                
                
                639
                
                
                
                9.3
                %Selling
      and marketing
                
                
                1,912
                
                
                
                2,005
                
                
                
                (93
                )
                
                
                (4.6
                )%Depreciation
      and amortization
                
                
                1,624
                
                
                
                1,330
                
                
                
                294
                
                
                
                22.1
                %Total
      costs and expenses
                
                
                31,819
                
                
                
                29,726
                
                
                
                2,093
                
                
                
                7.0
                %Loss
      from continuing operations before other income
                  and
      income taxes
                
                
                (3,211
                )
                
                
                (3,765
                )
                
                
                554
                
                
                
                14.7
                %Other
      income
                
                
                253
                
                
                
                824
                
                
                
                (571
                )
                
                
                (69.3
                )%Loss
      from continuing operations before income taxes
                
                
                (2,958
                )
                
                
                (2,941
                )
                
                
                (17
                )
                
                
                (0.6
                )%Income
      tax provision
                
                
                1
                
                
                
                12
                
                
                
                (11
                )
                
                
                (91.7
                )%Loss
      from continuing operations
                
                
                (2,959
                )
                
                
                (2,953
                )
                
                
                (6
                )
                
                
                (0.2
                )%Loss
      from discontinued operations, net
                
                
                (2,402
                )
                
                
                (584
                )
                
                
                (1,818
                )
                
                
                (311.3
                )%Net
      loss
                
                $
                (5,361
                )
                
                $
                (3,537
                )
                
                $
                (1,824
                )
                
                
                (51.6
                )%




26
 Tier
Technologies, Inc.





Six months
      ended
                
                
                VarianceMarch
      31,
                
                
                2009
      vs. 2008(in
      thousands, except percentages)
                
                2009
                
                
                2008
                
                
                $
                
                
                
                %Revenues
                
                $
                58,348
                
                
                $
                54,916
                
                
                $
                3,432
                
                
                
                6.3
                %Costs
      and expenses:Direct
      costs
                
                
                43,189
                
                
                
                41,752
                
                
                
                1,437
                
                
                
                3.4
                %General
      and administrative
                
                
                14,142
                
                
                
                13,982
                
                
                
                160
                
                
                
                1.1
                %Selling
      and marketing
                
                
                3,228
                
                
                
                4,119
                
                
                
                (891
                )
                
                
                (21.6
                )%Depreciation
      and amortization
                
                
                3,084
                
                
                
                2,625
                
                
                
                459
                
                
                
                17.5
                %Total
      costs and expenses
                
                
                63,643
                
                
                
                62,478
                
                
                
                1,165
                
                
                
                1.9
                %Loss
      from continuing operations before other income
                  and
      income taxes
                
                
                (5,295
                )
                
                
                (7,562
                )
                
                
                2,267
                
                
                
                30.0
                %Other
      income
                
                
                445
                
                
                
                1,790
                
                
                
                (1,345
                )
                
                
                (75.1
                )%Loss
      from continuing operations before income taxes
                
                
                (4,850
                )
                
                
                (5,772
                )
                
                
                922
                
                
                
                16.0
                %Income
      tax provision
                
                
                1
                
                
                
                28
                
                
                
                (27
                )
                
                
                (96.4
                )%Loss
      from continuing operations
                
                
                (4,851
                )
                
                
                (5,800
                )
                
                
                949
                
                
                
                16.4
                %(Loss)/income
      from discontinued operations, net
                
                
                (5,664
                )
                
                
                832
                
                
                
                (6,496
                )
                
                
                (781.8
                )%Net
      loss
                
                $
                (10,515
                )
                
                $
                (4,968
                )
                
                $
                (5,547
                )
                
                
                111.7
                %




The
following sections describe the reasons for key variances in the results that we
are reporting for Continuing and Discontinued Operations.






CONTINUING
OPERATIONS




The
Continuing Operations section of our Consolidated Statements of Operations
includes the results of operations of our core EPS business and certain
businesses that we expect to wind-down over the next four years.  The
following is an analysis of the variances in these financial
results.




Revenues (Continuing
Operations)




The
following table compares the revenues generated by our Continuing Operations
during the three and six months ended March 31, 2009 and 2008:




Three
      months ended
                          March
      31,
                        
                        
                        Variance(in
      thousands, except percentages)
                        
                        2009
                        
                        
                        2008
                        
                        
                        $
                        
                        
                        
                        %RevenuesEPS
                        
                        $
                        27,268
                        
                        
                        $
                        24,432
                        
                        
                        $
                        2,836
                        
                        
                        
                        11.6
                        %Wind-down
                        
                        
                        1,340
                        
                        
                        
                        1,529
                        
                        
                        
                        (189
                        )
                        
                        
                        (12.4
                        )%Total
                        
                        $
                        28,608
                        
                        
                        $
                        25,961
                        
                        
                        $
                        2,647
                        
                        
                        
                        10.2
                        %







Six
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %RevenuesEPS
                      
                      $
                      55,509
                      
                      
                      $
                      52,241
                      
                      
                      $
                      3,268
                      
                      
                      
                      6.3
                      %Wind-down
                      
                      
                      2,839
                      
                      
                      
                      2,675
                      
                      
                      
                      164
                      
                      
                      
                      6.1
                      %Total
                      
                      $
                      58,348
                      
                      
                      $
                      54,916
                      
                      
                      $
                      3,432
                      
                      
                      
                      6.3
                      %




The
following sections discuss the key factors that caused these revenue changes
from our Continuing Operations.




EPS
Revenues:  EPS provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients.  EPS’s revenues reflect the number of contracts with clients,
the volume of transactions processed under each contract and the rates that we
charge for each transaction that we process.


27
 Tier
Technologies, Inc.


EPS
generated $27.3 million of revenues during the three months ended
March 31, 2009, a $2.8 million, or 11.6%, increase over the three
months ended March 31, 2008.  The acquisition of ChoicePay in
January, 2009 and an increase in transactions and dollars processed contributed
to the increase in revenues during the three months ended March 31, 2009
compared to the same period last year.  During the three months ended
March 31, 2009, we processed 15.8% more transactions than we did in the
same period last year, representing 5.3% more dollars.  Most of the
markets that we serve, which we call verticals, experienced an increase in
transactions processed during the three months ended March 31, 2009
compared to the same period last year, ranging from 4.5% to
43.9%.  However, our Federal Income Tax and Court fees and fines
verticals, experienced decreases in transactions processed of 6.3% to 29.7%,
respectively.  During the three months ended March 31, 2009, we
added 104 new accounts, which contributed to the increase in revenues, of which
ChoicePay contributed more than 50 accounts.




EPS
generated $55.5 million of revenues during the six months ended
March 31, 2009, a $3.3 million, or 6.3%, increase over the six months
ended March 31, 2008.  The acquisition of ChoicePay in January,
2009 and an increase in transactions and dollars processed contributed to the
increase in revenues during the six months ended March 31, 2009 compared to
the same period last year.  During the six months ended March 31,
2009, we processed 8.7% more transactions than we did in the same period last
year, representing 8.0% more dollars.  Most of our verticals
experienced an increase in transactions processed during the six months ended
March 31, 2009 compared to the same period last year, ranging from 11.5% to
37.7%.  However, our Federal Income Tax, Education, and Court fees and
fines verticals, experienced decreases in transactions processed, ranging from
4.6% to 27.4%.  During the six months ended March 31, 2009, we
added 218 new clients, which contributed to the increase in
revenues.




An
increasing number of public and private sector entities strive to meet rising
consumer demand for electronic payment alternatives.  We believe our
renewed focus on our core EPS business will continue to produce revenue growth
for the foreseeable future.




Wind-down
Revenues:  During the three months ended March 31, 2009,
our Wind-down Operations generated $1.3 million in revenues, a
$0.2 million, or 12.4%, decrease from the three months ended March 31,
2008.  Our Voice and Systems Automation, or VSA, business reported
$1.3 million in revenues during the three months ended March 31, 2009,
which is a $22,000 decrease over the same period last year.  The
decrease in revenues was primarily due to the completion of several maintenance
projects in prior periods.  We expect to continue to support and renew
existing maintenance contracts; however, we do not expect we will actively
pursue new contracts for the VSA business.  Our Pension business
generated $42,000 in revenues for the three months ended March 31,
2009.  This is a $0.2 million decrease over the same period last
year due to the completion and near completion of two projects.




During
the six months ended March 31, 2009, our Wind-down Operations generated
$2.8 million in revenues, a $0.2 million, or 6.1%, increase from the
six months ended March 31, 2008.  Our Voice and Systems
Automation, or VSA, business reported $2.7 million in revenues during the
six months ended March 31, 2009, which is a $0.3 million, or 10.2%,
increase over the same period last year.  The increase is due to the
timing of billing of existing maintenance projects.  We expect to
continue to support and renew existing maintenance contracts; however, we do not
expect we will actively pursue new contracts for the VSA
business.  Our Pension business generated $0.1 million in
revenues for the six months ended March 31, 2009.  This is a
$0.1 million decrease over the same period last year primarily due to the
completion and near completion of two projects.




We
expect to wind down our Pension business during fiscal 2009.




Direct Costs (Continuing
Operations)




Direct
costs, which represent costs directly attributable to providing services to
clients, consist predominantly of payment card merchant discount fees and
assessments.  Other, less significant costs include: payroll and
payroll-related costs; travel-related expenditures; co-location and telephony
costs, hardware and software purchases; and the cost of hardware, software and
equipment sold to clients.  The following table provides a
year-over-year comparison of direct costs incurred by our Continuing Operations
during the three and six months ended March 31, 2009 and 2008:




28
 Tier
Technologies, Inc.




Three
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %Direct
      costsEPS
                      
                      $
                      20,149
                      
                      
                      $
                      18,736
                      
                      
                      $
                      1,413
                      
                      
                      
                      7.5
                      %Wind-down
                      
                      
                      622
                      
                      
                      
                      782
                      
                      
                      
                      (160
                      )
                      
                      
                      (20.5
                      )%Total
                      
                      $
                      20,771
                      
                      
                      $
                      19,518
                      
                      
                      $
                      1,253
                      
                      
                      
                      6.4
                      %




Six
      months ended
                  March
      31,
                
                
                Variance(in
      thousands, except percentages)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Direct
      costsEPS
                
                $
                41,987
                
                
                $
                39,854
                
                
                $
                2,133
                
                
                
                5.4
                %Wind-down
                
                
                1,202
                
                
                
                1,898
                
                
                
                (696
                )
                
                
                (36.7
                )%Total
                
                $
                43,189
                
                
                $
                41,752
                
                
                $
                1,437
                
                
                
                3.4
                %




The
following sections discuss the key factors that caused these changes in the
direct costs for Continuing Operations.




EPS Direct
Costs:  Direct costs within our EPS Operations rose
$1.4 million and $2.1 million, or 7.5% and 5.4%, respectively, during
the three and six months ended March 31, 2009, respectively, compared to
the same period last year.  Our direct costs consist primarily of
credit card discount costs and processing fees associated with the generation of
revenue.  Although revenues increased 11.6% and 6.3%, respectively for
the three and six months ended March 31, 2009, our direct costs for the
three and six months ended March 31, 2009, only increased 7.5% and 5.4%,
respectively, as a result of cost savings initiatives, the consolidation of our
San Ramon, California and Auburn, Alabama operations, and a change in our
revenue mix.




We
expect to see continued increases in our EPS direct costs as we strive to grow
this business and as more clients move toward electronic payment solutions
options.




Wind-down Direct
Costs:  During the three ended March 31, 2009, direct
costs from our Wind-down Operations decreased $0.2 million, or 20.5%, from
the same periods last year.  We have decreased labor and labor-related
expenses, including subcontractor costs required to service our various projects
by $0.4 million.  Offsetting this decrease is an increase in
product and material cost of $0.1 million and miscellaneous office expenses
of $0.1 million.  During the six months ended March 31,
2009, Wind-down direct costs decreased $0.7 million, or 36.7%, from the
same periods last year.  This decrease was primarily attributable to a
decrease in labor and labor-related expenses, including subcontractor costs of
$0.7 million and a decrease in $0.1 million in travel and
travel-related expenses and specific project reserves.  Offsetting
these decreases was an increase of $0.1 million in miscellaneous office
expenses.




As we
wind down these operations, we expect that the direct costs of these operations
will continue to decrease during the remainder of fiscal 2009.




General and Administrative
(Continuing Operations)




General
and administrative expenses consist primarily of payroll and payroll-related
costs for general management, administrative, accounting, legal and information
systems, as well as fees paid for outside services.  The following
table compares general and administrative costs incurred by our Continuing
Operations during the three and six months ended March 31, 2009 and
2008:




Three
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %General
      and administrativeEPS
                      
                      $
                      7,092
                      
                      
                      $
                      6,480
                      
                      
                      $
                      612
                      
                      
                      
                      9.4
                      %Wind-down
                      
                      
                      420
                      
                      
                      
                      393
                      
                      
                      
                      27
                      
                      
                      
                      6.9
                      %Total
                      
                      $
                      7,512
                      
                      
                      $
                      6,873
                      
                      
                      $
                      639
                      
                      
                      
                      9.3
                      %




29
 Tier
Technologies, Inc.




Six
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %General
      and administrativeEPS
                      
                      $
                      13,382
                      
                      
                      $
                      13,136
                      
                      
                      $
                      246
                      
                      
                      
                      1.9
                      %Wind-down
                      
                      
                      760
                      
                      
                      
                      846
                      
                      
                      
                      (86
                      )
                      
                      
                      (10.2
                      )%Total
                      
                      $
                      14,142
                      
                      
                      $
                      13,982
                      
                      
                      $
                      160
                      
                      
                      
                      1.1
                      %




EPS General and
Administrative:  During the three months ended March 31,
2009, EPS incurred $7.1 million of general and administrative expenses, a
$0.6 million, or 9.4%, increase over the same period last
year.  During the three months ended March 31, 2009, legal fees
increased $0.4 million, primarily due to one-time expenses incurred
relating to the filing of our proxy and fees associated with state business
licenses.  Travel and miscellaneous office expenses increased
$0.5 million over the same period last year, primarily attributable to the
acquisition of ChoicePay and initiatives to consolidate our EPS
platforms.  In addition, during the three months ended March 31,
2008 we benefited from a $0.2 million adjustment of a legal reserve
associated with an investigation previously conducted by the US Department of
Justice, or DOJ.




During
the three months ended March 31, 2009, labor and labor-related expenses,
including subcontractor and consultant expense decreased
$0.5 million.  Contributing to this decrease was:  the
absence of $0.4 million in subcontractor and consultant expense
attributable to the completion of our strategic cost savings initiatives, other
cost optimization efforts, and the absence of executive search fees incurred
during fiscal 2008; $0.2 million in company-related labor as a result of
our corporate and EPS consolidation; and $0.2 million in stock-based
compensation expense.  Offsetting these decreases was an increase in
bonus expense of $0.2 million as a result of additions to our executive
staff, and a shift in resources to our EPS operations and the award of
Performance Stock Units, or PSUs, to members of our executive staff and
additional severance expense of $0.1 million primarily due to the
consolidation of our San Ramon, California facility with our Auburn, Alabama
facility.




During
the six months ended March 31, 2009, EPS incurred $13.4 million of
general and administrative expenses, a $0.2 million, or 1.9%, increase over
the same period last year.  During the six months ended March 31,
2009 we incurred increases consisting of the
following:  $0.4 million in additional office related expenses,
including office equipment maintenance and repairs; $0.4 million in
additional legal fees associated with the filing of our proxy and state business
licenses; $0.2 million in additional restructuring expense related to our
consolidation efforts; and $0.2 million in additional travel and
travel-related expenses associated with the acquisition of ChoicePay and our
platform consolidation.  In addition, we benefited from the
$0.2 million adjustment of the DOJ reserve discussed above.




Offsetting
these increases was a decrease in outside services and labor and labor-related
expenses of $1.2 million due to the completion of our strategic initiative
review.  Stock-based compensation expense decreased $0.6 million
over the same period last year primarily due to the absence of the one-time
expense of $0.5 million in December 2007 related to the acceleration of the
vesting of options awarded to our Board of Directors in August
2006.  Offsetting these decreases was an increase in severance expense
of $0.4 million primarily due to the consolidation of our San Ramon,
California and Auburn, Alabama facilities, offset by the absence of expense
incurred during the six months ended March 31, 2008 associated with the
departure of an executive.  Further contributing to the increases was
a $0.2 million increase in bonus expense attributable to the staffing
changes and additions and PSU awards discussed above.




During
fiscal 2009, we expect to see decreases in general and administrative support
expense, primarily through further reductions in our labor-force and outside
services, as we continue to recognize the benefits of our cost saving strategic
initiatives and continue to consolidate and streamline our EPS
operations.




30
 Tier
Technologies, Inc.




Wind-down General
and Administrative:  During the three months ended
March 31, 2009, our Wind-down Operations incurred $0.4 million of
general and administrative expenses, a $27,000 increase over the same period
last year.  During the six months ended March 30, 2009, our
Wind-down Operations incurred $0.8 million of general and administrative
expenses, a $0.1 million decrease over the same periods last year primarily
attributable to the shift in resources from our Wind-down Operations to our EPS
Operations.




During
fiscal 2009, we expect to see general and administrative support expenses for
our Wind-down Operations fluctuate minimally as we continue to fully support
these operations.




Selling and Marketing
(Continuing Operations)




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.  The following table provides a year-over-year
comparison of selling and marketing costs incurred by our Continuing Operations
during the three and six months ended March 31, 2009 and 2008:




Three
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %Selling
      and marketingEPS
                      
                      $
                      1,909
                      
                      
                      $
                      1,942
                      
                      
                      $
                      (33
                      )
                      
                      
                      (1.7
                      )%Wind-down
                      
                      
                      3
                      
                      
                      
                      63
                      
                      
                      
                      (60
                      )
                      
                      
                      (95.2
                      )%Total
                      
                      $
                      1,912
                      
                      
                      $
                      2,005
                      
                      
                      $
                      (93
                      )
                      
                      
                      (4.6
                      )%




Six
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %Selling
      and marketingEPS
                      
                      $
                      3,223
                      
                      
                      $
                      3,937
                      
                      
                      $
                      (714
                      )
                      
                      
                      (18.1
                      )%Wind-down
                      
                      
                      5
                      
                      
                      
                      182
                      
                      
                      
                      (177
                      )
                      
                      
                      (97.3
                      )%Total
                      
                      $
                      3,228
                      
                      
                      $
                      4,119
                      
                      
                      $
                      (891
                      )
                      
                      
                      (21.6
                      )%




EPS Selling and
Marketing:  During the three months ended March 31, 2009,
EPS incurred $1.9 million of selling and marketing expenses, a $33,000, or
1.7%, decrease over the same period last year.  Contributing to this
decrease is a decrease in travel and travel-related expenses and commission
expense, offset by additional severance expense associated with the departure of
one of our executives.




During
the six months ended March 31, 2009, EPS incurred $3.2 million of
selling and marketing expenses, a $0.7 million, or 18.1%, decrease over the
same period last year.  Labor and labor-related expenses contributed
$0.4 million to the overall decline, consisting of a $0.6 million
decrease in commissions paid during the current period and $0.1 million in
labor and associated fringe expense offset by severance expense of
$0.3 million associated with the departure of one of our
executives.  A reduction in advertising and partnership-related costs
contributed $0.3 million to the overall decrease, primarily due to the
timing of our tax season advertising efforts, which we expect to incur during
the coming months.




We
expect to see a continued decrease in selling and marketing expenses for our EPS
Operations during fiscal 2009 as we continue to streamline our sales and
marketing force.




Wind-down Selling
and Marketing:  During the three months ended March 31,
2009, the selling and marketing expenses of our Wind-down Operation decreased by
$0.1 million, or 95.2% from the three months ended March 31,
2008.  During the six months ended March 31, 2009, these expenses
decreased $0.2 million, or 97.3%, over the six months ended March 31,
2008.  These variances are attributable to our strategic decision to
focus on our EPS Operations, in which all selling and marketing




31
 Tier
Technologies, Inc.


efforts
have been directed.  We expect to incur minimal expenses relating to
Wind-down Operations during fiscal 2009.




Depreciation and
Amortization (Continuing Operations)




Depreciation
and amortization represents expenses associated with the depreciation of
equipment, software and leasehold improvements, as well as the amortization of
intangible assets from acquisitions and other intellectual property not directly
attributable to client projects.




Three
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %Depreciation
      and amortizationEPS
                      
                      $
                      1,147
                      
                      
                      $
                      975
                      
                      
                      $
                      172
                      
                      
                      
                      17.6
                      %Wind-down
                      
                      
                      477
                      
                      
                      
                      355
                      
                      
                      
                      122
                      
                      
                      
                      34.4
                      %Total
                      
                      $
                      1,624
                      
                      
                      $
                      1,330
                      
                      
                      $
                      294
                      
                      
                      
                      22.1
                      %




Six
      months ended
                        March
      31,
                      
                      
                      Variance(in
      thousands, except percentages)
                      
                      2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      
                      %Depreciation
      and amortizationEPS
                      
                      $
                      2,126
                      
                      
                      $
                      1,899
                      
                      
                      $
                      227
                      
                      
                      
                      12.0
                      %Wind-down
                      
                      
                      958
                      
                      
                      
                      726
                      
                      
                      
                      232
                      
                      
                      
                      32.0
                      %Total
                      
                      $
                      3,084
                      
                      
                      $
                      2,625
                      
                      
                      $
                      459
                      
                      
                      
                      17.5
                      %




Depreciation
and amortization relating to our EPS Operations increased $0.2 million or
17.6% and 12.0%, respectively, for the three and six months ended March 31,
2009 over the same period last year primarily due to the acquisition of
ChoicePay assets during January 2009.  We incurred an additional
$0.1 million, or 34.4% and $0.2 million, or 32.0%, respectively, for
the three and six months ended March 31, 2009 over the same period last
year, in amortization expense for our Wind-down Operations as a result of the
decision at the end of fiscal 2008 to decrease the remaining useful life of
intangible assets from four to two years.




Other Income/(Loss)
(Continuing Operations)




Gain/(loss) on
investment:Duringthe three
months ended March 31, 2009, we recognized $13,000 gain on
investment.During the six months ended
March 31, 2009, we recognized a $0.1 million loss related to the
decrease in fair value of our auction rate securities.




Interest income,
net:Interest income during
the three and six months ended March 31, 2009 decreased $0.6 million
and $1.2 million, respectively, compared to the same periods last year,
attributable to both a decrease in the amount within our investment portfolio
and decreases in interest rates.  Due to current market conditions, we
have elected to sell as many debt securities as possible and invest the funds in
money market accounts, treasury bills and commercial paper – often at lower
interest rates than our debt securities.  Our interest rates fluctuate
with changes in the marketplace.




Income Tax Provision
(Continuing Operations)




We
reported income tax provisions of $1,000 for the three and six months ended
March 31, 2009 and $12,000 and $28,000, respectively for the three and six
months ended March 31, 2008.  The provision for income taxes
represents state tax obligations incurred by our EPS operations.  Our
Consolidated Statements of
Operations for the three and six months ended March 31, 2009 and
2008 do not reflect a federal tax provision because of offsetting adjustments to
our valuation allowance.  Our effective tax rates differ from the
federal statutory rate due to state and foreign income taxes, tax-exempt
interest income and the charge for establishing a valuation allowance on our net
deferred tax assets.  Our future tax rate may vary due to a variety of
factors, including, but not limited to:  the relative income
contribution by tax jurisdiction; changes in statutory tax rates; the amount of
tax exempt interest income generated during the




32
 Tier
Technologies, Inc.


year;
changes in our valuation allowance; our ability to utilize net operating losses
and any non-deductible items related to acquisitions or other nonrecurring
charges.




DISCONTINUED
OPERATIONS




Our
Discontinued Operations consists of portions of our former Government Business
Process Outsourcing, or GBPO, business and our Packaged Software Systems
Integration, or PSSI, business we have divested through March 31,
2009.  During the three and six months ended March 31, 2009, our
Discontinued Operations contributed $2.4 million and $5.7 million,
respectively, to our net loss.




LIQUIDITY
AND CAPITAL RESOURCES




Our
principal capital requirement is to fund working capital to support our organic
growth, including potential future acquisitions.  Under our Amended
and Restated Credit and Security Agreement, as amended, with our lender, we may
obtain up to $7.5 million of letters of credit.  The agreement
also 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
March 31, 2009, we had $1.4 million of letters of credit outstanding
under this credit facility, which are fully collateralized.  These
letters of credit were issued to secure performance bonds and a property
lease.




Net Cash
from Continuing Operations—Operating Activities.  During the
six months ended March 31, 2009, our operating activities from Continuing
Operations provided $2.0 million of cash.  This reflects a net
loss of $4.9 million from Continuing Operations and $4.2 million of
non-cash items.  During the six months ended March 31, 2009,
$8.5 million of cash was generated by an increase in accounts payable and
accrued liabilities, primarily associated with accounts payable escrow as a
result of the ChoicePay acquisition.  An increase in accounts
receivable, associated with the accounts payable escrow used $5.1 million
of cash.  A decrease in deferred income used $0.6 million of
cash.  An increase in prepaid expenses and other assets used
$0.1 million of cash.




Net Cash
from Continuing Operations—Investing Activities.  Net cash used
in our investing activities from Continuing Operations for the six months ended
March 31, 2009 was $14.0 million, including $21.5 million of cash
used to purchase marketable securities, offset by $13.9 million of cash
provided by maturities of marketable securities.  During the six
months ended March 31, 2009, $6.9 million of cash was used to purchase
substantially all of the assets of ChoicePay and $1.3 million of cash was
used to purchase equipment and software and fund internal development of
software primarily associated with our EPS business.  The proceeds
from the sale of our Discontinued Operations provided $1.3 million of
cash.  In addition, the release and maturity of restricted investments
provided $0.5 million of cash.




Net Cash
from Continuing Operations—Financing Activities.  Net cash used
in our financing activities from Continuing Operations for the six months ended
March 31, 2009 was $0.6 million used for the purchase of treasury
stock and $9,000 used for capital lease obligations.




Net Cash
from Discontinued Operations—Operating Activities.  During the six
months ended March 31, 2009, our operating activities from Discontinued
Operations used $4.8 million of cash.  This reflects a net loss
of $5.7 million and $3.7 million of non-cash items, of which
$2.6 million related to the write-down of held-for-sale assets,
$1.2 million related to a loss recognized on the sale and disposal of our
discontinued operations, and $0.2 million related to a reduction in bad
debt expense.  In addition, the net effect of changes in discontinued
assets and liabilities used $2.8 million of cash.




Net Cash
from Discontinued Operations—Investing Activities.  Net cash
used in our investing activities from Discontinued Operations for the six months
ended March 31, 2009 was $0.4 million, primarily used to fund internal
development of software.




In our
Note 3—Investments we disclosed that at March 31, 2009, our investment
portfolio included $31.3 million par value of AAA-rated auction rate
municipal bonds that were collateralized with student loans.  These
municipal bonds are bought and sold in the marketplace through a bidding process
sometimes referred to as a “Dutch Auction.”  After the initial
issuance of the securities, the interest rate on the securities is reset at a
prescribed interval (typically every 28 days), based upon the demand for these


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securities.  As
a result of concerns in the sub-prime mortgage market and overall credit market
issues, we continue to experience unsuccessful auctions, as there are
insufficient buyers for the securities at the reset date for our auction rate
securities.  The unsuccessful auctions and lack of liquidity has
caused a decrease in the fair value of these securities.  All of our
securities are collateralized with student loans.  Securities
collateralized with student loans are guaranteed by the issuing state and the
Federal Family Education Loan Program.  Under the Higher Education
Act, student loans cannot be cancelled (discharged) due to
bankruptcy.  Because of this, we continue to believe the credit
quality of these securities is high and the principal collectible.




In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager.  This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest.  Our investment banker has the right to
sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer.  Until liquidity in the market returns, or
our investment banker sells or disposes of securities, we may be unable to
liquidate these investments in a timely manner at par value.




In
January 2009, we announced a stock repurchase program, which authorizes the
repurchase of up to $15 million of our common stock in the open
market.




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 billing and collections. 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 fiscal year
2009.  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; capital expenditures supporting
continued growth of our EPS business; contingent payments earned; new and
existing contract requirements; the timing of the receipt of accounts
receivable, including unbilled receivables; the timing and ability to sell
investment securities held in our portfolio without a loss of principal; our
ability to draw on our bank facility; and employee growth.  To the
extent that our existing capital resources are insufficient to meet our capital
requirements, we will have to raise additional funds.  There can be no
assurance that additional funding, if necessary, will be available on favorable
terms, if at all.  The raising of additional capital may dilute our
shareholders’ ownership in us.




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






CONTRACTUAL
OBLIGATIONS




Since
September 30, 2008, there has been no material change 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 estimates and assumptions, which require complex
subjective judgments by management, could have a material impact on reported
results:  estimates of project costs and percentage of completion;
estimates of effective tax rates, deferred taxes and associated valuation


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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, 2008.






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
debt securities.  These 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 March 31, 2009, the fair value of the portfolio would
decline by about $34,000.




A
significant portion of our investment portfolio consists of AAA-rated auction
rate municipal bonds that were collateralized with student
loans.  These municipal bonds are bought and sold in the marketplace
through a bidding process sometimes referred to as a “Dutch
Auction.”  After the initial issuance of the securities, the interest
rate on the securities is reset at a prescribed interval (typically every 28
days), based upon the demand for these securities.  As a result of
concerns in the sub-prime mortgage market and overall credit market issues, we
continue to experience unsuccessful auctions, as there are insufficient buyers
for the securities at the reset date for our auction rate
securities.  The unsuccessful auctions and lack of liquidity has
caused a decrease in the fair value of these securities.  All of our
securities are collateralized with student loans.  Securities
collateralized with student loans are guaranteed by the issuing state and the
Federal Family Education Loan Program.  Under the Higher Education
Act, student loans cannot be cancelled (discharged) due to
bankruptcy.  Because of this, we continue to believe the credit
quality of these securities is high and the principal collectible.




In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager.  This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest.  Our investment banker has the right to
sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer.  Until liquidity in the market returns, or
our investment banker sells or disposes of securities, we may be unable to
liquidate these investments in a timely manner at par value.






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 March 31, 2009.  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 March 31, 2009, 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.




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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 six months
ended March 31, 2009 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.


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PART II.  OTHER INFORMATION






ITEM 1.  LEGAL PROCEEDINGS




On
May 31, 2006, we received a subpoena, and in January 2009 one current
employee and several former employees received additional subpoenas 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.




ITEM 1A.  RISK FACTORS




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




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.




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 in fiscal year 2005, we have reported net losses of
$27.4 million in fiscal 2008, $3.0 million in fiscal 2007,
$9.5 million in fiscal 2006, $63,000 in fiscal 2004 and $5.4 million
in fiscal 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 including
  recession;




·
            loss
      of significant clients;




·
            demand
      for our services;




·
            seasonality
      of business, resulting from timing of property tax payments and federal
      and state income tax payments;




·
            timing
      of service and product
implementations;




·
            unplanned
      increases in costs;




·
            delays
      in completion of projects;




·
            intense
      competition;




·
            costs
      of compliance with laws and government regulations;
  and




·
            costs
      of acquisitions, consolidation and integration of new business and
      technology.




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.  Fluctuations in the price
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.


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Our
income tax and property tax processing revenue has been negatively impacted by
recent economic conditions and may continue to decline.  As a result of the current global and U.S. economic
conditions, including unemployment and real estate foreclosures, we have
suffered a downturn in revenue, especially in our property tax and income tax
segments, due to decreased payments of federal income tax and property tax by
taxpayers who pay taxes on our website and Interactive Voice Response System
(IVR) payment processing systems.  If current conditions do not
improve, additional declines in revenue may occur, especially in the property
tax and federal income tax segments, negatively impacting use of our services,
our overall revenues and causing a decline in profits.




We could suffer material revenue
losses and liability in the event the divested business projects and contracts
are not successfully concluded.  We have completed divestment
of certain operations and portions of the business inclusive of BPO, FIDM, SSI,
FMS and UI operations.  Certain divestitures include contractual earn
outs and revenue sharing arrangements based on successful operation of the
businesses divested. If the businesses are not profitable or there are revenue
shortfalls we may not receive the expected benefits from the divestitures which
could have an adverse impact on our revenues.  Additionally, we remain
liable for certain obligations under some of the divested projects and their
related contracts.  If the contracts are not performed successfully,
or if there is a claim of delay or breach in connection with services or
products provided by either us or the acquiring company, liability could result
causing damages, unanticipated costs, bond forfeitures and loss of
revenue.




Our
business is less diverse and there is more risk as a result of our divestitures
and the transition to, and primary focus on, the electronic payment solutions
business.   Our focus on
payment processing going forward and the recent divestiture of the majority of
our legacy business units unrelated to payment processing, including software
licensing and government system integration businesses, has resulted in loss of
historical revenue sources and a decrease in diversification of services and
markets which has resulted in an increase in business risk.   In
the event of a business downturn in the payment processing business due to
increased competition, loss of clients, economic conditions, technology changes,
or in the event of increased costs, disruption in services, a change in laws, or
other events related to our payment solutions business there could be a greater
negative impact on our revenues than if we had retained our diverse
businesses.




We could suffer material losses or
significant disruption of operations and business if we are not successful in
consolidation of our EPS operations.We are consolidating and
moving certain EPS operations, facilities, departments, and positions as part of
our strategic plan to save costs and eliminate duplicative operations and
functions.  We completed consolidation of the customer service/call center, client services and
implementation services from San Ramon, California, to our existing facility in
Auburn, Alabama, and weare in the process of restructuring
certain information technology functions and consolidation of financial
operations. If
this restructuring and consolidation is not successful we could suffer
disruption of our operations, systems or services; incur a significant increase
in costs; or suffer a loss of valuable staff and historical knowledge, which
could have a material adverse impact on our business, significantly increase
operating costs and result in operational weaknesses and compliance
deficiencies.




We may not be successful in
integrating our acquisition of ChoicePay, Inc.On
January 27, 2009, we purchased substantially all of the assets of
ChoicePay, Inc., an ePayments solution provider based in Tulsa,
Oklahoma.  The acquisition included intellectual property, the
ChoicePay processing platform, systems, operations, services, products, clients,
employees, and other resources.  We may not be successful in
integrating the acquired assets into our existing business which could result in
disruption of operations, inefficiencies, excess costs, legal and financial
liability, additional outsourcing of services and consulting charges, failure to
provide services and products as contracted with clients and vendors, and
impairment of earnings and operating results.




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 other
appropriate acquisition candidates, we may be unsuccessful in negotiating the
terms of the




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acquisition,
financing the acquisition or, if an additional acquisition occurs, 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.




Consolidation of our payment
processing platforms involves significant risk.We are in the
process of integrating and consolidating our technology platforms.  We
currently maintain three processing platforms: one in San Ramon, California; one
in Auburn, Alabama; and a third in Tulsa, Oklahoma, which we recently acquired
in the ChoicePay acquisition.  We expect to have one consolidated
processing platform by December 2009.  Failure to timely, effectively,
and efficiently consolidate our payment processing platforms could result in
significant risks including restricted and limited transaction volume,
operational inefficiencies, inability to add new products or services, inability
to expand existing products and services, significant development costs, higher
labor costs, increased hardware and software costs, inability to provide certain
functionality, or system and service disruption or failure.   Our
EPS business is highly dependent upon having a safe and secure information
technology platform with sufficient capacity to meet both the high volume of
transactions and the future growth of our business.  If our ability to
develop and/or acquire upgrades or replacements of our existing platform does
not keep pace with the growth of our business, we may not be able to meet our
requirements for the sustainable and economic growth of the EPS
business.  Furthermore, if we are not able to acquire or develop these
systems on a timely and economical basis, the profitability of our EPS business
may be adversely affected.  If we are unable to successfully integrate
and consolidate these payment processing platforms it could result in a
significant loss of clients and revenues and risk of liability.




Our
revenues and cash flows could decline significantly if we were unable to retain
our largest client, or a number of significant clients.  The majority of our client contracts, including our
contract with the U.S. Internal Revenue Service, allow clients to terminate all
or part of their contracts on short notice, or provide notice of non-renewal
with little prior notification.Our contract with the
IRS has generated 27.8%, 28.3%, and 31.8%, of our annual revenues from
Electronic Payment Solutions for fiscal years 2008, 2007 and 2006,
repectively.  In April 2009 we were one of two companies awarded a
multi-year contract by the IRS to provide electronic payment solutions for
personal and business taxes. The contract contains a base period commencing
April 2, 2009 and four one-year option periods running until December 31,
2013.Our operating
results and cash flows could decline significantly if we were unable to retain
this client, or replace it in the event it is terminated, or if we were unable
to renew this contract, or are unsuccessful in future re-bids of this
contract.  Termination or non-renewal of a number of client contracts,
or certain significant client contracts, including the IRS contract, material
contracts resulting from the ChoicePay acquisition, or a number of large state,
local, utility or education-related contracts, could result in significant loss
of revenues and reduction in profitability.




Security breaches or improper access
to confidential data and personally identifiable information 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.  Our business requires us to obtain, process,
use, and destroy confidential and personally identifiable data and information
of clients and consumers.  Despite security measures we have taken,
our systems may be vulnerable to physical break-ins, fraud, computer viruses,
attacks by hackers and similar problems, causing interruption in service and
loss or theft of confidential data and personally identifiable information that
we store and/or process.  It is possible that our security controls
over confidential information and personal data, our training on data security,
and other practices we follow may not prevent the improper disclosure or
unauthorized access to confidential data and personally identifiable
information.  Our third-party vendors or suppliers also may experience
security breaches, fraud, computer viruses, attacks by hackers or other similar
incidents




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involving
the unauthorized access and theft of confidential data and personally
identifiable information.  In January 2009, Heartland Payment Systems
reported a breach of security of its systems resulting in the loss or theft of
personally identifiable information. We contract with Heartland for certain
payment processing services for credit and debit transactions in the education
market. Although no security breach occurred within our systems, and there is no
specific information to date that our clients or their related consumers
information or data was compromised, if such client or consumer data and
information was lost or stolen, such an incident could potentially result in
compliance costs, loss of clients and revenues, liability and
fines.  Any security breach within our systems, software or hardware
or our vendors or suppliers systems, software or hardware could result in theft,
loss, publication, deletion or modification of such data and information, and
could cause harm to our business and reputation, liability for fines and
damages, costs of notification, and a loss of clients and revenue.




We could suffer material losses if
our operations, systems or platforms fail to perform properly or
effectively.The continued efficiency and proper functioning
of our technical systems, platforms, and operational infrastructure is integral
to our performance. Failure of any or all of these resources subjects us to
significant risks. This includes but is not limited to operational or technical
failures of our systems and platforms, human error, failure of third-party
support and services, as well as the loss of key individuals or failure of key
individuals to perform.  Our EPS segment processes a high volume of
time-sensitive payment transactions.  The majority of our tax-related
transactions are processed in short periods of time, including between April 1
and April 15 of each tax year for federal tax payments.  If there is a
defect in our system software or hardware, an interruption or failure due to
loss of system functionality, a delay in our system processing speed, a lack of
system capacity, or loss of employees on short notice, even for a short period
of time, our ability to process transactions and provide services may be
significantly limited, delayed or eliminated, resulting in lost business and
revenue and harm to our reputation.  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.




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, compliance controls, accounting standards,
licensing and bonding requirements, industry/association rules, and public
disclosure requirements including under the Sarbanes Oxley Act of 2002, SEC
regulations, and Nasdaq Stock Market rules.  Compliance with and
changes in these laws, regulations, standards and requirements may result in
increased general and administrative expenses for outside services, increased
risks associated with compliance, and a diversion of management time and
attention from revenue-generating activities, which could curtail the growth of
our business.




Violation of any existing or future
laws or regulations related to our EPS business, including laws governing money
transmitters, could expose us to substantial liability and fines, force us to
cease providing our services, or force us to change our business
practices.Our EPS segment is subject to numerous federal and
state laws and regulations, some states’ money transmitter regulations, and
related licensing requirements.  Compliance with federal and state
laws and government regulations regarding money transmitters, money laundering,
privacy, data security, fraud, and other laws and regulations associated with
financial transaction processing is critical to our business.  New
laws and regulations in these areas may be enacted, or existing ones changed,
which could negatively impact services, restrict or eliminate our ability to
provide services, make our services unprofitable, or create significant
liability.  We have applications for licensure as a money transmitter
pending in several states.  We entered into a consent order with one
state which included payment of penalties for unlicensed activity prior to our
submission of the money transmitter application, and additional states could
impose such fines and fees.  In the future we may be subject to
additional states’ money transmitter regulations, federal money laundering
regulations and regulation of internet transactions.  We are also
subject to the applicable rules of the credit/debit card association, the
National Automated Clearing House Association (NACHA), and other industry
standards.  If we are found to be in violation of any such laws,
rules, regulations or standards, we could be exposed to significant financial
liability, substantial fines and penalties, cease and desist orders, and other
sanctions that could restrict or eliminate our ability to




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provide
our services in one or more states or accept certain types of transactions in
one or more states, or could force us to make costly changes to our business
practices.  Even if we are not forced to change our business
practices, the cost of compliance, and obtaining necessary licenses and
regulatory approvals, could be substantial.




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 electronic payment
transaction processing and e-commerce payment 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.




The revenues generated by our
Electronic Payment Solutions operations may fluctuate, and our ability to
maintain profitability is uncertain.  Our EPS business
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, utility and rent obligations.  The
revenues earned by our EPS business depend on consumers’ continued willingness
to pay a convenience fee and our relationships with clients, such as government
taxing authorities, educational institutions, public utilities and their
respective constituents.  Demand for Electronic Payment Solutions
services could decline 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.  The processing fees charged by
credit/debit card associations and financial institutions can be increased with
little or no notice, which could reduce our margins and harm our
profitability.




Demand
for Electronic Payment Solutions services could also be affected adversely by a
decline in the use of the Internet, economic factors such as a decline in
availability of credit, increased unemployment, 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.




Change in interchange rates could
have a significant impact on our cost of revenue
generation.  Interchange rates charged by credit and debit card
companies are a major factor in our delivery costs for the services we
perform.  A change in such rates either favorable or unfavorable could
have a significant impact on our financial performance.




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 client business, infrastructure and
technology platform is highly dependent on working with other companies, service
and network providers, card companies, processors, banks, merchants and other
entities related to our payment processing systems and e-commerce
solutions.  Some of our projects require us to bid on and perform on
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 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.  Our systems are dependent on
integration and implementation of complex third-party products and services
including software and




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hardware.  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, including in connection with system or
software defects, implementation or testing, or the discontinuation of the
services of a key subcontractor or vendor could result in degraded functionality
or system failure, significant cost and liability, diminished profitability and
damage to our reputation and competitive position.




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, to
form a competing company, or as a result of termination or a divestiture, the
loss of such personnel and any resulting loss of existing or potential clients
could harm our competitive position.




If we are not able to protect our
intellectual property, our business could suffer serious harm.Our
systems and operating platforms, scripts, software code and other intellectual
property are generally proprietary, confidential, and may be trade
secrets.  We protect our intellectual property rights through a
variety of methods, such as use of nondisclosure and license agreements and use
of trade secret, copyright and trademark laws.  Ownership of developed
software and customizations to software are the subject of negotiation and
license arrangements 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.  Our business is dependent on intellectual property
rights including software license rights and restrictions, patent rights, and
trademark rights.  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 or 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, statutory 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 obtain or 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 or continue to provide existing services, 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 or services do not
achieve market acceptance, we may lose market share, and our revenues could
decline.




42
 Tier
Technologies, Inc.


Our business is subject to increasing
performance requirements, which could result in reduced revenues and increased
liability.  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, statutory or bid
bonds.  Unsatisfactory performance of services, disruption of
services, or unanticipated difficulties or delays in processing payments or
providing contracted services may result in termination of the contract, a
reduction in revenues, liability for penalties and damages, or claims against a
bond.






ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS




Issuer
      Repurchases of Equity
Securities:






Period
      Covered
                          
                          Total
      Number of Shares Repurchased
                            (in
      thousands)
                          
                          
                          Average
      Price Paid per Share
                          
                          
                          Total
      Number of Shares Repurchased as Part of Publicly Announced Program (1)
                            (in
      thousands)
                          
                          
                          Approximate
      Dollar Value of Shares that May Yet Be Repurchased under the Program (1)(in
      thousands)January
      1 through
                            January
      31, 2009
                          
                          
                          —
                          
                          
                          $
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          15,000February
      1 through
                            February
      28, 2009
                          
                          
                          12.4
                          
                          
                          $
                          5.95
                          
                          
                          
                          12.4
                          
                          
                          
                          14,927March
      1 through
                            March
      31, 2009
                          
                          
                          100.0
                          
                          
                          $
                          5.63
                          
                          
                          
                          100.0
                          
                          
                          
                          14,361Total
                          
                          
                          112.4
                          
                          
                          $
                          5.69
                          
                          
                          
                          112.4
                          
                          
                          $
                          14,361




(1)  The
Company’s Board of Directors has authorized the repurchase, from time to time,
of up to $15.0 million of the Company’s common stock.






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






The
Annual Meeting of Shareholders of Tier Technologies, Inc. was held on March 11,
2009.  The following matters were voted upon at this
meeting.




1.
            Election
      of nine directors to serve for the ensuing year and until successors are
      elected;




2.
            Ratification
      of McGladrey & Pullen, LLP as our independent registered public
      accounting firm for the fiscal year ending September 30,
    2009;




3.
            A
      shareholder proposal requesting our Board of Directors to terminate the
      Company’s shareholder rights plan;
and




4.
            A
      shareholder proposal requesting our Board of Directors to amend our bylaws
      to permit shareholders owning at least 10% of the voting power to call
      special meetings of shareholders.




The
number of
shares of common stock entitled to vote at the annual meeting was
19,734,863.  The number of shares of common stock present or
represented by proxy was 16,904,831.  Our certificate of incorporation
provides for cumulative voting with respect to the election of
directors.  As a result, with respect to the election of directors,
each share was entitled to nine votes, which could be allocated among up to nine
candidates.  Therefore, votes in favor of a particular nominee may
exceed the total number of shares voting.  The final report of the
inspector of election did not detail the number of votes withheld from the
various nominees for election to the Board.  However, based on the
preliminary vote


43
 Tier
Technologies, Inc.


report,
Tier believes that the holders of 138,370 shares withheld from each of Messrs.
Berger, Cabot, Delucca, Guenther, Heasley, Poe, and Rossetti; the holders of an
additional 600 shares withheld from Messrs. Berger, Cabot, Delucca, Guenther,
and Heasley; the holders of an additional 5,286,122 shares withheld from Messrs.
Cabot and Guenther; the holders of an additional 200 shares withheld from
Messrs. Cabot and Delucca; the holders of an additional 18,400 shares withheld
from Mr. Delucca; the holders of an additional 1,000 shares withheld from Mr.
Poe; and the holders of an additional 71,378 shares withheld from Mr.
Rossetti.  In addition, and again based on the preliminary vote
report, Tier believes that the holders of 114,388 shares withheld from each of
Messrs. Donoghue and Murphy and the holders of an additional 152,753 shares
withheld from Mr. Murphy.  The results of the votes on each of the
matters presented to the shareholders at our annual meeting are set forth
below.




The
results of the votes on each of the matters presented to the shareholders at our
annual meeting are set forth below.




Matter
                
                Votes
      in favor
                
                
                Votes
      withheld
                
                
                Abstentions1.Election
      of DirectorsCharles
      W. Berger
                
                
                10,492,860Samuel
      Cabot III
                
                
                350,001John
      J. Delucca
                
                
                10,492,860Daniel
      J. Donoghue
                
                
                32,792,976Brian
      D. Edwards
                
                
                8,096,944Morgan
      P. Guenther
                
                
                10,492,860Philip
      G. Heasley
                
                
                10,492,860Michael
      R. Murphy
                
                
                32,792,976David
      A. Poe
                
                
                10,492,860Ronald
      L. Rossetti
                
                
                10,492,860Zachary
      F. Sadek
                
                
                12,878,5992.The
      ratification of McGladrey & Pullen, LLP as our independent registered
      public accounting firm for the fiscal year ending September 30,
      2009
                
                
                16,701,927
                
                
                
                165,548
                
                
                
                37,3563.Terminate
      shareholder rights plan
                
                
                15,996,648
                
                
                
                849,463
                
                
                
                58,7204.Amend
      bylaws to permit shareholders owning at least 10% of the voting power to
      call special meetings of shareholders
                
                
                15,822,594
                
                
                
                1,081,487
                
                
                
                750




The
following nine individuals were elected as directors at the annual meeting:
Charles W. Berger, John J. Delucca, Daniel J. Donoghue, Morgan P. Guenther,
Philip G. Heasley, Michael R. Murphy, David A. Poe, Ronald L. Rossetti, and
Zachary F. Sadek.




44
 Tier
Technologies, Inc.




ITEM 6.  EXHIBITS




Exhibit
      Number
            Description2.1
            Asset
      Purchase Agreement between Tier Technologies, Inc., Cowboy Acquisition
      Company and ChoicePay, Inc., dated as of January 13, 2009.
    (1)3.1
            Amended
      and Restated Bylaws, as amended, of Tier Technologies, Inc.
      (2)4.1
            Second
      Amendment to Rights Agreement, dated as of February 23, 2009, between Tier
      Technologies, Inc. and American Stock Transfer and Trust Company, as
      Rights Agent. (2)10.1
            Enterprise
      Value Award Plan Amendment to Reflect Supplemental Award dated December 4,
      2008 between Tier Technologies, Inc. and Ronald L. Rossetti.10.2
            Tier
      Technologies, Inc. Executive Performance Stock Unit Plan.
    (3)31.1
            Certification
      of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended. 
      †31.2
            Certification
      of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended.
      †32.1
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    †32.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    ††   
      Filed herewith.
              (1)  Filed as an exhibit to Form 8-K, filed on January 20,
      2009, and incorporated herein by reference.
              (2)  Filed as an exhibit to Form 8-K, filed on February 24,
      2009, and incorporated herein by reference.
              (3)  Filed as an exhibit to Form 8-K, filed on January 22,
      2009, and incorporated herein by
reference.
















45
 Tier
Technologies, Inc.




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:
      May 11, 2009









By:
            /s/
      Ronald W. Johnston






Ronald
      W. JohnstonChief
      Financial Officer(Principal
      Financial and Accounting Officer)









46