UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 (Mark
One)
 x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended June 30,
2008
 
 OR
 
 o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 __________________
 
 Commission
file number 000-23195
 
 TIER
TECHNOLOGIES, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              94-3145844(State
      or other jurisdiction
                of
      incorporation or organization)
              (I.R.S.
      Employer
                Identification
      No.)
 
 10780
Parkridge Boulevard, Suite 400
 Reston,
Virginia 20191
 (Address
of principal executive offices)
 
 (571)
382-1000
 (Registrant's
telephone number, including area code)
 
 Not
applicable
 (Former
name, former address, and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.Yes x No o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of "accelerated filer," "large 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
July 31, 2008 there were 19,732,863 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 ofOperations
                2Consolidated
      Statements of Comprehensive (Loss) Income
                3Consolidated
      Statements of Cash Flows
                4Consolidated
      SupplementalCashFlowInformation
                5Notes
      to Consolidated Financial Statements (unaudited)
                6Note
      1—Overview of Organization and Basis of
      Presentation
                6Note
      2—SummaryofSignificantAccountingPolicies
                7Note
      3—Investments
                9Note
      4—Customer Concentration and Risk
                11Note
      5—Goodwill and Other Intangible Assets
                12Note
      6—Income Taxes
                13Note
      7—Contingencies and Commitments
                13Note
      8—Related Party Transactions
                15Note
      9—Share-based Payment
                15Note
      10—Segment Information
                17Note
      11—Discontinued Operations
                19Note
      12—(Loss) Earnings per Share
                22Note
      13—Subsequent
      Event
                23Item
      2.  Management's Discussion and Analysis of Financial Condition
      and
                  Results of Operations
                24Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
                39Item
      4.  Controls and Procedures
                40PART
      II.  OTHER INFORMATION
                41Item
      1A.  Risk Factors
                41Item
      6.  Exhibits
                47SIGNATURE
                48
 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
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 41 which could cause actual results to differ materially
from those anticipated as of the date of this report.  We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
  i
   PART I.  FINANCIAL INFORMATION
  ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  TIER
TECHNOLOGIES, INC.
 CONSOLIDATED BALANCE SHEETS
  (in
      thousands)
              
              June 30,
                2008
              
              
              September 30,
      2007(unaudited)ASSETS:Current
      assets:Cash
      and cash equivalents
              
              $
              44,761
              
              
              $
              16,516Investments
      in marketable securities
              
              
              2,165
              
              
              
              57,815Accounts
      receivable, net
              
              
              4,783
              
              
              
              4,909Unbilled
      receivables
              
              
              363
              
              
              
              545Prepaid
      expenses and other current assets
              
              
              9,249
              
              
              
              2,169Assets
      of discontinued operations
              
              
              202
              
              
              
              672Current
      assets—held-for-sale
              
              
              16,597
              
              
              
              36,196Total
      current assets
              
              
              78,120
              
              
              
              118,822Property,
      equipment and software, net
              
              
              3,853
              
              
              
              3,743Goodwill
              
              
              14,526
              
              
              
              14,526Other
      intangible assets, net
              
              
              14,501
              
              
              
              17,640Investments
      in marketable securities
              
              
              30,725
              
              
              
              —Restricted
      investments
              
              
              8,361
              
              
              
              11,526Other
      assets
              
              
              346
              
              
              
              167Total
      assets
              
              $
              150,432
              
              
              $
              166,424LIABILITIES
      AND SHAREHOLDERS’ EQUITY:Current
      liabilities:Accounts
      payable
              
              $
              1,216
              
              
              $
              877Accrued
      compensation liabilities
              
              
              3,275
              
              
              
              4,653Accrued
      subcontractor expenses
              
              
              388
              
              
              
              504Accrued
      discount fees
              
              
              5,587
              
              
              
              4,529Other
      accrued liabilities
              
              
              4,085
              
              
              
              4,213Deferred
      income
              
              
              1,927
              
              
              
              2,649Liabilities
      of discontinued operations
              
              
              523
              
              
              
              421Current
      liabilities—held-for-sale
              
              
              13,096
              
              
              
              10,864Total
      current liabilities
              
              
              30,097
              
              
              
              28,710Other
      liabilities
              
              
              147
              
              
              
              200Total
      liabilities
              
              
              30,244
              
              
              
              28,910Commitments
      and contingencies (Note 7)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: 20,615 and 20,425; shares outstanding: 19,731 and
      19,541
              
              
              189,472
              
              
              
              186,417Treasury
      stock—at cost, 884 shares
              
              
              (8,684
              )
              
              
              (8,684
              )Accumulated
      other comprehensive loss
              
              
              (1,800
              )
              
              
              —Accumulated
      deficit
              
              
              (58,800
              )
              
              
              (40,219
              )Total
      shareholders’ equity
              
              
              120,188
              
              
              
              137,514Total
      liabilities and shareholders’ equity
              
              $
              150,432
              
              
              $
              166,424
 See Notes to Consolidated Financial
Statements
  1
 TIER
TECHNOLOGIES, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 
 Three
      months ended
                June
      30,
              
              
              Nine
      months ended
                June
      30,(in
      thousands, except per share data)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues
              
              $
              44,896
              
              
              $
              40,098
              
              
              $
              99,812
              
              
              $
              87,696Costs
      and expenses:Direct
      costs
              
              
              36,374
              
              
              
              32,030
              
              
              
              78,126
              
              
              
              67,321General
      and administrative
              
              
              6,494
              
              
              
              6,470
              
              
              
              20,475
              
              
              
              20,380Selling
      and marketing
              
              
              2,492
              
              
              
              2,479
              
              
              
              6,611
              
              
              
              6,232Depreciation
      and amortization
              
              
              1,347
              
              
              
              951
              
              
              
              3,973
              
              
              
              3,617Write-down
      of goodwill and intangible assets
              
              
              —
              
              
              
              8,585
              
              
              
              —
              
              
              
              8,585Total
      costs and expenses
              
              
              46,707
              
              
              
              50,515
              
              
              
              109,185
              
              
              
              106,135Loss
      from continuing operations before other income and
                income
      taxes
              
              
              (1,811
              )
              
              
              (10,417
              )
              
              
              (9,373
              )
              
              
              (18,439
              )Other
      income:Income
      from investment:Equity
      in net (loss) income of unconsolidated affiliate
              
              
              —
              
              
              
              (511
              )
              
              
              —
              
              
              
              475Realized
      foreign currency gain
              
              
              —
              
              
              
              239
              
              
              
              —
              
              
              
              239Gain
      on sale of unconsolidated affiliate
              
              
              —
              
              
              
              80
              
              
              
              —
              
              
              
              80Interest
      income, net
              
              
              503
              
              
              
              820
              
              
              
              2,294
              
              
              
              2,304Total
      other income
              
              
              503
              
              
              
              628
              
              
              
              2,294
              
              
              
              3,098Loss
      from continuing operations before income taxes
              
              
              (1,308
              )
              
              
              (9,789
              )
              
              
              (7,079
              )
              
              
              (15,341
              )Income
      tax provision (benefit)
              
              
              23
              
              
              
              (7
              )
              
              
              51
              
              
              
              60Loss
      from continuing operations
              
              
              (1,331
              )
              
              
              (9,782
              )
              
              
              (7,130
              )
              
              
              (15,401
              )(Loss)
      income from discontinued operations, net
              
              
              (12,282
              )
              
              
              4,063
              
              
              
              (11,451
              )
              
              
              15,634Net
      (loss) income
              
              $
              (13,613
              )
              
              $
              (5,719
              )
              
              $
              (18,581
              )
              
              $
              233(Loss)
      earnings per share—Basic and diluted:From
      continuing operations
              
              $
              (0.07
              )
              
              $
              (0.50
              )
              
              $
              (0.36
              )
              
              $
              (0.79
              )From
      discontinued operations
              
              $
              (0.62
              )
              
              $
              0.21
              
              
              $
              (0.59
              )
              
              $
              0.80(Loss)
      earnings per share—Basic and diluted
              
              $
              (0.69
              )
              
              $
              (0.29
              )
              
              $
              (0.95
              )
              
              $
              0.01Weighted
      average common shares used in computing:Basic
      and diluted (loss) earnings per share
              
              
              19,635
              
              
              
              19,511
              
              
              
              19,576
              
              
              
              19,505
 See
Notes to Consolidated Financial Statements
  2
  
 TIER
TECHNOLOGIES, INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (unaudited)
  Three
      months ended
                June
      30,
              
              
              Nine
      months ended
                June
      30,(in
      thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      (loss) income
              
              $
              (13,613
              )
              
              $
              (5,719
              )
              
              $
              (18,581
              )
              
              $
              233Other
      comprehensive (loss) income, net of tax:Unrealized
      loss on investments in marketable securities
              
              
              (386
              )
              
              
              (2
              )
              
              
              (1,800
              )
              
              
              (3
              )Foreign
      currency translation:Foreign
      currency translation adjustment
              
              
              —
              
              
              
              299
              
              
              
              —
              
              
              
              270Less
      impact of realized gains (transferred from AOCI into net (loss)
      income)
              
              
              —
              
              
              
              (239
              )
              
              
              —
              
              
              
              (239
              )Other
      comprehensive (loss) income
              
              
              (386
              )
              
              
              58
              
              
              
              (1,800
              )
              
              
              28Comprehensive
      (loss) income
              
              $
              (13,999
              )
              
              $
              (5,661
              )
              
              $
              (20,381
              )
              
              $
              261
 See
Notes to Consolidated Financial Statements
  3
 
 TIER
TECHNOLOGIES, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Nine
      months ended
                June
      30,(in
      thousands)
              
              2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
              
              $
              (18,581
              )
              
              $
              233Less:
      (loss) Income from discontinued operations, net
              
              
              (11,451
              )
              
              
              15,634Loss
      from continuing operations, net
              
              
              (7,130
              )
              
              
              (15,401
              )Non-cash
      items included in net (loss):Depreciation
      and amortization
              
              
              4,095
              
              
              
              3,755Provision
      for doubtful accounts
              
              
              (186
              )
              
              
              (311
              )Equity
      in net income of unconsolidated affiliate
              
              
              —
              
              
              
              (475
              )Gain
      on sale of unconsolidated affiliate
              
              
              —
              
              
              
              (319
              )Settlement
      of pension contract
              
              
              —
              
              
              
              1,254Share-based
      compensation
              
              
              1,805
              
              
              
              1,451Write-down
      of goodwill and intangible assets
              
              
              —
              
              
              
              8,585Other
              
              
              445
              
              
              
              (57
              )Net
      effect of changes in assets and liabilities:Accounts
      receivable and unbilled receivables
              
              
              493
              
              
              
              15Prepaid
      expenses and other assets
              
              
              (7,700
              )
              
              
              2,234Accounts
      payable and accrued liabilities
              
              
              (301
              )
              
              
              644Income
      taxes receivable
              
              
              51
              
              
              
              (44
              )Deferred
      income
              
              
              (722
              )
              
              
              94Cash
      provided by (used in) operating activities from continuing
      operations
              
              
              (9,150
              )
              
              
              1,425Cash
      provided by operating activities from discontinued
    operations
              
              
              14,372
              
              
              
              12,141Cash
      provided by operating activities
              
              
              5,222
              
              
              
              13,566CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of marketable securities
              
              
              (7,325
              )
              
              
              (6,108
              )Sales
      and maturities of marketable securities
              
              
              32,615
              
              
              
              3,550Purchase
      of restricted investments
              
              
              —
              
              
              
              (19,272
              )Sales
      and maturities of restricted investments
              
              
              1,000
              
              
              
              13,398Purchase
      of equipment and software
              
              
              (962
              )
              
              
              (728
              )Repayment
      of notes and accrued interest from related parties
              
              
              —
              
              
              
              4,295Proceeds
      from sale of unconsolidated affiliate
              
              
              —
              
              
              
              4,784Proceeds
      from sale of discontinued operations
              
              
              730
              
              
              
              —Other
      investing activities
              
              
              —
              
              
              
              (232
              )Cash
      provided by (used in) investing activities from continuing
      operations
              
              
              26,058
              
              
              
              (313
              )Cash
      used in investing activities from discontinued operations
              
              
              (4,232
              )
              
              
              (2,562
              )Cash
      provided by (used in) investing activities
              
              
              21,826
              
              
              
              (2,875
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from issuance of common stock
              
              
              1,250
              
              
              
              89Capital
      lease obligations and other financing arrangements
              
              
              (49
              )
              
              
              (18
              )Cash
      provided by financing activities from continuing
operations
              
              
              1,201
              
              
              
              71Cash
      used in financing activities from discontinued operations
              
              
              (4
              )
              
              
              (4
              )Cash
      provided by financing activities
              
              
              1,197
              
              
              
              67Effect
      of exchange rate changes on cash
              
              
              —
              
              
              
              (11
              )Net
      increase in cash and cash equivalents
              
              
              28,245
              
              
              
              10,747Cash
      and cash equivalents at beginning of period
              
              
              16,516
              
              
              
              18,468Cash
      and cash equivalents at end of period
              
              $
              44,761
              
              
              $
              29,215
  4
  TIER
TECHNOLOGIES, INC.
 CONSOLIDATED SUPPLEMENTAL CASH FLOW
INFORMATION
 (unaudited)
 
 Nine
      months ended
                June
      30,(in
      thousands)
              
              2008
              
              
              2007SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW
      INFORMATION:Cash
      paid during the period for:Interest
              
              $
              9
              
              
              $
              9Income
      taxes paid, net
              
              $
              —
              
              
              $
              113SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Interest
      accrued on shareholder notes
              
              $
              —
              
              
              $
              126Equipment acquired under
      capital lease obligations and other
                financing
      arrangements
              
              $
              28
              
              
              $
              26Investments
      released from restriction
              
              $
              2,165
              
              
              $
              —
 See
Notes to Consolidated Financial Statements
  5
 Tier
Technologies, Inc.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  NOTE 1—OVERVIEW OF ORGANIZATION AND BASIS OF
PRESENTATION
  Tier
Technologies, Inc., or Tier or the Company, provides federal, state and local
government and other public and private sector clients with electronic payment
and other transaction processing services, as well as software and systems
integrations services.  During fiscal 2007, we undertook a strategic
initiative that evaluated the risks, costs, benefits and growth potential of
each of our product lines and services.  As a result of this process,
we concluded that our company's focus should be on our core business—Electronic
Payment Processing.  As such, we began to seek buyers for certain
portions of our business in April 2007.
  Our
Senior Management team allocates resources to and assesses the performance of
our operations in two major categories: Continuing Operations and Discontinued
Operations.  As of June 30, 2008, our Continuing
Operations were composed of:
  ·
              Electronic
      Payment Processing, or EPP—provides electronic payment processing
      options, including payment of taxes, fees and other obligations owed to
      government entities, educational institutions, utilities and other public
      sector clients.  EPP services are provided by our two wholly
      owned subsidiaries:  Official Payments Corporation, or OPC, and
      EPOS Corporation, or EPOS;
  ·
              Wind-down
      Operations—represent portions of our Government Business Process
      Outsourcing, or GBPO and Packaged Software and System Integration, or PSSI
      operations that we expect to wind down over a five-year period because
      they are neither compatible with our long-term strategic direction nor
      complementary with the other businesses that we are
      divesting.  These operations
include:
  o
              Voice
      and Systems Automation (formerly part of GBPO)—provides call center
      interactive voice response systems and support services, including
      customization, installation and maintenance;
and
  o
              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.
  ·
              Corporate
      Operations—represent those functions that support our corporate
      governance, as well as certain shared services, including information
      technology and business
development.
  Our
      Discontinued
      Operations, or held-for-sale businesses, represent those portions
      of GBPO and PSSI sold, or for which we are seeking buyers, including the
      following:
  ·
              GBPO
      Discontinued Operations—included our child support payment
      processing, child support financial institution data match services,
      consulting services to state agencies, computer telephony and call centers
      operations, which were sold during the year;
and
  ·
              PSSI
      Discontinued Operations—includes our financial management systems,
      and unemployment insurance administration systems lines of
      business.  In addition, the results reported for our PSSI
      discontinued operations include our former Independent Validation and
      Verification and systems integration businesses sold during the
      year.
  In
June 2007, we sold our 46.96% investment in the outstanding common stock of
CPAS Systems, Inc., or CPAS, a Canadian-based supplier of pension administration
software systems, back to CPAS for $4.8 million (USD).  Prior to
this disposition, we used the equity method of accounting to report our
investment in CPAS.
  We
reclassified historical financial information presented in our Consolidated
Financial Statements and our Notes to Consolidated Financial Statements to
conform to the current period’s presentation.  For
 6
 Tier
Technologies, Inc.
 additional
information about our continuing operations, see Note
10—Segment Information.  For additional
information about the businesses that we have sold or classified as
held-for-sale, see Note 11—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; collectibility 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.
  NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  SIGNIFICANT
ACCOUNTING POLICIES
  Revenue
Recognition and Credit Risk.  We recognize revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable.  We assess
collectibility based upon our clients’ financial condition and prior payment
history, as well as our performance under the contract.  When we enter
into certain arrangements where we are obligated to deliver multiple products
and/or services, we account for each unit of the contract separately when each
unit provides value to the customer on a standalone basis and there is objective
evidence of the fair value of the standalone unit.
  We have
revised our disclosures about revenue recognition from our Annual Report on Form
10-K for the period ended September 30, 2007 to provide more of a
distinction between our Continuing Operations revenue streams and our
Discontinued Operations revenue streams.
  Continuing
Operations
  Our
Electronic Payment Processing, or EPP, operations offer payment processing
services to our clients, which allow them to offer their constituents
(individuals or businesses) the ability to pay certain financial obligations
with their credit or debit cards or with an electronic check.  Our
revenue is generated in the form of the convenience fee we are permitted to
charge the constituent for the electronic payment processing service
provided.  Depending on the agreement with the client, the convenience
fee can be a fixed fee or a percentage of the payment processed.  In
more than 90% of our arrangements, this fee is charged directly to the
constituent and is added to their payment obligation at the point the payment is
processed.  We recognize the revenue in the month in which the service
is provided.
  We use
the percentage-of-completion method to recognize revenue associated with our
Pension wind-down operations.  This method of revenue recognition is
discussed in more detail in the following Discontinued Operations
section.
  Our
remaining wind-down operations include software sales and maintenance and
support, as well as non-essential training and consulting.  We
recognize the revenues on training and consulting projects in the month the
services are performed.  The method of revenue recognition for
software sales and maintenance and support is discussed in more detail in the
following Discontinued
Operations section.
  7
 Tier
Technologies, Inc.
 Discontinued
Operations
  Typically,
our payment processing and call center operations earn revenues based upon a
specific fee per transaction or percentage of the dollar amount
processed.  We recognize these revenues in the month that the service
is provided.
  We use
the percentage-of-completion method to recognize revenues for software licenses
and related services for projects that require significant modification or
customization that is essential to the functionality of the
software.  We record a provision in those instances in which we
believe it is probable that a contract will generate a net loss and we can
reasonably estimate this loss.  If we cannot reasonably estimate the
loss, we limit the amount of revenue that we recognize to the costs we have
incurred, until we can estimate the total loss.  Advance payments from
clients and amounts billed to clients in excess of revenue recognized are
recorded as deferred revenue.  Amounts recognized as revenue in
advance of contractual billing are recorded as unbilled
receivables.
  For the
sale of software that does not require significant modification, we recognize
revenues from license fees when persuasive evidence of an agreement exists,
delivery of the software has occurred, no significant implementation or
integration obligations exist, the fee is fixed or determinable and
collectibility is probable.  If we do not believe it is probable that
we will collect a fee, we do not recognize the associated revenue until we
collect the payment.
  For
software license arrangements with multiple obligations (for example,
undelivered maintenance and support), we allocate revenues to each component of
the arrangement using the residual value method of accounting based on the fair
value of the undelivered elements, which is specific to our
company.  Fair value for the maintenance and support obligations for
software licenses is based upon the specific renewal rates.
  Our
license agreements do not offer return rights or price protection; therefore, we
do not have provisions for sales returns on these types of
agreements.  We do, however, offer routine, short-term warranties that
our proprietary software will operate free of material defects and in conformity
with written documentation.  Under these agreements, if we have an
active maintenance agreement, we record a liability for our estimated future
warranty claims, based on historical experience.  If there is no
maintenance contract, the warranty is considered implied maintenance and we
defer revenues consistent with other maintenance and support
obligations.
  When we
provide ongoing maintenance and support services, the associated revenue is
deferred and recognized on a straight-line basis over the life of the related
contract—typically one year.  Generally, we recognize the revenues
earned for non-essential training and consulting support when the services are
performed.
  Finally,
under the terms of a number of our contracts, we are reimbursed for certain
costs that we incur to support the project, including travel, postage,
stationery and printing.  We include the amounts that we are entitled
to be reimbursed and any associated mark-up on these expenses in Revenues and include the
expenses as a direct cost in (Loss) income from discontinued
operations, net on our Consolidated Statements of
Operations.
  RECENT
ACCOUNTING PRONOUNCEMENTS
  SFAS
157—Fair Value Measurements.  In October 2006, the Financial
Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standards No. 157—Fair Value
Measurements, or SFAS 157.  This standard establishes a
framework for measuring fair value and expands disclosures about fair value
measurement of a company’s assets and liabilities.  This standard also
requires that the fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability.  SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and, generally, must be
applied prospectively.  We expect to adopt
 8
 Tier
Technologies, Inc.
 this
standard beginning October 1, 2008.  We do not expect that the
adoption of SFAS 157 will have a material effect on our financial position and
results of operations.
  In
February 2008, FASB issued FASB Staff Position FAS 157-1—Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
Under Statement 13.  This FSP removes leasing transactions
accounted for under Statement of Financial Accounting Standards No.
13—Accounting for Leases and its related guidance from SFAS 157.  In
February 2008, FASB also issued FASB Staff Position FAS 157-2—Effective Date of
FASB Statement No. 157.  This FSP delays the effective date of
Statement 157 for all nonrecurring fair value measurements of nonfinancial
assets and nonfinancial liabilities until fiscal years beginning after
November 15, 2008.  We do not expect that the adoption of these
FSPs will have a material effect on our financial position and results of
operations.
  SFAS
159—The Fair Value Option for Financial Assets and Financial
Liabilities.  In February 2007, FASB issued Statement of
Financial Accounting Standard No. 159—The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS 159, which allows companies to
choose to measure many financial instruments and certain other items at fair
value.  Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date.  The principle can be applied on an instrument by instrument
basis, is irrevocable and must be applied to the entire
instrument.  SFAS 159 amends previous guidance to extend the use
of the fair value option to available-for-sale and held-to-maturity
securities.  SFAS 159 also establishes presentation and disclosure
requirements to help financial statement users understand the effect of the
election.  SFAS 159 is effective as of the beginning of each reporting
fiscal year beginning after November 15, 2007.  We expect to
adopt this standard beginning October 1, 2008.  We do not believe
that the adoption of SFAS 159 will have a material effect on our financial
position or results of operations.
  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.
  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.
  NOTE 3—INVESTMENTS
  Investments
are composed of available-for-sale debt securities, as defined in SFAS 115—Accounting for Certain Investments
in Debt and Equity Securities, or SFAS 115. Restricted investments
totaling $2.4 million at June 30, 2008 and $5.5 million at
September 30, 2007, which were pledged in connection with performance bonds
and a real estate operating lease, will be restricted for the terms of the
project performance and lease periods, the latest of which is estimated to end
March 2010.  At June 30, 2008 and September 30, 2007, we
also used a $6.0 million money market investment as a compensating balance
for a bank account used for certain operations.  These investments are
reported as Restricted
investments on our 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
 9
 Tier
Technologies, Inc.
 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
June 30, 2008 and September 30, 2007, our investment portfolio
included $30.7 million and $54.4 million, respectively, of municipal
bonds that were collateralized primarily 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.  Beginning in February 2008, some of
the auctions for these securities were unsuccessful.  These
investments rated AAA (with the exception of one pension obligation rated BBB)
were current on all obligations, and we continued to earn interest on our
auction rate security investments at the maximum contractual
rate.  However, the uncertainty of the credit markets has resulted in
negative impacts to liquidity and fair value of these
investments.  Through June 30, 2008, we liquidated as many of
these securities as possible and invested the funds in money market
accounts.  As a result of the unsuccessful auctions and the
uncertainty in the credit market, the estimated fair value, as estimated by our
investment banker, of the remaining investments no longer approximated par
value.  During the nine months ended June 30, 2008, we recorded a
temporary impairment charge of $1.8 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.
  The
funds associated with failed auctions will not be accessible until a successful
auction occurs, the issuer calls or restructures the underlying security, 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.  We have recorded the impairment as temporary as we
have the intent and ability to hold these investments until one of the
previously mentioned scenarios occurs.  We believe that our cash and
cash equivalents balances of $44.8 million at June 30, 2008 are
sufficient and we do not anticipate the lack of liquidity in the credit and
capital markets will have a material impact on our cash flows or the ability to
conduct our business.  Due to lack of liquidity as of June 2008, we
reclassified our entire auction rate security portfolio from current to long
termInvestments in marketable
securities on our Consolidated Balance Sheets.
  If the
current market conditions continue or the anticipated recovery in market values
does not occur, we may be required to record other-than-temporary impairment
charges in the future.  We intend to convert our investments in
auction rate securities to money market funds as liquidity returns and
conditions permit.
  In
accordance with SFAS No. 95—Statement of Cash Flows,
unrestricted investments with remaining maturities of 90 days or less (as of the
date that we purchased the securities) are classified as cash
equivalents.  Except for our restricted investments, all other
investments are categorized as available-for-sale under SFAS 115.  As
such, our securities are recorded at estimated fair value, based on quoted
market prices or pricing methodologies provided by our investment
banker.  Increases and decreases in fair value are recorded as
unrealized gains and losses in other comprehensive income.
  If we
determine that impairment is other-than-temporary, we reduce the recorded book
value of the investment by the amount of the impairment and recognize a realized
loss on the investment.  At June 30, 2008 and September 30,
2007, we did not believe any of our investments were other-than-temporarily
impaired.
  10
 Tier
Technologies, Inc.
 The
following table shows the balance sheet classification, amortized cost and
estimated fair values of investments included in cash equivalents, investments
in marketable securities and restricted investments:
  June
      30, 2008
              
              
              September
      30, 2007(in
      thousands)
              
              Amortized
      cost
              
              
              Unrealized
      loss
              
              
              Estimated
                fair
      value
              
              
              Amortized
      cost
              
              
              Unrealized
      loss
              
              
              Estimated
      fair valueCash
      equivalents:Money
      market
              
              $
              25,555
              
              
              $
              —
              
              
              $
              25,555
              
              
              $
              7,798
              
              
              $
              —
              
              
              $
              7,798Total
      investments included
                in
      cashand
                cash
      equivalents
              
              
              25,555
              
              
              
              —
              
              
              
              25,555
              
              
              
              7,798
              
              
              
              —
              
              
              
              7,798Investments
      in marketable securities:Debt
      securities (State and local bonds)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              54,400
              
              
              
              —
              
              
              
              54,400Certificates
      of deposit
              
              
              2,165
              
              
              
              —
              
              
              
              2,165
              
              
              
              3,415
              
              
              
              —
              
              
              
              3,415Total
      marketable securities
              
              
              2,165
              
              
              
              —
              
              
              
              2,165
              
              
              
              57,815
              
              
              
              —
              
              
              
              57,815Long-term
      investments:Debt
      securities (State and local bonds)
              
              
              32,525
              
              
              
              (1,800
              )
              
              
              30,725
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      long-term investments
              
              
              32,525
              
              
              
              (1,800
              )
              
              
              30,725
              
              
              
              —
              
              
              
              —
              
              
              
              —Restricted
      investments:Money
      market
              
              
              6,000
              
              
              
              —
              
              
              
              6,000
              
              
              
              6,000
              
              
              
              —
              
              
              
              6,000Certificates
      of deposit
              
              
              2,361
              
              
              
              —
              
              
              
              2,361
              
              
              
              5,526
              
              
              
              —
              
              
              
              5,526Total
      restricted investments
              
              
              8,361
              
              
              
              —
              
              
              
              8,361
              
              
              
              11,526
              
              
              
              —
              
              
              
              11,526Total
      investments
              
              $
              68,606
              
              
              $
              (1,800
              )
              
              $
              66,806
              
              
              $
              77,139
              
              
              $
              —
              
              
              $
              77,139
  NOTE 4—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 nine months ended June 30, 2008, our contract
with the Internal Revenue Service contributed revenues of $34.0 million, or
34.0% of our revenues from continuing operations.  During the nine
months ended June 30, 2007, this same contract contributed revenues of
$30.2million,
or 34.4% of our revenues from continuing operations.
  Accounts
receivable, net.  As of
June 30, 2008 and September 30, 2007, we reported $4.8 million
and $4.9 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.  Approximately 43.0% and 63.2% of the balances reported at
June 30, 2008 and September 30, 2007, respectively, represent accounts
receivable, net that are attributable to operations that we intend to wind down
during the course of the next five years (See Note 10—Segment
Information, for additional information about our wind-down
operations).  The remainder of the Accounts receivable, net
balance is composed of receivables from certain of our EPP
customers.  As of June 30, 2008 one customer accounted for 12.5%
of total customer accounts receivable.  As of June 30, 2008 and
September 30, 2007, Accounts receivable, net,
included an allowance for uncollectible accounts of $0.8 million and
$1.2 million, respectively, 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 June 30, 2008, Accounts receivable, netincluded $0.4 million of retainers that we expected to receive in
one year.  As of September 30, 2007, Accounts receivable, net
included $0.8 million of retainers that we expected to receive in one
year.
  Unbilled receivables
represent revenues that we have earned for the work that has been performed to
date that cannot be billed under the terms of the applicable contract until we
have completed specific
 11
 Tier
Technologies, Inc.
 project
milestones or the customer has accepted our work.  As of June 30,
2008 and September 30, 2007, total unbilled receivables, all of which are
expected to become billable in one year, were $0.4 million and
$0.5 million, respectively.
  All of
the retainers and unbilled receivable balances discussed above are associated
with businesses that we intend to wind down over the next five years (See Note 10—Segment Information).
  NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS
  GOODWILL
  The
following table summarizes changes in the carrying amount of goodwill during the
nine months ended June 30, 2008.  The goodwill for our continuing
operations is reported on the line titled Goodwillon our Consolidated
Balance Sheets, while the goodwill for our discontinued operations is included
in the line titled Current
assets—held-for-sale.
  Continuing
      Operations
              
              
              Discontinued
      Operations(in
      thousands)
              
              EPP
              
              
              Wind-down
              
              
              Total
              
              
              GBPO
              
              
              PSSI
              
              
              Total
              
              
              TotalBalance
      at
                September 30,
                2007
              
              $
              14,526
              
              
              $
              —
              
              
              $
              14,526
              
              
              $
              3,219
              
              
              $
              8,907
              
              
              $
              12,126
              
              
              $
              26,652Goodwill
                impairment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (320
              )
              
              
              (8,470
              )
              
              
              (8,790
              )
              
              
              (8,790
              )Goodwill
      write-off
                (divestiture)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,899
              )
              
              
              (437
              )
              
              
              (3,336
              )
              
              
              (3,336
              )Balance
      at
                June
      30, 2008
              
              $
              14,526
              
              
              $
              —
              
              
              $
              14,526
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              14,526
  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.  Hence, our
intention to divest the majority of our GBPO and PSSI assets and liabilities
triggered a requirement to review the goodwill associated with these asset
groups for impairment.  Because we intend to divest portions of two
reporting units, each quarter we test each business within our former PSSI and
GBPO segments for impairment.
  During
the nine months ended June 30, 2008, we recorded a $3.3 million
reduction in goodwill associated with the divestiture of our GBPO business unit
and a practice area within our PSSI business unit.  During the nine
months ended June 30, 2008, we recorded a goodwill impairment loss of
$8.8 million for our held-for-sale businesses. For additional information
regarding these discontinued businesses, see Note
11—Discontinued Operations.
  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.
 
 June
      30, 2008
              
              
              September
      30, 2007(in
      thousands)
              Amortization
      period
              
              Gross
              
              
              Accumulated
      amortization
              
              
              Net
              
              
              Gross
              
              
              Accumulated
      amortization
              
              
              NetClient
      relationships
              7-10
      years
              
              $
              28,408
              
              
              $
              (16,082
              )
              
              $
              12,326
              
              
              $
              28,408
              
              
              $
              (13,840
              )
              
              $
              14,568Technology
      and
                research
      and
                development
              5
      years
              
              
              3,966
              
              
              
              (3,098
              )
              
              
              868
              
              
              
              3,966
              
              
              
              (2,444
              )
              
              
              1,522Trademarks
              6-10
      years
              
              
              3,200
              
              
              
              (1,893
              )
              
              
              1,307
              
              
              
              3,214
              
              
              
              (1,664
              )
              
              
              1,550Other
      intangible
                assets,
      net
              
              
              $
              35,574
              
              
              $
              (21,073
              )
              
              $
              14,501
              
              
              $
              35,588
              
              
              $
              (17,948
              )
              
              $
              17,640
 
 During
the nine months ended June 30, 2008, we recognized $3.1 million of
amortization expense on our other intangible assets.
  NOTE 6—INCOME TAXES
  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.
  The
adoption of FIN 48 had no material impact on our Consolidated Balance Sheets or
our Consolidated Statements of Operations for the nine months ended
June 30, 2008.  After examining the current and past tax
positions taken, we concluded that it is more-likely-than-not these tax
positions will be sustained in the event of an examination and that there would
be no material impact to our effective tax rate.  No interest or
penalties have been accrued associated with any tax positions
taken.  In the event interest or penalties had been accrued, our
policy is to include these amounts related to unrecognized tax benefits in
income tax expense.  However, as of June 30, 2008, we had no
accrued interest or penalties related to uncertain tax
positions.  Currently, we are under audit by the IRS for tax year
ending September 30, 2005.  We expect the audit to conclude in
the next 12 months.  We are unaware of any material issues relating to
the audit.
  We are
subject to income tax in many state and local jurisdictions in the United
States, none of which are individually material to our financial position,
Consolidated Balance Sheets, Consolidated Statement of Cash Flows, or
Consolidated Statement of Operations.  With few exceptions, we are no
longer subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to 2001.
  NOTE 7—CONTINGENCIES AND COMMITMENTS
  LEGAL
ISSUES
  From
time to time during the normal course of business, we are a party to litigation
and/or other claims.  At June 30, 2008, none of these matters
were expected to have a material impact on our financial position, results of
operations or cash flows.  At June 30, 2008 and
September 30, 2007, we had legal accruals of $1.0 million and
$1.1 million, respectively, based upon estimates of key legal
matters.
  In
November 2003, we were granted conditional amnesty in relation to a Department
of Justice Antitrust Division investigation involving the child support payment
processing industry.  We fully cooperated with the
investigation.  In January 2008, we were advised by the DOJ that they
will no longer pursue this investigation.
  On
May 31, 2006, we received a subpoena from the Philadelphia District Office
of the Securities and Exchange Commission requesting documents relating to
financial reporting and personnel issues.  We have cooperated, and
will continue to cooperate fully, in this investigation.
 13
 Tier
Technologies, Inc.
 On
November 20, 2006, we were served with a purported class action lawsuit
filed with the United States District Court for the Eastern District of Virginia
on behalf of purchasers of our common stock.  The suit alleged that
Tier and certain of its former officers issued false and misleading
statements.  On July 24, 2007, the United States District Court
for the Eastern District of Virginia entered into an order denying the
plaintiff's motion for class certification for the purported class action
lawsuit.  On December 3, 2007, the court granted our motion to
dismiss plaintiff's complaint, but permitted plaintiff an opportunity to file an
amended complaint.  On January 29, 2008, we settled the matter
for a nominal sum and entered into a mutual settlement agreement and
release.  On February 19, 2008, the United States District Court
for the Eastern District of Virginia dismissed the case with
prejudice.
  BANK
LINES OF CREDIT
  At
June 30, 2008, 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, 2008, 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 June 30, 2008, $2.4 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.
  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.
  Note 3—Investments discloses that at June 30, 2008, our
investment portfolio included $30.7 million of primarily 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.  In mid-February
2008, we began to experience unsuccessful auctions.  An unsuccessful
auction happens when there are insufficient buyers for the securities at the
reset date.  If there are no buyers in the market for a particular
auction rate security, the security holder is unable to sell the
security.  Therefore, the security becomes illiquid until such time
that the market provides sufficient buyers for the security, the issuer
refinances the obligation, or the obligation reaches final
maturity.  This was caused by concerns in the sub-prime mortgage
market and overall credit market issues.  Because of the unsuccessful
auctions and lack of liquidity, the fair value of our auction rate securities
declined.  All but one of our securities are collateralized with
student loans, the other security is a pension obligation.  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.  Until liquidity is restored, we may not be able to
liquidate these investments in a timely manner or at par value.
  GUARANTEES
  In
conjunction with our participation as a subcontractor in a three-year contract
for unemployment insurance-related services, we guaranteed the performance of
the prime contractor on the project.  The contract does not establish
a limitation to the maximum potential future payments under the guarantee;
however, we estimate that the maximum potential undiscounted cost of the
guarantee is $4.5 million.  In accordance with FASB
Interpretation No. 45—Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, we valued this guarantee based upon the sum of
probability-weighted present values of possible future cash flows.  We
believe the probability is remote that the guarantee provision of this contract
will be invoked.
 14
 Tier
Technologies, Inc.
 PERFORMANCE
BONDS
  Under
certain contracts, we are required to obtain performance bonds from a licensed
surety and to post the performance bond with our customer.  Fees for
obtaining the bonds are expensed over the life of each bond.  At
June 30, 2008, we had $20.4 million of bonds posted with our
customers.  There were no claims pending against any of these bonds as
of June 30, 2008.
  EMPLOYMENT
AGREEMENTS
  As of
June 30, 2008, we had employment and change of control agreements with 6
executives and 19 other key managers.  If certain termination or
change of control events were to occur under the 25 remaining contracts as of
June 30, 2008, we could be required to pay up to
$10.3 million.  See Note 13—Subsequent
Event for additional information regarding an employment agreement with our
CFO that was executed July 1, 2008.
  As of
June 30, 2008, we had a separation agreement in place with one of our
executives, whose employment terminated March 31, 2008.  Under
the terms of the agreement we are obligated to pay the executive
$0.3 million over the next six months, which consists of 12 months' base
salary, COBRA premiums for the shorter of 12 months or the period during which
she is eligible for COBRA, up to $7,500 for outplacement services and $18,333
per month for consulting services.
  As of
June 30, 2008, we also had agreements with 18 key employees under which
these individuals would be entitled to receive designated amounts over a one- to
two-year period, after completing defined employment service
periods.  During the remainder of fiscal 2008, we expect to recognize
a maximum expense of $0.2 million for these agreements.  We
expect to recognize a maximum expense of $0.3 million during fiscal year
2009 and $39,250 during fiscal year 2010 for these agreements.  See Note 13—Subsequent Event for additional information regarding
other employment related agreements that we entered into after June 30,
2008.
  As of
June 30, 2008, we had change of control agreements with 11 key employees, 7
within our held-for-sale operations and 4 within our wind-down operations, which
we entered into beginning in February 2007.  Under these agreements,
individuals are entitled to receive three to twelve months of their base
salaries plus three to twelve months of COBRA benefits should certain change of
control events occur.  Under these agreements, we would be required to
pay up to $0.9 million if a defined change of control event were to occur
as of June 30, 2008.
  INDEMNIFICATION
AGREEMENTS
  We have
indemnification agreements with each of our directors and a number of key
executives. These agreements provide such persons with indemnification to the
maximum extent permitted by our Articles of Incorporation, 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.
  NOTE 8—RELATED PARTY TRANSACTIONS
  During
the nine months ended June 30, 2008, we purchased $0.5 million of
telecom services from ITC Deltacom, Inc., a company affiliated with a member of
our Board of Directors.
  NOTE 9—SHARE-BASED PAYMENT
  Stock
options and restricted stock units 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.  At June 30, 2008,
there were 1,124,193 shares of common stock reserved for future grants under the
Plan.
 15
 Tier
Technologies, Inc.
 STOCK
OPTIONS
  Stock-based
compensation expense for all stock-based compensation awards granted was based
on the grant-date fair value using the Black-Scholes model.  We
recognize compensation expense for stock option awards on a ratable basis over
the requisite service period of the award.  Stock-based compensation
expense was $0.3 million and $1.7 million, respectively, for the three
and nine months ended June 30, 2008, 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.  During the three and nine months ended June 30, 2007, we
recognized $0.3 million and $1.5 million, respectively, in stock based
compensation expense.  Generally stock options vest as to 20% of the
underlying shares each year on the anniversary of the date granted and expire in
ten years.
  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 intrinsic value of
options exercised.
  Three
      months ended
                June
      30,
              
              
              Nine
      months ended
                June
      30,2008
              
              
              2007(1)
              
              
              2008
              
              
              2007Weighted-average
      assumptions used in Black-Scholes model:Expected
      period that options will be outstanding (in
      years)
              
              
              5.00
              
              
              
              —
              
              
              
              5.00
              
              
              
              5.00Interest
      rate (based on U.S.
      Treasury yields at time of grant)
              
              
              3.44
              %
              
              
              —
              
              
              
              3.54
              %
              
              
              4.66
              %Volatility
              
              
              47.93
              %
              
              
              —
              
              
              
              42.41
              %
              
              
              47.54
              %Dividend
      yield
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Weighted-average
      fair value of options granted
              
              $
              3.59
              
              
              $
              —
              
              
              $
              4.08
              
              
              $
              3.53Intrinsic
      value of options exercised (in
      thousands)
              
              $
              228
              
              
              $
              19
              
              
              $
              247
              
              
              $
              71(1)
      No options were granted during the three months ended June 30,
      2007.
  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 nine months ended June 30, 2008 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, 2007
              
              
              2,113
              
              
              $
              8.54Granted
              
              
              1,075
              
              
              
              9.72Exercised
              
              
              (190
              )
              
              
              6.59Forfeitures
      or expirations
              
              
              (377
              )
              
              
              8.78Options
      outstanding at June 30, 2008
              
              
              2,621
              
              
              $
              9.13
              
              7.57
      years
              
              $
              1,373Options
      exercisable at June 30, 2008
              
              
              1,388
              
              
              $
              9.05
              
              6.32
      years
              
              $
              1,085
  As of
June 30, 2008, a total of $3.3 million of unrecognized compensation
cost related to stock options, net of estimated forfeitures, was expected to be
recognized over a 3.94 year weighted-average period.
  RESTRICTED
STOCK UNITS
  On
April 30, 2008, we granted 550,000 restricted stock units payable in shares
of our common stock to the extent available under our Amended and Restated 2004
Stock Incentive Plan, with any amounts that cannot be paid in shares to be paid
in cash, provided our common stock achieves certain price
targets.  The restricted stock units vest when both the price target
is achieved and the required service period is met.  We used a Monte
Carlo simulation option pricing model to estimate the grant-date fair value
using an expected volatility of 39.07%, an interest rate of 2.475%, an expected
term of 3 years and a zero dividend yield.
 16
 Tier
Technologies, Inc.
 Restricted
stock unit activity for the nine months ended June 30, 2008 is as
follows:
  Restricted
      shares (in thousands,
      except per share data)
              
              Shares
              
              
              Average
      grant-date
                fair
      valueRestricted
      at October 1, 2007
              
              
              —
              
              
              $
              —Granted(1)
              
              
              500
              
              
              
              3.54Vested
              
              
              —
              
              
              
              —Forfeited
              
              
              —
              
              
              
              —Restricted
      at June 30, 2008
              
              
              500
              
              
              $
              3.54(1)
      Maximum shares allowable under Amended and Restated 2004 Stock Incentive
      Plan is 500,000 shares.
  As of
June 30, 2008 we recorded $0.1 million in expense related to the
award.  As of June 30, 2008, we have $1.8 million in
unrecognized compensation cost, expected to be recognized over approximately
three years.
  NOTE 10—SEGMENT INFORMATION
  As
described more fully in Note 11—Discontinued Operations,
in April 2007, we announced our intention to seek buyers for the divestiture of
the majority of our PSSI and GBPO operations.  The assets and
liabilities associated with these disposal groups were classified as Current assets—held-for-sale
and Current
liabilities—held-for-sale on our Consolidated Balance
Sheets.  The results of operations for these disposal groups were
reported as (Loss) income from
discontinued operations, net on our Consolidated Statements of
Operations.
  Our
Senior Management team allocates resources to and assesses the performance of
our operations in three major categories: Electronic Payment Processing,
Wind-down Operations and Discontinued Operations.  See Note 11—Discontinued Operations for additional information
regarding the discontinued operations of our PSSI and GBPO
segments.  The Corporate & Eliminations column of the following
table includes corporate overhead and other costs that could not be assigned
directly to EPP or Discontinued Operations, as well as eliminations for
transactions between our continuing and discontinued
operations.  Prior period results have been reclassified to conform to
the current presentation.
  Continuing
      Operations(in
      thousands)
              
              EPP
              
              
              Wind-
                down
              
              
              Corporate
      &
                Eliminations
              
              
              TotalThree
      months ended June 30, 2008:Revenues
              
              $
              43,413
              
              
              $
              1,632
              
              
              $
              (149
              )
              
              $
              44,896Costs
      and expenses:Direct
      costs
              
              
              35,209
              
              
              
              1,165
              
              
              
              —
              
              
              
              36,374General
      and administrative
              
              
              2,677
              
              
              
              94
              
              
              
              3,723
              
              
              
              6,494Selling
      and marketing
              
              
              2,369
              
              
              
              (1
              )
              
              
              124
              
              
              
              2,492Depreciation
      and amortization
              
              
              882
              
              
              
              353
              
              
              
              112
              
              
              
              1,347Total
      costs and expenses
              
              
              41,137
              
              
              
              1,611
              
              
              
              3,959
              
              
              
              46,707(Loss)
      income from continuing operations before other income and income
      taxes
              
              
              2,276
              
              
              
              21
              
              
              
              (4,108
              )
              
              
              (1,811
              )Other
      income:Interest
      income
              
              
              —
              
              
              
              —
              
              
              
              503
              
              
              
              503Total
      other income
              
              
              —
              
              
              
              —
              
              
              
              503
              
              
              
              503(Loss)
      income from continuing operations before taxes
              
              
              2,276
              
              
              
              21
              
              
              
              (3,605
              )
              
              
              (1,308
              )Income
      tax (benefit) provision
              
              
              (28
              )
              
              
              —
              
              
              
              51
              
              
              
              23(Loss)
      income from continuing operations
              
              $
              2,304
              
              
              $
              21
              
              
              $
              (3,656
              )
              
              $
              (1,331
              )
   17
 Tier
Technologies, Inc.
  Continuing
      Operations(in
      thousands)
                
                EPP
                
                
                Wind-
                  down
                
                
                Corporate
      &
                  Eliminations
                
                
                TotalThree
      months ended June 30, 2007:Revenues
                
                $
                38,381
                
                
                $
                1,823
                
                
                $
                (106
                )
                
                $
                40,098Costs
      and expenses:Direct
      costs
                
                
                30,452
                
                
                
                1,578
                
                
                
                —
                
                
                
                32,030General
      and administrative
                
                
                1,879
                
                
                
                582
                
                
                
                4,009
                
                
                
                6,470Selling
      and marketing
                
                
                2,164
                
                
                
                320
                
                
                
                (5
                )
                
                
                2,479Depreciation
      and amortization
                
                
                800
                
                
                
                15
                
                
                
                136
                
                
                
                951Write
      down of goodwill and intangible assets
                
                
                —
                
                
                
                8,585
                
                
                
                —
                
                
                
                8,585Total
      costs and expenses
                
                
                35,295
                
                
                
                11,080
                
                
                
                4,140
                
                
                
                50,515(Loss)
      income from continuing operations before other income and income
      taxes
                
                
                3,086
                
                
                
                (9,257
                )
                
                
                (4,246
                )
                
                
                (10,417
                )Other
      income (expense):Loss
      from investment
                
                
                —
                
                
                
                —
                
                
                
                (192
                )
                
                
                (192
                )Interest
      income
                
                
                —
                
                
                
                —
                
                
                
                820
                
                
                
                820Total
      other income
                
                
                —
                
                
                
                —
                
                
                
                628
                
                
                
                628(Loss)
      income from continuing operations before taxes
                
                
                3,086
                
                
                
                (9,257
                )
                
                
                (3,618
                )
                
                
                (9,789
                )Income
      tax benefit
                
                
                (7
                )
                
                
                —
                
                
                
                —
                
                
                
                (7
                )(Loss)
      income from continuing operations
                
                $
                3,093
                
                
                $
                (9,257
                )
                
                $
                (3,618
                )
                
                $
                (9,782
                )
 Continuing
      Operations(in
      thousands)
              
              EPP
              
              
              Wind-
                down
              
              
              Corporate
      &
                Eliminations
              
              
              TotalNine
      months ended June 30, 2008:Revenues
              
              $
              95,936
              
              
              $
              4,307
              
              
              $
              (431
              )
              
              $
              99,812Costs
      and expenses:Direct
      costs
              
              
              75,063
              
              
              
              3,063
              
              
              
              —
              
              
              
              78,126General
      and administrative
              
              
              7,451
              
              
              
              940
              
              
              
              12,084
              
              
              
              20,475Selling
      and marketing
              
              
              6,025
              
              
              
              180
              
              
              
              406
              
              
              
              6,611Depreciation
      and amortization
              
              
              2,606
              
              
              
              1,079
              
              
              
              288
              
              
              
              3,973Total
      costs and expenses
              
              
              91,145
              
              
              
              5,262
              
              
              
              12,778
              
              
              
              109,185(Loss)
      income from continuing operations before other income and income
      taxes
              
              
              4,791
              
              
              
              (955
              )
              
              
              (13,209
              )
              
              
              (9,373
              )Other
      income:Interest
      income (expense)
              
              
              (2
              )
              
              
              —
              
              
              
              2,296
              
              
              
              2,294Total
      other income (expense)
              
              
              (2
              )
              
              
              —
              
              
              
              2,296
              
              
              
              2,294(Loss)
      income from continuing operations before taxes
              
              
              4,789
              
              
              
              (955
              )
              
              
              (10,913
              )
              
              
              (7,079
              )Income
      tax provision
              
              
              —
              
              
              
              —
              
              
              
              51
              
              
              
              51(Loss)
      income from continuing operations
              
              $
              4,789
              
              
              $
              (955
              )
              
              $
              (10,964
              )
              
              $
              (7,130
              )
  18
 Tier
Technologies, Inc.
  Continuing
      Operations(in
      thousands)
                
                EPP
                
                
                Wind-
                  down
                
                
                Corporate
      &
                  Eliminations
                
                
                TotalNine
      months ended June 30, 2007:Revenues
                
                $
                81,109
                
                
                $
                6,856
                
                
                $
                (269
                )
                
                $
                87,696Costs
      and expenses:Direct
      costs
                
                
                62,376
                
                
                
                4,945
                
                
                
                —
                
                
                
                67,321General
      and administrative
                
                
                4,816
                
                
                
                2,774
                
                
                
                12,790
                
                
                
                20,380Selling
      and marketing
                
                
                5,412
                
                
                
                802
                
                
                
                18
                
                
                
                6,232Depreciation
      and amortization
                
                
                2,402
                
                
                
                749
                
                
                
                466
                
                
                
                3,617Write
      down of goodwill and intangible assets
                
                
                —
                
                
                
                8,585
                
                
                
                —
                
                
                
                8,585Total
      costs and expenses
                
                
                75,006
                
                
                
                17,855
                
                
                
                13,274
                
                
                
                106,135(Loss)
      income from continuing operations before other income and income
      taxes
                
                
                6,103
                
                
                
                (10,999
                )
                
                
                (13,543
                )
                
                
                (18,439
                )Other
      income:Income
      from investment
                
                
                —
                
                
                
                —
                
                
                
                794
                
                
                
                794Interest
      income
                
                
                —
                
                
                
                —
                
                
                
                2,304
                
                
                
                2,304Total
      other income
                
                
                —
                
                
                
                —
                
                
                
                3,098
                
                
                
                3,098(Loss)
      income from continuing operations before taxes
                
                
                6,103
                
                
                
                (10,999
                )
                
                
                (10,445
                )
                
                
                (15,341
                )Income
      tax provision
                
                
                60
                
                
                
                —
                
                
                
                —
                
                
                
                60(Loss)
      income from continuing operations
                
                $
                6,043
                
                
                $
                (10,999
                )
                
                $
                (10,445
                )
                
                $
                (15,401
                )
  Our
total assets for each of these businesses are shown in the following
table:
  (in
      thousands)
              
              June
      30, 2008
              
              
              September
      30, 2007Continuing
      operations:EPP
              
              $
              102,963
              
              
              $
              96,527Wind-down
              
              
              6,046
              
              
              
              8,508Corporate
      (1)
              
              
              24,624
              
              
              
              24,521Assets
      for continuing operations
              
              
              133,633
              
              
              
              129,556Assets
      of discontinued operations
              
              
              202
              
              
              
              672Assets
      held-for-sale
              
              
              16,597
              
              
              
              36,196Total
      assets
              
              $
              150,432
              
              
              $
              166,424(1) Represents
      assets for our continuing businesses that are not assignable to a specific
      operation.
  See Note 11—Discontinued Operations for a breakdown of assets
that are classified as held-for-sale.
  NOTE 11—DISCONTINUED OPERATIONS
  DIVESTITURES
  On
December 31, 2007, we sold our rights to service a contract for Independent
Validation and Verification, or IV&V, services to a third party for $0.2
million in cash.  Under the terms of the agreement, we assigned our
future rights and obligations under the contract to the third
party.  However, we retained ownership of all assets and liabilities
for our IV&V business that were on our balance sheet as of December 31,
2007, including $0.1 million of deferred revenues.  The reversal of
these deferred revenues, combined with the cash that the buyer paid for this
business, resulted in a $0.3 million gain, which we recorded as (Loss) income from discontinued
operations, net on our Consolidated Statements of
Operations.  On March 1, 2008, we sold our rights to service a
contract for Health and Human Services, or HHS, to a third party, which resulted
in a $25,000 gain, which we recorded as (Loss) income from discontinued
operations, net on our Consolidated Statements of
Operations.
  On
April 1, 2008, we sold our rights to service our Call Center project to a
third party for $1.  Under the terms of the agreement, we assigned our
future rights and obligations under the contract to the third party, including
certain assets and liabilities for our call center project that were on our
balance sheet as of
  19
 Tier
Technologies, Inc.
 April 1, 2008.  We
have entered into an extended warranty plan to provide transition and support
services until June 30, 2009.  In addition, we have reserved
$0.2 million in escrow, which will be released back to us if the buyer is
successful in winning the June 2009 re-bid for the contract.  As a
result of this sale, we were able to eliminate our accrued forward loss
liability of $0.9 million.  The transaction resulted in a
$0.1 million loss, which is recorded as (Loss) income from discontinued
operations, net on our Consolidated Statement of Operations.
  On
May 30, 2008, we completed the sale of our assets, operations and certain
liabilities of our State System Integration, or SSI, business to a third
party.  The sale was completed pursuant to an Asset Purchase Agreement
dated May 23, 2008 for $0.7 million.  The sale resulted in a
$0.2 million loss which was recorded as (Loss) income from discontinued
operations, net on our Consolidated Statement of Operations.
  On June
30, 2008, we completed the sale of the assets, operations and certain
liabilities of our Government Business Process Outsourcing business, or GBPO, to
Informatix, Inc., a privately held company.  The sale was completed
pursuant to a Purchase and Sale Agreement dated June 9, 2008 between Tier
and Informatix for a purchase price of $8.0 million in cash, subject to a
working capital adjustment.  The $8.0 million was included in
Prepaid expenses and other
current assets on the Consolidated Balance Sheets.  The
agreement also provides for earn-out payments of up to $1 million per year
for fiscal years 2008, 2009 and 2010, if the revenues of the business meet the
targets set forth in the agreement for those respective fiscal
years.  The sale resulted in a $1.0 million loss which is
recorded as (Loss) income from
discontinued operations, net on our Consolidated Statement of
Operations.
  The
following schedule shows the current carrying value of the assets and
liabilities for the IV&V, HHS, Call Center, SSI and GBPO businesses included
in Assets of discontinued
operations and Liabilities of discontinued
operationson our Consolidated Balance Sheets.
  (in
      thousands)
              
              June 30,
      2008
              
              
              September
      30, 2007Assets
      of discontinued operations:Current
      assets
              
              $
              202
              
              
              $
              578Goodwill
              
              
              —
              
              
              
              91Property
      & equipment
              
              
              —
              
              
              
              2Other
      assets
              
              
              —
              
              
              
              1Total
      assets
              
              
              202
              
              
              
              672Liabilities
      of discontinued operations:Current
      liabilities
              
              
              523
              
              
              
              421Total
      liabilities
              
              
              523
              
              
              
              421Net
      assets and liabilities of disposal group
              
              $
              (321
              )
              
              $
              251
  ASSET
GROUPS HELD-FOR-SALE
  Early
in fiscal 2007, we undertook a strategic initiative to determine how we could
best utilize our financial and management resources.  As a result of
that initiative, we concluded that shareholder value could be maximized if we
focused on our core business—Electronic Payment Processing.  As a
result, in April 2007, we announced our intention to seek buyers for the
divestiture of the majority of our PSSI and GBPO segments.  We have
two remaining PSSI practice areas for which we are still seeking
buyers.  We classified the assets and liabilities associated with
those practice areas to be divested as Current assets—held-for-saleand Current
liabilities—held-for-salein accordance with SFAS 144—Accounting for the Impairment or
Disposal of Long-Lived Assets.  Because the practice areas
within the PSSI segment are so diverse, they are being marketed for divestiture
separately; and as such, we expect to divest these practice areas as separate
transactions.
  The
following schedule shows the current carrying value of the assets and
liabilities in the GBPO and PSSI segments that are in the disposal group as of
June 30, 2008 and September 30, 2007.
 20
 Tier
Technologies, Inc.
  June
      30, 2008
              
              
              September
      30, 2007(in
      thousands)
              
              PSSI
              
              
              Total
              
              
              GBPO
              
              
              PSSI
              
              
              Eliminations
              
              
              TotalAssets:Current
      assets
              
              $
              5,742
              
              
              $
              5,742
              
              
              $
              4,009
              
              
              $
              6,548
              
              
              $
              39
              
              
              $
              10,596Property,
      equipment and software, net
              
              
              10,854
              
              
              
              10,854
              
              
              
              5,606
              
              
              
              6,657
              
              
              
              (476
              )
              
              
              11,787Goodwill
              
              
              —
              
              
              
              —
              
              
              
              3,219
              
              
              
              8,816
              
              
              
              —
              
              
              
              12,035Other
      assets
              
              
              1
              
              
              
              1
              
              
              
              —
              
              
              
              1,778
              
              
              
              —
              
              
              
              1,778Total
      assets
              
              
              16,597
              
              
              
              16,597
              
              
              
              12,834
              
              
              
              23,799
              
              
              
              (437
              )
              
              
              36,196Liabilities:Current
      liabilities
              
              
              13,096
              
              
              
              13,096
              
              
              
              2,944
              
              
              
              7,619
              
              
              
              —
              
              
              
              10,563Other
      liabilities
              
              
              —
              
              
              
              —
              
              
              
              283
              
              
              
              18
              
              
              
              —
              
              
              
              301Total
      liabilities
              
              
              13,096
              
              
              
              13,096
              
              
              
              3,227
              
              
              
              7,637
              
              
              
              —
              
              
              
              10,864Net
      assets and liabilities of disposal group
              
              $
              3,501
              
              
              $
              3,501
              
              
              $
              9,607
              
              
              $
              16,162
              
              
              $
              (437
              )
              
              $
              25,332
  We
performed impairment analyses of all held-for-sale assets in accordance with
SFAS 144 and SFAS 142.  As a result of this analysis, we
determined that one of our former GBPO businesses and our two remaining PSSI
businesses had carrying values that exceeded fair value.  As a result,
during the three and nine months ended June 30, 2008, we recorded an
impairment expense of $12.3 million and $15.8 million, respectively,
of which $7.1 million and $8.8 million, respectively, relates to
goodwill impairment under SFAS 142 and $5.2 million and $7.0 million,
respectively relates to long-lived asset impairment under SFAS
144.  This impairment is included in (Loss) income from discontinued
operations on our Consolidated Statement of Operations.
  SUMMARY
OF REVENUE AND NET (LOSS) INCOME—DISCONTINUED OPERATIONS
  Except
for minor transitional activities, we do not believe that we will have any
ongoing involvement or cash flows in any businesses that we classified as
held-for-sale or that we have divested.  Thus, we classified the
results of operations for these businesses as (Loss) income from discontinued
operations, net on our Consolidated Statements of Operations in
accordance with SFAS 144.  The following table summarizes our revenue
and net (loss) income generated by these operations during the three and nine
months ended June 30, 2008 and 2007.
  Three
      months ended
                June
      30,
              
              
              Nine
      months ended
                June
      30,(in
      thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues
      (Discontinued operations):GBPO
              
              $
              6,019
              
              
              $
              9,382
              
              
              $
              20,226
              
              
              $
              30,456PSSI
              
              
              6,175
              
              
              
              8,180
              
              
              
              19,817
              
              
              
              22,499Other/eliminations
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      revenues
              
              $
              12,194
              
              
              $
              17,562
              
              
              $
              40,043
              
              
              $
              52,955(Loss)
      income before gain
                (Discontinued
      operations):GBPO
              
              $
              2,145
              
              
              $
              3,248
              
              
              $
              7,066
              
              
              $
              7,188PSSI
              
              
              (13,424
              )
              
              
              159
              
              
              
              (18,175
              )
              
              
              187Other/eliminations
              
              
              263
              
              
              
              178
              
              
              
              584
              
              
              
              182(Loss)
      income before gain on
                discontinued
      operations
              
              
              (11,016
              )
              
              
              3,585
              
              
              
              (10,525
              )
              
              
              7,557(Loss)
      gain on disposal of
                discontinued
      operations
              
              
              (1,266
              )
              
              
              478
              
              
              
              (926
              )
              
              
              8,077Net
      (loss) income
              
              $
              (12,282
              )
              
              $
              4,063
              
              
              $
              (11,451
              )
              
              $
              15,634
  AUSTRALIAN
OPERATIONS
  In
fiscal 2002, we disposed of most of our Australian operations, and in fiscal
2003 we requested and received $6.5 million of federal income tax refunds
associated with this disposal.  Although we received the refund in
October 2003, we fully reserved the entire balance because of uncertainty about
the final
 21
 Tier
Technologies, Inc.
 review
and resolution of this transaction by the Internal Revenue
Service.  Since October 2003, we increased our reserve by
$1.1 million to recognize the potential interest and penalties we could
have incurred if the Internal Revenue Service made an unfavorable
decision.
  In
March 2007, we were notified by the Internal Revenue Service that its Joint
Committee on Taxation had completed its review and had approved the
$6.5 million of refund.  As a result, during the second quarter
of fiscal 2007, we reversed the $6.5 million of reserve for the refund and
the $1.1 million reserve for potential interest and
penalties.  This $7.6 million reversal has been recorded on our
Consolidated Statements of Operations as (Loss) income from discontinued
operations in accordance with SFAS 144.
  In May
2007 we were notified by the Australian government that our operations in
Australia, which were primarily disposed of in fiscal 2002, were able to be
fully liquidated.  During the quarter ended June 30, 2007, we
recorded net income of $0.5 million associated with the reversal of certain
accruals that had been recorded in anticipation of costs, which did not
actualize, associated with the final close-out of the Australian
operations.
  NOTE 12—(LOSS) EARNINGS PER SHARE
  The
following table presents the computation of basic and diluted (loss) earnings
per share:
  Three
      months ended
                June
      30,
              
              
              Nine
      months ended
                June
      30,(in
      thousands, except per share amounts)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Numerator:(Loss)
      income from:Continuing
      operations, net of income taxes
              
              $
              (1,331
              )
              
              $
              (9,782
              )
              
              $
              (7,130
              )
              
              $
              (15,401
              )Discontinued
      operations, net of income taxes
              
              
              (12,282
              )
              
              
              4,063
              
              
              
              (11,451
              )
              
              
              15,634Net
      (loss) income
              
              $
              (13,613
              )
              
              $
              (5,719
              )
              
              $
              (18,581
              )
              
              $
              233Denominator:Weighted-average
      common shares outstanding
              
              
              19,635
              
              
              
              19,511
              
              
              
              19,576
              
              
              
              19,505Effects
      of dilutive common stock options
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Adjusted
      weighted-average shares
              
              
              19,635
              
              
              
              19,511
              
              
              
              19,576
              
              
              
              19,505(Loss)
      earnings per basic and diluted share:From
      continuing operations
              
              $
              (0.07
              )
              
              $
              (0.50
              )
              
              $
              (0.36
              )
              
              $
              (0.79
              )From
      discontinued operations
              
              
              (0.62
              )
              
              
              0.21
              
              
              
              (0.59
              )
              
              
              0.80(Loss)
      earnings per basic and diluted share
              
              $
              (0.69
              )
              
              $
              (0.29
              )
              
              $
              (0.95
              )
              
              $
              0.01
  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
                June
      30,
              
              
              Nine
      months ended
                June
      30,(in
      thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Weighted-average
      options excluded from computation of diluted (loss) earnings per
      share
              
              
              1,675
              
              
              
              798
              
              
              
              1,647
              
              
              
              1,668
  22
 Tier
Technologies, Inc.
 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
                June
      30,
              
              
              Nine
      months ended
                June
      30,(in
      thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Common
      stock equivalents excluded from computation of diluted (loss) earnings per
      share
              
              
              226
              
              
              
              273
              
              
              
              252
              
              
              
              125
  NOTE 13—SUBSEQUENT EVENT
  On
July 1, 2008, we entered into an employment and change of control agreement
with our Chief Financial Officer.  Pursuant to that agreement, if
certain termination or change of control events were to occur, we could be
required to pay up to $1.4 million.
  In July
2008 we entered into employment agreements with 34 key employees under which
these individuals would receive designated amounts over a three- to twelve-month
period.  We expect to recognize a maximum expense of $1.2 million
related to these agreements.  We expect to recognize $0.4 million
of expense during the remainder of fiscal 2008 and $0.8 million during
fiscal 2009.  These agreements were entered into in conjunction with
our decision to consolidate our EPP operations in San Ramon, California with our
EPP operations in Auburn, Alabama.
  
  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 government and other public and private sector
clients with electronic payment and other transaction processing services, as
well as software and systems integration services.  During fiscal 2007
we undertook a strategic initiative that evaluated the risks, costs, benefits
and growth potential of each of our product lines and services.  In
addition, we assessed the degree to which incremental investments or managerial
changes were needed to maximize the profitability of each product
line.  Based upon this review, we concluded that we could best
maximize our long-term profitability and stockholder value if we focused on our
core Electronic Payment Processing, or EPP, business.  As a result, in
April 2007 we began to seek buyers for the divestiture of the majority of our
Government Business Process Outsourcing, or GBPO, operations and our Packaged
Systems and Software Integration, or PSSI, operations.
  On our
Consolidated Balance Sheets, we classified the associated assets and liabilities
for each of these businesses as held-for-sale, in accordance with SFAS 144—Accounting for the Impairment or
Disposal of Long-Lived Assets, or SFAS 144.  In our
Consolidated Statements of Operations, we have classified the operations of
these businesses as (Loss)
income from discontinued operations, net, because we do not expect to
have continuing involvement or cash flows from these businesses after the
divestitures.  All assets and liabilities that are reported in these
financial statements as “held-for-sale” are reported at the lower of the
carrying cost or fair value less cost to sell.  We have divested all
but two of our held-for-sale business units during fiscal 2008.  The
divested businesses are reported as (Loss) income from discontinued
operations, net on our Consolidated Statement of
Operations.  Although we report the two remaining held-for-sale
operations as “discontinued” on our Consolidated Statements of Operations, we
continue to operate these operations as efficiently and effectively as possible
in order to maximize the proceeds that we expect to receive from the eventual
disposition of these operations.
  We also
have a number of businesses within GBPO and PSSI whose operations were neither
compatible with our long-term strategic direction nor complementary with other
businesses that we were divesting.  We decided to complete, and in
some cases extend, the term of the existing contracts for these businesses for
the near-term.  We believe that these businesses will be phased out
over the next five years.  We continue to report the businesses as
continuing operations in our consolidated financial statements, in accordance
with SFAS 144.
  SUMMARY
OF OPERATING RESULTS
  For the
three months ended June 30, 2008, we reported a net loss of
$13.6 million, or $0.69 per fully diluted share, compared with a net loss
of $5.7 million, or $0.29 per fully diluted share, for the three months
ended June 30, 2007.  Our continuing operations reported a loss
of $1.3 million, or $0.07 per
 24
 Tier
Technologies, Inc.
 fully
diluted share, while our discontinued operations reported a net loss of
$12.3 million, or $0.62 per fully diluted share, for the three months ended
June 30, 2008.
  For the
nine months ended June 30, 2008, we reported a net loss of
$18.6 million, or $0.95 per fully diluted share, compared with net income
of $0.2 million, or $0.01 per fully diluted share, for the nine months
ended June 30, 2007.  Our continuing operations reported a loss
of $7.1 million, or $0.36 per fully diluted share, while our discontinued
operations reported a net loss of $11.5 million, or $0.59 per fully diluted
share, for the nine months ended June 30, 2008.
  Our
continuing operations are composed of our EPP business, certain businesses that
we are winding down and corporate costs.  On a standalone basis, our
EPP business reported income of $2.3 million, or $0.12 per fully diluted
share, during the three months ended June 30, 2008, which is a
$0.8 million, or 25.5% decrease over the same period last
year.  For the nine months ended June 30, 2008, our EPP business
reported income of $4.8 million, or $0.24 per fully diluted share, which is
a $1.3 million, or 20.8% decrease over the same period last
year.  The results for the nine months ended June 30, 2007
included a one-time legal settlement resulting in a $0.2 million refund of
excess interchange fees. While the number of transactions and the total dollars
processed by our EPP business rose 29.3% and 24.4%, respectively, the size of
the average payment that we processed was 3.8% lower than the nine months ended
June 30, 2007.  Although EPP provides electronic payment
processing services to over 3,000 clients, approximately 34.0% of EPP’s revenues
generated during the nine months ended June 30, 2008, resulted from
transactions processed for the Internal Revenue Service.  Our EPP
business is seasonal in nature, primarily due to federal, state and local
mandated due dates for property and income taxes.  Our revenues and
direct costs increase during the periods when these mandated due dates
occur.
  Our
wind-down operations reported net income of $21,000 during the three months
ended June 30, 2008, which is a $9.3 million improvement over the same
period last year.  For the nine months ended June 30, 2008, we
reported a loss of $1.0 million, or $0.05 per fully diluted share, which is
a $10.0 million, or 91.3% improvement over last year.  These
improvements are primarily due to the absence of the impairment expense that was
recorded during the period ended June 30, 2007 of $8.6 million as well
as the absence of one-time contract settlement costs that were reported during
the period ended June 30, 2007.  As we continue to wind down
these operations, we expect that the level of the losses will decline in future
quarters.  During fiscal 2008, we expect to wind down our Pension
business that generated losses totaling $0.3 million during the nine months
ended June 30, 2008.  Our Voice and Systems Automation business,
which reported a $0.7 million loss during the nine months ended
June 30, 2008 is expected to be wound down over a five-year
period.  Our corporate overhead contributed $3.7 million to the
overall net loss from continuing operations, or $0.19 per fully diluted share
for the three months ended June 30, 2008, and $11.0 million, or $0.56
per fully diluted share for the nine months ended June 30,
2008.  This includes a significant portion of costs for
shared-services that could not be assigned directly to any business
unit.  We expect that the need for, and cost of, these shared-services
and other corporate costs will diminish after we divest and/or wind down our
GBPO and PSSI businesses.
  For the
three months ended June 30, 2008, our discontinued operations from our
held-for-sale GBPO and PSSI operations reported a loss of $12.3 million, or
$0.62 per fully diluted share, a decrease of $16.3 million from the same
period last year.  For the nine months ended June 30, 2008, we
reported a net loss of $11.5 million, or $0.59 per fully diluted share, a
decrease of $27.1 million over the same period last year.  The
primary reason for the decrease over the same periods last year is the
impairment of certain PSSI operations whose carrying value exceeded its fair
value as well as the absence of an income tax reserve reversal relating to our
previously disposed Australian operations, which contributed $8.1 million
to income from discontinued operations for the nine months ended June 30,
2007.  The expiration of two GBPO contracts and the completion of a
number of PSSI projects during fiscal 2007, as well as the expiration of another
GBPO contract in June 2008, are expected to result in lower earnings in future
years.
 25
 Tier
Technologies, Inc.
 EXPECTATIONS
AND STRATEGY FOR 2008
 
 We
expect that fiscal 2008 will continue to be a transition year as we position our
company for the long-term growth of the EPP business.  In the
remainder of fiscal 2008, we expect to see continued revenue growth in our EPP
business, driven not only by revenue growth initiatives, but also by increasing
consumer demand for electronic payment processing
alternatives.  Furthermore, we are undertaking two key initiatives
designed to facilitate the growth of the EPP business.  First, we are
analyzing our processing platforms and infrastructure to determine what actions
are needed to improve efficiency and reduce costs, while providing the capacity
for future growth.  Based on our current conclusions, we expect to
make new investments to consolidate our current EPP technology in fiscal
2008.  Second, we expect to move EPP beyond focusing primarily on
governmental clients into the commercial biller-direct payment processing
space.  To facilitate our EPP strategy, we have developed a
five-pronged sales and marketing strategy focusing on the
following:
  ·
              increasing
      client acquisition by expanding our existing markets through sales and
      marketing resources and expanding our channeled
  selling;
  ·
              increasing
      customer adoption through increased marketing and promotional
      efforts;
  ·
              enhance
      our cross-selling capabilities by making greater use of registered users
      in the My Account database;
  ·
              development
      of new products; and
  ·
              entering
      new markets.
  In
addition, we are consolidating some of our EPP operations, facilities,
departments and positions in San Ramon, California with our EPP operations in
Auburn, Alabama, in an effort to save costs and eliminate duplicative operations
and functions.  We also intend to right-size our corporate overhead
once the disposition of our non-core assets is complete.  In calendar
year 2008, we also expect to finalize the divestiture of the held-for-sale
businesses and use the proceeds from these dispositions to fund future growth in
our EPP business.
  While
we expect that certain of these initiatives will produce some cost savings
during fiscal 2008, we believe the cost of implementing these initiatives will
outweigh those savings during fiscal 2008 and we expect to incur a net loss in
fiscal 2008.  However, once the implementation of these
initiatives is complete, we believe that our company will report long-term,
sustainable profitability.
  RESULTS
OF OPERATIONS
  The
following tables provide an overview of our results of operations for the three
and nine months ended June 30, 2008 and 2007:
  Three
      months ended
              
              
              VarianceJune
      30,
              
              
              2008
      vs. 2007(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Revenues
              
              $
              44,896
              
              
              $
              40,098
              
              
              $
              4,798
              
              
              
              12.0
              %Costs
      and expenses
              
              
              46,707
              
              
              
              50,515
              
              
              
              (3,808
              )
              
              
              (7.5
              )%Loss
      from continuing operations before other income and income
      taxes
              
              
              (1,811
              )
              
              
              (10,417
              )
              
              
              8,606
              
              
              
              82.6
              %Other
      income
              
              
              503
              
              
              
              628
              
              
              
              (125
              )
              
              
              (19.9
              )%Loss
      from continuing operations before income taxes
              
              
              (1,308
              )
              
              
              (9,789
              )
              
              
              8,481
              
              
              
              86.6
              %Income
      tax provision (benefit)
              
              
              23
              
              
              
              (7
              )
              
              
              30
              
              
              
              *Loss
      from continuing operations
              
              
              (1,331
              )
              
              
              (9,782
              )
              
              
              8,451
              
              
              
              86.4
              %(Loss)
      income from discontinued operations, net
              
              
              (12,282
              )
              
              
              4,063
              
              
              
              (16,345
              )
              
              
              *Net
      loss
              
              $
              (13,613
              )
              
              $
              (5,719
              )
              
              $
              (7,894
              )
              
              
              (138.0
              )%*
      Not meaningful
  
 26
 Tier
Technologies, Inc.
  Nine
      months ended
              
              
              VarianceJune
      30,
              
              
              2008
      vs. 2007(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Revenues
              
              $
              99,812
              
              
              $
              87,696
              
              
              $
              12,116
              
              
              
              13.8
              %Costs
      and expenses
              
              
              109,185
              
              
              
              106,135
              
              
              
              3,050
              
              
              
              2.9
              %Loss
      from continuing operations before other income and income
      taxes
              
              
              (9,373
              )
              
              
              (18,439
              )
              
              
              9,066
              
              
              
              49.2
              %Other
      income
              
              
              2,294
              
              
              
              3,098
              
              
              
              (804
              )
              
              
              (26.0
              )%Loss
      from continuing operations before income taxes
              
              
              (7,079
              )
              
              
              (15,341
              )
              
              
              8,262
              
              
              
              53.9
              %Income
      tax provision
              
              
              51
              
              
              
              60
              
              
              
              (9
              )
              
              
              (15.0
              )%Loss
      from continuing operations
              
              
              (7,130
              )
              
              
              (15,401
              )
              
              
              8,271
              
              
              
              53.7
              %(Loss)
      income from discontinued operations, net
              
              
              (11,451
              )
              
              
              15,634
              
              
              
              (27,085
              )
              
              
              *Net
      (loss) income
              
              $
              (18,581
              )
              
              $
              233
              
              
              $
              (18,814
              )
              
              
              **
      Not meaningful
  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 EPP business, certain businesses
that we expect to wind down over the next five years and general corporate
operations.  The following table presents the revenues and expenses
for our continuing operations for the three and nine months ended June 30,
2008 and 2007.  This table is followed by a detailed analysis
summarizing reasons for variances in these financial results.
  Three
      months ended
                June
      30,
              
              
              Nine
      months ended
                June
      30,(in
      thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues
              
              $
              44,896
              
              
              $
              40,098
              
              
              $
              99,812
              
              
              $
              87,696Costs
      and expenses:Direct
      costs
              
              
              36,374
              
              
              
              32,030
              
              
              
              78,126
              
              
              
              67,321General
      and administrative
              
              
              6,494
              
              
              
              6,470
              
              
              
              20,475
              
              
              
              20,380Selling
      and marketing
              
              
              2,492
              
              
              
              2,479
              
              
              
              6,611
              
              
              
              6,232Depreciation
      and amortization
              
              
              1,347
              
              
              
              951
              
              
              
              3,973
              
              
              
              3,617Write-down
      of goodwill and intangible assets
              
              
              —
              
              
              
              8,585
              
              
              
              —
              
              
              
              8,585Total
      costs and expenses
              
              
              46,707
              
              
              
              50,515
              
              
              
              109,185
              
              
              
              106,135Loss
      from continuing operations before other income
                and
      income taxes
              
              
              (1,811
              )
              
              
              (10,417
              )
              
              
              (9,373
              )
              
              
              (18,439
              )Other
      income
              
              
              503
              
              
              
              628
              
              
              
              2,294
              
              
              
              3,098Loss
      from continuing operations before income taxes
              
              
              (1,308
              )
              
              
              (9,789
              )
              
              
              (7,079
              )
              
              
              (15,341
              )Income
      tax provision (benefit)
              
              
              23
              
              
              
              (7
              )
              
              
              51
              
              
              
              60Loss
      from continuing operations
              
              $
              (1,331
              )
              
              $
              (9,782
              )
              
              $
              (7,130
              )
              
              $
              (15,401
              )
  Revenues (Continuing
Operations)
  The
following table compares the revenues generated by our continuing operations
during the three and nine months ended June 30, 2008 and 2007:
  Three
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %RevenuesEPP
              
              $
              43,413
              
              
              $
              38,381
              
              
              $
              5,032
              
              
              
              13.1
              %Wind-down
              
              
              1,632
              
              
              
              1,823
              
              
              
              (191
              )
              
              
              (10.5
              )%Corporate
              
              
              (149
              )
              
              
              (106
              )
              
              
              (43
              )
              
              
              (40.6
              )%Total
              
              $
              44,896
              
              
              $
              40,098
              
              
              $
              4,798
              
              
              
              12.0
              %
  27
 Tier
Technologies, Inc.
  Nine
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %RevenuesEPP
              
              $
              95,936
              
              
              $
              81,109
              
              
              $
              14,827
              
              
              
              18.3
              %Wind-down
              
              
              4,307
              
              
              
              6,856
              
              
              
              (2,549
              )
              
              
              (37.2
              )%Corporate
              
              
              (431
              )
              
              
              (269
              )
              
              
              (162
              )
              
              
              (60.2
              )%Total
              
              $
              99,812
              
              
              $
              87,696
              
              
              $
              12,116
              
              
              
              13.8
              %
  The
following sections discuss the key contributors that caused these revenue
changes from our continuing operations.
  EPP
Revenues:  EPP provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients.  EPP’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.  EPP generated
$43.4 million of revenues during the three months ended June 30, 2008,
a $5.0 million, or 13.1%, increase over the three months ended
June 30, 2007.  During the three months ended June 30, 2008,
we processed 27.9% more transactions than we did in the same period last year,
representing 18.4% more dollars.  All of our payment processing
markets incurred a 20.0% to 86.0% transaction growth rate, except our federal
income tax market, which incurred a 2.4% increase and our educational
institution market, which incurred a 27.0% decrease, due to the absence of one
contract.
  During
the nine months ended June 30, 2008, EPP generated $95.9 million of
revenues, a $14.8 million, or 18.3%, increase over the same period last
year.  During the nine months ended June 30, 2008, we processed
29.3% more transactions than we did during the nine months ended June 30,
2007, representing 24.4% more dollars.  All of our verticals incurred
a 16.0% to 68.0% transactional growth rate, with the exception of our federal
income tax market which incurred a 5.0% growth and our educational institution
market which incurred a 3.8% loss, due to the absence of one
contract.
  Our
contract with the U.S. Internal Revenue Service, or IRS, provided approximately
25% of our annual revenues for fiscal years 2007 and 2006.  Currently,
we are operating under a contract extension which expires November 30,
2008.  Our contract provides two additional extension periods through
December 31, 2009.  As of June 30, 2008, the IRS has not
issued a Request for Proposal, or RFP, for a contract period commencing after
November 30, 2008.  As 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 EPP business will
continue to produce significant revenue growth for the foreseeable
future.
  Wind-down
Revenues:  During the three months ended June 30, 2008,
our two wind-down operations generated $1.6 million in revenues, a
$0.2 million, or 10.5%, decrease from the three months ended June 30,
2008.  The completion of maintenance contracts during fiscal 2007
within our Voice and Systems Automation, or VSA, business contributed
$0.3 million to the decline in revenues.  This decrease was
offset by $0.1 million in additional revenue generated by our Pension
business as a result of a contract extension.  During the nine months
ended June 30, 2008, our wind-down operations generated $4.3 million,
a $2.5 million or 37.2%, decrease from the nine months ended June 30,
2007.  The completion of maintenance projects within our VSA business
during fiscal 2007 contributed $1.3 million to the decline.  Our
Pension business contributed $1.2 million to the overall decline, in which
one project contributed $0.6 million to the decline and another contributed
$0.5 million.  As we wind down these operations, we will continue
to see decreased revenues throughout fiscal 2008.
  Corporate
Operations/Eliminations:  During the three and nine months
ended June 30, 2008, we eliminated $149,000 and $431,000, respectively, of
revenues for transactions processed by EPP for our GBPO business (which is
included in discontinued operations).  These amounts are $43,000 and
$162,000, respectively, greater than the amounts eliminated during the three and
nine months ended June 30, 2007, because of a rise in the number of
transactions that EPP processed for our GBPO business.
 28
 Tier
Technologies, Inc.
 Direct Costs (Continuing
Operations)
  Direct
costs, which represent costs directly attributable to providing services to
clients, include: payroll and payroll-related costs; credit card interchange
fees and assessments; travel-related expenditures; amortization of intellectual
property; amortization and depreciation of project-related equipment, hardware
and software purchases; and the cost of hardware, software and equipment sold to
clients.  The following table provides a year-over-year comparison of
direct costs incurred by our continuing operations during the three and nine
months ended June 30, 2008 and 2007:
  Three
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Direct
      costsEPP
              
              $
              35,209
              
              
              $
              30,452
              
              
              $
              4,757
              
              
              
              15.6
              %Wind-down
              
              
              1,165
              
              
              
              1,578
              
              
              
              (413
              )
              
              
              (26.2
              )%Total
              
              $
              36,374
              
              
              $
              32,030
              
              
              $
              4,344
              
              
              
              13.6
              %
   Nine
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Direct
      costsEPP
              
              $
              75,063
              
              
              $
              62,376
              
              
              $
              12,687
              
              
              
              20.3
              %Wind-down
              
              
              3,063
              
              
              
              4,945
              
              
              
              (1,882
              )
              
              
              (38.1
              )%Total
              
              $
              78,126
              
              
              $
              67,321
              
              
              $
              10,805
              
              
              
              16.1
              %
  The
following sections discuss the key contributors that caused these changes in the
direct costs for continuing operations.
  EPP Direct
Costs:  Consistent with the growth of our EPP revenues, EPP’s
direct costs rose $4.8 million, or 15.6%, during the three months ended
June 30, 2008 and $12.7 million, or 20.3%, during the nine months
ended June 30, 2008, over the same periods last year.  This
increase directly reflects interchange fees charged to us to process the
previously described increase in the number and volume of electronic payments
processed for our electronic payment processing clients.  In addition,
the results that we reported for the nine months ended June 30, 2007
included the one-time recovery of excess interchange fees.  We expect
to see continued increases in our EPP direct costs as we strive to grow this
business and as more clients move toward electronic payment processing
options.
  Wind-down Direct
Costs:  Direct costs from our wind-down operations decreased
$0.4 million, or 26.2%, for the three months ended June 30, 2008 and
$1.9 million, or 38.1%, for the nine months ended June 30, 2008, from
the same periods last year.  The completion of several Pension
projects during fiscal 2007 contributed $0.4 million for the three months
ended June 30, 2008 and $1.2 million for the nine months ended
June 30, 2008, primarily from the absence of labor and labor-related
expenses.  The completion of maintenance contracts within our VSA
business resulted in $0.7 million for the nine months ended June 30,
2008, primarily from reduced labor and labor-related costs, as well as other
costs required to service the contracts.  As we wind down these
operations, we expect that the direct costs of these operations will continue to
decrease during the remainder of fiscal 2008.
  29
 Tier
Technologies, Inc.
 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 to our directors and auditors.  The
following table compares general and administrative costs incurred by our
continuing operations during the three and nine months ended June 30, 2008
and 2007:
  Three
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %General
      and administrativeEPP
              
              $
              2,677
              
              
              $
              1,879
              
              
              $
              798
              
              
              
              42.5
              %Wind-down
              
              
              94
              
              
              
              582
              
              
              
              (488
              )
              
              
              (83.9
              )%Corporate
              
              
              3,723
              
              
              
              4,009
              
              
              
              (286
              )
              
              
              (7.1
              )%Total
              
              $
              6,494
              
              
              $
              6,470
              
              
              $
              24
              
              
              
              0.4
              %
 
 Nine
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %General
      and administrativeEPP
              
              $
              7,451
              
              
              $
              4,816
              
              
              $
              2,635
              
              
              
              54.7
              %Wind-down
              
              
              940
              
              
              
              2,774
              
              
              
              (1,834
              )
              
              
              (66.1
              )%Corporate
              
              
              12,084
              
              
              
              12,790
              
              
              
              (706
              )
              
              
              (5.5
              )%Total
              
              $
              20,475
              
              
              $
              20,380
              
              
              $
              95
              
              
              
              0.5
              %
  EPP General and
Administrative:  During the three months ended June 30,
2008, EPP incurred $2.7 million of general and administrative expenses, a
$0.8 million, or 42.5%, increase over the same period last year. These
increases are attributable primarily to a $0.4 million increase for labor
and labor-related expenses, as a result of a realignment of resources from
discontinued operations as well as the shift of staff from our wind-down VSA
operations to our EPP operation, to support our strategic growth
initiatives.  We also incurred a $0.2 million increase for
consulting services to develop and implement key strategic
initiatives.  The remaining $0.2 million increase is attributable
to an increase in legal costs in association with applying for money transmitter
licenses and other miscellaneous office expenses.
  During
the nine months ended June 30, 2008, EPP incurred $7.5 million of
general and administrative expenses, a $2.6 million, or 54.7%, increase
over the same period last year. These increases are attributable primarily to a
$1.2 million increase for labor and labor-related expenses, as previously
described, and a $0.8 million increase for consulting services to develop
and implement key strategic initiatives.  In addition, legal costs
associated with applying for money transmitter licenses contributed
$0.3 million to the overall increase.  The remaining
$0.3 million increase is attributable to increased bad debt expense and
other miscellaneous office and travel expenses.
  During
the remainder of fiscal 2008, general and administrative expenses for our EPP
operations could increase as we move toward establishing a consolidated
electronic payment processing platform.  We currently process payments
on multiple platforms at multiple locations creating redundant
costs.  Combining our electronic processing platforms, we believe,
will improve the long-term efficiency and cost-effectiveness of our EPP
operations and will provide the capacity to process significantly more
transactions.
  Wind-down General
and Administrative:  During the three months ended
June 30, 2008, our wind-down operations incurred $0.1 million of
general and administrative expenses, a $0.5 million, or 83.9%, decrease
over the same period last year.  Labor and labor-related expenses
contributed of $0.3 million to the decrease over the same period last
year.  The remaining $0.2 million variance is primarily
attributable to miscellaneous office and bad debt expenses.
  During
the nine months ended June 30, 2008, our wind-down operations incurred
$1.0 million of general and administrative expenses, a $1.8 million,
or 66.1%, decrease over the same period last year.  During
 30
 Tier
Technologies, Inc.
 f iscal
2007, we recorded a contract settlement for one of our Pension projects, which
contributed $1.3 million to the decrease of expenses in the current
period.  In addition, the absence of labor and labor-related expenses
of $0.6 million contributed to the overall decrease.  Offsetting
these decreases is an increase of $0.1 million miscellaneous office expense
and bad debt expense.
  Corporate General
and Administrative:  Our corporate operations represent those
functions that support our corporate governance, including the costs associated
with our Board of Directors and executive management team, as well as
accounting, finance, legal and the costs of maintaining our corporate
headquarters in Reston, Virginia.  In addition, corporate costs
include functions that provide shared-services that support operations
throughout our organization, such as information technology and business
development.
  During
the three months ended June 30, 2008, our corporate operations incurred
$3.7 million of general and administrative expenses, a $0.3 million,
or 7.1%, decrease over the same period last year.  Of the overall
decrease, $0.8 million is attributable to the absence of labor and
labor-related expenses, of which $0.5 million is attributable to a
reduction in work force and $0.3 million is attributable to a reduction in
bonus costs.  Partially offsetting the decrease in expense is a
$0.4 million increase in legal and consulting costs related to our
strategic initiative efforts.  The remaining $0.1 million
increase in expense is related to miscellaneous office supplies.
  During
the nine months ended June 30, 2008, our corporate operations incurred
$12.1 million of general and administrative expenses, a $0.7 million,
or 5.5%, decrease over the same period last year.  Labor and
labor-related expenses contributed $1.1 million to the overall decrease in
expenses, primarily due to the absence of $1.4 million in wages and
benefits costs as a result of decreased staff and $0.3 million in reduced
bonus expense, offset by $0.3 million of additional severance costs,
primarily attributable to the departure of one of our executives and
$0.3 million of additional share-based payment expense, due to the
acceleration of vesting of options to purchase common stock originally issued to
several of our Board members in August 2006.  In addition, legal fees
decreased $0.2 million as a result of the reversal of a reserve accrual
associated with the previously mentioned DOJ investigation.  Partially
offsetting these decreases is an increase of $0.3 million of additional
recruiting and consulting services during the nine months ended June 30,
2008, as a result of two executive placement searches and additional support for
our legal, human resources and accounting functions.  We also incurred
an additional $0.3 million in legal and consulting services related to our
divestitures.
  We
believe the anticipated divestitures of the majority of our GBPO and PSSI
operations will reduce the need for corporate support.  Therefore,
during fiscal 2009, we anticipate reductions in corporate general and
administrative expenses.
  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 nine months ended June 30, 2008 and 2007:
  Three
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Selling
      and marketingEPP
              
              $
              2,369
              
              
              $
              2,164
              
              
              $
              205
              
              
              
              9.5
              %Wind-down
              
              
              (1
              )
              
              
              320
              
              
              
              (321
              )
              
              
              (100.3
              )%Corporate
              
              
              124
              
              
              
              (5
              )
              
              
              129
              
              
              
              *Total
              
              $
              2,492
              
              
              $
              2,479
              
              
              $
              13
              
              
              
              0.5
              %*
      Not meaningful
  31
 Tier
Technologies, Inc.
 Nine
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Selling
      and marketingEPP
              
              $
              6,025
              
              
              $
              5,412
              
              
              $
              613
              
              
              
              11.3
              %Wind-down
              
              
              180
              
              
              
              802
              
              
              
              (622
              )
              
              
              (77.6
              )%Corporate
              
              
              406
              
              
              
              18
              
              
              
              388
              
              
              
              *Total
              
              $
              6,611
              
              
              $
              6,232
              
              
              $
              379
              
              
              
              6.1
              %*
      Not meaningful
  EPP Selling and
Marketing:  During the three months ended June 30, 2008,
EPP incurred $2.4 million of selling and marketing expenses, a
$0.2 million, or 9.5%, increase over the same period last
year.  Of the overall increase, $0.4 million is attributable to
additional labor and labor-related expenses and additional travel
costs.  Offsetting these increases is a decrease of $0.2 million
in strategic partnership costs.  During the nine months ended
June 30, 2008, EPP incurred $6.0 million of selling and marketing
expenses, a $0.6 million, or 11.3%, increase over the nine months ended
June 30, 2007 primarily attributable to $0.5 million of additional
labor and labor-related expenses, $0.2 million of additional travel costs
and $0.1 million in conference, trade show and other miscellaneous
expenses.  Offsetting these increases is a decrease in strategic
partnership costs of $0.2 million.  During fiscal 2008, we expect
that EPP’s direct sales and marketing expenses will increase as we strive to
accelerate the growth of this business.
  Wind-down Selling
and Marketing:  During the three months ended June 30,
2008, the selling and marketing expenses of our wind-down operations decreased
$0.3 million, over the same period last year.  During the nine
months ended June 30, 2008, these expenses decreased $0.6 million, or
77.6%, over the same period last year.  The primary factor in these
decreases is the absence of labor and labor-related expenses, as our selling and
marketing efforts are being redirected to our EPP business.  We expect
to continue to see a decrease in expenses during fiscal 2008 as we wind down
specific businesses.
  Corporate Selling
and Marketing:  As a general rule, we assign labor and
labor-related costs incurred by our corporate selling and marketing function
directly to individual projects and businesses that benefited from the
service.  The $0.1 million and $0.4 million, respectively,
increase in sales and marketing expenses during the three and nine months ended
June 30, 2008 compared to the same periods last year primarily reflects a
higher proportion labor and labor-related costs that could not be assigned
directly to a specific project.
  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.  The following table provides a
year-over-year comparison of depreciation and amortization costs incurred by our
continuing operations during the three and nine months ended June 30, 2008
and 2007:
  Three
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Depreciation
      and amortizationEPP
              
              $
              882
              
              
              $
              800
              
              
              $
              82
              
              
              
              10.3
              %Wind-down
              
              
              353
              
              
              
              15
              
              
              
              338
              
              
              
              *Corporate
              
              
              112
              
              
              
              136
              
              
              
              (24
              )
              
              
              (17.7
              )%Total
              
              $
              1,347
              
              
              $
              951
              
              
              $
              396
              
              
              
              41.6
              %*Not
      meaningful
   32
 Tier
Technologies, Inc.
  Nine
      months ended
                June
      30,
              
              
              Variance(in
      thousands, except percentages)
              
              2008
              
              
              2007
              
              
              $
              
              
              
              %Depreciation
      and amortizationEPP
              
              $
              2,606
              
              
              $
              2,402
              
              
              $
              204
              
              
              
              8.5
              %Wind-down
              
              
              1,079
              
              
              
              749
              
              
              
              330
              
              
              
              44.1
              %Corporate
              
              
              288
              
              
              
              466
              
              
              
              (178
              )
              
              
              (38.2
              )%Total
              
              $
              3,973
              
              
              $
              3,617
              
              
              $
              356
              
              
              
              9.8
              %
  During
the fourth quarter of fiscal 2007 we reclassified our VSA operation from
Held-for-Sale to Wind-down and subsequently began depreciating and amortizing
its assets.  As a result, our depreciation and amortization expense
increased $0.4 million for the three and nine months ended June 30,
2008 over the same periods last year.  During fiscal 2008 we also
reclassified some of our IT assets from Corporate to EPP, thereby creating a
reduction in Corporate depreciation and amortization expense and increasing EPP
depreciation and amortization expense.
  Write-down of Goodwill and
Intangible Assets (Continuing Operations)
  During
the three months ended June 30, 2007, we recorded an $8.6 million
impairment loss on the carrying value of our VSA business, of which
$8.0 million represented a write off of goodwill and $0.6 million
represented an impairment of assets for this business unit.
  Other Income (Continuing
Operations)
  Equity in net
income of unconsolidated affiliate:We had no equity in net
income of unconsolidated affiliate during the three or nine months ended
June 30, 2008 due to the sale of our 46.96% ownership of CPAS, Inc., a
former minority-owned investment, in the third quarter of fiscal
2007.  As a result of this sale, we realized a $239,000 foreign
currency gain, plus an $80,000 gain on the sale of the equity
investment.  We reported a net loss of $0.5 million for the three
months ended June 30, 2007, primarily attributable to a management
incentive payout associated with CPAS fiscal year end results, and net income of
$0.5 million for the nine months ended June 30, 2007, primarily
attributable to successful contracting efforts by CPAS during the first quarter
of fiscal 2007, offset by the management incentive payouts previously
mentioned.
  Interest income,
net:Interest income during
the three months ended June 30, 2008 decreased 38.7% over the same period
last year, primarily due to interest rate declines in recent months, consistent
with interest rate changes in the marketplace.  Interest income during
the nine months ended June 30, 2008, remained consistent with the same
period last year, as the significant increase in our average daily balance of
our investment portfolio over the same period last year was offset by a decrease
in the interest rate, as previously discussed.  We expect to see
continued fluctuations in interest rates our investments earn until the market
stabilizes.
  Income Tax Provision
(Continuing Operations)
  During
the three months ended June 30, 2008 we recorded an income provision of
$23,000, which primarily represents state tax obligations incurred by our EPP
operations.  During the three months ended June 30, 2007, we
recorded a $7,000 tax benefit due to an overstated estimate of tax provision
from the prior fiscal 2007 periods.  During the nine months ended
June 30, 2008 and 2007, we recorded income tax provisions of $51,000 and
$60,000, respectively.  The provision for income taxes primarily
represents state tax obligations incurred by our EPP operations.  Our
Consolidated Statements of
Operations for the three and nine months ended June 30, 2008 and
2007 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
 33
 Tier
Technologies, Inc.
 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.
  DISCONTINUED
OPERATIONS
  In
April 2007, we began to seek buyers for the majority of our GBPO and PSSI
segments.  As of June 30, 2008, we have two remaining business
units from our PSSI segment that we continue to own and operate.  SFAS
144 requires that we report all of these businesses as “discontinued” on our
Consolidated Statements of Operations, because we do not expect to have
continuing involvement in, or cash flows from, these operations after their
divestiture.  As such, we reclassified revenues and costs associated
with the portions of those segments held-for-sale to discontinued operations for
all periods presented.  During fiscal 2008 we have divested our GBPO,
State Systems Integration, or SSI, Independent Validation and Verification, or
IV&V, Health and Human Services, or HHS, and Call Center
operations.  These items are also classified as discontinued on our
Consolidated Statements of Operations for all periods presented.
  The
following tables summarize our results of operations from discontinued
operations for the three and nine months ended June 30, 2008 and
2007.  Immediately following these tables is a discussion of key
variances in these results.
  Three
      months ended
                June
      30, 2008
              
              
              Three
      months ended
                June
      30, 2007(in
      thousands)
              
              GBPO
              
              
              PSSI
              
              
              Eliminations
              
              
              Total
              
              
              GBPO
              
              
              PSSI
              
              
              Eliminations
              
              
              TotalRevenues
              
              $
              6,019
              
              
              $
              6,175
              
              
              $
              —
              
              
              $
              12,194
              
              
              $
              9,382
              
              
              $
              8,180
              
              
              $
              —
              
              
              $
              17,562Costs
      and expenses:Direct
      costs
              
              
              3,111
              
              
              
              5,056
              
              
              
              (149
              )
              
              
              8,018
              
              
              
              5,140
              
              
              
              5,612
              
              
              
              (106
              )
              
              
              10,646General
      and
                administrative
              
              
              720
              
              
              
              1,767
              
              
              
              (85
              )
              
              
              2,402
              
              
              
              719
              
              
              
              1,628
              
              
              
              (52
              )
              
              
              2,295Selling
      and marketing
              
              
              46
              
              
              
              458
              
              
              
              (29
              )
              
              
              475
              
              
              
              275
              
              
              
              761
              
              
              
              (20
              )
              
              
              1,016Depreciation
      and
                amortization
              
              
              —
              
              
              
              20
              
              
              
              —
              
              
              
              20
              
              
              
              —
              
              
              
              20
              
              
              
              —
              
              
              
              20Write-down
      of goodwill
                and
      intangibles
              
              
              (3
              )
              
              
              12,298
              
              
              
              —
              
              
              
              12,295
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      costs and
                expenses
              
              
              3,874
              
              
              
              19,599
              
              
              
              (263
              )
              
              
              23,210
              
              
              
              6,134
              
              
              
              8,021
              
              
              
              (178
              )
              
              
              13,977(Loss)
      income before gain
                on
      discontinued
                operations
              
              
              2,145
              
              
              
              (13,424
              )
              
              
              263
              
              
              
              (11,016
              )
              
              
              3,248
              
              
              
              159
              
              
              
              178
              
              
              
              3,585(Loss)
      gain on
                discontinued
      operations
              
              
              (1,052
              )
              
              
              (214
              )
              
              
              —
              
              
              
              (1,266
              )
              
              
              —
              
              
              
              —
              
              
              
              478
              
              
              
              478(Loss)
      income from discontinued operations, net
              
              $
              1,093
              
              
              $
              (13,638
              )
              
              $
              263
              
              
              $
              (12,282
              )
              
              $
              3,248
              
              
              $
              159
              
              
              $
              656
              
              
              $
              4,063
  34
 Tier
Technologies, Inc.
  Nine
      months ended
                June
      30, 2008
              
              
              Nine
      months ended
                June
      30, 2007(in
      thousands)
              
              GBPO
              
              
              PSSI
              
              
              Eliminations
              
              
              Total
              
              
              GBPO
              
              
              PSSI
              
              
              Eliminations
              
              
              TotalRevenues
              
              $
              20,226
              
              
              $
              19,817
              
              
              $
              —
              
              
              $
              40,043
              
              
              $
              30,456
              
              
              $
              22,499
              
              
              $
              —
              
              
              $
              52,955Costs
      and expenses:Direct
      costs
              
              
              10,631
              
              
              
              15,977
              
              
              
              (431
              )
              
              
              26,177
              
              
              
              20,345
              
              
              
              16,024
              
              
              
              (269
              )
              
              
              36,100General
      and
                administrative
              
              
              1,658
              
              
              
              4,917
              
              
              
              (114
              )
              
              
              6,461
              
              
              
              2,199
              
              
              
              4,289
              
              
              
              63
              
              
              
              6,551Selling
      and marketing
              
              
              731
              
              
              
              1,382
              
              
              
              (39
              )
              
              
              2,074
              
              
              
              722
              
              
              
              1,925
              
              
              
              24
              
              
              
              2,671Depreciation
      and
                amortization
              
              
              —
              
              
              
              59
              
              
              
              —
              
              
              
              59
              
              
              
              2
              
              
              
              74
              
              
              
              —
              
              
              
              76Write-down
      of goodwill
                and
      intangibles
              
              
              140
              
              
              
              15,657
              
              
              
              —
              
              
              
              15,797
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      costs and
                expenses
              
              
              13,160
              
              
              
              37,992
              
              
              
              (584
              )
              
              
              50,568
              
              
              
              23,268
              
              
              
              22,312
              
              
              
              (182
              )
              
              
              45,398(Loss)
      income before gain
                on
      discontinued
                operations
              
              
              7,066
              
              
              
              (18,175
              )
              
              
              584
              
              
              
              (10,525
              )
              
              
              7,188
              
              
              
              187
              
              
              
              182
              
              
              
              7,557(Loss)
      gain on
                discontinued
      operations
              
              
              (1,027
              )
              
              
              90
              
              
              
              11
              
              
              
              (926
              )
              
              
              —
              
              
              
              —
              
              
              
              8,077
              
              
              
              8,077(Loss)
      income from discontinued operations, net
              
              $
              6,039
              
              
              $
              (18,085
              )
              
              $
              595
              
              
              $
              (11,451
              )
              
              $
              7,188
              
              
              $
              187
              
              
              $
              8,259
              
              
              $
              15,634
  Revenues (Discontinued
Operations)
  GBPO
Revenues:  During the three months ended June 30, 2008,
revenues from discontinued GBPO operations decreased $3.4 million, or
35.9%, compared to the same period last year.  The decrease is
attributable primarily to the absence of $2.1 million of revenue from one
payment processing center contract that expired at the end of the third quarter
of fiscal 2007.  A shift to lower cost, state-mandated electronic
payment alternatives at other payment processing centers reduced revenues by
$0.2 million.  The absence of $0.8 million in revenues from
our prior Call Center business further contributed to the overall decrease in
revenues.  In addition, the absence of revenues due to completion
during fiscal 2007 of a state contract within our HHS business contributed
$0.3 million to the overall decline.
  During
the nine months ended June 30, 2008, revenues from discontinued GBPO
operations decreased $10.2 million, or 33.6%, compared to the same period
last year.  The decrease is attributable primarily to the absence of
$6.0 million of revenue from one payment processing center contract that
expired at the end of the third quarter of fiscal 2007.  A shift to
lower cost, state-mandated electronic payment alternatives at other payment
processing centers reduced revenues by $1.4 million.  In
addition, the absence of revenues due to completion of several projects within
our HHS business during fiscal 2007 contributed $2.2 million to the
decline, of which $1.9 million was attributable to the completion of one
state contract.  Finally, the absence of revenue from our Call Center
operation, as a result of the sale of this business unit during fiscal 2008,
contributed $0.6 million to the decline.
  PSSI
Revenues:  During the three months ended June 30, 2008,
revenues from discontinued PSSI operations decreased $2.0 million, or
24.5%, over the same period last year.  Of the overall decline,
$1.1 million is attributable to the absence of revenues as a result of the
sale of our SSI and IV&V operations.  The completion of
maintenance contracts within our Financial Management Systems, or FMS,
operations contributed $0.6 million to the decline.  In addition,
our Unemployment Insurance, or UI, operations incurred a $0.2 million
decrease in revenues, of which $1.1 million is attributable to the
completion or near completion of several projects, offset by $0.9 million
of additional revenues from contracts added during fiscal 2007 and
2008.
  During
the nine months ended June 30, 2008, revenues from discontinued PSSI
operations decreased $2.7 million, or 11.9%, over the same period last
year.  The disposition of our IV&V business during fiscal 2008
contributed $1.3 million to the decline in revenues.  In
addition, $1.2 million of the decrease is attributable to the completion or
near completion of several projects within our FMS business.  Our UI
business contributed $0.8 million to the overall decline, of which
$3.0 million is due to the completion or near completion of several
projects, offset by $2.2 million in revenues from new projects added during
fiscal 2008.  Offsetting these decreases is an increase of
$0.6 million in work performed for an existing client within our SSI
business, prior to sale of the business unit during the current
period.
 35
 Tier
Technologies, Inc.
 Direct Costs (Discontinued
Operations)
  GBPO Direct
Costs:  During the three months ended June 30, 2008,
direct costs from discontinued GBPO operations decreased $2.0 million, or
39.5%, from the same period last year.  Our payment processing centers
contributed $1.3 million to the overall decline in direct costs, of which
$0.9 million is attributable to the completion of one project during fiscal
2007 and $0.4 million is attributable to the reduction in costs
attributable to the shift to lower cost, state-mandated electronic payment
alternatives.  The absence of costs and the reversal of an accrued
forward loss as a result of the sale of our Call Center operation contributed
$0.6 million to the decline in costs.  In addition, the absence
of costs associated with our HHS unit, contributed $0.2 million to the
decline.  These decreases are offset by an increase in costs for our
Financial Institution Data Match unit of $0.1 million.
  During
the nine months ended June 30, 2008, direct costs from discontinued GBPO
operations decreased $9.7 million, or 47.8%, from the same period last
year.  Our payment processing centers contributed $6.6 million to
the overall decline in direct costs, of which $3.6 million is attributable
to the shift to lower cost, state-mandated electronic payment alternatives at
other payment processing centers and $3.0 million is attributable to the
completion of one project during fiscal 2007.  The completion of a
project within our HHS business and the sale of the business unit during fiscal
2008 contributed $1.8 million to the decrease.  The absence of
costs and the reversal of an accrued forward loss as a result of the sale of our
Call Center operation contributed $1.4 million to the overall reduction in
direct costs.
  PSSI Direct
Costs:  During the three months ended June 30, 2008,
direct costs from discontinued PSSI operations decreased $0.6 million, or
9.9%, from the same period last year.  The absence of direct costs
from the sale of our IV&V and SSI business units contributed
$1.0 million to the overall decline.  Partially offsetting this
decrease is additional costs of $0.4 million within our UI operations
attributable to new projects added during fiscal 2007 and 2008.
  During
the nine months ended June 30, 2008, direct costs from discontinued PSSI
operations decreased $47,000, or 0.3%, from the same period last
year.  The absence of direct costs as a result of the sale of IV&V
contributed $1.0 million to the decline.  Offsetting this
decrease is additional costs associated with our FMS business of
$0.7 million and $0.3 million of additional work for an existing
customer in our SSI unit that were incurred prior to the sale of that
unit.
  Other Expenses (Discontinued
Operations)
  GBPO Other
Expenses:  During the three months ended June 30, 2008,
general and administrative expenses for our GBPO discontinued operations
remained consistent with the same period last year.  Selling and
marketing expenses decreased $0.2 million, or 83.3%, primarily from the
absence of labor and labor-related expenses.
  During
the nine months ended June 30, 2008, general and administrative expenses
for our GBPO discontinued operations decreased $0.5 million, or 24.6%, due
to a $0.3 million decrease in labor and labor-related support services and
travel, primarily attributable to the closure of one of our payment processing
centers in the third fiscal quarter of fiscal 2007, and a $0.2 million
decrease in bad debt expense.  Selling and marketing expenses remained
relatively consistent with the same period last year.  Finally, we
recognized $140,000 of SFAS 142 and SFAS 144 impairment expense during the nine
months ended June 30, 2008 to write down the carrying value of certain GBPO
assets that are classified as held-for-sale to fair value.
  PSSI Other
Expenses:  During the three months ended June 30, 2008,
general and administrative expenses for discontinued PSSI operations increased
$0.1 million, or 8.5%, over the same period last year, primarily due to a
$0.2 million increase in bad debt expense and $0.1 million increase in
legal expenses.  Partially offsetting these increases is a
$0.2 million decrease in rent and miscellaneous office related
expenses.  Selling and marketing expenses decreased $0.3 million,
or 39.8%, during the three months ended June 30, 2008 compared to the same
periods last year, primarily from a decrease in labor and labor-
 36
 Tier
Technologies, Inc.
 related
expenses, including labor expenses allocated from corporate overhead that can be
directly assigned to specific operations.  During the three months
ended June 30, 2008, we recognized $12.3 million of SFAS 142 and
SFAS 144 impairment to write down the carrying value of certain PSSI
operations that are classified as held-for-sale to fair value.
  During
the nine months ended June 30, 2008, general and administrative expenses
for discontinued PSSI operations increased $0.6 million, or 14.6%, over the
same period last year, primarily due to a $1.1 million increase in labor
and labor-related expenses of administrative support services, offset by a
$0.5 million decrease in rent and miscellaneous office related
expenses.  Selling and marketing expenses decreased $0.5 million,
or 28.2%, during the nine months ended June 30, 2008, primarily from a
$0.8 million decrease in labor and labor-related expenses, including labor
expenses allocated from corporate overhead that can be directly assigned to
specific operations.  Offsetting this decrease is an increase of
$0.3 million in advertising, consulting services associated with proposal
writing and travel related expenses.  During the nine months ended
June 30, 2008, we recognized $15.7 million of SFAS 142 and
SFAS 144 impairment to write down the carrying value of certain PSSI
operations that are classified as held-for-sale to fair value.
  Corporate Other
Expenses:  During the three and nine months ended June 30,
2008, general and administrative expenses for discontinued corporate operations
decreased $33,000 and $0.2 million, respectively, over the same period last
year, primarily due to a decrease in labor and labor-related expenses that could
not be assigned to specific operations.
  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
June 30, 2008, we had $2.4 million of letters of credit outstanding
under this credit facility, which are fully collateralized.  These
letters of credit were issued to secure performance bonds, a property lease and
satisfy customer contract requirements.
  Note 3—Investments discloses that at June 30, 2008, our
investment portfolio included $30.7 million of primarily AAA-rated auction
rate municipal bonds that were collateralized with student loans.  In
mid-February 2008, we began to experience unsuccessful
auctions.  An unsuccessful auction happens when there are insufficient
buyers for the securities at the reset date.  If there are no buyers
in the market for a particular auction rate security, the security holder is
unable to sell the security.  Therefore, the security becomes illiquid
until such time that the market provides sufficient buyers for the security, the
issuer refinances the obligation, or the obligation reaches final
maturity.  This was caused by concerns in the sub-prime mortgage
market and overall credit market issues.  All but one of our
securities are collateralized with student loans, the other security is a
pension obligation.  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.  Until
liquidity is restored, we may not be able to liquidate these investments in a
timely manner or at par value.
  Net Cash
from Continuing Operations—Operating Activities.  During the
nine months ended June 30, 2008, our continuing operations used
$9.1 million of cash. This reflects a net loss of $7.1 million from
continuing operations offset by $6.2 million of non-cash items. During the
nine months ended June 30, 2008, $0.5 million of cash was provided by
a decrease in accounts receivables and unbilled receivables.  The sale
of our GBPO business resulted in an increase in prepaid expenses and other
assets of $7.7 million.  A decrease in accounts payable and
accrued liabilities used $0.3 million of cash. A decrease in deferred
revenue used $0.7 million of cash.
  During
the nine months ended June 30, 2007, our operating activities from continuing
operations provided $1.4 million of cash.  This reflects a net
loss of $15.4 million from continuing operations and $13.9 million of
non-cash items. During the nine months ended June 30, 2007,
$2.2 million of cash was provided by a
 37
 Tier
Technologies, Inc.
 decrease
in prepaid expenses and other assets.  An increase in accounts payable
and accrued liabilities provided $0.6 million of cash and an increase in
deferred revenue provided $0.1 million of cash.
  Net Cash
from Continuing Operations—Investing Activities.  Net cash
provided by our investing activities from continuing operations for the nine
months ended June 30, 2008 was $26.1 million, including
$33.6 million of cash provided by sales and maturities of marketable
securities, offset by $7.3 million of cash used to purchase marketable
securities.  In addition, $0.7 million of cash was generated from
sale of our discontinued operations and $0.9 million of cash was used to
purchase equipment and software.
  During
the nine months ended June 30, 2007, our operations used $0.3 million
of cash for investing activities. The purchase of restricted investments and
marketable securities used $19.3 million and $6.1 million,
respectively, and $0.7 million of cash was used to purchase equipment and
software.  In addition, $0.2 million of cash was used for other
investing activities.  This use of funds was partially offset by
$13.4 million of cash generated from the sale and maturities of restricted
investments and $3.5 million of cash generated from the sale and maturities
of marketable securities. In addition, $4.3 million of cash was generated
from the repayment of notes and accrued interest from a related party and
$4.8 million of cash was generated from sale of an investment in
unconsolidated affiliate.
  Net Cash
from Continuing Operations—Financing Activities.  Net cash
provided by our financing activities from continuing operations for the nine
months ended June 30, 2008 was $1.2 million, including
$1.3 million generated from the exercise of options to purchase our common
stock, partially offset by the use of $0.1 million for capital lease
obligations.
  During
the nine months ended June 30, 2007, $71,000 of cash was provided by our
financing activities from continuing operations, of which $89,000 was generated
from the exercise of options to purchase our common stock, partially offset by
the use of $18,000 for capital lease obligations.
  Net Cash
from Discontinued Operations—Operating Activities.  During the nine
months ended June 30, 2008, our operating activities from discontinued
operations provided $14.4 million of cash.  This reflects
$11.4 million of net loss and $16.7 million of non-cash items, of
which $15.8 million relates to the write-down of goodwill and held-for-sale
assets and $0.9 million of loss on sale of discontinued
operations.
  During
the nine months ended June 30, 2007, our operating activities from
discontinued operations generated $12.1 million of cash, including
$15.6 million of net income offset by $1.4 million of non-cash
items.  We reversed a $7.6 million federal income tax reserve,
which had initially been recorded in October 2003 pending an IRS review of a
refund we received associated with the disposal of our former Australian
operations.  This reversal represents a non-cash adjustment that was
reported in income from discontinued operations.
  Net Cash
from Discontinued Operations—Investing Activities.  Net cash
used in our investing activities from discontinued operations for the nine
months ended June 30, 2008 and June 30, 2007 was $4.2 million and
$2.6 million, respectively, primarily used to purchase equipment and
software, and fund internally developed software.
  Net Cash
from Discontinued Operations—Financing Activities.  During the
nine months ended June 30, 2008 and 2007, our discontinued operations used
$4,000 of cash for capital lease obligations.
  We
expect to generate cash flows from operating activities over the long term;
however, we may experience significant fluctuations from quarter to quarter
resulting from the need to fund and expand our EPP platform to provide for
future growth and the timing of the billing and collection of large project
milestones.  We anticipate that our existing capital resources,
including our cash balances, cash that we anticipate will be provided by
operating activities and cash generated by the divestiture of our businesses
held-for-sale will be adequate to fund our operations through fiscal
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 or divestitures; contingent
 38
 Tier
Technologies, Inc.
 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;
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, 2007, there have been no material changes outside the
ordinary course of business in the contractual obligations disclosed in our most
recent annual report.
  CRITICAL
ACCOUNTING POLICIES
  The
preparation of our financial results of operations and financial position
requires us to make judgments and estimates that may have a significant impact
upon our financial results.  We believe that of our accounting
policies, the following 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
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, 2007.
   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 available-for-sale securities are subject to
interest rate risk and may decline in value if market interest rates
increase.  If market interest rates increase immediately and uniformly
by ten percentage points from levels at June 30, 2008, the fair value
of the portfolio would decline by about $8,000.
  The
majority of our investment portfolio is composed of AAA-rated auction rate
municipal bonds, collateralized with student loans.  These municipal
bonds, which typically have 20- to 30-year maturities, are bought and sold in
the marketplace through a bidding process sometimes referred to as a “Dutch
Auction.”  After their initial issuance, the interest rate on these
securities is reset at prescribed intervals (typically every 28 days), based
upon the market demand for the securities.  In mid-February 2008, we
began to experience unsuccessful auctions relating to our municipal
bonds.  An auction is unsuccessful when the amount of securities
offered for sale exceeds the amount of bids.  As a result, the
liquidity of our auction rate securities has diminished and has caused a decline
in the fair market value of the securities.  We believe this decline
is temporary but it may affect our ability to liquidate our investment in these
securities on a timely basis.
  39
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Technologies, Inc.
 ITEM 4.  CONTROLS AND PROCEDURES
  EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
  Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of June 30, 2008.  The term “disclosure controls and
procedures” means controls and other procedures that are designed to ensure that
information required to be disclosed by a company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.  Management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.  Based on the evaluation of our
disclosure controls and procedures as of June 30, 2008, our Chief Executive
Officer and our Chief Financial Officer concluded that as of that date, our
disclosure controls and procedures were effective at the reasonable assurance
level.
  There
was no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
   
  40
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Technologies, Inc.
  PART II.  OTHER INFORMATION
  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 updated these risk factors from those included in our
Form 10-Q for the period ended March 31, 2008.
  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 expect to report a loss for fiscal 2008 and
have reported net losses of $3.0 million during fiscal year 2007,
$9.5 million during the fiscal year 2006, $63,000 in fiscal year 2004 and
$5.4 million in fiscal year 2003.
  Our revenues and operating margins
may decline and may be difficult to forecast, which could result in a decline in
our stock price.  Our revenues, operating margins and cash
flows are subject to significant variation from quarter to quarter due to a
number of factors, many of which are outside our control.  These
factors include:
  ·
              economic
      conditions in the marketplace;
  ·
              our
      customers’ budgets and demand for our
services;
  ·
              seasonality
      of business, 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;
  ·
              variability
      of software license revenues; and
  ·
              integration
      and costs of acquisitions.
  The
occurrence of any of these factors may cause the market price of our stock to
decline or fluctuate significantly, which may result in substantial losses to
investors.  We believe that period-to-period comparisons of our
operating results are not necessarily meaningful and/or indicative of future
performance.  From time to time, our operating results may fail to
meet analysts’ and investors’ expectations, which could cause a significant
decline in the market price of our stock.  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.
  We may not be successful in divesting
certain assets and liabilities, and our anticipated divestiture could disrupt
our operations.  We may not be able to obtain reasonable offers
for the fair value of the assets and liabilities that we are
divesting.  In that event, we may be required to recognize additional
impairment losses or to terminate our planned
divestiture.  Furthermore, our announced divestiture plan has resulted
in additional turnover of employees and has had an adverse impact on our ability
to attract and retain customers, which, in turn, has had, and will continue to
have, an adverse impact on the
 41
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Technologies, Inc.
 revenues
generated by the remaining businesses subject to divestiture.  In
addition, if our estimates of the fair value of these businesses are not
accurate, we may incur additional impairment losses or other losses on the
divestiture of these businesses.  Divestiture of certain portions of
these businesses has been delayed, and may be further delayed, or may be
unsuccessful, resulting in business disruption and increased costs of running
and completing certain projects.  We may not receive the expected
benefits from the divestitures, or they may take longer to be realized than we
expect.
  We could suffer material losses or
significant disruption of operations and business if we are not successful in
consolidation of our operations.We are consolidating and
moving certain operations, facilities, departments, and positions as part of our
strategic plan to save costs and eliminate duplicative operations and
functions.  We initiated consolidation of our EPP operations located
in San Ramon, California with our EPP operations location in Auburn,
Alabama.  If this 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 business and significantly increase
operating costs, the result in operational weaknesses and compliance
deficiencies.
  We may not be successful in
identifying acquisition candidates and, if we undertake acquisitions, they could
be expensive, increase our costs or liabilities or disrupt our
business.One of our strategies is to pursue growth through
acquisitions.  We may not be able to identify suitable acquisition
candidates at prices that we consider appropriate or to finance acquisitions at
favorable terms.  If we do identify an appropriate acquisition
candidate, we may be unsuccessful in negotiating the terms of the acquisition,
financing the acquisition or, if the acquisition occurs, integrating the
acquired business into our existing business.  Negotiations of
potential acquisitions and the integration of acquired business operations could
disrupt our business by diverting management attention away from day-to-day
operations.  Acquisitions of businesses or other material operations
may require additional debt or equity financing, resulting in leverage or
dilution of ownership.  We also may not realize cost efficiencies or
synergies that we anticipated when selecting our acquisition
candidates.  In addition, we may need to record write-downs from
future impairments of identified intangible assets and goodwill, which could
reduce our future reported earnings.  Acquisition candidates may have
liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition.  Any costs, liabilities or
disruptions associated with any future acquisitions we may pursue could harm our
operating results.
  Our current and future information
technology infrastructure may not meet our requirements for the sustainable and
economical growth of our EPP business.Our EPP business is
highly dependent upon having a safe and secure information technology platform
with sufficient capacity to meet 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 growth
expectations.  Furthermore, if we are not able to acquire or develop
these systems on a timely and economical basis, the profitability of our EPP
business may be adversely affected.
  Our revenues and cash flows could
decline significantly if we were unable to retain our largest
client.Our contract with the U.S. Internal Revenue Service
has historically generated about 25% of our annual revenues from electronic
payment processing.  This contract is scheduled to expire at the end
of 2008 if the IRS does not exercise its option to renew.  Our
operating results and cash flows could decline significantly if we were unable
to retain this client, or replace it in the event we were unable to renew this
contract or are unsuccessful in future re-bids of this contract.
  We operate in highly competitive
markets.  If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market
share.  Our business is focused on transaction processing and
software systems solutions, which are highly competitive markets and are served
by numerous international, national and local firms.  Many competitors
have significantly greater financial, technical and marketing resources and name
recognition than we do.  In addition, there are relatively low
barriers to entry into these markets and we expect to continue to face
additional competition from new entrants into our markets.  Parts of
our business are subject to increasing pricing pressures from competitors, as
well as from clients facing pressure to control costs.  Some
competitors are able to operate at significant losses for extended periods of
time, which increases pricing pressure on our
 42
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Technologies, Inc.
 products
and services.  If we do not compete effectively, the demand for our
products and services and our revenue growth and operating margins could
decline, resulting in reduced profitability and loss of market
share.
  Changes in 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, licensing and bonding requirements, industry
association rules and public disclosure requirements, which are subject to
change.  Changing laws, regulations and standards relating to
corporate governance, accounting standards, and public disclosure, including the
Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq Stock Market rules, are
creating uncertainty for companies and increasing the cost of
compliance.  To maintain high standards of corporate governance and
public disclosure, we intend to invest all reasonably necessary resources to
comply with evolving standards.  This investment may result in
increased general and administrative expenses for outside services and a
diversion of management time and attention from revenue-generating
activities.  New laws, regulations or industry standards may be
enacted, or existing ones changed, which could negatively impact our services
and revenues.  Taxes or fees may be imposed or we could be subject to
additional requirements in regard to privacy, security or qualification for
doing business.  A change in such laws, rules or regulations could
restrict or eliminate our ability to provide services and could increase costs,
impair growth and make our services unprofitable.
  Violation of any existing or future
laws or regulations related to our EPP 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 EPP segment is subject to numerous state laws
and regulations, some states’ money transmitter regulations, and related
licensing requirements.  We currently have a number of applications
for licensure as a money transmitter pending in various states. 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 and National Automated Clearing House Association
(NACHA).  If we are found to be in violation of any such laws, rules
or regulations 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 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 obtaining
these licenses and regulatory approvals could be substantial.
  The revenues generated by our
electronic payment processing operations may fluctuate and the ability to
maintain profitability is uncertain.  Our EPP 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 EPP 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.  If consumers are not receptive to paying a
convenience fee; if card associations change their rules or laws are passed that
do not allow us to charge the convenience fees; or if credit or debit card
issuers or marketing partners eliminate or reduce the value of rewards to
consumers under their respective rewards programs, demand for electronic payment
processing services could decline.  The processing fees charged by
credit/debit card associations and financial institutions can be increased with
little or no notice, which could reduce margins and harm our
profitability.  Demand for electronic payment processing services
could also be affected adversely by a decline in the use of the Internet,
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.
  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
 43
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Technologies, Inc.
 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 a divestiture, the loss of such
personnel and any resulting loss of existing or potential clients could harm our
competitive position.
  We depend on third parties for our
products and services.  Failure by these third parties to perform
their obligations satisfactorily could hurt our reputation, operating results
and competitiveness.  Our business is highly dependent on
working with other companies and organizations to bid on and perform complex
multi-party projects.  We may act as a prime contractor and engage
subcontractors, or we may act as a subcontractor to the prime
contractor.  We use third-party software, hardware and support service
providers to perform joint engagements.  We depend on licensed
software and other technology from a small number of primary vendors. We also
rely on a third-party co-location facility for our primary data center, use
third-party processors to complete payment transactions and use third-party
software providers for system solutions, security and
infrastructure.  Our systems are dependent on integration and
implementation of complex third party products and services including software
and 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.
  Our fixed-price and transaction-based
contracts require accurate estimates of resources and transaction
volumes.  Failure to estimate these factors accurately could cause us
to lose money on these contracts.  Our business relies on
accurate estimates.  If we underestimate the resources, cost or time
required for a project or overestimate the expected volume of transactions or
transaction dollars processed, our costs could be greater than expected or our
revenues could be less than expected.  Under fixed-price contracts, we
generally receive our fee if we meet specified deliverables, such as completing
certain components of a system installation.  For transaction-based
contracts, we receive our fee on a per-transaction basis or as a percentage of
dollars processed, such as the number of child support payments processed or tax
dollars processed.  If we fail to prepare accurate estimates on
factors used to develop contract pricing, such as labor costs, technology
requirements or transaction volumes, we may incur losses on those contracts and
our operating margins could decline.
  Our revenue is highly dependent on
government funding. The loss or decline of existing or future government funding
could cause our revenue and cash flows to decline.  A
significant portion of our revenue is derived from federal and state mandated
projects.  A large portion of these projects may be subject to a
reduction or discontinuation of funding, which may cause early termination of
projects, diversion of funds away from our projects or delays in
implementation.  The occurrence of any of these conditions could have
an adverse effect on our projected revenue, cash flows and
profitability.
  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.  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 suppliers also may experience security
breaches involving the unauthorized access of confidential data and personally
identifiable information.  A security breach could result in theft,
loss, publication, deletion or modification of such data and information, and
cause harm to our business and reputation and a loss of clients and
revenue.
  44
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Technologies, Inc.
 We could suffer material losses if
our operations or 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, failure of third-party support and
services, as well as the loss of key individuals or failure to perform on the
part of the key individuals.  Our EPP 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 if 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.
  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.  From time to time we receive notices from others
claiming we are infringing on their intellectual property
rights.  Defending a claim of infringement against us could prevent or
delay our providing products and services, cause us to pay substantial costs and
damages, force us to redesign products or enter into royalty or licensing
agreements on less favorable terms.  If we are required to enter into
such agreements or take such actions, our operating margins could
decline.
  If we are not able to obtain adequate
or affordable insurance coverage or bonds, we could face significant liability
claims and increased premium costs and our ability to compete for business could
be compromised.  We maintain insurance to cover various risks
in connection with our business.  Additionally, our business includes
projects that require us to obtain performance, 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 do not achieve
market acceptance, we may lose market share and our revenues could
decline.
  Our business is subject to increasing
performance requirements, which could result in reduced revenues and increased
liability.Our
business involves projects that are critical to the operations of our clients'
businesses.  The failure to meet client expectations could damage our
reputation and compromise our ability to attract new business.  On
certain projects we make performance guarantees, based upon defined operating
specifications, service levels and delivery dates, which are sometimes backed by
 45
 Tier
Technologies, Inc.
 contractual
guarantees and performance, statutory or bid bonds.  Unsatisfactory
performance or unanticipated difficulties or delays in starting or completing
such projects may result in termination of the contract, a reduction in payment,
liability for penalties and damages, or claims against a bond.  Client
performance expectations or unanticipated delays could necessitate the use of
more resources than we initially budgeted for a particular project, which could
increase our project costs and make us less profitable.
   46
 Tier
Technologies, Inc.
   ITEM 6.  EXHIBITS
  Exhibit
                Number
              Description2.1
              Purchase
      and Sale Agreement between Tier Technologies, Inc. and Informatix, Inc.,
      dated June 30, 2008. (1)10.1
              Employment
      Agreement between Tier Technologies, Inc. and Keith Kendrick, dated June
      30, 2008. (1)31.1
              Certification
      of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended.†31.2
              Certification
      of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended.†32.1
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †32.2
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.††Filed
      herewith.
                (1)Filed as an exhibit on current report Form 8-K, filed on July 7,
      2008, and incorporated herein by
reference.
 
 
  47
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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: August 7, 2008By:
              /s/ Ronald W.
      JohnstonRonald W.
    JohnstonChief Financial
      Officer(Principal
      Financial and Accounting Officerand
      a Duly Authorized Officer)
  48