UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q


(Mark
      One)


x
            QUARTERLY
                REPORT PURSUANT TO
                SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934





For
      the quarterly period ended December 31,
      2007





OR





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


__________________





Commission
      file number 000-23195





TIER
      TECHNOLOGIES, INC.


(Exact
      name of registrant as specified in its charter)





Delaware
            94-3145844(State
                or other jurisdiction
              of
                incorporation or organization)
            (I.R.S.
                Employer
              Identification
                No.)





10780
      Parkridge Boulevard, Suite 400


Reston,
      Virginia 20191


(Address
      of principal executive offices)





(571)
      382-1000


(Registrant's
      telephone number, including area code)





Not
      applicable


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








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.                 Yes
x  No
o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a 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  x




Non-accelerated
      filer  o  Smaller
      reporting companyo


(Do
      not check if 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 x  No
o




At
      January 31, 2008 there were 19,545,954shares of the Registrant's Common Stock outstanding.









i


TIER
      TECHNOLOGIES,
      INC.


TABLE
      OF CONTENTS




PART
        I.  FINANCIAL INFORMATION1
  Item
        1.  Consolidated Financial Statements
        (unaudited)1
  Consolidated
        Balance Sheets1
  Consolidated
        Statements ofOperations2
  Consolidated
        Statements of Comprehensive (Loss) Income3
  Consolidated
        Statements of Cash Flows4
  Consolidated
        SupplementalCashFlowInformation5
  Notes
        to
        Consolidated Financial Statements (unaudited)6
  Note
        1—Overview
        of Organization and Basis of Presentation6
 Note
        2—Recent
        Accounting Pronouncements7
 Note
        3—(Loss)
        Earnings per Share8
 Note
        4—Customer
        Concentration and Risk8
 Note
        5—Investments9
 Note
        6—Goodwill
        and Other Intangible Assets10
 Note
        7—Segment
        Information11
 Note
        8—Restructuring13
 Note
        9—Contingencies and Commitments13
 Note
        10—Related
        Party Transactions15
 Note
        11—Share-based Payment15
 Note
        12—Discontinued Operations16
 Note
        13—Income
        Taxes17
 Note
        14—Subsequent
        Event18
  Item
        2.  Management's Discussion and Analysis of Financial Condition and
        Results of Operations19
  Item
        3.  Quantitative and Qualitative Disclosures about Market
        Risk29
  Item
        4.  Controls and Procedures29
  PART
        II.  OTHER INFORMATION31
  Item
        1.  Legal Proceedings31
  Item
        1A.  Risk Factors31
  Item
        6.  Exhibits36
  SIGNATURE37


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 31, which could cause actual results to differ materially
        from
        those anticipated as of the date of this report.  We undertake no
        obligation to publicly update or revise any forward-looking statements, whether
        as a result of new information, future events or otherwise.


ii







PART
      I. FINANCIAL INFORMATION




ITEM
      1. CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)




TIER
      TECHNOLOGIES, INC.


CONSOLIDATED
      BALANCE SHEETS




(in
                thousands)
            
            December 31,
                2007
            
            
            September 30,
                2007(unaudited)ASSETS:Current
                assets:Cash
                and cash equivalents
            
            $
            21,010
            
            
            $
            16,516Investments
                in marketable securities
            
            
            56,140
            
            
            
            57,815Accounts
                receivable, net
            
            
            5,396
            
            
            
            5,083Unbilled
                receivables
            
            
            263
            
            
            
            546Prepaid
                expenses and other current assets
            
            
            2,117
            
            
            
            2,160Assets
                of discontinued operations
            
            
            208
            
            
            
            504Current
                assets—held-for-sale
            
            
            36,049
            
            
            
            36,201Total
                current assets
            
            
            121,183
            
            
            
            118,825Property,
                equipment and software, net
            
            
            4,235
            
            
            
            3,745Goodwill
            
            
            14,526
            
            
            
            14,526Other
                intangible assets, net
            
            
            16,594
            
            
            
            17,640Restricted
                investments
            
            
            11,526
            
            
            
            11,526Other
                assets
            
            
            178
            
            
            
            162Total
                assets
            
            $
            168,242
            
            
            $
            166,424LIABILITIES
                AND SHAREHOLDERS’ EQUITY:Current
                liabilities:Accounts
                payable
            
            $
            1,065
            
            
            $
            878Accrued
                compensation liabilities
            
            
            4,598
            
            
            
            4,710Accrued
                subcontractor expenses
            
            
            611
            
            
            
            522Accrued
                discount fees
            
            
            6,825
            
            
            
            4,529Other
                accrued liabilities
            
            
            4,487
            
            
            
            4,160Deferred
                income
            
            
            2,402
            
            
            
            2,649Liabilities
                of discontinued operations
            
            
            164
            
            
            
            304Current
                liabilities—held-for-sale
            
            
            10,961
            
            
            
            10,958Total
                current liabilities
            
            
            31,113
            
            
            
            28,710Other
                liabilities
            
            
            192
            
            
            
            200Total
                liabilities
            
            
            31,305
            
            
            
            28,910Commitments
                and contingencies (Note 9)Shareholders’
                equity:Preferred
                stock, no par value; authorized shares:  4,579;
              no
                shares issued and outstanding
            
            
            —
            
            
            
            —Common
                stock and paid-in capital; shares authorized: 44,260;
              shares
                issued: 20,429 and 20,425; shares outstanding: 19,545 and
                19,541
            
            
            187,271
            
            
            
            186,417Treasury
                stock—at cost, 884 shares
            
            
            (8,684
            )
            
            
            (8,684
            )Accumulated
                deficit
            
            
            (41,650
            )
            
            
            (40,219
            )Total
                shareholders’ equity
            
            
            136,937
            
            
            
            137,514Total
                liabilities and shareholders’ equity
            
            $
            168,242
            
            
            $
            166,424


See
      Notes to Consolidated Financial Statements


1







TIER
      TECHNOLOGIES, INC.


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(unaudited)





Three
                months ended
              December
                31,(in
                thousands, except per share data)
            
            2007
            
            
            2006Revenues
            
            $
            29,192
            
            
            $
            26,136Costs and expenses:Direct
                costs
            
            
            22,402
            
            
            
            19,276General
                and administrative
            
            
            7,248
            
            
            
            5,446Selling
                and marketing
            
            
            2,113
            
            
            
            1,766Depreciation
                and amortization
            
            
            1,296
            
            
            
            1,332Total
                costs and expenses
            
            
            33,059
            
            
            
            27,820Loss from continuing operations before other income and income
                taxes
            
            
            (3,867
            )
            
            
            (1,684
            )Other income:Equity
                in net income of unconsolidated affiliate
            
            
            —
            
            
            
            809Interest
                income, net
            
            
            967
            
            
            
            877Total
                other income
            
            
            967
            
            
            
            1,686(Loss) income from continuing operations before income
                taxes
            
            
            (2,900
            )
            
            
            2Income tax provision
            
            
            16
            
            
            
            60Loss from continuing operations
            
            
            (2,916
            )
            
            
            (58
            )Income from discontinued operations, net
            
            
            1,485
            
            
            
            2,272Net (loss) income
            
            $
            (1,431
            )
            
            $
            2,214(Loss) earnings per share—Basic and dilutedFrom
                continuing operations
            
            $
            (0.15
            )
            
            $
            —From
                discontinued operations
            
            
            0.08
            
            
            
            0.11(Loss)
                earnings per share—Basic and diluted
            
            $
            (0.07
            )
            
            $
            0.11Weighted average common shares used in computing:Basic
                and diluted (loss) earnings per share
            
            
            19,543
            
            
            
            19,499


See
      Notes to Consolidated Financial Statements


2


TIER
      TECHNOLOGIES, INC.


CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


(unaudited)






Three
                months ended
              December
                31,(in thousands)
            
            2007
            
            
            2006Net (loss) income
            
            $
            (1,431
            )
            
            $
            2,214Other comprehensive loss, net of tax:Unrealized
                loss on investments in marketable securities
            
            
            —
            
            
            
            (1
            )Foreign
                currency translation adjustment
            
            
            —
            
            
            
            (39
            )Other
                comprehensive loss
            
            
            —
            
            
            
            (40
            )Comprehensive
                (loss) income
            
            $
            (1,431
            )
            
            $
            2,174


See
      Notes to Consolidated Financial Statements


3


TIER
      TECHNOLOGIES, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(unaudited)


Three
                months ended
              December
                31,(in
                thousands)
            
            2007
            
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                (loss) income
            
            $
            (1,431
            )
            
            $
            2,214Less:
                Income from discontinued operations, net
            
            
            1,485
            
            
            
            2,272Loss
                from continuing operations, net
            
            
            (2,916
            )
            
            
            (58
            )Non-cash
                items included in net income:Depreciation
                and amortization
            
            
            1,314
            
            
            
            1,361Loss
                on retirement of equipment and software
            
            
            —
            
            
            
            1Provision
                for doubtful accounts
            
            
            (225
            )
            
            
            (371
            )Equity
                in net income of unconsolidated affiliate
            
            
            —
            
            
            
            (809
            )Accrued
                forward loss on contract
            
            
            99
            
            
            
            (8
            )Share-based
                compensation
            
            
            790
            
            
            
            348Impairment
                of assets
            
            
            (27
            )
            
            
            —Deferred
                rent
            
            
            9
            
            
            
            6Net
                effect of changes in assets and liabilities:Accounts
                receivable and unbilled receivables
            
            
            195
            
            
            
            (1,658
            )Prepaid
                expenses and other assets
            
            
            12
            
            
            
            91Accounts
                payable and accrued liabilities
            
            
            2,734
            
            
            
            302Income
                taxes payable
            
            
            15
            
            
            
            199Deferred
                income
            
            
            (247
            )
            
            
            (181
            )Cash
                provided by (used in) operating activities from continuing
                operations
            
            
            1,753
            
            
            
            (777
            )Cash
                provided by operating activities from discontinued
                operations
            
            
            3,122
            
            
            
            4,900Cash
                provided by operating activities
            
            
            4,875
            
            
            
            4,123CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of marketable securities
            
            
            (3,925
            )
            
            
            —Sales
                and maturities of marketable securities
            
            
            5,600
            
            
            
            —Purchase
                of restricted investments
            
            
            —
            
            
            
            (3,260
            )Sales
                and maturities of restricted investments
            
            
            —
            
            
            
            3,312Purchase
                of equipment and software
            
            
            (778
            )
            
            
            (285
            )Other
                investing activities
            
            
            —
            
            
            
            (1
            )Cash
                provided by (used in) investing activities from continuing
                operations
            
            
            897
            
            
            
            (234
            )Cash
                used in investing activities from discontinued operations
            
            
            (1,269
            )
            
            
            (715
            )Cash
                used in investing activities
            
            
            (372
            )
            
            
            (949
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from issuance of common stock
            
            
            29
            
            
            
            —Capital
                lease obligations and other financing arrangements
            
            
            (36
            )
            
            
            (7
            )Cash
                used in financing activities from continuing operations
            
            
            (7
            )
            
            
            (7
            )Cash
                used in financing activities from discontinued operations
            
            
            (2
            )
            
            
            (1
            )Cash
                used in financing activities
            
            
            (9
            )
            
            
            (8
            )Effect
                of exchange rate changes on cash
            
            
            —
            
            
            
            (6
            )Net
                increase in cash and cash equivalents
            
            
            4,494
            
            
            
            3,160Cash
                and cash equivalents at beginning of period
            
            
            16,516
            
            
            
            18,468Cash
                and cash equivalents at end of period
            
            $
            21,010
            
            
            $
            21,628





4


TIER
      TECHNOLOGIES, INC.


CONSOLIDATED
      SUPPLEMENTAL CASH FLOW INFORMATION


(unaudited)





Three
                months ended December 31,(in
                thousands)
            
            2007
            
            
            2006SUPPLEMENTAL
                DISCLOSURES OF CASH
                FLOW
                INFORMATION:Cash
                paid during the period for:Interest
            
            $
            6
            
            
            $
            3Income
                taxes paid, net
            
            $
            —
            
            
            $
            33SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
                ACTIVITIES:Interest
                accrued on shareholder notes
            
            $
            —
            
            
            $
            71Equipment
                acquired under
                capital lease obligations and other financing arrangements
            
            $
            29
            
            
            $
            —


See
      Notes to Consolidated Financial Statements


5







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 December 31, 2007, 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;




o
            Health
                and Human Services (formerly part of GBPO)—provides
                certain
                consulting services to state agencies;
                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 for which we are seeking buyers, including the following:




·
            GBPO
                Discontinued Operations—includes our child support payment
                processing, child support financial institution data match services,
                computer telephony and call centers operations;
                and




·
            PSSI
                Discontinued Operations—includes our financial management systems,
                unemployment insurance administration systems and systems integration
                lines of business.  In addition, the results reported for our
                PSSI discontinued operations include our former Independent Validation
                and
                Verification business, which was sold on December 31,
                2007.




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 year’s presentation.  For additional
      information about our continuing operations, see Note 7—Segment
      Information.  For additional




6


information
      about the businesses that we have sold or classified as held-for-sale, see
      Note
      12—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—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 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.




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




7


expense
      all acquisition-related costs.  SFAS 141(R) is effective as of each
      reporting fiscal year 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—(LOSS) EARNINGS PER SHARE




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




Three
                months
                ended
              December
                31,(in
                thousands,
                except per share amounts)
            
            2007
            
            
            2006Numerator:(Loss)
                income
                from:Continuing
                operations, net of
                income taxes
            
            $
            (2,916
            )
            
            $
            (58
            )Discontinued
                operations, net of
                income taxes
            
            
            1,485
            
            
            
            2,272Net
                (loss)
                income
            
            $
            (1,431
            )
            
            $
            2,214Denominator:Weighted-average
                common shares
                outstanding
            
            
            19,543
            
            
            
            19,499Effects
                of dilutive common stock
                options
            
            
            —
            
            
            
            —Adjusted
                weighted-average
                shares
            
            
            19,543
            
            
            
            19,499(Loss)
                earnings per
                basic and diluted share:From
                continuing
                operations
            
            $
            (0.15
            )
            
            $
            —From
                discontinued
                operations
            
            
            0.08
            
            
            
            0.11(Loss)
                earnings per basic and
                diluted share
            
            $
            (0.07
            )
            
            $
            0.11




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
              December
                31,(in
                thousands)
            
            2007
            
            
            2006Weighted-average
                options excluded from computation of diluted (loss) earnings per
                share
            
            
            1,400
            
            
            
            1,793




In
      addition, 351,000 shares at December 31, 2007 and 92,000 shares at
      December 31, 2006, of common stock equivalents were excluded from the
      calculation of diluted (loss) earnings per share since their effect would have
      been anti-dilutive.






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 three months ended December 31, 2007, our
      contract with the Internal Revenue Service contributed revenues of
      $4.5 million, or 15.4% of our revenues from continuing
      operations.  During the three months ended December 31, 2006,
      this same contract contributed revenues of $4.1million,
      or 15.5% of our revenues from continuing operations.




Accounts
      receivable, net.  As of
      December 31, 2007 and 2006, we reported $5.4 million and
      $5.1 million, respectively, in Accounts receivable, neton
      our Consolidated Balance Sheets.  This item represents theshort-term portion
      of
      receivables to our customers and other parties and retainers that we expect
      to
      receive.  Approximately 44.4% and 64.4% of the balances reported at
      December 31, 2007 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 7—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.  None of our customers have




8


receivables
      that exceed 10% of our total receivable balance.  As of both
      December 31, 2007 and September 30, 2007, Accounts receivable net,
      included an allowance for uncollectible accounts of $1.2 million, which
      represents the balance of receivables that we believe are likely to become
      uncollectible.




Certain
        of our contracts allow customers to retain a portion of the amounts owed
        to us
        until predetermined milestones are achieved or until the project is
        completed.  At December 31, 2007, Accounts receivable, netincluded $0.9 million of retainers that we expected to receive in
        one year.  At 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 project milestones or the customer has accepted our
      work.  At December 31, 2007 and September 30, 2007, total
      unbilled receivables, all of which are expected to become billable in one year,
      were $0.3 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
      7—Segment
      Information).






NOTE
      5—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 $5.5 million at December 31, 2007 and
      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 December 31, 2007 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.




At
      December 31, 2007 and September 30, 2007, our investment portfolio
      included $53.2 million and $54.4 million, respectively, of AAA-rated
      auction rate municipal bonds that were collateralized with student
      loans.  These municipal bonds are bought and sold in the marketplace
      through a bidding process sometimes referred to as a “Dutch
      Auction.”  After the initial issuance of the securities, the interest
      rate on the securities is reset at prescribed intervals (e.g., every 7, 28
      or 35
      days), based upon the market demand for the securities on the reset
      date.  While the stated maturities for these securities vary between
      20 to 30 years, we have the ability and intent, if necessary, to liquidate
      any
      of these investments in order to meet our liquidity needs within our normal
      operating cycles.  As such, we generally account for these investments
      as available-for-sale under SFAS 115 and classify them as Investments in marketable
      securitieson our Consolidated Balance Sheets.  Because the auction rate
      securities in our portfolio have traded at par value, we have not recorded
      any
      gains or losses in Comprehensive (loss) income
      during the three months ended December 31, 2007 or 2006.




In
      accordance with SFAS No. 95—Statement of Cash Flows,
      unrestricted investments, including auction rate securities, 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.  Increases and decreases in fair
      value are recorded as unrealized gains and losses in other comprehensive
      income.




9


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:




December
                31, 2007
            
            
            September
                30, 2007(in
                thousands)
            
            Amortized
                cost
            
            
            Unrealized
                gain/(loss)
            
            
            Estimated
              fair
                value
            
            
            Amortized
                cost
            
            
            Unrealized
                gain/(loss)
            
            
            Estimated
                fair valueCash
                equivalents:Money
                market
            
            $
            6,293
            
            
            $
            —
            
            
            $
            6,293
            
            
            $
            7,798
            
            
            $
            —
            
            
            $
            7,798Total
                investments included
              in
                cash
                and
                cash
              equivalents
            
            
            6,293
            
            
            
            —
            
            
            
            6,293
            
            
            
            7,798
            
            
            
            —
            
            
            
            7,798Investments
                in marketable
              securities:Debt
                securities (State and local bonds)
            
            
            53,225
            
            
            
            —
            
            
            
            53,225
            
            
            
            54,400
            
            
            
            —
            
            
            
            54,400Certificates
                of deposit
            
            
            2,915
            
            
            
            —
            
            
            
            2,915
            
            
            
            3,415
            
            
            
            —
            
            
            
            3,415Total
                marketable
              securities
            
            
            56,140
            
            
            
            —
            
            
            
            56,140
            
            
            
            57,815
            
            
            
            —
            
            
            
            57,815Restricted
                investments:Money
                market
            
            
            6,000
            
            
            
            —
            
            
            
            6,000
            
            
            
            6,000
            
            
            
            —
            
            
            
            6,000Certificates
                of deposit
            
            
            5,526
            
            
            
            —
            
            
            
            5,526
            
            
            
            5,526
            
            
            
            —
            
            
            
            5,526Total
                restricted investments
            
            
            11,526
            
            
            
            —
            
            
            
            11,526
            
            
            
            11,526
            
            
            
            —
            
            
            
            11,526Total
                investments
            
            $
            73,959
            
            
            $
            —
            
            
            $
            73,959
            
            
            $
            77,139
            
            
            $
            —
            
            
            $
            77,139




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




If
      we
      determine that impairment is other-than-temporary, we reduce the recorded book
      value of the investment by the amount of the impairment and recognize a realized
      loss on the investment.  At December 31, 2007 and
      September 30, 2007, we did not believe any of our investments were
      other-than-temporarily impaired.






NOTE
      6—GOODWILL AND OTHER INTANGIBLE ASSETS




GOODWILL




The
      following table summarizes changes in the carrying amount of goodwill during
      the
      three months ended December 31, 2007.  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
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (373
            )
            
            
            (373
            )
            
            
            (373
            )Balance
                at December 31, 2007
            
            $
            14,526
            
            
            $
            —
            
            
            $
            14,526
            
            
            $
            3,219
            
            
            $
            8,534
            
            
            $
            11,753
            
            
            $
            26,279




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




10




sell
      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 three months ended December 31, 2007, we recorded a goodwill impairment
      loss of $373,000 for our held-for-sale businesses. For additional information
      regarding these discontinued businesses, see Note 12—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:




December
                31, 2007
            
            
            September
                30, 2007(in
                thousands)
            Amortization
              period
            
            Gross
            
            
            Accumulated
                amortization
            
            
            Net
            
            
            Gross
            
            
            Accumulated
                amortization
            
            
            NetClient relationships
            7-10
                years
            
            $
            28,408
            
            
            $
            (14,587
            )
            
            $
            13,821
            
            
            $
            28,408
            
            
            $
            (13,840
            )
            
            $
            14,568Technology and research and
              development
            5
                years
            
            
            3,966
            
            
            
            (2,662
            )
            
            
            1,304
            
            
            
            3,966
            
            
            
            (2,444
            )
            
            
            1,522Trademarks
            6-10
                years
            
            
            3,214
            
            
            
            (1,745
            )
            
            
            1,469
            
            
            
            3,214
            
            
            
            (1,664
            )
            
            
            1,550Other
                intangible assets, net
            
            
            $
            35,588
            
            
            $
            (18,994
            )
            
            $
            16,594
            
            
            $
            35,588
            
            
            $
            (17,948
            )
            
            $
            17,640




During
      the three months ended December 31, 2007, we recognized $1.0 million
      of amortization expense on our other intangible assets.









NOTE
      7—SEGMENT INFORMATION




As
      described more fully in Note 12—Discontinued Operations, in
      April 2007, we announced our intention to seek buyers for the sale 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 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 12—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 either 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.




11




Continuing
                Operations(in
                thousands)
            
            EPP
            
            
            Wind-
              down
            
            
            Corporate
                &
              Eliminations
            
            
            TotalThree
                months ended December 31, 2007:Revenues
            
            $
            27,948
            
            
            $
            1,382
            
            
            $
            (138
            )
            
            $
            29,192Costs
                and expenses:Direct
                costs
            
            
            21,118
            
            
            
            1,284
            
            
            
            —
            
            
            
            22,402General
                and administrative
            
            
            2,310
            
            
            
            591
            
            
            
            4,347
            
            
            
            7,248Selling
                and marketing
            
            
            1,887
            
            
            
            118
            
            
            
            108
            
            
            
            2,113Depreciation
                and amortization
            
            
            833
            
            
            
            372
            
            
            
            91
            
            
            
            1,296Total
                costs and expenses
            
            
            26,148
            
            
            
            2,365
            
            
            
            4,546
            
            
            
            33,059(Loss)
                income from continuing operations before other income and income
                taxes
            
            
            1,800
            
            
            
            (983
            )
            
            
            (4,684
            )
            
            
            (3,867
            )Other
                income:Interest
                income
            
            
            —
            
            
            
            —
            
            
            
            967
            
            
            
            967Total
                other income
            
            
            —
            
            
            
            —
            
            
            
            967
            
            
            
            967(Loss)
                income from continuing operations before taxes
            
            
            1,800
            
            
            
            (983
            )
            
            
            (3,717
            )
            
            
            (2,900
            )Income
                tax provision
            
            
            16
            
            
            
            —
            
            
            
            —
            
            
            
            16(Loss)
                income from continuing operations
            
            $
            1,784
            
            
            $
            (983
            )
            
            $
            (3,717
            )
            
            $
            (2,916
            )Three
                months ended December 31, 2006:Revenues
            
            $
            22,239
            
            
            $
            3,967
            
            
            $
            (70
            )
            
            $
            26,136Costs
                and expenses:Direct
                costs
            
            
            16,582
            
            
            
            2,694
            
            
            
            —
            
            
            
            19,276General
                and administrative
            
            
            1,313
            
            
            
            553
            
            
            
            3,580
            
            
            
            5,446Selling
                and marketing
            
            
            1,556
            
            
            
            203
            
            
            
            7
            
            
            
            1,766Depreciation
                and amortization
            
            
            803
            
            
            
            367
            
            
            
            162
            
            
            
            1,332Total
                costs and expenses
            
            
            20,254
            
            
            
            3,817
            
            
            
            3,749
            
            
            
            27,820(Loss)
                income from continuing operations before other income and income
                taxes
            
            
            1,985
            
            
            
            150
            
            
            
            (3,819
            )
            
            
            (1,684
            )Other
                income:Equity
                in net income of unconsolidated affiliate
            
            
            —
            
            
            
            —
            
            
            
            809
            
            
            
            809Interest
                income
            
            
            —
            
            
            
            —
            
            
            
            877
            
            
            
            877Total
                other income
            
            
            —
            
            
            
            —
            
            
            
            1,686
            
            
            
            1,686Income
                (loss) from continuing operations before taxes
            
            
            1,985
            
            
            
            150
            
            
            
            (2,133
            )
            
            
            2Income
                tax provision
            
            
            60
            
            
            
            —
            
            
            
            —
            
            
            
            60(Loss)
                income from continuing operations
            
            $
            1,925
            
            
            $
            150
            
            
            $
            (2,133
            )
            
            $
            (58
            )




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




(in
                thousands)
            
            December
                31, 2007
            
            
            September
                30, 2007Continuing
                operations:EPP
            
            $
            103,765
            
            
            $
            96,527Wind-down
            
            
            7,227
            
            
            
            8,676Corporate(1)
            
            
            20,993
            
            
            
            24,516Assets
                for continuing operations
            
            
            131,985
            
            
            
            129,719Assets
                of discontinued operations
            
            
            208
            
            
            
            504Assets
                held-for-sale
            
            
            36,049
            
            
            
            36,201Total
                assets
            
            $
            168,242
            
            
            $
            166,424(1) Represents
                assets for our continuing businesses that are not assignable to a
                specific
                operation.




See
      Note 12—Discontinued
      Operations for a breakdown of assets that are classified as
      held-for-sale.




12


NOTE
      8—RESTRUCTURING




During
      the three months ended December 31, 2007, we incurred $174,000 in
      restructuring liabilities for severance costs associated with the termination
      of
      several employees within our Voice and Systems Automation wind-down operations
      and facilities costs associated with the closure of our New Mexico
      shared-service facility.  During fiscal year 2004, we incurred
      restructuring liabilities for facilities closure costs associated with the
      relocation of our administrative functions from Walnut Creek, California to
      Reston, Virginia.




The
      following table summarizes the restructuring liabilities activity during the
      three months ended December 31, 2007:




(in
                thousands)
            
            Facilities
                closures
            
            
            Severance
            
            
            TotalBalance
                at September 30, 2007
            
            $
            180
            
            
            $
            —
            
            
            $
            180Additions
            
            
            5
            
            
            
            169
            
            
            
            174Cash
                payments
            
            
            (59
            )
            
            
            —
            
            
            
            (59
            )Balance
                at December 31, 2007
            
            $
            126
            
            
            $
            169
            
            
            $
            295




As
      shown in the preceding table, we had $0.3 million of restructuring
      liabilities at December 31, 2007, which was included in Other accrued liabilities in
      the Consolidated Balance Sheet.  We expect to pay the remaining
      $0.3 million liability during fiscal year 2008.






NOTE
      9—CONTINGENCIES AND COMMITMENTS




LEGAL
      ISSUES




From
      time to time during the normal course of business, we are a party to litigation
      and/or other claims.  At December 31, 2007, none of these matters
      were expected to have a material impact on our financial position, results
      of
      operations or cash flows.  At December 31, 2007 and
      September 30, 2007, we had legal accruals of $1.2 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.  See Note 14—Subsequent Events for
      information on recent key events associated with 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.




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,
      but did not specify the damages being sought.  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.  Currently, the parties are
      in the process of resolving that lawsuit.  We believe we have minimal,
      if any, exposure associated with this complaint.




BANK
      LINES OF CREDIT




At
      December 31, 2007, 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 December 31, 2007, $5.5 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.




13


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
      5—Investments discloses
      that at December 31, 2007, our investment portfolio included
      $53.2 million of AAA-rated auction rate municipal bonds that were
      collateralized with student loans.  These municipal bonds are bought
      and sold in the marketplace through a bidding process sometimes referred to
      as a
“Dutch Auction.”  After the initial issuance of the securities, the
      interest rate on the securities is reset at a prescribed interval (typically
      every 28 days), based upon the demand for these securities.  To date,
      we are not aware of the failure of any auctions for municipal bonds that were
      collateralized with student loans.  In the event, however, than an
      auction occurs for which there was insufficient demand by potential buyers
      for a
      particular security, the fair value of that security could decline and we might
      not be able to liquidate our investment in that security on a timely
      basis.  All auction rate securities in our portfolio are
      collateralized with student loans.  Under the Higher Education Act,
      student loans cannot be canceled (discharged) due to bankruptcy; unless the
      borrower can successfully prove that the repayment of the debt would cause
      “undue hardship”.   Because of these and other provisions under
      the Higher Education Action, the likelihood of default is much lower than other
      types of loans.  Therefore, we believe that the probability is remote
      that we will not be able to liquidate our position on these securities on a
      timely basis at our book 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.  As
      of December 31, 2007, the remaining liability was $0.1 million, which
      is being amortized over the term of the contract.  We believe the
      probability is remote that the guarantee provision of this contract will be
      invoked.




PERFORMANCE
      BONDS




Under
      certain contracts, we are required to obtain performance bonds from a licensed
      surety and to post the performance bond with our customer.  Fees for
      obtaining the bonds are expensed over the life of each bond and are included
      in
Direct costs on our
      Consolidated Statements of Operations.  At December 31, 2007, we
      had $16.9 million of bonds posted with our customers.  There were
      no claims pending against any of these bonds as of December 31,
      2007.




EMPLOYMENT
      AGREEMENTS




As
      of
      December 31, 2007, we had employment and change of control agreements with
      six executives, a former executive and 22 other key managers.  If
      certain termination or change of control events were to occur under the 29
      remaining contracts as of December 31, 2007, we could be required to pay up
      to $8.4 million.




As
      of
      December 31, 2007, we also had agreements with 32 key employees under which
      these individuals would be entitled to receive three to twelve months of their
      base salaries over a one- to two-year period, after completing defined
      employment service periods.  During the remainder of fiscal 2008, we
      expect to recognize a maximum expense of $0.6 million for these
      agreements.  We expect to recognize a maximum expense of
      $0.2 million during fiscal year 2009 for these agreements.




As
      of
      December 31, 2007, we had change of control agreements with 31 key employees
      within our held-for-sale 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




14


months
      of COBRA benefits should certain change of control events
      occur.  Under these agreements, we would be required to pay up to
      $2.2 million if a defined change of control were to occur as of
      December 31 ,2007.




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.




FORWARD
      LOSSES




Throughout
      the term of our customer contracts, we forecast revenues and expenses over
      the
      total life of the contract.  In accordance with generally accepted
      accounting principles, if we determine that forecasted total expenses will
      probably exceed the total forecasted revenues over the term of the contract,
      we
      record an accrual in the current period equal to the total forecasted losses
      over the term of the contract, less losses recognized to date, if
      any.  As of December 31, 2007 and September 30, 2007,
      accruals totaling $1.0 million and $0.9 million, respectively, were
      included in Other accrued
      liabilities on our Consolidated Balance Sheets.  Changes in the
      accrued forward loss are reflected in Direct costs on our
      Consolidated Statements of Operations.






NOTE
      10—RELATED PARTY TRANSACTIONS




During
      the three months ended December 31, 2007, we purchased $165,000 of telecom
      services from ITC Deltacom, Inc., a company affiliated with a member of our
      Board of Directors.






NOTE
      11—SHARE-BASED PAYMENT




Stock
      options are issued under the Amended and Restated 2004 Stock Incentive Plan,
      or
      the Plan.  The Plan provides our Board of Directors discretion in
      creating employee equity incentives, including incentive and non-statutory
      stock
      options.  Generally, these options vest as to 20% of the underlying
      shares each year on the anniversary of the date granted and expire in ten
      years.  At December 31, 2007, there were 1,505,672 shares of
      common stock reserved for future grants under the Plan.




Stock-based
      compensation expense for all stock-based compensation awards granted was based
      on the grant-date fair value using the Black-Scholes model.  We
      recognize compensation expense for stock option awards on a ratable basis over
      the requisite service period of the award.  Stock-based compensation
      expense was $0.8 million for the three months ended December 31, 2007,
      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 months
      ended December 31, 2006, we recognized $0.4 million in stock based
      compensation expense.




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




Three
                months ended
              December
                31,2007
            
            
            2006Weighted-average
                assumptions used in Black-Scholes model:Expected
                period that options will be outstanding (in
                years)
            
            
            5.00
            
            
            
            5.00Interest
                rate (based on U.S.
                Treasury yields at time of grant)
            
            
            3.65
            %
            
            
            4.50
            %Volatility
            
            
            41.68
            %
            
            
            49.56
            %Dividend
                yield
            
            
            —
            
            
            
            —Weighted-average
                fair value of options granted
            
            $
            4.26
            
            
            $
            3.39Weighted-average
                intrinsic value of options exercised (in
                thousands)
            
            $
            12
            
            
            $
            —




15


Expected
      volatilities are based on both the implied and 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 three months ended December 31, 2007 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
            
            
            855
            
            
            
            10.20Exercised
            
            
            (4
            )
            
            
            7.27Forfeitures
                or expirations
            
            
            (39
            )
            
            
            10.74Options
                outstanding at December 31, 2007
            
            
            2,925
            
            
            $
            9.00
            
            7.80
                years
            
            $
            2,730Options
                exercisable at December 31, 2007
            
            
            1,605
            
            
            $
            8.94
            
            6.64
                years
            
            $
            2,017




As
      of
      December 31, 2007, a total of $3.5 million of unrecognized
      compensation cost related to stock options, net of estimated forfeitures, was
      expected to be recognized over a 4.2 year weighted-average
      period.






NOTE
      12—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 Income from discontinued
      operations,
      net on our Consolidated Statements of Operations.




The
      following schedule shows the current carrying value of the assets and
      liabilities for the IV&V business included in Assets of discontinued
      operations and Liabilities of discontinued
      operationson our Consolidated Balance Sheets.




(in
                thousands)
            
            December
                31, 2007
            
            
            September
                30, 2007Assets
                of discontinued operations:Current
                assets
            
            $
            197
            
            
            $
            412Goodwill
            
            
            11
            
            
            
            91Other
                assets
            
            
            —
            
            
            
            1Total
                assets
            
            $
            208
            
            
            $
            504Liabilities
                of discontinued operations:Current
                liabilities
            
            $
            164
            
            
            $
            304Total
                liabilities
            
            $
            164
            
            
            $
            304Net
                assets and liabilities of disposal group
            
            $
            44
            
            
            $
            200




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 sale
      of
      the majority of our PSSI and GBPO segments.  We classified the assets
      and liabilities associated with these divestures 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 that
      comprise the GBPO and PSSI segments have widely divergent operations and
      customer bases, each practice area, which




16


represents
      a separate business, is being marketed for sale separately.  In total,
      we expect to divest these practice areas through a series of at least six
      transactions to separate buyers.




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
      December 31, 2007 and September 30, 2007.




December
                31, 2007
            
            
            September
                30, 2007(in
                thousands)
            
            GBPO
            
            
            PSSI
            
            
            Eliminations
            
            
            Total
            
            
            GBPO
            
            
            PSSI
            
            
            Eliminations
            
            
            TotalAssets:Current
                assets
            
            $
            3,415
            
            
            $
            7,432
            
            
            $
            45
            
            
            $
            10,892
            
            
            $
            4,009
            
            
            $
            6,548
            
            
            $
            39
            
            
            $
            10,596Property,
                equipment and software, net
            
            
            5,622
            
            
            
            7,910
            
            
            
            (476
            )
            
            
            13,056
            
            
            
            5,606
            
            
            
            6,657
            
            
            
            (476
            )
            
            
            11,787Goodwill
            
            
            3,219
            
            
            
            8,523
            
            
            
            —
            
            
            
            11,742
            
            
            
            3,219
            
            
            
            8,816
            
            
            
            —
            
            
            
            12,035Other
                assets
            
            
            —
            
            
            
            359
            
            
            
            —
            
            
            
            359
            
            
            
            5
            
            
            
            1,778
            
            
            
            —
            
            
            
            1,783Total
                assets
            
            $
            12,256
            
            
            $
            24,224
            
            
            $
            (431
            )
            
            $
            36,049
            
            
            $
            12,839
            
            
            $
            23,799
            
            
            $
            (437
            )
            
            $
            36,201Liabilities:Current
                liabilities
            
            $
            3,439
            
            
            $
            7,281
            
            
            $
            —
            
            
            $
            10,720
            
            
            $
            3,037
            
            
            $
            7,619
            
            
            $
            —
            
            
            $
            10,656Other
                liabilities
            
            
            228
            
            
            
            13
            
            
            
            —
            
            
            
            241
            
            
            
            284
            
            
            
            18
            
            
            
            —
            
            
            
            302Total
                liabilities
            
            $
            3,667
            
            
            $
            7,294
            
            
            $
            —
            
            
            $
            10,961
            
            
            $
            3,321
            
            
            $
            7,637
            
            
            $
            —
            
            
            $
            10,958Net assets and liabilities of disposal group
            
            $
            8,589
            
            
            $
            16,930
            
            
            $
            (431
            )
            
            $
            25,088
            
            
            $
            9,518
            
            
            $
            16,162
            
            
            $
            (437
            )
            
            $
            25,243




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 two businesses, one within the PSSI operations and one within
      the GBPO operations, had carrying values that exceeded fair value.  As
      a result, during the three months ended December 31, 2007, we recorded an
      impairment expense of $398,000, of which $373,000 relates to goodwill impairment
      under SFAS 142 and $25,000 relates to long-lived asset impairment under SFAS
      144.  This impairment is included in Income from discontinued
      operations.




SUMMARY
      OF REVENUE AND INCOME BEFORE TAXES—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 our former IV&V businesses.  Thus, we classified
      the results of operations for these businesses as Income from discontinued
      operations,
      net on our Consolidated Statements of Operations in accordance with SFAS
      144.  The following table summarizes our revenue and pre-tax income
      generated by these operations during the three months ended December 31,
      2007 and 2006.




Three
                months ended
              December 31,(in
                thousands)
            
            2007
            
            
            2006Revenues
                (Discontinued operations):GBPO
            
            $
            6,896
            
            
            $
            9,220PSSI
            
            
            6,610
            
            
            
            7,364Other/eliminations
            
            
            —
            
            
            
            —Total
                revenues
            
            $
            13,506
            
            
            $
            16,584Income
                before taxes (Discontinued operations):GBPO
            
            $
            1,799
            
            
            $
            1,613PSSI
            
            
            (396
            )
            
            
            737Other/eliminations
            
            
            82
            
            
            
            (78
            )Total
                income before taxes
            
            $
            1,485
            
            
            $
            2,272






NOTE
      13—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




17


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 quarter ended
      December 31, 2007.  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 December 31, 2007, 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
      14—SUBSEQUENT EVENT




In
      May
      2003, we received a subpoena from a grand jury in the Southern District of
      New
      York to produce certain documents pursuant to an investigation by the Antitrust
      Division of the U.S. Department of Justice, or the DOJ, involving the child
      support payment processing industry.  On November 23, 2003, the
      DOJ granted us conditional amnesty pursuant to the Antitrust Division's
      Corporate Leniency Policy.  In January 2008, we were advised by
      the DOJ that they will no longer pursue this investigation.




18


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




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




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
      rigorous 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 sale 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 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.  Although we report
      these 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 December 31, 2007, we reported a net loss of
      $1.4 million, or $0.07 per fully diluted share, compared with net income of
      $2.2 million, or $0.11 per fully diluted share, for the three months ended
      December 31, 2006.  Our continuing operations reported a loss of
      $2.9 million, or $0.15 per fully diluted share, while our discontinued
      operations reported net income of $1.5 million, or $.08 per fully diluted
      share, for the three months ended December 31, 2007.




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 $1.8 million, or




19


$0.09
      per fully diluted share, during the three months ended December 31,
      2007.  This represents a $0.1 million, or 7.3%, decrease from the
      same period last year.  The results for the quarter ended December 31,
      2006 included a one-time $0.2 million refund of excess interchange fees. While
      the number of transactions and the total dollars processed by our EPP business
      rose 41.1% and 31.7%, respectively, the size of the average payment that we
      processed was 6.6% lower than the first quarter of fiscal
      2007.  Although EPP provides electronic payment processing services to
      over 3,000 clients, approximately 16.1% of EPP’s revenues generated during the
      three months ended December 31, 2007, resulted from transactions processed
      for
      the Internal Revenue Service.




Our
      wind-down operations reported a loss of $1.0 million, or $0.05 per fully
      diluted share during the three months ended December 31, 2007, compared with
      income of $0.2 million, or $0.01 per fully diluted share, for the same period
      last year.  As we continue to wind-down these operations, we expect
      that the level of this loss will decline in future quarters.  During
      fiscal 2008, we expect to wind-down two businesses that generated losses
      totaling $0.5 million during the quarter ended December 31,
      2007.  Another business that reported a $0.5 million loss during the
      three months ended December 31, 2007 is expected to be wound-down over a
      five-year period.  Our corporate overhead contributed
      $3.7 million, or $0.19 per fully diluted share, to the overall net loss
      from continuing operations, which 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 sell and/or wind-down our
      GBPO
      and PSSI businesses.




For
      the
      three months ended December 31, 2007, our discontinued operations from our
      held-for-sale GBPO and PSSI operations reported income of $1.5 million, or
      $0.08 per fully diluted share, a decrease of $0.8 million from the same
      period last year.  Although the GBPO and PSSI operations generated
      income during the three months ended December 31, 2007 on a standalone
      basis (excluding an allocation of general corporate costs), the expiration
      of
      two GBPO contracts and the completion of a number of PSSI projects during fiscal
      2007 are expected to result in lower earnings in future years.




EXPECTATIONS
      FOR 2008




We
      expect that fiscal 2008 will be another transition year as we position our
      company for the long-term growth of the EPP business.  In fiscal 2008,
      we expect to see continued significant 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 preliminary conclusions, we expect to make a significant investment
      in
      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.  In addition to these two
      EPP-specific initiatives, we also intend to right-size our corporate overhead
      once the sale of our non-core assets is complete.  In fiscal 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.




20


RESULTS
      OF OPERATIONS




The
      following table provides an overview of our results of operations for the three
      months ended December 31, 2007 and 2006:




VarianceThree
                months ended December 31,
            
            
            2007
                vs. 2006(in
                thousands, except percentages)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %Revenues
            
            $
            29,192
            
            
            $
            26,136
            
            
            $
            3,056
            
            
            
            11.7
            %Costs
                and expenses
            
            
            33,059
            
            
            
            27,820
            
            
            
            5,239
            
            
            
            18.8
            %Loss from continuing operations before other income and income
                taxes
            
            
            (3,867
            )
            
            
            (1,684
            )
            
            
            (2,183
            )
            
            
            (129.6
            )%Other
                income
            
            
            967
            
            
            
            1,686
            
            
            
            (719
            )
            
            
            (42.6
            )%Loss
                from continuing operations before income taxes
            
            
            (2,900
            )
            
            
            2
            
            
            
            (2,902
            )
            
            
            *Income
                tax provision
            
            
            16
            
            
            
            60
            
            
            
            (44
            )
            
            
            (73.3
            )%Loss
                from continuing operations
            
            
            (2,916
            )
            
            
            (58
            )
            
            
            (2,858
            )
            
            
            *Income
                from discontinued operations, net
            
            
            1,485
            
            
            
            2,272
            
            
            
            (787
            )
            
            
            (34.6
            )%Net
                (loss) income
            
            $
            (1,431
            )
            
            $
            2,214
            
            
            $
            (3,645
            )
            
            
            (164.6
            )%*
                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 months ended December 31, 2007
      and 2006.  This table is followed by a detailed analysis summarizing
      reasons for variances in these financial results.




Three
                months ended
              December
                31,(in
                thousands)
            
            2007
            
            
            2006Revenues
            
            $
            29,192
            
            
            $
            26,136Costs
                and expenses:Direct
                costs
            
            
            22,402
            
            
            
            19,276General
                and administrative
            
            
            7,248
            
            
            
            5,446Selling
                and marketing
            
            
            2,113
            
            
            
            1,766Depreciation
                and amortization
            
            
            1,296
            
            
            
            1,332Total
                costs and expenses
            
            
            33,059
            
            
            
            27,820Loss
                from continuing operations before other income and income
                taxes
            
            
            (3,867
            )
            
            
            (1,684
            )Other
                income
            
            
            967
            
            
            
            1,686(Loss)
                income from continuing operations before income taxes
            
            
            (2,900
            )
            
            
            2Income
                tax provision
            
            
            16
            
            
            
            60Loss
                from continuing operations
            
            $
            (2,916
            )
            
            $
            (58
            )




Revenues
      (Continuing
      Operations)




The
      following table compares the revenues generated by our continuing operations
      during the three months ended December 31, 2007 and 2006:




Three
                months ended
              December
                31,
            
            
            Variance(in
                thousands, except percentages)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %RevenuesEPP
            
            $
            27,948
            
            
            $
            22,239
            
            
            $
            5,709
            
            
            
            25.7
            %Wind-down
            
            
            1,382
            
            
            
            3,967
            
            
            
            (2,585
            )
            
            
            (65.2
            )%Corporate
            
            
            (138
            )
            
            
            (70
            )
            
            
            (68
            )
            
            
            (97.1
            )%Total
            
            $
            29,192
            
            
            $
            26,136
            
            
            $
            3,056
            
            
            
            11.7
            %






21


The
      following sections discuss the key drivers 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
      $27.9 million of revenues during the three months ended December 31,
      2007, a $5.7 million, or 25.7%, increase over the three months ended
      December 31, 2006.  During the three months ended
      December 31, 2007, we processed 41.1% more transactions than we did in the
      same period last year, representing 31.7% more dollars.  The revenues
      generated by EPP’s educational institution payments vertical increased 68.6%
      during the three months ended December 31, 2007 over the same period last
      year.  In addition, the revenues generated by EPP’s property tax
      payment vertical increased 27.9%.  The remainder of the increase is
      attributable to increases in federal and state taxes processing and
      utilities.




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 December 31,
      2007, our three wind-down operations generated $1.4 million in revenues, a
      $2.6 million, or 65.2%, decrease from the three months ended
      December 31, 2006.  The overall revenue decrease was due
      primarily to the completion or near completion of several projects during fiscal
      2007.  Our Pension business contributed $1.2 million to the
      overall decline in revenues, in which one project contributed $0.7 million
      and another project contributed $0.6 million, offset by an increase of
      $0.1 million in warranty work on another project.  The completion
      of one project within our Health and Human Services, or HHS, business
      contributed $1.1 million to the overall decline in Wind-down
      revenues.  The completion of $0.3 million in maintenance
      contracts within our Voice and Systems Automation business further contributed
      to the overall decline.




Corporate
      Operations/Eliminations:  During the three months ended
      December 31, 2007, we eliminated $138,000 of revenues for transactions
      processed by EPP for our GBPO business (which is included in discontinued
      operations).  This amount was $68,000 greater than the amount
      eliminated during the three months ended 2006, because of a rise in the number
      of transactions that EPP processed for our GBPO business.




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 months
      ended
      December 31, 2007 and 2006:




Three
                months ended
              December
                31,
            
            
            Variance(in
                thousands, except percentages)
            
            2007
            
            
            2006
            
            
            $Direct
                costsEPP
            
            $
            21,118
            
            
            $
            16,582
            
            
            $
            4,536
            
            
            
            27.4
            %Wind-down
            
            
            1,284
            
            
            
            2,694
            
            
            
            (1,410
            )
            
            
            (52.3
            )%Total
            
            $
            22,402
            
            
            $
            19,276
            
            
            $
            3,126
            
            
            
            16.2
            %




The
      following sections discuss the key drivers 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 $4.5 million, or 27.4%, during the three months ended
      December 31, 2007.  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




22


reported
      for the three months ended December 31, 2006 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:  During the three months ended December 31, 2007,
      Direct costs from our wind-down operations decreased $1.4 million, or
      52.3%, from the same period last year.  These decreases are primarily
      due to the absence of labor and labor-related expenses and subcontractor costs
      incurred on a Pension and a HHS contract, which were both completed during
      fiscal year 2007.  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.




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 months ended December 31, 2007 and
      2006:




Three
                months ended
              December
                31,
            
            
            Variance(in
                thousands, except percentages)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %General
                and administrativeEPP
            
            $
            2,310
            
            
            $
            1,313
            
            
            $
            997
            
            
            
            75.9
            %Wind-down
            
            
            591
            
            
            
            553
            
            
            
            38
            
            
            
            6.9
            %Corporate
            
            
            4,347
            
            
            
            3,580
            
            
            
            767
            
            
            
            21.4
            %Total
            
            $
            7,248
            
            
            $
            5,446
            
            
            $
            1,802
            
            
            
            33.1
            %




EPP
      General and
      Administrative:  During the three months ended
      December 31, 2007, EPP incurred $2.3 million of general and
      administrative expenses, a $1.0 million, or 75.9%, increase over the same
      period last year. These increases are attributable primarily to:  a
      $0.4 million increase for labor and labor-related expenses, including
      shared-service costs for resources redeployed from discontinued operations
      and
      general corporate operations to EPP; a $0.3 million increase for consulting
      services to develop and implement key strategic initiatives; a $0.2 million
      increase in bad debt expense; and $0.1 million of additional rent and legal
      expenses.




During
      the remainder of fiscal 2008, general and administrative expenses for our EPP
      operations could increase as we move toward establishing a common electronic
      payment processing platform.  Currently, we process payments on
      multiple platforms at multiple locations.  Investing in a common
      platform, 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
      December 31, 2007, our wind-down operations incurred $0.6 million of
      general and administrative expenses, a $38,000, or 6.9%, increase over the
      same
      period last year.  Included in this variance was a $285,000 increase
      in our bad debt expense, partially offset by a $209,000 decrease in our labor
      and labor-related expenses and a $52,000 decrease in other administrative
      costs.




The
      $285,000 increase in bad debts expense resulted from the recognition of $82,000
      of bad debts expense during the three months ended December 31, 2007, combined
      with the effects of a $203,000 reduction in the allowance for uncollectible
      accounts receivable to reflect successful collection efforts in our VSA and
      Pension businesses during the three months ended December 31,
      2006.  The $209,000 decrease in our labor and labor-related expenses
      reflects $344,000 in wages and fringe benefits, partially offset by $135,000
      of
      additional severance costs, which both result from decreases in the VSA and
      Pension workforces that we are making as we wind-down these
      operations.




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




23


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 December 31, 2007, our corporate operations incurred
      $4.3 million of general and administrative expenses, an $0.8 million,
      or 21.4%, increase over the same period last year, primarily because of a $0.4
      million increase in legal expenses and a $0.3 million increase in corporate
      labor and labor-related expenses.  Legal costs increased $0.4 million
      primarily because of the absence of the reversal of an over-accrual from the
      prior fiscal year made during December 31, 2006, and the ongoing
      investigation by the Securities and Exchange Commission.  The
      $0.3 million increase in our corporate labor and labor-related expenses
      includes:  $0.3 million of additional incentives and bonuses paid to
      retain key employees during the divestiture period; $0.1 million of
      additional severance, and; $0.3 million of additional share-based payment
      expenses resulting from the issuance of options to purchase 855,000 shares
      of
      our common stock and the acceleration of the vesting period for certain options
      previously issued to our Board of Directors, which provided Board members with
      a
      vesting period consistent with the other options issued to them; partially
      offset by a $0.4 million reduction in our wages and fringe costs, which
      primarily resulted from the consolidated of portions of our corporate
      information and technology function..




We
      believe the anticipated sales of the majority of our GBPO and PSSI operations
      will reduce the need for corporate support.  Therefore, during late
      fiscal 2008, 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 months ended December 31, 2007 and 2006:




Three
                months ended
              December
                31,
            
            
            Variance(in
                thousands, except percentages)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %Selling
                and marketingEPP
            
            $
            1,887
            
            
            $
            1,556
            
            
            $
            331
            
            
            
            21.3
            %Wind-down
            
            
            118
            
            
            
            203
            
            
            
            (85
            )
            
            
            (41.9
            )%Corporate
            
            
            108
            
            
            
            7
            
            
            
            101
            
            
            
            *Total
            
            $
            2,113
            
            
            $
            1,766
            
            
            $
            347
            
            
            
            19.7
            %*
                Not meaningful




EPP
      Selling and
      Marketing:  During the three months ended December 31,
      2007, EPP incurred $1.9 million of selling and marketing expenses, a
      $0.3 million, or 21.3%, increase over the same period last
      year.  Of the overall increase, $0.2 million is attributable to
      additional advertising and partnership related costs.  The remaining
      $0.1 million increase is due to additional labor and labor-related expenses
      and additional travel costs.  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 December 31,
      2007, the selling and marketing expenses of our wind-down operation decreased
      to
      $0.1 million, a 41.9% decrease from the same period last
      year.  The minor decrease is attributable primarily to a decrease in
      labor and labor-related expenses.  We do not expect to incur
      significant selling and marketing expenses for our wind-down operations in
      fiscal 2008.




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 increase in sales and marketing expenses
      during the three months ended December 31, 2007 primarily reflects a higher
      proportion labor and labor-related costs that could not be assigned directly
      to
      a specific project.




24


Depreciation
      and
      Amortization (Continuing Operations)




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




Three
                months ended
              December
                31,
            
            
            Variance(in
                thousands, except percentages)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %Depreciation
                and amortizationEPP
            
            $
            833
            
            
            $
            803
            
            
            $
            30
            
            
            
            3.7
            %Wind-down
            
            
            372
            
            
            
            367
            
            
            
            5
            
            
            
            1.4
            %Corporate
            
            
            91
            
            
            
            162
            
            
            
            (71
            )
            
            
            (43.8
            )%Total
            
            $
            1,296
            
            
            $
            1,332
            
            
            $
            (36
            )
            
            
            (2.7
            )%




Depreciation
      and amortization during the three months ended December 31, 2007 and 2006
      remained relatively consistent.




Other
      Income (Continuing
      Operations)




Equity
      in net
      income of unconsolidated affiliate:We had no
      equity in net
      income of unconsolidated affiliate during the three months ended December 31,
      2007, compared with $0.8 million in the same quarter last year, due to the
      divestiture in our 46.96% ownership of CPAS, Inc., a former minority-owned
      investment, in the third quarter of fiscal 2007.




Interest
      income,
      net:Interest income
      during
      the three months ended December 31, 2007 remained relatively consistent
      with the three months ended December 31, 2006.  Although the
      average daily balance of our investment portfolio increased significantly,
      the
      interest rates we received on these investments has declined in recent months
      consistent with interest rate changes in the marketplace. The interest
      rates on our investment portfolio fluctuate with changes in the marketplace;
      however, we believe that the principal value of our portfolio is secure,
      since we have no investments in the types of financial instruments that have
      caused other financial institutions to write-down the value of their
      portfolios.




Income
      Tax Provision
      (Continuing Operations)




We
      reported income tax provisions of $16,000 for the three months ended
      December 31, 2007 and $60,000 for the three months ended December 31,
      2006.  The provision for income taxes represents state tax obligations
      incurred by our EPP operations.  Our Consolidated Statements
      of
      Operations for the three months ended December 31, 2007 and 2006 do
      not reflect a federal tax provision because of offsetting adjustments to our
      valuation allowance.  Our effective tax rates differ from the federal
      statutory rate due to state and foreign income taxes, tax-exempt interest income
      and the charge for establishing a valuation allowance on our net deferred tax
      assets.  Our future tax rate may vary due to a variety of factors,
      including, but not limited to:  the relative income contribution by
      tax jurisdiction; changes in statutory tax rates; the amount of tax exempt
      interest income generated during the year; changes in our valuation allowance;
      our ability to utilize foreign tax credits and net operating losses and any
      non-deductible items related to acquisitions or other nonrecurring
      charges.






DISCONTINUED
      OPERATIONS




In
      April 2007, we began to seek buyers for the majority of our GBPO and PSSI
      segments.  As of December 31, 2007, we continued to own and
      operate these businesses.  However, SFAS 144 requires that we report
      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 represented.




25




The
      following table summarizes our results of operations from discontinued
      operations for the three months ended December 31, 2007 and
      2006.  Immediately following this table is a discussion of key
      variances in these results.




Three
                months ended
              December
                31, 2007
            
            
            Three
                months ended
              December
                31, 2006(in
                thousands)
            
            GBPO
            
            
            PSSI
            
            
            Eliminations
            
            
            Total
            
            
            GBPO
            
            
            PSSI
            
            
            Eliminations
            
            
            TotalRevenues
            
            $
            6,896
            
            
            $
            6,610
            
            
            $
            —
            
            
            $
            13,506
            
            
            $
            9,220
            
            
            $
            7,364
            
            
            $
            —
            
            
            $
            16,584Costs
                and expenses:Direct
                costs
            
            
            4,134
            
            
            
            5,047
            
            
            
            (138
            )
            
            
            9,043
            
            
            
            6,750
            
            
            
            4,894
            
            
            
            (114
            )
            
            
            11,530General
                and
              administrative
            
            
            387
            
            
            
            1,501
            
            
            
            41
            
            
            
            1,929
            
            
            
            658
            
            
            
            1,144
            
            
            
            192
            
            
            
            1,994Selling
                and marketing
            
            
            551
            
            
            
            368
            
            
            
            15
            
            
            
            934
            
            
            
            198
            
            
            
            563
            
            
            
            —
            
            
            
            761Depreciation
                and
              amortization
            
            
            —
            
            
            
            20
            
            
            
            —
            
            
            
            20
            
            
            
            1
            
            
            
            26
            
            
            
            —
            
            
            
            27Write-down of goodwill
              and
                intangibles
            
            
            25
            
            
            
            373
            
            
            
            —
            
            
            
            398
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
                costs and
              expenses
            
            
            5,097
            
            
            
            7,309
            
            
            
            (82
            )
            
            
            12,324
            
            
            
            7,607
            
            
            
            6,627
            
            
            
            78
            
            
            
            14,312Income before other
              income
                and
              income
                taxes
            
            
            1,799
            
            
            
            (699
            )
            
            
            82
            
            
            
            1,182
            
            
            
            1,613
            
            
            
            737
            
            
            
            (78
            )
            
            
            2,272Other
                income
            
            
            —
            
            
            
            303
            
            
            
            —
            
            
            
            303
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Income
                before income taxes
            
            
            1,799
            
            
            
            (396
            )
            
            
            82
            
            
            
            1,485
            
            
            
            1,613
            
            
            
            737
            
            
            
            (78
            )
            
            
            2,272Income
                tax provision
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Income
                from discontinued
              operations,
                net
            
            $
            1,799
            
            
            $
            (396
            )
            
            $
            82
            
            
            $
            1,485
            
            
            $
            1,613
            
            
            $
            737
            
            
            $
            (78
            )
            
            $
            2,272




Revenues
      (Discontinued
      Operations)




GBPO
      Revenues:  During the three months ended December 31,
      2007, revenues from discontinued GBPO operations decreased $2.3 million, or
      25.2%, compared to the same period last year.  The decrease is
      attributable primarily to the absence of $1.9 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 another payment processing center reduced revenues
      by
      $0.5 million during the three months ended December 31, 2007.
      Offsetting these decreases was a $0.1 million increase in revenues from a
      call center project as a result of two additional offices assigned to our
      contract.




PSSI
      Revenues:  During the three months ended December 31,
      2007, revenues from discontinued PSSI operations decreased $0.8 million, or
      10.2%, from the same period last year.  The decrease reflects a $0.9
      million reduction in revenues contributed by our Unemployment insurance, or
      UI,
      operations and a $0.2 million reduction in revenues contributed by our Financial
      Management Systems, or FMS, business.  These decreases were partially
      offset by $0.4 million of incremental revenue from our State Systems
      Integration, or SSI, business.




UI
      contributed $0.9 million of lower revenues primarily because of the completion
      of a project, which contributed $0.7 million to the decline and a $0.6
      million reduction in revenues from deliverables on another
      project.  These decreases were partially offset by $0.4 million
      of additional revenue from a project which commenced during the fourth quarter
      of fiscal 2007.   FMS contributed $0.2 million lower revenues
      because of the completion or near completion of projects.  SSI
      contributed $0.4 million of incremental revenues because of additional revenues
      for work performed for an existing customer.






Direct
      Costs (Discontinued
      Operations)




GBPO
      Direct
      Costs:  During the three months ended December 31, 2007,
      direct costs from discontinued GBPO operations decreased $2.6 million, or
      38.8%, from the same period last year.  Our payment processing centers
      contributed $2.2 million to the overall decline in direct costs, of which
      $1.2 million is attributable to the completion of one project during fiscal
      2007 and $1.0 million was attributable to the shift to lower cost,
      state-mandated electronic payment alternatives at another payment processing
      center.  Our call center project benefited from a $0.6 million
      decrease in direct costs for the three months ended December 31, 2007
      primarily from the absence of $0.2 million in forward loss accruals, the
      reduction of




26


$0.2 million
      in telephone expense and the absence of depreciation expense of
      $0.1 million, as a result of its held-for-sale status, in which no
      depreciation expense is recognized in accordance with SFAS 144.




PSSI
      Direct
      Costs:  During the three months ended December 31, 2007,
      direct costs from discontinued PSSI operations increased $0.2 million, or
      3.1%, from the same period last year.  An increase in direct costs for
      maintenance contracts within our FMS business contributed $0.5 million to
      the overall increase in expenses.  In addition, our SSI business
      incurred $0.3 million more in expenses in the three months ended
      December 31, 2007 over the same period last year.  Offsetting
      these increases was a $0.6 million decrease by our UI business,
      including $0.4 million attributable to the completion of one project and
      $0.4 million attributable to reduced work on another fixed-price
      contract, partially offset by a $0.2 million increase in
      expenses incurred on several smaller projects.






Other
      Expenses (Discontinued
      Operations)




GBPO
      Other
      Expenses:  During the three months ended December 31,
      2007, general and administrative expenses for our GBPO discontinued operations
      decreased $0.3 million, or 41.2%, because of a $0.2 million decrease
      in bad debt expense and a $0.1 million decrease in labor and labor-related
      support services, primarily attributable to the closure of one of our payment
      processing centers in the third fiscal quarter of fiscal
      2007.  Selling and marketing expenses increased $0.4 million,
      because of the costs associated with preparing a number of significant
      proposals.  Finally, we recognized $25,000 of SFAS 144 impairment
      expense during the three months ended December 31, 2007 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 December 31,
      2007, general and administrative expenses for discontinued PSSI operations
      increased $0.4 million, or 31.2%, over the same period last year, primarily
      due to a $0.9 million increase in labor and labor related expenses of
      administrative support services.  Partially offsetting this increase
      is a decrease of $0.3 million of bad debt expense and a $0.2 million
      decrease in office supplies and miscellaneous expenses.  Selling and
      marketing expenses decreased $0.2 million during the three months ended
      December 31, 2007, primarily from a decrease in labor and labor-related
      expenses, including labor expenses allocated from corporate overhead that can
      be
      directly assigned to specific operations.  During the three months
      ended December 31, 2007, we recognized $0.4 million of 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 months ended December 31,
      2007, general and administrative expenses for discontinued corporate operations
      decreased $0.2 million 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 December 31,
      2007, we had $5.5 million of letters of credit outstanding under this
      credit facility, which are fully collateralized.  These letters of
      credit were issued to secure performance bonds, insurance and a property
      lease.




Net
      Cash
      from Continuing Operations—Operating Activities.  During the
      three months ended December 31, 2007, our operating activities from
      continuing operations provided $1.8 million of cash.  This
      reflects a net loss of $2.9 million from continuing operations and
      $2.0 million of non-cash items.  During the three months ended
      December 31, 2007, $2.7 million of cash was generated by an increase
      in accounts payable and accrued liabilities.  A decrease in accounts
      receivable and unbilled receivables generated $0.2 million of
      cash.  A decrease in deferred revenue used $0.2 million of
      cash.




During
      the three months ended December 31, 2006, our operating activities from
      continuing operations used $0.8 million of cash.  This reflects a
      net loss of $0.1 million from continuing operations and $0.5 million
      of




27


non-cash
      items.  During the three months ended December 31, 2006,
      $1.7 million of cash was used in by an increase in accounts receivable and
      unbilled receivables.  A decrease in deferred revenue used
      $0.2 million of cash.  An increase in accounts payable and
      accrued liabilities generated $0.3 million of cash, an increase in income
      taxes receivable generated $0.2 million of cash and a decrease of prepaid
      expenses and other assets generated $0.1 million of cash.




Net
      Cash
      from Continuing Operations—Investing Activities.  Net cash
      provided by our investing activities from continuing operations for the three
      months ended December 31, 2007 was $0.9 million, including
      $5.6 million of cash provided by sales and maturities of marketable
      securities, offset by $3.9 million of cash used to purchase marketable
      securities.  In addition, $0.8 million of cash was used to
      purchase equipment and software, primarily associated with our corporate
      IT.




Net
      cash used in our investing activities from continuing operations for the three
      months ended December 31, 2006 was $0.2 million, including
      $3.3 million of cash used to purchase restricted investments in the form of
      certificates of deposit required to collateralize performance bonds, offset
      by
      $3.3 million of cash generated by sales and maturities of restricted
      investments. In addition, we used $0.3 million of cash to purchase
      equipment and software.




Net
      Cash
      from Continuing Operations—Financing Activities.  Net cash used
      in our financing activities from continuing operations for the three months
      ended December 31, 2007 was $7,000, including $29,000 provided by the
      exercise of options to purchase our common stock, partially offset by the use
      of
      $36,000 for capital lease obligations.  Net cash used in our financing
      activities from continuing operations for the three months ended
      December 31, 2006 was $7,000, used for capital lease
      obligations.




Net
      Cash
      from Discontinued Operations—Operating Activities.  During the
      three
      months ended December 31, 2007, our operating activities from discontinued
      operations provided $3.1 million of cash.  This reflects
      $1.5 million of net income and $0.1 million used for non-cash items,
      of which $0.4 million relates to the write-down of goodwill and
      held-for-sale assets and $0.3 million by the reduction in bad debt
      expense.  During the three months ended December 31, 2006, our
      operating activities from discontinued operations generated $4.9 million of
      cash, including $2.3 million of net income and $1.3 million of
      non-cash items.




Net
      Cash
      from Discontinued Operations—Investing Activities.  Net cash
      used in our investing activities from discontinued operations for the three
      months ended December 31, 2007 was $1.3 million, primarily used to
      purchase equipment and software, and fund internally developed
      software.  Net cash used in our investment activities from
      discontinued operations for the three months ended December 31, 2006 was
      $0.7 million, primarily to purchase equipment and software, and fund
      internally developed software.




Net
      Cash
      from Discontinued Operations—Financing Activities.  During the
      three months ended December 31, 2007 and 2006, we used $2,000 and $1,000,
      respectively, 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 timing of the billing and collection of large project
      milestones.  We anticipate that our existing capital resources,
      including our cash balances, cash that we anticipate will be provided by
      operating activities and our available credit facilities will be adequate to
      fund our operations for at least fiscal 2008.  There can be no
      assurance that changes will not occur that would consume available capital
      resources before such time.  Our capital requirements and capital
      resources depend on numerous factors, including:  potential
      acquisitions; initiation of large child support payment processing contracts
      that typically require large cash outlays for capital expenditures and staff-up
      costs; contingent payments earned; new and existing contract requirements;
      the
      timing of the receipt of accounts receivable, including unbilled receivables;
      the timing and ability to sell investment securities held in our portfolio
      without a loss of principal; our ability to draw on our bank facility; and
      employee growth.  To the extent that our existing capital resources
      are insufficient to meet our capital requirements, we will have to raise
      additional funds.  There can be no assurance that additional funding,
      if necessary, will be available on favorable terms, if at all.  The
      raising of additional capital may dilute our shareholders’ ownership in
      us.




Due
      to
      the current economic climate, the performance bond market has changed
      significantly, resulting in reduced availability of bonds, increased cash
      collateral requirements and increased premiums.  Some of our


28


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 December 31, 2007, the fair
      value of the portfolio would decline by about $19,200.




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.  To date, we are not aware
      of the failure of any auctions for municipal bonds, collateralized with student
      loans.  In the event, however, that an auction occurs for which there
      was insufficient demand by potential buyers for a particular security, the
      fair
      value of our investment could decline and we may not be able to liquidate our
      investment in that security on a timely basis.






ITEM
      4. CONTROLS AND PROCEDURES




EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES




Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act)
      as of December 31, 2007.  The term “disclosure controls and
      procedures” means controls and other procedures that are designed to ensure that
      information required to be disclosed by a company in reports that it files
      or
      submits under the Exchange Act is recorded, processed, summarized and reported,
      within the time periods specified in the SEC’s rules and
      forms.  Disclosure controls and procedures include, without
      limitation, controls and procedures designed to ensure that such information
      is
      accumulated and communicated to the company’s management, including its
      principal executive and principal financial officers, as appropriate to allow
      timely decisions regarding


29


required
      disclosure.  Management recognizes that any controls and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving their objectives and management necessarily applies its judgment
      in
      evaluating the cost-benefit relationship of possible controls and
      procedures.  Based on the evaluation of our disclosure controls and
      procedures as of December 31, 2007, our Chief Executive Officer and our
      Chief Financial Officer concluded that as of that date, our disclosure controls
      and procedures were effective at the reasonable assurance level.




There
      was no change in our internal control over financial reporting (as defined
      in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
      December 31, 2007 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.






30


PART
      II. OTHER INFORMATION




ITEM
      1. LEGAL PROCEEDINGS




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,
      but did not specify the damages being sought.  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.  Currently, the parties are
      in the process of resolving that lawsuit.  We believe we have minimal,
      if any, exposure associated with this complaint.




In
      May
      2003, we received a subpoena from a grand jury in the Southern District of
      New
      York to produce certain documents pursuant to an investigation by the Antitrust
      Division of the U.S. Department of Justice, or the DOJ, involving the child
      support payment processing industry.  On November 23, 2003, the
      DOJ granted us conditional amnesty pursuant to the Antitrust Division's
      Corporate Leniency Policy.  In January 2008, we were advised by
      the DOJ that they will no longer pursue this investigation.






ITEM
      1A. RISK FACTORS




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




The
      following factors and other risk factors could cause our actual results to
      differ materially from those contained in forward-looking statements in this
      Form 10-Q.  We updated these risk factors from those included in our
      annual report on Form 10-K to, among other things, update the risk factor
      regarding claims and lawsuits.




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;




·
            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.




31


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




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




While
      our continuing operations
      provide services to over 3,000 clients, our revenues and cash flows could
      decline significantly if we were unable to retain our largest
      clients.Our electronic payment processing provides services
      to over 3,000 clients.  However, 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.




32


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




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




Changes
      in laws and government and
      regulatory compliance requirements may result in additional compliance costs
      and
      may adversely impact our reported earnings.  Our business is
      subject to numerous federal, state and local laws, government regulations,
      corporate governance standards, 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.  For our transaction processing services, we are
      subject to various federal and state laws and regulations, the rules of the
      National Automated Clearing House Association, licensing requirements, and
      the
      applicable credit/debit card association rules.  We could be subject
      to fees, penalties, or other sanctions for failure to comply with these laws,
      rules or regulations.  A change in such laws, rules or regulations
      could restrict or eliminate our ability to provide services or accept certain
      types of transactions, and could increase costs, impair growth and make our
      services unprofitable.




The
      revenues generated by our
      electronic payment processing operations may fluctuate and the ability to
      maintain profitability is uncertain.  EPP primarily provides
      credit and debit card and electronic check payment options for the payment
      of
      federal and state personal income taxes, real estate and personal property
      taxes, business taxes, fines for traffic violations and parking citations and
      educational and utility obligations.  The revenues earned by EPP
      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 credit or 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




33


increasing
      competition and rapid technological change.  If we are not able to
      develop, market and deliver competitive technologies, our market share will
      decline and our operating results and financial condition could
      suffer.




Our
      ability to grow depends largely
      on our ability to attract, integrate and retain qualified
      personnel.  The success of our business is based largely on our
      ability to attract and retain talented and qualified employees and
      contractors.  The market for skilled workers in our industry is
      extremely competitive.  In particular, qualified project managers and
      senior technical and professional staff are in great demand.  If we
      are not successful in our recruiting efforts or are unable to retain key
      employees, our ability to staff projects and deliver products and services
      may
      be adversely affected.  We believe our success also depends upon the
      continued services of senior management and a number of key employees whose
      employment may terminate at any time.  If one or more key employees
      resigns to join a competitor, 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.  The failure of any of these third parties to meet
      their contractual obligations, our inability to obtain favorable contract terms,
      failures or defects attributable to these third parties or their products,
      or
      the discontinuation of the services of a key subcontractor or vendor could
      result in significant cost and liability, diminished profitability and damage
      to
      our reputation and competitive position.




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




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




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


34


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




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




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




35


clients'
      businesses.  The failure to meet client expectations could damage our
      reputation and compromise our ability to attract new business.  On
      certain projects we make performance guarantees, based upon defined operating
      specifications, service levels and delivery dates, which are sometimes backed
      by
      contractual guarantees and performance, 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.






ITEM
      6. EXHIBITS




Exhibit
              Number
            Description10.1
            Employment
                Agreement between Tier Technologies, Inc. and Michael A. Lawler,
                dated
                October 29, 2007. *10.2
            Employment
                Agreement between Tier Technologies, Inc. and Steven M. Beckerman,
                dated
                October 29, 2007. *31.1
            Certification
                of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                promulgated under the Securities Exchange Act of 1934, as amended.†31.2
            Certification
                of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                promulgated under the Securities Exchange Act of 1934, as amended.†32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †32.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.††Filed
                herewith.
              *Filed
                as an exhibit to Form 8-K, filed November 1, 2007, and incorporated
                herein
                by reference.








36




SIGNATURE




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










Tier
                Technologies, Inc.





Dated:  February
      6, 2008








By:/s/
                David E.
                Fountain


David
      E.
      Fountain


Chief
      Financial
      Officer


(Principal
      Financial and
      Accounting Officer)


37