**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 *(Mark
        One)*
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the quarterly period ended** **March
        31, 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
        non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). (Check
        one):
  Large
        accelerated filer o  Accelerated
        filer x Non-accelerated
        filer o
   Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
  Yes o No x
  
  At
        April 30, 2007, there were 20,397,856 shares of the Registrant's Common Stock
        outstanding.
 
  
 
 
  TIER
        TECHNOLOGIES, INC.
 **TABLE
        OF CONTENTS**
 
  **Part
                  I. Financial Information**
              **1****Item
                  1. Consolidated Financial Statements
                  (unaudited)**
              **1**Consolidated
                  Balance Sheets
              1Consolidated
                  Statements of Operations
              2Consolidated
                  Statements of Comprehensive
                  Income
              3Consolidated
                  Statement of Cash Flows
              4Notes
                  to Consolidated Financial Statements
                  (unaudited)
              5Note
                  1 - Overview of Organization and Basis of
                  Presentation
              5Note
                  2 - Recent Accounting
                  Pronouncements
              6Note
                  3 - Customer Concentration and Risk
              6Note
                  4 - Investments
              7Note
                  5 - Goodwill and Other Intangible
                  Assets
              8Note
                  6 - Earnings (Loss) Per Share
              9Note
                  7 - Segment Information
              10Note
                  8 - Restructuring
              10Note
                  9 - Contingencies and Commitments
              11Note
                  10 - Related Party Transactions
              13Note
                  11 - Share-based Payment
              13Note
                    12 - Discontinued Operations
              14Note
                  13 - Subsequent Events
              15**Item
                  2. Management's Discussion and Analysis of Financial
                  Condition and Results of Operations**
              **16****Item
                  3. Quantitative and Qualitative Disclosures about
                  Market Risk**
              **23****Item
                  4. Controls and Procedures**
              **23****Part
                  II. Other
                  Information**
              **25****Item
                  1. - Legal Proceedings**
              **25****Item
                  1A. - Risk Factors**
              **25****Item
                  4. Submission of Matters to a Vote of Security
                  Holders**
              **30****Item
                  6. Exhibits**
              **31****Signature**
              **32**
 
 
 ***Private
        Securities Litigation Reform Act Safe Harbor
        Statement***
  Certain
        statements contained in this report, including statements regarding the future
        development of and demand for our services and our markets, anticipated trends
        in various expenses, expected costs of legal proceedings and other statements
        that are not historical facts, are forward-looking statements within the
        meaning
        of the federal securities laws. These forward-looking statements relate to
        future events or our future financial and/or operating performance and can
        generally be identified as such because the context of the statement will
        include words such as "may," "will," "intends," "plans," "believes,"
        "anticipates," "expects," "estimates," "shows," "predicts," "potential,"
        "continue," or "opportunity," the negative of these words or words of similar
        import. These forward-looking statements are subject to risks and uncertainties,
        including the risks and uncertainties described and referred to under *Item
        1A—Risk Factors* beginning on page 25 ,
        which
        could cause actual results to differ materially from those anticipated as
        of the
        date of this report. We undertake no obligation to publicly update or revise
        any
        forward-looking statements, whether as a result of new information, future
        events or otherwise.
   i
   **PART
        I. FINANCIAL INFORMATION**
  **Item
        1.****Consolidated
        Financial Statements (unaudited)**
  **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
  *(in
                  thousands)*
              
              March 31,
                2007
              
              September 30,
                  2006(unaudited)**ASSETS:**Current
                  assets:Cash
                  and cash equivalents
              
              $
              18,357
              
              $
              18,486Investments
                  in marketable securities
              
              
              39,054
              
              
              36,950Accounts
                  receivable, net
              
              
              12,113
              
              
              15,035Unbilled
                  receivables
              
              
              2,298
              
              
              2,918Prepaid
                  expenses and other current assets
              
              
              4,921
              
              
              3,067Total
                  current assets
              
              
              76,743
              
              
              76,456Property,
                  equipment and software, net
              
              
              13,154
              
              
              13,466Goodwill
              
              
              37,567
              
              
              37,567Other
                  intangible assets, net
              
              
              19,754
              
              
              21,879Restricted
                  investments
              
              
              18,278
              
              
              12,287Investment
                  in unconsolidated affiliate
              
              
              4,912
              
              
              3,978Other
                  assets
              
              
              2,198
              
              
              3,916**Total
                  assets**
              
              **$**
              **172,606**
              
              **$**
              **169,549****LIABILITIES
                  AND SHAREHOLDERS’ EQUITY:**Current
                  liabilities:Accounts
                  payable
              
              $
              1,606
              
              $
              871Income
                  taxes payable
              
              
              —
              
              
              7,288Accrued
                  compensation liabilities
              
              
              5,489
              
              
              5,325Accrued
                  subcontractor expenses
              
              
              2,045
              
              
              2,360Accrued
                  discount fees
              
              
              4,072
              
              
              4,013Other
                  accrued liabilities
              
              
              7,989
              
              
              7,810Deferred
                  income
              
              
              5,078
              
              
              5,750Total
                  current liabilities
              
              
              26,279
              
              
              33,417Other
                  liabilities
              
              
              734
              
              
              1,922**Total
                  liabilities**
              
              
              **27,013**
              
              
              **35,339**Contingencies
                  and commitments (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: 20,388 and 20,383; shares outstanding: 19,501 and
                  19,499
              
              
              185,722
              
              
              184,387Treasury
                  stock—at cost, 884 shares
              
              
              (8,684
              )
              
              (8,684
              )Notes
                  receivable from related parties
              
              
              (149
              )
              
              (4,275
              )Accumulated
                  other comprehensive loss
              
              
              (63
              )
              
              (33
              )Accumulated
                  deficit
              
              
              (31,233
              )
              
              (37,185
              )**Total
                  shareholders’ equity**
              
              
              **145,593**
              
              
              **134,210****Total
                  liabilities and shareholders’ equity**
              
              **$**
              **172,606**
              
              **$**
              **169,549**
  *See
        Notes to Consolidated Financial Statements*
  1
   **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(unaudited)**
 
 **Three
                  months ended**
                **March
                  31,**
              
              **Six
                  months ended**
                **March
                  31,***(in
                  thousands, except per share data)*
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**Revenues
              
              $
              40,271
              
              $
              37,474
              
              $
              82,991
              
              $
              77,356Costs
                  and expenses:Direct
                  costs
              
              
              29,710
              
              
              30,696
              
              
              60,338
              
              
              58,592General
                  and administrative
              
              
              10,932
              
              
              8,859
              
              
              18,555
              
              
              15,782Selling
                  and marketing
              
              
              2,904
              
              
              2,740
              
              
              5,426
              
              
              5,320Depreciation
                  and amortization
              
              
              1,363
              
              
              1,325
              
              
              2,722
              
              
              2,644Total
                  costs and expenses
              
              
              44,909
              
              
              43,620
              
              
              87,041
              
              
              82,338Loss
                  from continuing operations before other income and income
                  taxes
              
              
              (4,638
              )
              
              (6,146
              )
              
              (4,050
              )
              
              (4,982
              )Other
                  income:Equity
                  in net income of unconsolidated affiliate
              
              
              177
              
              
              462
              
              
              986
              
              
              521Interest
                  income, net
              
              
              607
              
              
              683
              
              
              1,484
              
              
              1,274Total
                  other income
              
              
              784
              
              
              1,145
              
              
              2,470
              
              
              1,795Loss
                  from continuing operations before income taxes
              
              
              (3,854
              )
              
              (5,001
              )
              
              (1,580
              )
              
              (3,187
              )Income
                  tax provision
              
              
              7
              
              
              —
              
              
              67
              
              
              5Net
                  loss from continuing operations
              
              
              (3,861
              )
              
              (5,001
              )
              
              (1,647
              )
              
              (3,192
              )Income
                  from discontinued operations
              
              
              7,599
              
              
              —
              
              
              7,599
              
              
              —Net
                  income (loss)
              
              $
              3,738
              
              $
              (5,001
              )
              $
              5,952
              
              $
              (3,192
              )Earnings
                  (loss) per share—Basic:From
                  continuing operations
              
              $
              (0.20
              )
              $
              (0.26
              )
              $
              (0.08
              )
              $
              (0.16
              )From
                  discontinued operations
              
              $
              0.39
              
              $
              —
              
              $
              0.39
              
              $
              —**Earnings
                  (loss) per share—Basic**
              
              **$**
              **0.19**
              
              **$**
              **(0.26**
              **)**
              **$**
              **0.31**
              
              **$**
              **(0.16**
              **)**Earnings
                  (loss) per share—Diluted:From
                  continuing operations
              
              $
              (0.20
              )
              $
              (0.26
              )
              $
              (0.08
              )
              $
              (0.16
              )From
                  discontinued operations
              
              $
              0.39
              
              $
              —
              
              $
              0.39
              
              $
              —**Earnings
                  (loss) per share—Diluted**
              
              **$**
              **0.19**
              
              **$**
              **(0.26**
              **)**
              **$**
              **0.31**
              
              **$**
              **(0.16**
              **)**Weighted
                  average common shares used in computing:Basic
                  earnings (loss) per share
              
              
              19,501
              
              
              19,493
              
              
              19,500
              
              
              19,491Diluted
                  earnings (loss) per share
              
              
              19,617
              
              
              19,493
              
              
              19,604
              
              
              19,491
 
 *See
        Notes to Consolidated Financial Statements*
  2
  
 **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME******
 **(unaudited)**
 
 
 **Three
                  months ended**
                **March
                  31,**
              
              **Six
                  months ended**
                **March
                  31,***(in
                  thousands)*
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**Net
                  income (loss)
              
              $
              3,738
              
              $
              (5,001
              )
              $
              5,952
              
              $
              (3,192
              )Other
                  comprehensive income (loss), net of tax:Unrealized
                  gain (loss) on investments in marketable securities
              
              
              —
              
              
              24
              
              
              (1
              )
              
              54Foreign
                  currency translation adjustment
              
              
              10
              
              
              9
              
              
              (29
              )
              
              (11
              )Other
                  comprehensive income (loss)
              
              
              10
              
              
              33
              
              
              (30
              )
              
              43Comprehensive
                  income (loss)
              
              $
              3,748
              
              $
              (4,968
              )
              $
              5,922
              
              $
              (3,149
              )
 
 *See
        Notes to Consolidated Financial Statements*
  3
  **TIER
        TECHNOLOGIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  **(unaudited)**
 **Six
                  months ended March 31,***(in
                  thousands)*
              
              **2007**
              
              **2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  income (loss)
              
              $
              5,952
              
              $
              (3,192
              )Less:
                  Income from discontinued operations, net
              
              
              7,599
              
              
              —(Loss)
                  income from continuing operations, net
              
              
              (1,647
              )
              
              (3,192
              )Non-cash
                  items included in net income from continuing operations:Depreciation
                  and amortization
              
              
              4,547
              
              
              4,478Loss
                  on retirement of equipment and software
              
              
              1
              
              
              28Provision
                  for doubtful accounts
              
              
              (342
              )
              
              599Equity
                  in net income of unconsolidated affiliate
              
              
              (986
              )
              
              (521
              )Share-based
                  compensation
              
              
              1,180
              
              
              734Accrued
                  forward loss on contracts
              
              
              276
              
              
              2,791Pending
                  settlement of pension contract
              
              
              1,190
              
              
              —Net
                  effect of changes in assets and liabilities:Accounts
                  receivable and unbilled receivables
              
              
              1,671
              
              
              4,420Prepaid
                  expenses and other assets
              
              
              (309
              )
              
              (1,170
              )Accounts
                  payable and accrued liabilities
              
              
              544
              
              
              (144
              )Income
                  taxes payable
              
              
              311
              
              
              (229
              )Deferred
                  income
              
              
              (672
              )
              
              (2,050
              )Cash
                  provided by operating activities from continuing
                  operations
              
              
              5,764
              
              
              5,744Cash
                  provided by discontinued operations:Income
                  from discontinued operations, net
              
              
              7,599
              
              
              —Non-cash
                  items included in income from discontinued operations,
                  net:Reversal
                  of income tax reserve
              
              
              (7,599
              )
              
              —Cash
                  provided by operating activities from discontinued
                  operations
              
              
              —
              
              
              —Cash
                  provided by operating activities
              
              
              5,764
              
              
              5,744**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchases
                  of marketable securities
              
              
              (3,108
              )
              
              (42,100
              )Sales
                  and maturities of marketable securities
              
              
              1,000
              
              
              32,214Purchase
                  of restricted investments
              
              
              (9,260
              )
              
              (2,878
              )Sales
                  and maturities of restricted investments
              
              
              3,348
              
              
              2,371Purchase
                  of equipment and software
              
              
              (2,081
              )
              
              (2,392
              )Repayment
                  of notes and accrued interest from related parties
              
              
              4,249
              
              
              —Other
                  investing activities
              
              
              (75
              )
              
              (1
              )Cash
                  used in investing activities
              
              
              (5,927
              )
              
              (12,786
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Net
                  proceeds from issuance of common stock
              
              
              32
              
              
              69Capital
                  lease obligations and other financing arrangements
              
              
              10
              
              
              (31
              )Cash
                  provided by financing activities
              
              
              42
              
              
              38Effect
                  of exchange rate changes on cash
              
              
              (8
              )
              
              (6
              )Net
                  decrease in cash and cash equivalents
              
              
              (129
              )
              
              (7,010
              )Cash
                  and cash equivalents at beginning of period
              
              
              18,486
              
              
              27,843Cash
                  and cash equivalents at end of period
              
              $
              18,357
              
              $
              20,833**SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                  paid during the period for:Interest
              
              $
              6
              
              $
              8Income
                  taxes paid, net
              
              $
              50
              
              $
              188**SUPPLEMENTAL
                  DISCLOSURES OF NON-CASH TRANSACTIONS:**Interest
                  accrued on shareholder notes
              
              $
              123
              
              $
              14
 
 *See
        Notes to Consolidated Financial Statements*
 
 4
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (UNAUDITED)**
  **NOTE
        1—OVERVIEW OF ORGANIZATION AND
        B****ASIS OF PRESENTATION**
  *ORGANIZATION*
  Tier
        Technologies,
        Inc. provides transaction processing services and software and systems
        integration services to federal, state, and local governments and other public
        sector clients. We provide our services through three segments:
  ·
            *Electronic
                Payment Processing, or EPP*—provides electronic payment processing
                options, including payment of taxes, fees and other obligations owed
                to
                government entities, educational institutions and other public sector
                clients;   **·**
            *Government
                Business Process Outsourcing, or GBPO*—focuses on child support
                payment processing, child support financial institution data match
                services, health and human services consulting and other related
                systems
                integration services; and   ·
            *Packaged
                Software and Systems Integration, or PSSI*—provides software and
                systems implementation services through practice areas in financial
                management systems, public pension administration systems, unemployment
                insurance administration systems, electronic government services,
                computer
                telephony and call centers, and systems integration services for
                the State
                of Missouri.   Our
        two
        principal subsidiaries, which are accounted for as part of our EPP and GBPO
        segments, include:
  ·
            *Official
                Payments Corporation, or OPC**—*provides proprietary
                telephone and Internet systems transaction processing and settlement
                for
                electronic payment options to federal, state, and municipal government
                agencies, educational institutions and other public sector clients;
                and   ·
            *EPOS
                Corporation, or EPOS*—provides interactive communications and
                transaction processing technologies to federal, state, and municipal
                government agencies, educational institutions and other public sector
                clients.   We
        also
        own 46.96% of the outstanding common stock of CPAS Systems, Inc., or CPAS,
        a
        global supplier of pension administration software systems.
   *BASIS
        OF PRESENTATION*
  Our
        Consolidated Financial Statements were prepared in accordance with accounting
        principles generally accepted in the United States of America for interim
        financial information and in accordance with Regulation S-X, Article 10,
        under
        the Securities Exchange Act of 1934, as amended. They are unaudited and exclude
        some disclosures required for annual financial statements. We believe we
        have
        made all necessary adjustments so that our Consolidated Financial Statements
        are
        presented fairly and that all such adjustments are of a normal recurring
        nature.
   These
        Consolidated Financial Statements include the accounts of Tier Technologies,
        Inc. and its subsidiaries. Intercompany transactions and balances were
        eliminated. We account for our 46.96% investment in CPAS (an investment in
        which
        we exercise significant influence, but do not control and are not the primary
        beneficiary) using the equity method, under which our share of CPAS’ net income
        (loss) is recognized in the period in which it is earned by CPAS. As of March
        31, 2007, our Consolidated Balance Sheet reflects $4.9 million in *Investment
        in unconsolidated affiliate,* which
        represents our $2.2 million equity in the underlying assets of CPAS and
        $2.7 million of goodwill.
   Preparing
        financial statements requires us to make estimates and assumptions that affect
        the amounts reported on our Consolidated Financial Statements and accompanying
        notes. We believe that near-term changes could impact the following estimates:
        project costs and percentage of completion; effective tax rates, deferred
        taxes
        and associated valuation allowances; collectibility of receivables; stock-based
        compensation and valuation of goodwill, intangibles and investments. Although
        we
        believe the estimates
  5
 and
        assumptions used in preparing our Consolidated Financial Statements and related
        notes are reasonable in light of known facts and circumstances, actual results
        could differ materially. ****
   **NOTE****2—RECENT** **ACCOUNTING
        PRONOUNCEMENTS**
  *SFAS
        154—Accounting Changes and Error
        Corrections*.****In May 2005, the Financial
        Accounting Standards Board, or FASB, issued Statement of Financial Accounting
        Standard No. 154—*Accounting Changes and Error Corrections*, or SFAS 154,
        which changes the requirements for the accounting for, and reporting of,
        a
        change in accounting principle. It also carries forward earlier guidance
        for the
        correction of errors in previously issued financial statements, as well as
        the
        guidance for changes in accounting estimate. SFAS 154 applies to all voluntary
        changes in accounting principles, as well as changes mandated by a
        standard-setting authority that do not include specific transition provisions.
        For such changes in accounting principles, SFAS 154 requires retrospective
        application to prior periods’ financial statements, unless it is impracticable
        to determine either period-specific or cumulative effects of the change.
        SFAS
        154 is effective for accounting changes and corrections of errors made in
        fiscal
        years beginning after December 15, 2005. We adopted this standard beginning
        in
        October 2006. Since this standard applies to both voluntary changes in
        accounting principles, as well as those that may be mandated by standard-setting
        authorities, it is not possible to estimate the impact that the adoption
        of this
        standard will have on our financial position and results of
        operations.
   *FIN
        48—Accounting for Uncertainty in Income Taxes*. In July 2006, FASB
        Interpretation No. 48—*Accounting for Uncertainty in Income Taxes*,
        or FIN 48, was issued. FIN 48 clarifies the accounting for uncertainty in
        income
        taxes recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109—*Accounting for Income Taxes*. FIN 48 is effective for
        fiscal years beginning after December 15, 2006. We expect to implement FIN
        48 beginning on October 1, 2007. We are evaluating the impact that adopting
        FIN
        48 will have on our financial position and results of operations.
   *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. Currently,
        we are evaluating the impact that this new standard will have on our financial
        position and results of operations.
   **NOTE
        3—CUSTOMER CONCENTRATION AND RISK**
  We
        derive a
        significant portion of our revenue from a limited number of governmental
        customers. Typically, the contracts allow these customers to terminate all
        or
        part of the contract for convenience or cause. For the six months ended March
        31, 2007 and 2006, revenue from one customer totaled $8.7 million and
        $8.6 million, respectively, or 10.5% and 11.2%, respectively, of total
        revenues, and total revenues from another customer totaled $10.0 million,
        or 12.0% of total revenues, for the six months ended March 31,
        2007.
   As
        described in more detail below, we have several large accounts receivable
        and
        unbilled receivable balances. A dispute, early contract termination or other
        collection issue with one of these key customers could have a material adverse
        impact on our financial condition and results of operations.
   *Accounts
        receivable, net* *.*  *Accounts
        receivable, net* ,
        represents the short-term portion of receivables from our customers and other
        parties and retainers that we expect to receive within one year, less an
        allowance for accounts that we estimated would become uncollectible. Our
        accounts receivable are comprised of the following three
        categories:
   6
 ·
            Customer
                receivables—receivables
                from our clients;   ·
            Mispost
                receivables—receivables from individuals to whom our payment
                processing centers made incorrect payments;
                and   ·
            Not
                Sufficient Funds (“NSF”) receivables—receivables from individuals who
                paid their child support payment with a check that had insufficient
                funds.   We
        maintain a separate allowance for uncollectible accounts for each category
        of
        receivables, which we offset against the receivables on our Consolidated
        Balance
        Sheets. As shown in the following table, at March 31, 2007 and September
        30,
        2006, the balance of our *Accounts
        receivable, net* was
        $12.1 million and $15.0 million, respectively.
  *(in
                  thousands)*
              
              **March
                  31, 2007**
              
              **September
                  30, 2006**Accounts
                  receivable from:Customers
              
              $
              12,297
              
              $
              14,719Recipients
                  of misposted payments
              
              
              652
              
              
              1,445Payers
                  of NSF
                  child support
              
              
              407
              
              
              769Total
                  accounts
                  receivable
              
              
              13,356
              
              
              16,933Allowance
                  for
                  uncollectible accounts receivable:Customer
              
              
              (626
              )
              
              (1,037
              )Mispost
              
              
              (595
              )
              
              (1,171
              )NSF
              
              
              (390
              )
              
              (751
              )Total
                  allowance for uncollectible accounts
              
              
              (1,611
              )
              
              (2,959
              )Short-term
                  accounts receivable retainer
              
              
              368
              
              
              1,061Accounts
                  receivable, net (in current assets)
              
              $
              12,113
              
              $
              15,035
  At
        March 31, 2007 and September 30, 2006, one customer accounted for 9.4% and
        20.0%, respectively, of total customer accounts receivable.
   Certain
        of our contracts allow customers to retain a portion of the amounts owed
        to us
        until predetermined milestones are achieved or until the project is completed.
        At March 31, 2007 and September 30, 2006, *Accounts
        receivable, net* included $0.4 million and $1.1 million, respectively, of retainers
        that we expected to receive in one year. In addition, there were
        $2.0 million and $3.7 million, respectively, of retainers that we
        expected to be outstanding more than one year, which are included in *Other
        assets* on our
        Consolidated Balance Sheets.
   *Unbilled
        Receivables.*******Unbilled receivables
        represent revenues that we have earned for the work that has been performed
        to
        date that cannot be billed under the terms of the respective contract until
        we
        have completed specific project milestones or the customer has accepted our
        work. At March 31, 2007 and September 30, 2006, unbilled receivables, which
        are all expected to become billable in one year, were $2.3 million and
        $2.9 million, respectively. At March 31, 2007, three customers
        accounted for 41.0%, 25.2% and 19.5%, respectively, of total unbilled
        receivables and at September 30, 2006, four customers accounted for 32.5%,
        28.8%, 21.2% and 11.8%, respectively, of unbilled
        receivables.
   **NOTE****4—INVESTMENTS**
  Investments
        are
        comprised of available-for-sale debt and equity securities as defined in
        SFAS
        No. 115—*Accounting for Certain Investments in Debt and Equity
        Securities*, or SFAS 115. Restricted investments totaling $12.3 million
        and $12.3 million, respectively, at March 31, 2007 and
        September 30, 2006, were pledged in connection with a security interest in
        cash collateral, performance bonds, insurance and real estate operating leases
        and will be restricted for the terms of the project performance periods and
        lease periods, the latest of which is estimated to end September 2008. At
        March 31, 2007, a $6.0 million money market investment was also used
        as a compensating balance for a bank account used for certain operations.
        These
        investments are reported as *Restricted investments* on the Consolidated
        Balance Sheets.
   In
        accordance with
        SFAS No. 95—*Statement of Cash Flows*, unrestricted investments with
        remaining maturities of 90 days or less (as of the date that we purchased
        the
        securities) are classified as cash
  7
 equivalents.
        We
        exclude from cash equivalents certain investments, such as mutual funds and
        auction rate securities. Securities such as these, and all other securities
        that
        would not otherwise be included in *Restricted investments* or *Cash
        and cash equivalents*, are classified on the Consolidated Balance Sheets as
*Investments in marketable securities*. Except for our investment in CPAS
        and our restricted investments, all other investments are categorized as
        available-for-sale under SFAS No. 115. As such, our securities are recorded
        at
        estimated fair value, based on quoted market prices. Increases and decreases
        in
        fair value are recorded as unrealized gains and losses in other comprehensive
        income.
   The
        following table
        shows the balance sheet classification, amortized cost and estimated fair
        values
        of investments included in cash equivalents, investments in marketable
        securities and restricted investments:
  **March
                  31, 2007**
              
              **September
                  30, 2006***(in
                  thousands)*
              
              **Amortized
                  cost**
              
              **Unrealized
                  loss**
              
              **Estimated**
                **fair
                  value**
              
              **Amortized
                  cost**
              
              **Unrealized
                  loss**
              
              **Estimated
                  fair value****Cash
                  equivalents:**Money
                  market
              
              $
              2,741
              
              $
              —
              
              $
              2,741
              
              $
              9,053
              
              $
              —
              
              $
              9,053**Total
                  investments included in cash**
                **and
                  cash
                  equivalents**
              
              
              **2,741**
              
              
              **—**
              
              
              **2,741**
              
              
              **9,053**
              
              
              **—**
              
              
              **9,053****Investments
                  in marketable securities:**Debt
                  securities (Primarily state and local bonds/notes)
              
              
              39,054
              
              
              —
              
              
              39,054
              
              
              36,950
              
              
              —
              
              
              36,950**Total****investments in marketable
                  securities**
              
              
              **39,054**
              
              
              **—**
              
              
              **39,054**
              
              
              **36,950**
              
              
              **—**
              
              
              **36,950****Restricted
                  investments****:**Certificates
                  of deposit
              
              
              8,941
              
              
              —
              
              
              8,941
              
              
              8,941
              
              
              —
              
              
              8,941Money
                  market
              
              
              6,000
              
              
              —
              
              
              6,000
              
              
              —
              
              
              —
              
              
              —U.S.
                  government sponsored enterprise obligations
              
              
              3,339
              
              
              (2
              )
              
              3,337
              
              
              3,348
              
              
              (2
              )
              
              3,346**Total
                  restricted investments**
              
              
              **18,280**
              
              
              **(2**
              **)**
              
              **18,278**
              
              
              **12,289**
              
              
              **(2**
              **)**
              
              **12,287****Total
                  investments**
              
              **$**
              **60,075**
              
              **$**
              **(2**
              **)**
              **$**
              **60,073**
              
              **$**
              **58,292**
              
              **$**
              **(2**
              **)**
              **$**
              **58,290**
  At
        March 31, 2007
        and September 30, 2006, all of the debt securities that were included in
        marketable securities had remaining maturities in excess of ten
        years.
   We
        evaluate certain
        available-for-sale investments for other-than-temporary impairment when the
        fair
        value of the investment is lower than its book value. Factors that management
        considers when evaluating for other-than-temporary impairment include: the
        length of time and the extent to which market value has been less than cost;
        the
        financial condition and near-term prospects of the issuer; interest rates;
        credit risk; the value of any underlying portfolios or investments; and our
        intent and ability to hold the investment for a period of time sufficient
        to
        allow for any anticipated recovery in the market. We do not adjust the recorded
        book value for declines in fair value that we believe are temporary if we
        have
        the intent and ability to hold the associated investments for the foreseeable
        future and we have not made the decision to dispose of the securities as
        of the
        reported date.
   If
          we determine
          that impairment is other-than-temporary, we reduce the recorded book value
          of
          the investment by the amount of the impairment and recognize a realized
          loss on
          the investment. At March 31, 2007 and September 30, 2006, we did not
          believe any of our investments were other-than-temporarily impaired.
   **NOTE****5—GOODWILL** **AND OTHER INTANGIBLE
        ASSETS**
  The
        carrying amount of goodwill was unchanged during the six months ended
        March 31, 2007. The balance of goodwill at March 31, 2007 and
        September 30, 2006 was $37.6 million.
   We
        test goodwill
        for impairment during the fourth quarter of each fiscal year at the reporting
        unit level using a fair value approach, in accordance with SFAS No.
        142—*Goodwill and Other Intangible Assets*. This annual testing
        identified no impairment to goodwill in fiscal year 2006. If an event occurs
        or
        circumstances change that would more likely than not reduce the fair value
        of a
        reporting unit below its
  8
 carrying
        value, we
        would evaluate goodwill for impairment between annual tests. No such events
        occurred during the six months ended March 31, 2007.
   At
        March 31, 2007 and September 30, 2006, *Other
        intangible assets, net* ,
        consisted of the following:
  **March
                  31, 2007**
              
              **September
                  30, 2006***(in
                  thousands)*
              
              **Amortization
                  period**
              
              **Gross**
              
              **Accumulated
                  amortization**
              
              **Net**
              
              **Gross**
              
              **Accumulated
                  amortization**
              
              **Net**Client
                  relationships
              
              10
                  years
              
              $
              28,749
              
              $
              (12,613
              )
              $
              16,136
              
              $
              28,749
              
              $
              (11,176
              )
              $
              17,573Technology
                  & research and development
              
              3-10
                  years
              
              
              4,289
              
              
              (2,414
              )
              
              1,875
              
              
              4,289
              
              
              (1,986
              )
              
              2,303Trademarks
              
              7-10
                  years
              
              
              3,214
              
              
              (1,503
              )
              
              1,711
              
              
              3,214
              
              
              (1,342
              )
              
              1,872Non-compete
                  agreements
              
              2-3
                  years
              
              
              615
              
              
              (583
              )
              
              32
              
              
              615
              
              
              (484
              )
              
              131Other
                  intangible assets, net
              
              
              
              
              $
              36,867
              
              $
              (17,113
              )
              $
              19,754
              
              $
              36,867
              
              $
              (14,988
              )
              $
              21,879
  Amortization
        expense for other intangible assets was $2.2 million for the six months
        ended March 31, 2007.
   **NOTE****6—EARNINGS
        (LOSS) PER
        SHARE**
  The
        following table presents the computation of basic and diluted earnings (loss)
        per share:
  **Three
                  months ended**
                **March
                  31,**
              
              **Six
                  months ended**
                **March
                  31,***(in
                  thousands, except per share amounts)*
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006****Numerator:**Net
                  income (loss) from:Continuing
                  operations, net of income taxes
              
              $
              (3,861
              )
              $
              (5,001
              )
              $
              (1,647
              )
              $
              (3,192
              )Discontinued
                  operations
              
              
              7,599
              
              
              —
              
              
              7,599
              
              
              —Net
                  income (loss)
              
              $
              3,738
              
              $
              (5,001
              )
              $
              5,952
              
              $
              (3,192
              )**Denominator:**Weighted-average
                  common shares outstanding
              
              
              19,501
              
              
              19,493
              
              
              19,500
              
              
              19,491Effects
                  of dilutive common stock options
              
              
              116
              
              
              —
              
              
              104
              
              
              —Adjusted
                  weighted-average shares
              
              
              19,617
              
              
              19,493
              
              
              19,604
              
              
              19,491**Earnings
                  (loss) per share—Basic:**From
                  continuing operations
              
              $
              (0.20
              )
              $
              (0.26
              )
              $
              (0.08
              )
              $
              (0.16
              )From
                  discontinued operations
              
              $
              0.39
              
              $
              —
              
              $
              0.39
              
              $
              —**Earnings
                  (loss) per share—Basic**
              
              **$**
              **0.19**
              
              **$**
              **(0.26**
              **)**
              **$**
              **0.31**
              
              **$**
              **(0.16**
              **)****Earnings
                  (loss) per share—Diluted:**From
                  continuing operations
              
              $
              (0.20
              )
              $
              (0.26
              )
              $
              (0.08
              )
              $
              (0.16
              )From
                  discontinued operations
              
              $
              0.39
              
              $
              —
              
              $
              0.39
              
              $
              —**Earnings
                  (loss) per share—Diluted**
              
              **$**
              **0.19**
              
              **$**
              **(0.26**
              **)**
              **$**
              **0.31**
              
              **$**
              **(0.16**
              **)**
  The
        following shares attributable to outstanding stock options were excluded
        from
        the calculation of diluted earnings per share because their inclusion would
        have
        been anti-dilutive:
  **Three
                  months ended**
                **March
                  31,**
              
              **Six
                  months ended**
                **March
                  31,***(in
                  thousands, except per share amounts)*
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**Weighted-average
                  options excluded from computation of diluted earnings per
                  share
              
              
              1,677
              
              
              2,383
              
              
              1,703
              
              
              2,362Range
                  of exercise prices per share:High
              
              $
              20.70
              
              $
              20.70
              
              $
              20.70
              
              $
              20.70Low
              
              $
              5.91
              
              $
              7.61
              
              $
              5.91
              
              $
              7.61
   9
 In
        addition, 125,000 and 133,000, respectively, of common stock equivalents
        were
        excluded from the calculations of diluted loss per share for the three and
        six
        months ended March 31, 2006, since their effect would have been
        anti-dilutive.
   **NOTE
        7—****SEGMENT
        INFORMATION**
  We
        evaluate the performance of our EPP, GBPO and PSSI operating segments based
        on
        revenues and direct costs, while other operating costs are evaluated on a
        geographical basis. Accordingly, we do not include selling and marketing
        expense, general and administrative expense, depreciation and amortization
        expense not attributable to state child support payment processing centers,
        net
        interest income, other income and income tax expense in segment profitability.
   Beginning
        October 1, 2006, we reclassified our Voice and Systems Automation practice
        area
        revenues and direct costs from our PSSI segment to our GBPO segment to align
        complementary product lines with the same operating segment. Accordingly,
        the
        prior period revenues and direct costs for these segments have been reclassified
        to conform to the current presentation.
   The
        following table presents financial information for the three reportable
        segments, including the elimination of revenues and costs associated with
        the
        purchase, installation and depreciation of a call center from one of our
        subsidiaries, which have been eliminated and are disclosed in the Eliminations
        column below:
  **Three
                  months ended**
              
              **Six
                  months ended***(in
                  thousands)*
              
              **EPP****(1)**
              
              **GBPO****(2)**
              
              **PSSI****(3)**
              
              **Eliminations**
              
              **Total**
              
              **EPP****(1)**
              
              **GBPO****(2)**
              
              **PSSI****(3)**
              
              **Eliminations**
              
              **Total****March
                  31, 2007:**Revenues
              
              $
              20,397
              
              $
              12,590
              
              $
              7,284
              
              $
              —
              
              $
              40,271
              
              $
              42,566
              
              $
              24,616
              
              $
              15,809
              
              $
              —
              
              $
              82,991Direct
                  costs
              
              $
              15,114
              
              $
              8,592
              
              $
              6,125
              
              $
              (121
              )
              $
              29,710
              
              $
              31,518
              
              $
              17,356
              
              $
              11,706
              
              $
              (242
              )
              $
              60,338**March
                  31, 2006:**Revenues
              
              $
              15,464
              
              $
              13,503
              
              $
              8,507
              
              $
              —
              
              $
              37,474
              
              $
              30,515
              
              $
              27,951
              
              $
              18,890
              
              $
              —
              
              $
              77,356Direct
                  costs
              
              $
              11,463
              
              $
              12,785
              
              $
              6,569
              
              $
              (121
              )
              $
              30,696
              
              $
              22,537
              
              $
              23,420
              
              $
              12,887
              
              $
              (252
              )
              $
              58,592(1)During the three and six months ended March 31, 2007, the revenues
                  from
                  one customer produced 28.2% and 23.5%, respectively, of the revenues
                  for
                  EPP segment. During the three and six months ended March 31, 2006,
                  the
                  revenues from this customer produced 30.9% and 23.3%, respectively,
                  of the
                  revenues for the EPP segment.
                (2)The revenues from one customer produced 30.0% and 31.0%, respectively,
                  of
                  the revenues for the GBPO segment during the three and six months
                  ended
                  March 31, 2007, and produced 31.8% and 30.7%, respectively, of
                  GBPO
                  revenues during the three and six months ended March 31, 2006.
                  The
                  revenues from another customer produced 16.4% and 16.2%, respectively,
                  of
                  the GBPO revenues for the three and six months ended March 31,
                  2007, while
                  the revenues from this customer produced 13.8% and 13.4%, respectively,
                  of
                  GBPO revenues during the three and six months ended March 31, 2006.
                (3)During
                  the three and six months ended March 31, 2007, the revenues from
                  one
                  customer produced 27.5% and 25.3%, respectively, of the revenues
                  for the
                  PSSI segment. During the three and six months ended March 31, 2006,
                  the
                  revenues from this customer produced 30.7% and 29.0%, respectively,
                  of the
                  revenues for the PSSI segment. The revenues from another customer
                  produced
                  23.4% and 22.9%, respectively, of the PSSI revenues for the three
                  and six
                  months ended March 31, 2007, while the revenues from this customer
                  produced 22.7% and 14.4%, respectively, of the PSSI revenues during
                  the
                  three and six months ended March 31,
                  2006.
  Our
        total assets for each segment are shown in the following table:
  *(in
                  thousands)*
              
              **March
                  31, 2007**
              
              **September
                  30, 2006**EPP
              
              $
              93,144
              
              $
              87,997GBPO
              
              
              30,004
              
              
              37,061PSSI
              
              
              24,960
              
              
              25,827Corporate(1)
              
              
              24,498
              
              
              18,664Total
              
              $
              172,606
              
              $
              169,549(1)Represents
                  assets that are not assignable to a specific
                  segment
  **NOTE****8—RESTRUCTURING**
  During
        fiscal year
        2004, we incurred restructuring liabilities for facilities closure costs
        associated with the relocation of our administrative functions from Walnut
        Creek, California to Reston, Virginia. We did not incur any restructuring
        expense during the six months ended March 31, 2007.
  10
  The
        following table summarizes the restructuring liabilities activity from
        September 30, 2006 to March 31, 2007:
  *(in
                  thousands)*
              
              **Facilities
                  closures**Balance
                  at September 30, 2006
              
              $
              401Cash
                  payments
              
              
              (108
              )Balance
                  at March 31, 2007
              
              $
              293
  As
        shown in the preceding table, we had $0.3 million of restructuring
        liabilities at March 31, 2007, of which $0.2 million was included in *Other
        liabilities* and
        the remainder was included in *Other
        accrued liabilities* in the
        Consolidated Balance Sheet. We expect to pay $113,000 and $180,000 of these
        liabilities during fiscal years 2007 and 2008, respectively.
   **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 March 31, 2007, none of these matters were expected
          to have a material impact on our financial position, results of operations
          or
          cash flows. At March 31, 2007 and September 30, 2006, we had legal
          accruals of $1.1 million and $1.4 million, respectively, based upon
          estimates of key legal matters. In November 2003, we were granted conditional
          amnesty in relation to a Department of Justice Antitrust Division investigation
          involving the child support payment processing industry. We have cooperated,
          and
          will continue to cooperate, with the investigation and, therefore, will
          continue
          to incur legal costs.
  On
        May 31, 2006, we received a subpoena from the Philadelphia District Office
        of the Securities and Exchange Commission requesting documents relating to
        financial reporting and personnel issues. We have cooperated, and will continue
        to cooperate fully, in this investigation.
  On
        November 20, 2006, we were served with a purported class action lawsuit on
        behalf of purchasers of our common stock from November 29, 2001 to October
        25,
        2006. The suit alleges that Tier and certain of our former officers violated
        the
        Securities Exchange Act of 1934, but did not identify the damages being sought.
        This case is pending in the United States District Court for the Eastern
        District of Virginia. We are not able to estimate the probability or level
        of
        exposure associated with this complaint.
  *BANK
        LINES OF CREDIT*
  Throughout
        the majority of fiscal 2006, the first quarter of fiscal 2007 and the majority
        of the second quarter of fiscal 2007, we had a credit facility that allowed
        us
        to obtain letters of credit up to a total of $15.0 million and also granted
        the lender a perfected security interest in cash collateral in an amount
        equal
        to all issued and to be issued letters of credit. This credit facility was
        scheduled to mature on March 31, 2007. On March 23, 2007, we entered into
        an amendment to this credit facility that allows us to obtain letters of
        credit up to a total of $10.0 million. The amendment continues to grant the
        lender a perfected security interest in cash and collateral in an amount
        equal
        to all issued and to be issued letters of credit. The amended facility is
        scheduled to mature on September 30, 2007. As of March 31, 2007,
        $8.9 million of letters of credit were outstanding under this credit
        facility. These letters of credit were issued to secure performance bonds,
        insurance and a lease.
  *OTHER
        LETTERS OF CREDIT*
  At
        both
        March 31, 2007 and September 30, 2006, we also had a $3.0 million letter of
        credit outstanding that was collateralized by certain securities in our
        investment portfolio. This letter of credit was issued to secure a performance
        bond for a project scheduled to complete in April 2007. We report the
        investments used to collateralize these letters of credit as *Restricted
        investments* on our
        Consolidated Balance Sheets.
  11
 *CREDIT
        RISK*
  We
        maintain our cash in bank deposit accounts which, at times, may exceed federally
        insured limits. We have not experienced any losses in such accounts and believe
        that any associated credit risk is *de
        minimis* .
  *GUARANTEES*
  In
        conjunction with our participation as a subcontractor in a three-year contract
        for unemployment insurance-related services, we guaranteed the performance
        of
        the prime contractor on the project. The contract does not establish a
        limitation to the maximum potential future payments under the guarantee;
        however, we estimate that the maximum potential undiscounted cost of the
        guarantee is $2.8 million. In accordance with FASB Interpretation No.
        45— *Guarantor’s
        Accounting and Disclosure Requirements for Guarantees, Including Indirect
        Guarantees of Indebtedness of Others* ,
        we
        valued this guarantee based upon the sum of probability-weighted present
        values
        of possible future cash flows. As of March 31, 2007, the remaining
        liability was $115,000, which is being amortized over the term of the contract.
        We believe that the probability is remote that the guarantee provision of
        this
        contract will be invoked.
  *PERFORMANCE
        BONDS*
  Under
        certain contracts, we are required to obtain performance bonds from a licensed
        surety and to post the performance bond with our customer. Fees for obtaining
        the bonds are expensed over the life of each bond and are included in *Direct
        costs* on our
        Consolidated Statements of Operations. At March 31, 2007, we had
        $21.4 million of bonds posted with our customers. There were no claims
        pending against any of these bonds as of March 31, 2007.
  *EMPLOYMENT
        AGREEMENTS*
  At
        March 31, 2007, four executives had employment agreements with us that entitled
        them to severance payments ranging from 0.2 to 3.0 years of base salary,
        and in
        one case a bonus corresponding to the severance period, if they are terminated
        without cause or if certain events occur in connection with a change of control
        of Tier. As of March 31, 2007, we would have been required to pay up to a
        maximum of $2.3 million to these four executives if these events had
        occurred. We also have employment and security agreements with three other
        executives and certain key managers. Under the terms of the agreements, if
        certain pre-defined events were to occur as a result of a change in control
        of
        our company, the individuals covered by these agreements would be entitled
        to
        severance payments ranging from six to twelve months of their current base
        salaries. If these events had occurred on March 31, 2007, we would have
        been obligated to pay up to $3.2 million under these agreements.
  In
        February 2007, we entered into agreements with 33 key employees, under
        which these individuals will be entitled to receive three to twelve months
        of
        their base salaries over a one- to two-year period, after
        completing defined employment service periods. During the remainder of
        fiscal 2007, we expect to recognize a maximum expense of $936,000, or
        $468,000 during each of the two remaining quarters, for these agreements.
        During
        fiscal 2008, we expect to recognize a maximum expense of $0.8 million,
        or $0.2 million per quarter for these agreements. In addition, we have
        agreements with 39 other individuals under which they may receive compensation
        of up to $2.7 million if certain change of control events were to
        occur.
  One
        of
        our GBPO segment contracts will expire on June 30, 2007, which will
        necessitate the closure of one of our facilities. On January 11, 2007, we
        provided general guidance to the staff of the facility about retention and
        severance packages that we expect to offer to encourage continued service
        by the
        facilities' employees through the end of the contract. As of March 31, 2007,
        the
        maximum amount that could be paid out under these retention packages was
        $0.2 million.
  *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, Bylaws and 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
  12
 persons
        become liable as a result of acting in any capacity on our behalf, subject
        to
        certain limitations. We are not able to estimate our maximum exposure under
        these agreements.
  *FORWARD
        LOSSES*
  Throughout
        the term of our customer contracts, we forecast revenues and expenses over
        the
        total life of the contract. In accordance with generally accepted accounting
        principles, if we determine that the total expenses over the entire term
        of the
        contract will probably exceed the total forecasted revenues over the term
        of the
        contract, we record an accrual in the current period equal to the total
        forecasted losses over the term of the contract, less losses recognized to
        date,
        if any. As of March 31, 2007 and September 30, 2006, accruals totaling
        $1.2 million and $1.0 million, respectively, were included in *Other
        accrued liabilities* on our
        Consolidated Balance Sheets. Changes in the accrued forward loss are reflected
        in *Direct
        costs* on our
        Consolidated Statements of Operations.
  **NOTE****10—RELATED
        PARTY
        TRANSACTIONS**
  *NOTES
        AND ACCRUED INTEREST RECEIVABLE*
  At
        March 31,
        2007 and September 30, 2006, we had $149,000 and $4.3 million,
        respectively, of full-recourse notes and interest receivable from a former
        Chairman of the Board and Chief Executive Officer. During the second quarter
        of
        fiscal 2007, the former Chairman paid $4.2 million in principal and
        interest on notes that matured during that period. The three remaining
        notes mature in May and July 2007 and bear interest at rates of 6.99% and
        7.18%.
        The former Chairman pledged 387,490 shares of Tier common stock, with a market
        value of $3.4 million at March 31, 2007, as collateral for these
        notes. Approximately $2.2 million of these full-recourse notes were issued
        in
        connection with the exercise of options to purchase shares of Tier’s common
        stock.
   These
        notes and the
        associated accrued interest are reported as *Notes receivable from related
        parties* in the shareholders’ equity section of our Consolidated Balance
        Sheets. Interest earned on these notes is included in *Common stock and
        paid-in capital* in the shareholders’ equity section of our Consolidated
        Balance Sheets.
   *OTHER
        RELATED-PARTY TRANSACTIONS*
  We
        own
        a 46.96% interest in CPAS, a Canadian entity that we account for using the
        equity method. During the six months ended March 31, 2007, we recognized
        $137,000 in revenue related to a pension project in which we are a subcontractor
        to CPAS. In addition, CPAS is a subcontractor on a pension project for which
        we
        are the prime contractor. During the six months ended March 31, 2007,
        we recognized $209,000 of expenses for the work performed by CPAS for this
        project.
   During
        the six months ended March 31, 2007 we purchased $3,300 of software
        licenses, maintenance and related services from Nuance Communications, Inc.,
        a
        company affiliated with a member of our Board of Directors.
   During
        the six months ended March 31, 2007, we purchased $66,000 of telecom
        services from ITC Deltacom, Inc., a company affiliated with a member of our
        Board of Directors.
   **NOTE
        1****1—SHARE-BASED
        PAYMENT**
  Stock
        options are
        issued under the *Amended and Restated 2004 Stock Incentive Plan*, or the
        Plan. The Plan provides our Board of Directors discretion in creating employee
        equity incentives, including incentive and non-statutory stock options.
        Generally, 20% of these options vest each year on the anniversary of the
        date
        granted and expire in ten years. At March 31, 2007 there were 2,297,294
        shares of common stock reserved for future issuance under the Plan.
   Stock-based
        compensation expense for all stock-based compensation awards granted was
        based
        on the grant-date fair value using the Black-Scholes model. We recognize
        compensation expense for stock option awards on a ratable basis over the
        requisite service period of the award. For the three and six
  13
 months
        ended March
        31, 2007 and 2006 we recognized $0.8 million and $0.3 million,
        respectively, and $1.2 million and $0.7 million, respectively, in
        stock-based compensation expense.
   The
        following table
        shows the weighted-average assumptions we used to calculate the fair value
        of
        share-based options, as well as the weighted-average fair value of options
        granted and the weighted-average intrinsic value of options
        exercised.
  **Three
                  months ended**
                **March
                  31,**
              
              **Six
                  months ended**
                **March
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Weighted-average
                  assumptions used in Black-Scholes model:Expected
                  period that options will be outstanding*(in
                  years)*
              
              
              5.00
              
              
              5.00
              
              
              5.00
              
              
              5.00Interest
                  rate*****(based
                  on U.S.
                  Treasury yields at time of grant)*
              
              
              4.72
              %
              
              4.50
              %
              
              4.66
              %
              
              4.39
              %Volatility
              
              
              46.67
              %
              
              48.04
              %
              
              47.54
              %
              
              48.93
              %Dividend
                  yield
              
              
              —
              
              
              —
              
              
              —
              
              
              —Weighted-average
                  fair value of options granted
              
              $
              3.60
              
              $
              3.61
              
              $
              3.53
              
              $
              4.00Weighted-average
                  intrinsic value of options exercised*****(in
                  thousands)*
              
              $
              52
              
              $
              6
              
              $
              52
              
              $
              7
  We
        based expected volatilities on both the implied and historical volatility
        of our
        stock. In addition, we used historical data to estimate employee forfeitures
        within the valuation model.
   Stock
        option
        activity for the six months ended March 31, 2007 is as
        follows:
  **Weighted-average**
              
              **Aggregate
                  intrinsic value**
                **($000)****Shares
                  under option**
                **(000)**
              
              **Exercise
                  price per share**
              
              **Remaining
                  contractual term**Options
                  outstanding at October 1, 2006
              
              
              2,237
              
              $
              8.45Granted
              
              
              240
              
              
              7.48Exercised
              
              
              (10
              )
              
              3.25Forfeitures
                  or
                  expirations
              
              
              (268
              )
              
              7.56Options
                  outstanding at March 31, 2007
              
              
              2,199
              
              $
              8.47
              
              
              7.62
                  years
              
              $
              3,436Options
                  exercisable at March 31, 2007
              
              
              1,298
              
              $
              9.36
              
              
              6.77
                  years
              
              $
              1,691
  As
        of
        March 31, 2007, we expect that $2.1 million of unrecognized
        compensation cost, net of estimated forfeitures, related to stock options
        will
        be recognized over a weighted-average period of approximately
        2.1 years.
   **NOTE
        12—DISCONTINUED OPERATIONS**
  In
        fiscal 2002, we disposed of most of our Australian operations and in fiscal
        2003
        requested and received $6.5 million of federal income tax refunds
        associated with this disposal. Although we received the refund in October
        2003,
        we fully reserved the entire balance because of uncertainty about the final
        review and resolution of this transaction by the Internal Revenue Service.
        Since
        October 2003, we increased our reserve by $1.1 million to recognize the
        potential interest and penalties we may have incurred if the Internal Revenue
        Service made an unfavorable decision.
   In
        March 2007, we were notified by the Internal Revenue Service that its Joint
        Committee on Taxation had completed its review and approved the
        $6.5 million refund. As a result, during the second quarter of fiscal 2007,
        we reversed the $6.5 million of reserve for the refund and the
        $1.1 million reserve for potential interest and penalties. This
        $7.6 million reversal has been recorded on our Consolidated Statements of
        Operations as *Income
        from discontinued operations* in
        accordance with Statement of Financial Accounting Standards No. 144— *Accounting
        for the Impairment or Disposal of Long-Lived Assets* .
  14
  **NOTE
        1****3—SUBSEQUENT
        EVENTS**
  *ASSETS
        PENDING HELD-FOR-SALE STATUS*
  During
        the quarter ended December 31, 2006, we commenced an initiative to evaluate
        our strategic direction and to identify how to best deploy our financial
        and
        management resources in order to better maximize shareholder value. Because
        we
        have limited financial and management resources to fully optimize all of
        our
        business units, we intend to focus on our core competency in electronic payment
        processing and only explore growth opportunities within our EPP segment and
        other synergistic electronic payment processing businesses. As a result of
        this
        refocusing, we intend to redeploy assets from other business units that are
        not
        compatible with this direction. It is likely that we will incur significant
        one-time charges in connection with these activities.
   In
        April 2007, we
        began to seek buyers for certain portions of our business, including portions
        of
        our PSSI and GBPO segments. Since this marketing effort began during our
        third
        fiscal quarter, the associated assets and liabilities were classified as
        held
        and used as of March 31, 2007. However, during the quarter ended June 30,
        2007,
        these assets will be classified as held-for-sale as required by Statement
        of
        Financial Accounting Standard No. 144—*Accounting for the Impairment of
        Long-Lived Assets*. The following table shows the carrying value of the
        assets and liabilities in the disposal group as of March 31, 2007:
  *(In
                  thousands)*
              
              **March
                  31, 2007****Assets****:**Current
                  assets
              
              $
              10,065Property,
                  equipment and software, net
              
              
              8,100Other
                  assets
              
              
              1,330Total
                  assets
              
              $
              19,495**Liabilities:**Current
                  liabilities
              
              $
              5,302Other
                  liabilities
              
              
              407Total
                  liabilities
              
              $
              5,709Net
                  assets & liabilities of disposal group
              
              $
              13,786
  No
        impairment loss has been recognized to-date on these net assets and
        liabilities.
   *CONTRACT
        TERMINATION*
  In
          April 2007 we began negotiations on a contract termination agreement with
          one of our PSSI segment clients. We believe it is probable that this agreement
          will be signed and will result in a $1.2 million loss. This loss has been
          recorded in *General and administrative* expenses during the quarter
          ended March 31, 2007, since the loss was probable as of that date. No
          further losses are expected to be incurred associated with this
          agreement.
   15
   **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
  *This
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations includes forward-looking statements. We have based these
        forward-looking statements on our current plans, expectations and
        belie**fs about future events. Our actual performance could differ
        materially from the expectations and beliefs reflected in the forward-looking
        statements in this section and throughout this report, as a result of the
        risks,
        uncertainties and assumptions discussed under Item 1A—Risk Factors of this
        Quarterly Report on Form 10-Q and other factors discussed in this section.
        For
        more information regarding what constitutes a forward-looking statement,
        refer
        to the “Risk Factors” section.*
   The
        following discussion and analysis is intended to help the reader understand
        the
        results of operations and financial condition of Tier Technologies, Inc.
        This
        discussion and analysis is provided as a supplement to, and should be read
        in
        conjunction with, our financial statements and the accompanying notes to
        the
        financial statements.
  *OVERVIEW*
  We
        provide transaction processing services and software and systems integration
        services primarily to federal, state and local governments, as well as public
        sector clients. We target industry sectors where we believe that demand for
        our
        services is less discretionary and is likely to provide us with recurring
        revenue streams through long-term contracts. The forces driving the need
        for our
        services tend to involve federal- or state-mandated services, such as child
        support payments, collections and disbursements, as well as a fundamental
        shift
        in consumer transaction preferences toward electronic payment methods instead
        of
        cash or paper checks. Since the markets we serve are highly competitive,
        changes
        in our competitors' strategies or service offerings could have a significant
        impact on our profitability, unless we quickly and effectively adapt our
        business model to meet the changes in the marketplace.
   We
        have
        derived, and expect to continue to derive, a significant portion of our revenues
        from a small number of large clients or their constituents. For example,
        during
        the six months ended March 31, 2007 and 2006, contracts with our three
        largest clients and their constituents generated 27% and 27%, respectively,
        of
        our total revenues. During the six months ended March 31, 2007
        approximately 12% of our total revenues resulted from a contract with one
        customer, while 11% and 11%, respectively, of our total revenue for the six
        months ended March 31, 2007 and 2006, resulted from a contract with a
        different customer. Substantially all of our contracts are terminable by
        the
        client following limited notice and without significant penalty to the client.
        As a result, unsatisfactory performance or unanticipated difficulties in
        completing projects may result in client dissatisfaction, contractual or
        adjudicated monetary penalties or contract terminations—all of which could have
        a material adverse effect upon our business, financial condition and results
        of
        operations.
   Our
        clients outsource portions of their business processes to us and rely on
        us for
        our industry-specific information technology expertise and solutions. Nearly
        73%
        of our revenues are generated by our transaction-based services including:
        1) electronic payment processing services for federal, state and local
        government clients, which allow our clients to offer their constituents the
        ability to use credit cards, debit cards or electronic checks to pay taxes
        and
        other governmental obligations; and 2) child support payment processing and
        related services for state government clients. While many of these transactions
        occur on a monthly basis, there are seasonal and annual fluctuations in the
        volume of some transactions that we process, such as tax payments. For example,
        each year the IRS rotates the order in which it lists the names of the two
        companies that provide payment processing services; because taxpayers often
        opt
        to use the first listed payment processing provider more frequently than
        the
        second listed payment processing provider, the year in which we are listed
        second can result in reduced transaction volume. We recognize revenues for
        transaction-based services at the time the services are performed.
   Our
        packaged software and systems integration segment primarily integrates our
        proprietary software products and licensed third-party software products
        into
        our clients’ business operations. We recognize these revenues on a time and
        material basis, percentage-of-completion basis or at the time delivery is
        made,
        depending upon the terms of the contract and the requirements of associated
        accounting standards.
  16
  *RECENT
        EVENTS*
  During
        the quarter
        ended December 31, 2006, we commenced an initiative to evaluate our strategic
        direction and to identify how to best deploy our financial and management
        resources in order to better maximize shareholder value. Because we have
        limited
        financial and management resources to fully optimize all of our business
        units,
        we intend to focus on our core competency in electronic payment processing
        and
        only explore growth opportunities within our EPP segment and other synergistic
        electronic payment processing businesses. As a result of this refocusing,
        we
        intend to redeploy assets from other business units that are not compatible
        with
        this direction. In April 2007, we began to seek buyers for certain portions
        of
        our business, including the majority of our PSSI and GBPO segments. See Note
        13—*Subsequent Events* to our Consolidated Financial Statements for
        additional information.
   *RESULTS
        OF OPERATIONS*
  During
            the three months ended March 31, 2007, we incurred a $3.9 million loss
            from
            continuing operations, which represents a $1.1 million, or 23% improvement
            over
            the same quarter last year. Similarly, during the six months ended
            March 31, 2007, we incurred a loss of $1.6 million, which represents a
            $1.5 million, or 48% improvement over the same period last year. These
            improvements resulted from the $2.6 million and $2.3 million, reduction
            in
            forward losses recorded during the respective three and six months ended
            March 31, 2007. In addition, the absence of $0.3 million and
            $3.1 million, respectively, of costs associated with the restatement of our
            financial statements last year, contributed to the reduction in net loss
            from
            continuing operations for the three and six months ended March 31, 2007
            respectively, over the same periods last year. During the three and six
            months
            ended March 31, 2007, increased revenues less the corresponding increase in
            project expenses, contributed $1.2 million and $1.0 million,
            respectively, to the reduction in net loss from continuing operations.
            These
            reductions were offset primarily by an increase of $1.8 million and
            $3.6 million, respectively, in general and administrative expenses incurred
            during the three and six months ended March 31, 2007, compared with the
            same periods last year. In addition, during March 31, 2007 we recorded a
            loss of $1.2 million relating to the settlement of a contract with one of
            our Packaged Software and Systems Integration segment, or PSSI, clients.
            Finally, in March 2007, we recorded net income of $7.6 million from
            discontinued operations for a reversal of a federal income tax reserve
            and
            associated interest and penalty accruals. In total, we are reporting
            net income
            for the three and six months ended March 31, 2007 of $3.8 million and
            $6.0 million, respectively.
   The
        following table provides an overview of our results of operations for the
        three
        and six months ended March 31, 2007 and 2006:
  **Three
                  months ended**
                **March
                  31,**
              
              **Variance**
              
              **Six
                  months ended**
                **March
                  31,**
              
              **Variance***(in
                  thousands, except percentages)*
              
              **2007**
              
              **2006**
              
              **$
                  Amount**
              
              **%**
              
              **2007**
              
              **2006**
              
              **$
                  Amount**
              
              **%**Revenues
              
              $
              40,271
              
              $
              37,474
              
              $
              2,797
              
              
              7
              %
              $
              82,991
              
              $
              77,356
              
              $
              5,635
              
              
              7
              %Costs
                  and expenses
              
              
              44,909
              
              
              43,620
              
              
              1,289
              
              
              3
              %
              
              87,041
              
              
              82,338
              
              
              4,703
              
              
              6
              %Loss
                  before other income, income taxes
              
              
              (4,638
              )
              
              (6,146
              )
              
              1,508
              
              
              25
              %
              
              (4,050
              )
              
              (4,982
              )
              
              932
              
              
              19
              %Other
                  income
              
              
              784
              
              
              1,145
              
              
              (361
              )
              
              (32
              )%
              
              2,470
              
              
              1,795
              
              
              675
              
              
              38
              %Loss
                  before income taxes
              
              
              (3,854
              )
              
              (5,001
              )
              
              1,147
              
              
              23
              %
              
              (1,580
              )
              
              (3,187
              )
              
              1,607
              
              
              50
              %Provision
                  for income taxes
              
              
              7
              
              
              —
              
              
              7
              
              
              *
              
              
              67
              
              
              5
              
              
              62
              
              
              *Net
                  loss from continuing operations
              
              
              (3,861
              )
              
              (5,001
              )
              
              1,140
              
              
              23
              %
              
              (1,647
              )
              
              (3,192
              )
              
              1,545
              
              
              48
              %Net
                  income from discontinued operations
              
              
              7,599
              
              
              —
              
              
              7,599
              
              
              *
              
              
              7,599
              
              
              —
              
              
              7,599
              
              
              *Net
                  income (loss)
              
              $
              3,738
              
              $
              (5,001
              )
              $
              8,739
              
              
              *
              
              $
              5,952
              
              $
              (3,192
              )
              $
              9,144
              
              
              ***Not
                  meaningful*
  *Revenues*
  During
        the three and six months ended March 31, 2007, our revenues increased
        $2.8 million and $5.6 million, respectively, or 7% and 7%,
        respectively, over the same periods last year. The increased revenue primarily
        reflects period-over-period increases of 32% and 39%, respectively, earned
        by
        our EPP segment, primarily as a result of increased transaction volume from
        new
        and pre-existing contracts in that segment. The increase in EPP revenues
        is
        offset by a 7% and 12%, respectively, period-over-period decrease in revenues
        by
        our Government Business Process Outsourcing segment, or GBPO, and a 14%
 17
 and
        16%, respectively, period-over-period decrease in revenues by our PSSI,
        primarily due to the completion of projects in both segments during the previous
        fiscal year.
  The
        following table presents the revenues for each of our reportable segments
        for
        the three and six months ended March 31, 2007 and 2006 :
  **Three
                  months ended**
                **March
                  31,**
              
              **Variance**
              
              **Six
                  months ended**
                **March
                  31,**
              
              **Variance***(in
                  thousands, except percentages)*
              
              **2007**
              
              **2006**
              
              **$
                  Amount**
              
              **%**
              
              **2007**
              
              **2006**
              
              **$
                  Amount**
              
              **%**Revenue,
                  by segment:EPP
              
              $
              20,397
              
              $
              15,464
              
              $
              4,933
              
              
              32
              %
              $
              42,566
              
              $
              30,515
              
              $
              12,051
              
              
              39
              %GBPO
              
              
              12,590
              
              
              13,503
              
              
              (913
              )
              
              (7
              )%
              
              24,616
              
              
              27,951
              
              
              (3,335
              )
              
              (12
              )%PSSI
              
              
              7,284
              
              
              8,507
              
              
              (1,223
              )
              
              (14
              )%
              
              15,809
              
              
              18,890
              
              
              (3,081
              )
              
              (16
              )%Total
                  revenues
              
              $
              40,271
              
              $
              37,474
              
              $
              2,797
              
              
              7
              %
              $
              82,991
              
              $
              77,356
              
              $
              5,635
              
              
              7
              %
  *Electronic
        Payment Processing Segment* —Our
        EPP segment provides electronic payment processing options, including payment
        of
        taxes, fees and other obligations owed to government entities, educational
        institutions and other public sector clients. The revenues reported by our
        EPP
        segment reflect the number of contracts with clients, as well as the volume
        of
        transactions processed under each contract and the rates that we charge for
        each
        transaction that we process.
   During
        the three and six months ended March 31, 2007, the revenues generated by
        our EPP
        segment rose to $20.4 million and $42.6 million, respectively, which
        represents a $4.9 million and $12.1 million, respectively, or 32% and
        39%, respectively, increase over the same period last year. A rise in the
        volume
        of transaction from new and pre-existing contracts processed by our EPP segment
        added $4.9 million and $12.1 million, respectively, of revenues over
        the same periods last year.  This increase includes
        $1.0 million and $2.9 million, respectively, of additional revenues we
        earned during the three and six months ended March 31, 2007, as compared to
        the same periods last year, as a result of an increase in the volume of
        transactions processed for our largest customer.
   We
        believe that these increases are attributable primarily to a changing consumer
        preference toward using electronic payments to pay their obligations to federal,
        state and local governments. We anticipate continued revenue increases
        throughout fiscal year 2007, as more state and local taxing jurisdictions
        move
        toward electronic payment processing options.
   *Government
        Business Process Outsourcing Segment* *—* Our
        GBPO segment provides governmental clients with child support payment
        processing, child support financial institution data match services, health
        and
        human services consulting and other related systems integration services,
        including call center interactive voice response systems and support
        services.  Because of the importance that these clients place on receiving
        consistent and reliable service, the contracts with our GBPO customers are
        typically three- to five-years in duration and we may receive contract
        extensions or renewals based on our clients’ past experience with our
        company.
   During
        the three and six months ended March 31, 2007, our GBPO segment generated
        $12.6 million and $24.6 million, respectively, in revenues, which
        represents a $0.9 million and $3.3 million, respectively, or 7% and
        12%, respectively, decrease over the same periods last year.  The $0.9
        million revenue reduction that occurred during the three months ended
        March 31, 2007, as compared to the same period last year, primarily
        reflects the absence of $2.5 million of revenues from contracts completed
        during the last 12 months and a decline in the volume of transactions
        processed by our child support payment processing centers which led to a
        $0.3 million decrease in revenues. The effect of these decreases was
        partially offset by $1.9 million of additional revenues from new contracts.
        The $3.3 million revenue reduction that occurred during the six months
        ended March 31, 2007, as compared to the same period last year, primarily
        reflects the absence of $5.2 million of revenues from contracts completed
        during the last 15 months; the impact of a decline in the volume of
        transactions processed by our child support payment processing centers, which
        led to a $0.7 million decrease in revenues; and a $0.2 million decline
        in maintenance revenues earned by our voice and system automation practice.
        The
        effect of these decreases was partially offset by $2.9 million of
        additional revenues from new contracts.
 18
   For
        the
        remainder of fiscal 2007, we expect that GBPO revenues will be lower then
        the
        same periods last year because of one major contract in our GBPO segment
        that
        expired in the second quarter of fiscal 2007 and another contract that will
        expire at June 30, 2007. These two contracts contributed
        $2.9 million of
        revenues during the quarter ended March 31, 2007 and have contributed
        approximately $12.0 million of revenues annually.
   *Packaged
        Software and Systems Integration Segment* —Our
        PSSI segment provides software and systems implementation services through
        practice areas in financial management systems, public pension administration systems ,
        unemployment insurance administration systems, electronic government services,
        and systems integration services. Since the services provided by our PSSI
        segment are generally project-oriented, the contracts with our clients typically
        have a one- to three-year contract term, and may have subsequent maintenance
        and
        support phases. The revenues reported by our PSSI segment in any given period
        reflect the size and volume of active contracts, as well as our current phase
        in
        the project life cycle of individual contracts.
   During
        the three and six months ended March 31, 2007, our PSSI segment generated
        $7.3 million and $15.8 million, respectively, in revenues, which
        represents a decline of $1.2 million and $3.1 million, respectively,
        or 14% and 16%, respectively, over the same periods last year. This
        period-over-period decrease reflects a $0.9 million and $4.1 million,
        respectively, decline resulting from the completion, or near completion,
        of
        several PSSI contracts, including contracts with three clients that represented
        $0.6 million and $3.5 million, respectively, of the decline. We also
        had an overall decline of $1.0 million and $1.0 million, respectively,
        compared to the same periods last year, in revenues from decreased activity
        for
        several of our time and material contracts. These declines were partially
        offset
        by a $0.7 million and $1.5 million, respectively, increase in revenues
        from new contracts. The decrease in revenues year-to-date over the same period
        last year was also partially offset by $0.5 million in fixed-price
        contracts that are hitting their revenue peaks.
   *Costs
        and Expenses*
  During
        the three and six months ended March 31, 2007, we incurred
        $44.9 million and $87.0 million, respectively, of costs and expenses,
        which represents a $1.3 million and $4.7 million, or 3% and 6%,
        respectively, increase over the same periods last year. The year-to-date
        increase is primarily due to increased interchange fees directly associated
        with
        increased revenues in our EPP segment and costs associated with the settlement
        of one of our PSSI segment contracts, offset by a decrease in legal and
        accounting costs associated with our reconciliation project and audit committee
        investigation relating to our restatement in fiscal 2006. The following table
        provides an overview of operating costs and expenses for the three and six
        months ended March 31, 2007 and 2006:
  **Three
                  months ended**
                **March
                  31,**
              
              **Variance**
              
              **Six
                  months ended**
                **March
                  31,**
              
              **Variance***(in
                  thousands, except percentages)*
              
              **2007**
              
              **2006**
              
              **$
                  Amount**
              
              **%**
              
              **2007**
              
              **2006**
              
              **$
                  Amount**
              
              **%**Direct
                  costs
              
              $
              29,710
              
              $
              30,696
              
              $
              (986
              )
              
              (3
              )%
              $
              60,338
              
              $
              58,592
              
              $
              1,746
              
              
              3
              %General
                  and administrative
              
              
              10,932
              
              
              8,859
              
              
              2,073
              
              
              23
              %
              
              18,555
              
              
              15,782
              
              
              2,773
              
              
              18
              %Selling
                  and marketing
              
              
              2,904
              
              
              2,740
              
              
              164
              
              
              6
              %
              
              5,426
              
              
              5,320
              
              
              106
              
              
              2
              %Depreciation
                  and amortization
              
              
              1,363
              
              
              1,325
              
              
              38
              
              
              3
              %
              
              2,722
              
              
              2,644
              
              
              78
              
              
              3
              %Total
                  costs and expenses
              
              $
              44,909
              
              $
              43,620
              
              $
              1,289
              
              
              3
              %
              $
              87,041
              
              $
              82,338
              
              $
              4,703
              
              
              6
              %
  *Direct
        costs.* Direct
        costs, which represent costs attributable directly to providing services
        to
        clients, include: payroll and payroll-related costs; independent
        contractor/subcontractor costs; travel-related expenditures; credit card
        interchange fees and assessments; amortization of intellectual property;
        amortization and depreciation of project-related equipment, hardware and
        software purchases; and the cost of hardware, software and equipment sold
        to
        clients.
   Direct
        costs for the three months ended March 31, 2007 decreased
        $1.0 million, or 3%, while direct costs for the six months ended
        March 31, 2007 increased $1.8 million or 3%, over the same periods
        last year. The decrease for the three months ended March 31, 2007, as
        compared to the same periods last year, primarily reflects: a
        $2.6 million reduction in the net forward loss accrued for a GBPO project
        and a pension project; the absence of $0.3 million of one-time expenses for
        outside services attributable to the reconciliation of certain account balances
        during fiscal 2006; a $0.3 million reduction in employee and employee
        related expenses and a $0.5 million reduction in subcontractor expenses,
        which both resulted
 19
 from
        the completion or near completion of several projects within the GBPO and
        PSSI
        segments; reductions of $0.5 million, $0.7 million and
        $0.4 million, respectively, in reimbursable expenses, postage fees and
        other miscellaneous expenses, which all resulted from reduced transaction
        volume. These decreases
        were partially offset by a $4.2 million increase in interchange fees, which
        resulted from the rise in EPP transactional volumes.
   The
        $1.8 million increase in direct costs for the six months ended
        March 31, 2007 is primarily attributable to a $9.0 million increase in
        interchange fees resulting from a rise in the level of EPP volumes. The increase
        in direct costs is partially offset by a $2.3 million reduction of net
        forward loss accrued for two projects; the absence of $1.4 million of
        one-time expenses for outside services attributable to the reconciliation
        of
        certain account balances during fiscal 2006; a $1.1 million reduction in
        printing, postage, equipment maintenance and bank charges attributable to
        decreased volumes of transactions processed by one of our payment processing
        centers; and reductions of $1.0 million, $0.5 million and $0.5
        million, respectively, in labor and labor-related costs, subcontractor expense
        and postage expense, which all resulted from the completion of projects by
        our
        GBPO and PSSI segments.
   *General
        and administrative.* General and administrative expenses consist primarily of payroll and
        payroll-related costs for general management, administrative, accounting,
        investor relations, compliance and legal functions and information systems.
   General
        and administrative expenses for the three and six months ended March 31,
        2007 increased $2.1 million and $2.8 million, respectively, or 23% and
        18%, respectively, from the same period last year. These period-over-period
        increases reflect: a $1.2 million adjustment during March 2007 to record
        the settlement of a contract with one of our PSSI segment clients; increases
        for
        the three and six month periods of $1.3 million and $2.2 million,
        respectively, in payroll and payroll-related expenses; and increases of
        $0.5 million and $0.5 million, respectively, in share-based
        compensation. These increases in the three- and six-month results, as compared
        to the same periods last year, were partially offset by reductions of
        $0.6 million during both the three and six months ended March 31, 2007 of
        legal and consulting services primarily related to the restatement of our
        financial statements in fiscal year 2006, partially offset by legal costs
        incurred in fiscal 2007 to respond to the SEC subpoena and to defend against
        the
        class action lawsuit. In addition, bad debt expense declined by
        $0.2 million and $0.7 million, respectively, as compared to the same
        periods last year, as a result of successful collection efforts.
   During
        the remainder of fiscal 2007, we expect to see a year-over-year reduction
        in
        general and administration costs because of the absence of one-time legal
        and
        accounting expenses that we incurred during fiscal 2006 attributable to the
        restatement of our historical financial statements and an investigation
        conducted by the Audit Committee of the Board of Directors. In February 2007,
        we
        entered into agreements with a number of key employees, under which these
        individuals will be entitled to receive three to twelve months of their base
        salaries over a one- to two-year period, after completing defined employment
        service periods. During the remainder of fiscal 2007, we expect to recognize
        a
        maximum expense of $0.9 million for these agreements. In addition,
        during fiscal 2008, we expect to recognize a maximum expense of
        $0.8 million, or $0.2 million during each quarter in fiscal 2008.
   *Selling
        and marketing.* ** Selling
        and marketing expenses consist primarily of payroll and payroll-related costs,
        commissions, advertising and marketing expenditures, and travel-related
        expenditures. We expect selling and marketing expenses to fluctuate from
        quarter
        to quarter due to a variety of factors, such as increased advertising and
        marketing expenses incurred in anticipation of the April 15 th federal tax season.
   Selling
        and marketing expenses increased 6% and 2%, respectively, to $2.9 million
        and $5.4 million, respectively, for the three and six months ended
        March 31, 2007. This increase is primarily attributable to an increase
        in advertising expense incurred by our EPP segment during the current period.
        We
        expect selling and marketing expenses to decline during the remainder of
        fiscal
        2007, as a result of our decision not to pursue new contracts in certain
        practice areas in our GBPO and PSSI segments.
   *Depreciation
        and amortization.* Depreciation and amortization consists primarily of expenses associated with
        depreciation of equipment, software and leasehold improvements and amortization
        of intangible assets resulting from acquisitions and other intellectual property
        not directly attributable to client projects. Project-related depreciation
        and
        amortization is included in direct costs.
 20
   During
        the three and six months ended March 31, 2007, depreciation and
        amortization expenses increased by $38,000 and $78,000, respectively, or
        3% and
        3%, respectively, from the same periods last year.
        These increases are primarily attributable to depreciation expense in the
        current period associated with assets acquired throughout the prior fiscal
        year.
   *Other
        Income*
   *Equity
        in net income of unconsolidated affiliate* .
During
        the three months ended March 31, 2007 and 2006, we reported income of
        $0.2 million and $0.5 million, respectively. During the six months
        ended March 31, 2007 and 2006, we reported net income of $1.0 million
        and $0.5 million, respectively, representing our 46.96% share in the net
        income and losses incurred by our investment in CPAS. The $0.3 million
        decrease for the three months ended March 31, 2007, over the same period
        last year, is due to a reduction of license revenues in the current period.
        The
        $0.5 million improvement year-to-date in CPAS’ performance resulted
        primarily from CPAS’ successful contracting efforts primarily during
        the first quarter of fiscal 2007.
   *Interest
        income, net.* ** Our
        interest income during the three and six months ended March 31, 2007 was
        relatively unchanged, because both interest rates and the daily balance of
        our
        investment portfolio have remained relatively constant during all reported
        periods.
   *Provision
        for income taxes.* ** During
        the six months ended March 31, 2007 and 2006, our income tax reflected
        minimum state tax payment of $67,000 and $5,000, respectively.  We applied
        carry-forward losses from earlier periods in the calculation of income taxes,
        which resulted in our tax expense in both periods being limited to expected
        state tax obligations. In addition, in accordance with Statement of Financial
        Accounting Standards No. 109— *Accounting
        for Income Taxes* ,
        we
        have continued to maintain a valuation allowance for the full amount of our
        deferred tax assets because of cumulative net losses incurred in recent years.
   *Discontinued
        Operations*
   *Income
        from discontinued operations.* ** In
        fiscal 2002, we disposed of most of our Australian operations and in fiscal
        2003
        requested and received $6.5 million of federal income tax refunds
        associated with this disposal. Although we received the refund in October
        2003,
        we fully reserved the entire balance because of uncertainty about the final
        review and resolution of this transaction by the Internal Revenue Service.
        Since
        October 2003, we increased our reserve by $1.1 million to recognize the
        potential interest and penalties we may have incurred if the Internal Revenue
        Service made an unfavorable decision.
   In
        March 2007, we were notified by the Internal Revenue Service that its Joint
        Committee on Taxation had completed its review which approved the
        $6.5 million refund. As a result, during the second quarter of fiscal 2007,
        we reversed the $6.5 million of reserve for refunds and the
        $1.1 million reserve for potential interest and penalties. This
        $7.6 million reversal has been recorded on our Consolidated Statements of
        Operations as *Income
        from discontinued operations* in
        accordance with Statement of Financial Accounting Standards No. 144— *Accounting
        for the Impairment or Disposal of Long-Lived Assets* .
   *LIQUIDITY
        AND CAPITAL RESOURCES*
  Our
        principal
        capital requirement is to fund working capital and to support our growth,
        including potential future acquisitions. Under our *Amended and Restated
        Credit and Security Agreement,* as amended*,* with our lender,
        we may obtain up to $10.0 million of letters of credit. Furthermore, the
        agreement grants the lender a perfected security interest in cash collateral
        in
        an amount equal to all issued and to be issued letters of credit. At
        March 31, 2007, we had $8.9 million of letters of credit outstanding
        under this credit facility, which are fully collateralized. These letters
        of
        credit were issued to secure performance bonds, insurance and a
        lease.
   In
        addition to the
        letters of credit issued under the credit facility mentioned above, at
        March 31, 2007, we had a $3.0 million letter of credit outstanding,
        which was collateralized by certain securities in our investment portfolio.
        This
        letter of credit was issued to secure a performance bond.
 21
   *Net
        Cash
        from Continuing Operations—Operating Activities*. During the six months
        ended March 31, 2007, our operating activities provided $5.8 million
        of cash, including $1.6 million of net loss from continuing operations and
        $5.9 million of non-cash items. During the six months ended March 31,
        2007, $1.7 million of cash was generated by a decrease in the balance of
        accounts receivable, $0.5 million was generated by
        an increase in
        accounts payable and $0.3 million was generated by a decrease in estimated
        income tax liabilities. These increases were primarily offset by
        $0.6 million in cash used by an increase in deferred revenue and
        $0.3 million in cash used by an increase in prepaid expenses and other
        assets.
   During
        the six
        months ended March 31, 2006, our operating activities provided
        $5.7 million of cash, including $3.2 million from net income and
        $8.1 million of non-cash items included in net income. During the six
        months ended March 31, 2006, $4.4 million of cash was also generated
        by a decrease in the balance of accounts receivable, due to successful
        collection efforts. These increases were partially offset by our use of
        $1.2 million of cash to support prepaid expenses and other assets and a
        $2.1 million decrease in deferred revenues.
   *Net
        Cash
        from Continuing Operations—Investing Activities*. During the six months
        ended March 31, 2007, our operations used $5.9 million of cash for
        investing activities, of which $2.1 million was used to purchase equipment
        and software, and fund internally developed software. In addition,
        $9.3 million of cash was used to purchase restricted investments and
        $3.1 million of cash was used to purchase marketable securities during the
        six months ended March 31, 2007. This use of funds was partially offset by
        $3.3 million of cash generated from the sale and maturities of restricted
        investments and $1.0 million of cash generated from the sale and maturities
        of marketable securities. In addition, $4.2 million of cash was generated
        from the repayment of notes and accrued interest from a related
        party.
   During
        the six
        months ended March 31, 2006, our investing activities used
        $12.8 million of cash, of which $42.1 million was used to purchase
        available-for-sale investments and $32.2 million was generated by sales and
        maturities of available-for-sale investments. During the six months ended
        March 31, 2006, $2.4 million was generated when restricted securities
        matured, while $2.9 million was used to purchase restricted investments. In
        addition, $2.4 million was used to purchase equipment and software during
        the six months ended March 31, 2006.
   *Net
        Cash
        from Continuing Operations—Financing Activities*. During the six months
        ended March 31, 2007, $42,000 of cash was provided by our financing
        activities. The increase represents $32,000 of cash from issuance of our
        common
        stock and $10,000 of cash provided by a new capital lease
        agreement.
   During
        the six
        months ended March 31, 2006, $38,000 of cash was provided by our financing
        activities. The increase represents $69,000 from issuance of our Class B
        common
        stock, partially offset by $31,000 of cash used in capital lease obligations.
   *Net
        Cash
        from Discontinued Operations*. During the six months ended
        March 31, 2007, we reversed a $7.6 million federal income tax reserve,
        which had initially been recorded in October 2003, pending an IRS review
        of a
        refund we received associated with the disposal of our former Australian
        operations.  This reversal represents a non-cash adjustment that was
        reported in income from discontinued operations.
   We
        expect to
        generate cash flows from operating activities over the long-term; however,
        we
        may experience significant fluctuations from quarter to quarter resulting
        from
        the timing of the billing and collection of large project milestones. We
        anticipate that our existing capital resources, including our cash balances,
        cash that we anticipate will be provided by operating activities and our
        available credit facilities will be adequate to fund our operations for at
        least
        the next 12 months. There can be no assurance that changes will not occur
        that
        would consume available capital resources before such time. Our capital
        requirements and capital resources depend on numerous factors, including
        potential acquisitions; initiation of large child support payment processing
        contracts that typically require large cash outlays for capital expenditures
        and
        staff-up costs; contingent payments earned; new and existing contract
        requirements; the timing of the receipt of accounts receivable, including
        unbilled receivables; the timing and ability to sell investment securities
        held
        in our portfolio without a loss of principle; our ability to draw on our
        bank
        facility; and employee growth. To the extent that our existing capital resources
        are insufficient to meet our capital requirements, we will have to raise
        additional funds. There can be no
 22
  assurance
        that
        additional funding, if necessary, will be available on favorable terms, if
        at
        all. The raising of additional capital may dilute our shareholders’ ownership in
        us.
   Due
        to the current
        economic climate, the performance bond market has changed significantly,
        resulting in reduced availability of bonds, increased cash collateral
        requirements and increased premiums. Some of our
        government
        contracts require a performance bond, and future requests for proposal may
        also
        require a performance bond. Our inability to obtain performance bonds, increased
        costs to obtain such bonds or a requirement to pledge significant cash
        collateral in order to obtain such bonds would adversely affect our business
        and
        our capacity to obtain additional contracts. Increased premiums or a claim
        made
        against a performance bond could adversely affect our earnings and cash flow
        and
        impair our ability to bid for future contracts.
   *CONTRACTUAL
        OBLIGATIONS*
  Since
        September 30, 2006, there has been no material change outside the ordinary
        course of business in the contractual obligations disclosed in our most recent
        annual report.
  *CRITICAL
        ACCOUNTING POLICIES*
  The
        preparation of our financial results of operations and financial position
        requires us to make judgments and estimates that may have a significant impact
        upon our financial results. We believe that of our accounting policies, the
        following require estimates and assumptions that require complex subjective
        judgments by management, which can materially impact reported results: estimates
        of project costs and percentage of completion; estimates of effective tax
        rates,
        deferred taxes and associated valuation allowances; valuation of goodwill
        and
        intangibles; and estimated share-based compensation. Actual results could
        differ
        materially from management’s estimates.
   For
        a
        full discussion of our critical accounting policies and estimates, see the *Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations* in our
        Annual Report on Form 10-K for the fiscal year ended September 30,
        2006.
   **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK******
  We
        maintain a portfolio of cash equivalents and investments in a variety of
        securities including certificates of deposit, money market funds and government
        and non-government debt securities. These available-for-sale securities are
        subject to interest rate risk and may decline in value if market interest
        rates
        increase. If market interest rates increase immediately and uniformly by
        ten percentage points from levels at March 31, 2007, the fair value of
        the portfolio would decline by about $14,500.
   **ITEM
        4. CONTROLS AND PROCEDURES**
  *EVALUATION
        OF DISCLOSURE CONTROLS AND PROCEDURES*
  Our
        management, with the participation of our Chief Executive Officer and Chief
        Financial Officer, evaluated the effectiveness of our disclosure controls
        and
        procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
        Act)
        as of March 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 required disclosure.
        Management recognizes that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        their
        objectives and management necessarily applies its judgment in evaluating
        the
        cost-benefit relationship of possible controls and procedures. Based on the
        evaluation of our disclosure controls and procedures as of March 31, 2007,
        our Chief Executive Officer and our Chief Financial Officer concluded that
        as of
        that date, our disclosure
  23
 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
        March 31, 2007 that has materially affected, or is reasonably likely to
        materially affect, our internal control over financial reporting.
    24
    **PART
        II. OTHER INFORMATION**
  **ITEM
        1.—LEGAL PROCEEDINGS**
  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 on
        behalf of purchasers of our common stock from November 29, 2001 to
        October 25, 2006. The suit alleges that Tier and certain of our former
        officers violated the Securities Exchange Act of 1934, but did not identify
        the
        damages being sought. This case is pending in the United States District
        Court
        for the Eastern District of Virginia. We are not able to estimate the
        probability or level of exposure associated with this complaint.
  **ITEM
        1A.—RISK FACTORS**
  The
        following factors and other risk factors could cause our actual results to
        differ materially from those contained in forward-looking statements in this
        Form 10-Q.
   **If
        we fail
        to regain our listing status on Nasdaq, the value of our stock may continue
        to
        be depressed, we may have difficulties attracting and retaining customers
        and
        employees and our company may be susceptible to takeover
        attempts.** Effective at the open of business on May 25, 2006,
        our common stock was delisted from the Nasdaq National Market (now the Nasdaq
        Global Market). Although we have applied for re-listing, we may not be
        successful in having our common stock listed on the Nasdaq Global
        Market.
   **We
        have
        incurred losses in the past and may not be profitable in the
        future.******We have incurred losses in the past and
        we may do so in the future. While we reported net income from continuing
        operations in fiscal year 2005, we reported losses from continuing operations
        of
        $9.5 million during the fiscal year 2006, $63,000 in fiscal year 2004 and
        $5.4 million in fiscal year 2003.
   **Our
        revenues and operating margins may decline and may be difficult to forecast,
        which could result in a decline in our stock price.** Our revenues,
        operating margins and cash flows are subject to significant variation from
        quarter to quarter due to a number of factors, many of which are outside
        our
        control. These factors include:
   ·
            economic
                conditions in the marketplace;   ·
            our
                customers’ budgets and demand for our services;   ·
            seasonality
                of business;   ·
            timing
                of
                service and product implementations;   ·
            unplanned
                increase in costs;   ·
            delay
                in
                completion of projects;   ·
            intense
                competition;   ·
            variability
                of software license revenues; and   ·
            integration
                and costs of acquisitions.   The
        occurrence of
        any of these factors may cause the market price of our stock to decline or
        fluctuate significantly, which may result in substantial losses to
        investors.****We believe that period-to-period comparisons of
        our operating results are not necessarily meaningful and/or indicative of
        future
        performance. From time to time, our operating results may fail to meet analysts’
and investors’ expectations, which could cause a significant decline in the
        market price of our stock. Price fluctuations and trading volume of our stock
        may be rapid and severe and may leave investors little time to react.
  25
 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
        rely on
        small numbers of projects, customers and target markets for significant portions
        of our revenues and our cash flow may decline significantly if we are unable
        to
        retain or replace these projects or
        clients.** ****We depend on a small number of
        clients to generate a significant portion of our revenues. The completion
        or
        cancellation of a large project or a significant reduction in project scope
        could significantly reduce our revenues and cash flows. Many of our contracts
        allow our clients to terminate the contract for convenience upon notice and
        without penalty. If any of our large clients or prime contractors terminates
        its
        relationship with us, we will lose a significant portion of our revenues
        and
        cash flows. Because of our specific market focus, adverse economic conditions
        affecting government agencies in these markets could also result in a reduction
        in our revenues and cash flows. During the six months ended March 31, 2007,
        our ten largest clients represented approximately 48% of our total revenues,
        including one contract that generated over 12% of our total revenues. Our
        operating results and cash flows could decline significantly if we cannot
        keep
        these clients, or replace them if lost.
   **We
        operate
        in highly competitive markets. If we do not compete effectively, we could
        face
        price reductions, reduced profitability and loss of market
        share.******Our business is focused on transaction
        processing and software systems solutions, which are highly competitive markets
        and are served by numerous international, national and local firms. Many
        competitors have significantly greater financial, technical and marketing
        resources and name recognition than we do. In addition, there are relatively
        low
        barriers to entry into these markets and we expect to continue to face
        additional competition from new entrants into our markets. Parts of our business
        are subject to increasing pricing pressures from competitors, as well as
        from
        clients facing pressure to control costs. Some competitors are able to operate
        at significant losses for extended periods of time, which increases pricing
        pressure on our products and services. If we do not compete effectively,
        the
        demand for our products and services and our revenue growth and operating
        margins could decline, resulting in reduced profitability and loss of market
        share.
   **Changes
        in
        accounting standards could significantly change our reported results. Our
        accounting policies and methods are fundamental to how we record and report
        our
        financial condition and results of
        operations.******From time to time, the Financial
        Accounting Standards Board changes the financial accounting and reporting
        standards that govern the preparation of our financial statements. These
        changes
        can be hard to predict and can have a material effect on how we record and
        report our financial condition and results of operations. In some cases,
        we
        could be required to apply a new or revised standard retroactively, resulting
        in
        our restating prior period financial statements.
   **Changes
        in
        laws and government and regulatory compliance requirements may result in
        additional compliance costs and may adversely impact our reported earnings.**Our business is subject to numerous federal, state and local laws,
        government regulations, corporate governance standards, industry association
        rules and public disclosure requirements, which are subject to change. Changing
        laws, regulations and standards relating to corporate governance, accounting
        standards, and public disclosure, including the Sarbanes-Oxley Act of 2002,
        SEC
        regulations and Nasdaq Stock Market rules, are creating uncertainty for
        companies and increasing the cost of compliance. To maintain high standards
        of
        corporate governance and public disclosure, we intend to invest all reasonably
        necessary resources to comply with evolving standards. This investment may
        result in increased general and****administrative expenses
        for outside services and a diversion of management time and attention from
        revenue-generating activities. New laws, regulations or industry standards
        may
        be enacted, or existing ones changed, which could
        negatively****impact our services and revenues. Taxes or
        fees****may be****imposed or we could be
        subject to additional requirements in regard to privacy, security or
        qualification for doing business. For our transaction processing services,
        we
        are subject to the rules of the National Automated Clearing House Association
        and the applicable credit/debit card association rules. A change in such
        rules
        and regulations could restrict or eliminate our ability to provide services
        or
        accept certain types of transactions, and could increase costs, impair growth
        and make our services unprofitable.
  26
  **The
        revenues provided by our EPP segment from electronic payment processing may
        fluctuate and the ability to maintain profitability is
        uncertain.******Our EPP segment primarily provides
        credit and debit card and electronic check payment options for the payment
        of
        federal and state personal income taxes, real estate and personal property
        taxes, business taxes, fines for traffic violations and parking citations
        and
        educational and utility obligations. The revenues earned by our EPP segment
        depend on consumers’ continued willingness to pay a convenience fee and our
        relationships with clients, such as government taxing authorities, educational
        institutions, public utilities and their respective constituents. If consumers
        are not receptive to paying a convenience fee; if card associations change
        their
        rules or laws are passed that do not allow us to charge the convenience fees;
        or
        if credit or debit card issuers or marketing partners eliminate or reduce
        the
        value of rewards to consumers under their respective rewards programs, demand
        for electronic payment processing services could decline. The processing
        fees
        charged by credit/debit card associations and financial institutions can
        be
        increased with little or no notice, which could reduce margins and harm our
        profitability. Demand for electronic payment processing services could also
        be
        affected adversely by a decline in the use of the Internet or consumer migration
        to a new or different technology or payment method. The use of credit and
        debit
        cards and electronic checks to make payments to government agencies is subject
        to increasing competition and rapid technological change. If we are not able
        to
        develop, market and deliver competitive technologies, our market share will
        decline and our operating results and financial condition could
        suffer.
   **Our
        ability
        to grow depends largely on our ability to attract, integrate and retain
        qualified personnel. The success of our business is based largely on our
        ability
        to attract and retain talented and qualified employees and
        contractors.** The market for skilled workers in our industry is
        extremely competitive. In particular, qualified project managers and senior
        technical and professional staff are in great demand. If we are not successful
        in our recruiting efforts or are unable to retain key employees, our ability
        to
        staff projects and deliver products and services may be adversely affected.
        We
        believe our success also depends upon the continued services of senior
        management and a number of key employees whose employment may terminate at
        any
        time. If one or more key employees resigns to join a competitor or to form
        a
        competing company, the loss of such personnel and any resulting loss of existing
        or potential clients could harm our competitive position.
   **We
        depend
        on third parties for our products and services. Failure by these third parties
        to perform their obligations satisfactorily could hurt our reputation, operating
        results and competitiveness.******Our business is
        highly dependent on working with other companies and organizations to bid
        on and
        perform complex multi-party projects. We may act as a prime contractor and
        engage subcontractors, or we may act as a subcontractor to the prime contractor.
        We use third-party software, hardware and support service providers to perform
        joint engagements. We depend on licensed software and other technology from
        a
        small number of primary vendors. We also rely on a third-party co-location
        facility for our primary data center, use third-party processors to complete
        payment transactions and use third-party software providers for system
        solutions, security and infrastructure. The failure of any of these third
        parties to meet their contractual obligations, our inability to obtain favorable
        contract terms, failures or defects attributable to these third parties or
        their
        products, or the discontinuation of the services of a key subcontractor or
        vendor could result in significant cost and liability, diminished profitability
        and damage to our reputation and competitive position.
   **Our
        fixed-price and transaction-based contracts require accurate estimates of
        resources and transaction volumes. Failure to estimate these factors accurately
        could cause us to lose money on these
        contracts.******Our business relies on accurate
        estimates. If we underestimate the resources, cost or time required for a
        project or overestimate the expected volume of transactions or transaction
        dollars processed, our costs could be greater than expected or our revenues
        could be less than expected. Under fixed-price contracts, we generally receive
        our fee if we meet specified deliverables, such as completing certain components
        of a system installation. For transaction-based contracts, we receive our
        fee on
        a per-transaction basis or as a percentage of dollars processed, such as
        the
        number of child support payments processed or tax dollars processed. If we
        fail
        to prepare accurate estimates on factors used to develop contract pricing,
        such
        as labor costs, technology requirements or transaction volumes, we may incur
        losses on those contracts and our operating margins could decline.
   **Our
        revenue
        is highly dependent on government funding. The loss or decline of existing
        or
        future government funding could cause our revenue and cash flows to
        decline.******A significant portion of our
  27
 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, computer viruses,
        attacks by hackers and similar problems causing interruption in service and
        loss
        or theft of data and information. Our third-party suppliers also may experience
        security breaches involving the unauthorized access of proprietary information.
        A security breach could result in theft, publication, deletion or modification
        of confidential information; cause harm to our business and reputation; and
        result in loss of clients and revenue.
   **We
        could
        suffer material losses if our operations fail to perform effectively. The
        potential for operational risk exposure exists throughout our
        organization.******Integral to our performance is the
        continued efficiency of our technical systems, operational infrastructure,
        relationships with third parties and key executives in our day-to-day and
        ongoing operations. Failure by any or all of these resources subjects us
        to
        risks that may vary in size, scale and scope. This includes but is not limited
        to operational or technical failures, ineffectiveness or exposure due to
        interruption in third-party support as expected, as well as the loss of key
        individuals or failure on the part of the key individuals to perform properly.
        Our insurance may not be adequate to compensate us for all losses that may
        occur
        as a result of any such event, or any system, security or operational failure
        or
        disruption.
   **At
        any
        given time, we are subject to a variety of claims and lawsuits. An adverse
        decision in any of these claims could have an adverse impact on our reputation
        and financial results.** Adverse outcomes in a claim, lawsuit, government
        investigation, tax determination, or other liability matter could result
        in
        significant monetary damages, substantial costs, or injunctive relief against
        us
        that could adversely affect our ability to conduct our business. We cannot
        guarantee that the disclaimers, limitations of warranty, limitations of
        liability and other provisions set forth in our contracts will be enforceable
        or
        will otherwise protect us from liability for damages. The successful assertion
        of one or more claims against us may not be covered by, or may exceed our
        available insurance coverage.
   In
        May 2003, we
        received a subpoena from a grand jury in the Southern District of New York
        to
        produce certain documents pursuant to an investigation by the Antitrust Division
        of the U.S. Department of Justice, or the DOJ, involving the child support
        payment processing industry. We have cooperated, and intend to continue to
        cooperate, fully with the subpoena and with the DOJ’s investigation. On
        November 20, 2003, the DOJ granted us conditional amnesty pursuant to the
        Antitrust Division’s Corporate Leniency Policy. Consequently, the DOJ will not
        bring any criminal charges against us or our officers, directors and employees,
        as long as we continue to comply with the Corporate Leniency Policy, which
        requires, among other things, our full cooperation in the investigation and
        restitution payments if it is determined that parties were injured as a result
        of impermissible anticompetitive conduct. We anticipate that we will incur
        additional expenses as we continue to cooperate with the investigation. Such
        expenses and any restitution payments could negatively impact our reputation,
        compromise our ability to compete and win new projects and result in financial
        losses.
   In
        May 2006, we
        received a subpoena from the Philadelphia District Office of the SEC requesting
        documents relating to financial reporting and personnel issues. If the SEC
        were
        to conclude that further investigative activities are merited or to take
        formal
        action against Tier, our reputation could be impaired. We have cooperated,
        and
        intend to continue to cooperate, fully with this investigation. We anticipate
        that we will incur additional legal and administrative expenses as we continue
        to cooperate with the SEC’s investigation.
   On
        November 20,
        2006, we were served with a purported class action lawsuit on behalf of
        purchasers of our common stock from November 29, 2001 to October 25, 2006.
        The
        suit alleges that Tier and certain of our former officers violated the
        Securities Exchange Act of 1934, but did not identify the damages being sought.
        This case is pending in the United States District Court for the Eastern
        District of Virginia. We
  28
 anticipate
        that we
        will incur legal and administrative expenses to defend this claim. We are
        not
        able to estimate the probability or level of exposure, if any, associated
        with
        this complaint; however, in the event of significant adverse verdicts or
        settlements, liability could exceed the levels of our insurance coverage.
   **If
        we are
        not able to protect our intellectual property, our business could suffer
        serious
        harm. We protect our intellectual property rights through a variety of methods,
        such as use of nondisclosure and license agreements and use of trade secret,
        copyright and trademark laws.******Ownership of
        developed software and customizations to software are the subject of negotiation
        with individual clients. Despite our efforts to safeguard and protect our
        intellectual property and proprietary rights, there is no assurance that
        these
        steps will be adequate to avoid the loss or misappropriation of our rights
        or
        that we will be able to detect unauthorized use of our intellectual property
        rights. If we are unable to protect our intellectual property, competitors
        could
        market services or products similar to ours, and demand for our offerings
        could
        decline, resulting in an adverse impact on revenues.
   **We
        may be
        subject to infringement claims by third parties, resulting in increased costs
        and loss of business.******From time to time we
        receive notices from others claiming we are infringing on their intellectual
        property rights. Defending a claim of infringement against us could prevent
        or
        delay our providing products and services, cause us to pay substantial costs
        and
        damages, force us to redesign products or enter into royalty or licensing
        agreements on less favorable terms. If we are required to enter into such
        agreements or take such actions, our operating margins could
        decline.
   **If
        we are
        not able to obtain adequate or affordable insurance coverage or bonds, we
        could
        face significant liability claims and increased premium costs and our ability
        to
        compete for business could be compromised.******We
        maintain insurance to cover various risks in connection with our business.
        Additionally, our business includes projects that require us to obtain
        performance and bid bonds from a licensed surety. There is no guarantee that
        such insurance coverage or bonds will continue to be available on reasonable
        terms, or at all. If we are unable to maintain adequate insurance and bonding
        coverage, potential liabilities associated with the risks discussed in this
        report could exceed our coverage, and we may not be able to obtain new
        contracts, which could result in decreased business opportunities and declining
        revenues.
   **Our
        markets
        are changing rapidly. If we are not able to adapt to changing conditions,
        we may
        lose market share and may not be able to compete
        effectively.******The markets for our products are
        characterized by rapid changes in technology, client expectations and evolving
        industry standards. Our future success depends on our ability to innovate,
        develop, acquire and introduce successful new products and services for our
        target markets and to respond quickly to changes in the market. If we are
        unable
        to address these requirements, or if our products do not achieve market
        acceptance, we may lose market share and our revenues could
        decline.
   **We
        may not
        be successful in identifying acquisition candidates and, if we undertake
        acquisitions, they could be expensive, increase our costs or liabilities
        or
        disrupt our business. One of our strategies is to pursue growth through
        acquisitions.**We may not be able to identify suitable acquisition
        candidates at prices that we consider appropriate or to finance acquisitions
        at
        favorable terms. If we do identify an appropriate acquisition candidate,
        we may
        be unsuccessful in negotiating the terms of the acquisition, finance the
        acquisition or, if the acquisition occurs we may be unsuccessful in integrating
        the acquired business into our existing business. Negotiations of potential
        acquisitions and the integration of acquired business operations could disrupt
        our business by diverting management attention away from day-to-day operations.
        Acquisitions of businesses or other material operations may require additional
        debt or equity financing, resulting in leverage or dilution of ownership.
        We
        also may not realize cost efficiencies or synergies that we anticipated
        when****selecting our acquisition candidates. In addition, we
        may need to record write-downs from future impairments of identified intangible
        assets and goodwill, which could reduce our future reported earnings.
        Acquisition candidates may have liabilities or adverse operating issues that
        we
        fail to discover through due diligence prior to the acquisition. Any costs,
        liabilities or disruptions associated with any future acquisitions we may
        pursue
        could harm our operating results.
   **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
        offers for the fair value of the portions of
  29
 PSSI
        and GBPO
        assets and liabilities that we are marketing. In that event, we may be required
        to recognize an impairment loss or to withdraw our planned divestiture.
        Furthermore, our announced divestiture plan could result in a 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.
   **Our
        business is subject to increasing performance requirements, which could result
        in reduced revenues and increased liability** .  Our
        business involves projects that are critical to the operations of our clients'
        businesses. The failure to meet client expectations could damage our reputation
        and compromise our ability to attract new business. On certain projects we
        make
        performance guarantees, based upon defined operating specifications, service
        levels and delivery dates, which are sometimes backed by contractual guarantees
        and performance bonds. Unsatisfactory performance or unanticipated difficulties
        or delays in starting or completing such projects may result in termination
        of
        the contract, a reduction in payment, liability for penalties and damages,
        or
        claims against a performance bond. Client performance expectations or
        unanticipated delays could necessitate the use of more resources than we
        initially budgeted for a particular project, which could increase our project
        costs and make us less profitable.
  **ITEM****4.
        SUBMISSION OF MATTERS TO A
        VOTE OF SECURITY HOLDERS**
  The
        Annual Meeting of Shareholders of Tier Technologies, Inc. was held on February
        28, 2007. The following matters were voted upon at this meeting.
  1.
            Election
                of seven directors to serve for the ensuing year and until successors
                are
                elected; and   2.
            Ratification
                of McGladrey & Pullen, LLP as our independent registered public
                accounting firm for the fiscal year ending September 30,
                2007.   The
        number of shares of common stock present or represented by proxy and entitled
        to
        vote at the annual meeting was 15,704,474. The results of the votes on each
        of
        the matters presented to the shareholders at our annual meeting are set forth
        below.
  **Matter**
              **Votes
                  in favor**
              **Votes
                  withheld**
              **Abstentions**1.Election
                  of DirectorsCharles
                  W. Berger
              7,137,581
              8,566,893Samuel
                  Cabot III
              7,137,581
              8,566,893John
                  J. DeLucca
              14,740,599
              963,875Morgan
                  P. Guenther
              7,137,581
              8,566,893Ronald
                  L. Rossetti
              7,065,581
              8,638,893T.
                  Michael Scott
              7,138,081
              8,566,393Bruce
                  R. Spector
              7,137,881
              8,566,5932.The
                  ratification of McGladrey & Pullen, LLP as our independent registered
                  public accounting firm for the fiscal year ending September 30,
                  2007
              15,271,933
              430,910
              1,631
  
   30
   **Item
        6. Exh****ibits**
 **Exhibit**
                **Number**
              **Description**10.1
              First
                  Amendment to Amended and Restated Credit and Security Agreement
                  dated
                  March 20, 2007 between the Registrant, Official Payments Corporation,
                  EPOS
                  Corporation and City National Bank.(1)31.1
              Certification
                  of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                  promulgated under the Securities Exchange Act of 1934, as
                  amended.†31.2
              Certification
                  of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                  promulgated under the Securities Exchange Act of 1934, as
                  amended.†32.1
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†32.2
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.††Filed
                  herewith.
                (1)Filed as an exhibit to current report Form 8-K, filed on March 28,
                  2007. and incorporated herein by
                  reference.
 
 
  31
   **SIGNATURE**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report on Form 10-Q to be signed on its behalf by the
        undersigned thereunto duly authorized.
  
 
 Tier
        Technologies,
        Inc.
 
 Dated:
        May 1, 2007
 
 
 By: /s/
        David E. Fountain
 **David
        E. Fountain**
 **Chief
        Financial Officer**
 **(Principal
        Financial and Accounting Officer)**


32