UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K


(Mark
One)


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




FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2008




OR




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




FOR
THE TRANSITION PERIOD FROM ______ TO ______







COMMISSION
FILE NUMBER 000-23195




TIER
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)




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




10780
PARKRIDGE BOULEVARD—4th FLOOR,
RESTON, VA  20191


(Address
of principal executive offices)




Registrant's
telephone number, including area code:(571) 382-1000




Securities
registered pursuant to Section 12(b) of the Act:







Title
      of each class
              COMMON
      STOCK, $0.01 PAR VALUE
            Name
      of each exchange on which registered
              The
      NASDAQ STOCK MARKET, LLC




Securities
registered pursuant to Section 12(g) of the Act


NONE




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈    No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  ̈    No x




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  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  ̈




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




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




Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act).     Yes  ̈    No
x




As of
March 31, 2008, the aggregate market value of common stock held by
non-affiliates of the registrant was $156,044,551, based on the closing sale
price of the common stock on March 31, 2008, as reported on The NASDAQ
Stock Market. As of November 28, 2008, there were 19,734,463 shares of common
stock outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




The
information required by Items 10, 11, 12, 13 and 14 of Part III (except for
information required with respect to our executive officers, which is set forth
under "Part I—Executive Officers") of this report, which will appear in our
definitive proxy statement, is incorporated by reference into this
report.












TIER
TECHNOLOGIES, INC.


FORM
10-K


TABLE
OF CONTENTS




part
      i
                  2item
      1—business
                  2item
      1a—risk factors
                  7item
      1b—unresolved staff comments
                  12item
      2—properties
                  13item
      3—legal proceedings
                  13item
      4—submission of matters to a vote of security holders
                  13executive
      officers
                  14part
      ii
                  14item
      5—market for registrant's common equity, related stockholder
                    matters
      and issuer purchases of equity securities
                  14item
      6—selected financial data
                  16item
      7—management's discussion and analysis of financial condition and results
      of
                    operations
                  17item
      7A—Quantitative and qualitative disclosures about market
    risk
                  40item8—financial
      statements and supplementary data
                  41item
      9—changes in and disagreements with accountants on accounting and
      financial
                    disclosure
                  76Item
      9A—controls and procedures
                  76part
      iii
                  78item
      10—directors, executive officers and corporate governance
                  78item
      11—executive compensation
                  78item
      12—security ownership of certain beneficial owners and management and
                    related
      stockholders matters
                  78item
      13—certain relationships and related transactions and director
      independence
                  78Item
      14—principal accounting fees and services
                  78Part
      iv
                  79Item
      15—exhibits, financial statement schedules
                  79signatures
                  82


1




Private
Securities Litigation Reform Act Safe Harbor Statement




Certain statements contained in this
report, including statements regarding the future development of and demand for
our services and our markets, anticipated trends in various expenses, expected
costs of legal proceedings, expectations for the divestitures of certain assets,
and other statements that are not historical facts, are forward-looking
statements within the meaning of the federal securities laws.  These
forward-looking statements relate to future events or our future financial
and/or operating performance and can generally be identified as such because the
context of the statement includes words such as "may," "will," "intends,"
"plans," "believes," "anticipates," "expects," "estimates," "shows," "predicts,"
"potential," "continue," or "opportunity," the negative of these words or words
of similar import.  These forward-looking statements are subject to
risks and uncertainties, including the risks and uncertainties described and
referred to under Item 1A—Risk Factors beginning on page7, 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.






PART
I




ITEM 1—BUSINESS




GENERAL




Tier Technologies,
Inc., or Tier, is a leading provider of biller direct electronic payment
solutions.  We provide federal, state and local government,
educational institutions, utility companies and other public sector clients with
electronic payment and other transaction processing services, as well as
software and systems integration services. The demand for our services has been
driven by an increasing preference of consumers and governmental agencies to
make payments electronically, increased acceptance of interactive voice response
systems and contact management solutions, as well as by legislative
mandates.  Originally incorporated in 1991 in California, we
reincorporated in Delaware effective July 15, 2005.  We are
headquartered in Reston, Virginia.  As of September 30, 2008, our
412 employees and contractors provided services to nearly 3,700 clients
nationwide, including over 3,300 customers served by our core Electronic Payment
Processing business.




SEGMENT
INFORMATION




Fiscal year 2008
continued to be a transitional year for our company.  During fiscal
2007 we undertook a strategic initiative designed to enhance our profitability
and overall shareholder value.  This initiative led to the decision to
focus on our Electronic Payment Processing, or EPP,
business.  Portions of our operations were classified as held-for-sale
during fiscal 2007 concurrent with the decision to seek buyers for portions of
our operations.  As of September 30, 2008 we have successfully
sold our Government Business Process Outsourcing, or GBPO, operation, including
our Health and Human Services and Call Center operations, and portions of our
former Packaged Software Systems Integration, or PSSI, operations including our
State Systems Integration and Independent Validation and Verification
operations.  In November 2008 we sold our Financial Management
Systems, another operation within our PSSI operation.  We have one
remaining PSSI operation for which we continue to seek a buyer—our Unemployment
Insurance Systems, or UI, operation.  We continue to operate UI as
efficiently and effectively as possible in order to maximize the proceeds that
we expect to receive from its disposition.




We manage and
report our business under two major categories: Continuing Operations and
Discontinued Operations.  Our Continuing Operations includes our EPP
operations, certain Wind-down Operations and our Corporate
Operations.  Our Discontinued Operations includes portions of our
operations that have already been sold or for which we are seeking buyers and
includes our former GBPO and PSSI operations.  All financial
information presented in this report for historical periods has been
reclassified to conform to our current organizational structure.




2




The following chart
illustrates our organizational operating structure as of September 30,
2008:






Organizational
Operating Structure of Tier Technologies, Inc.


As
of September 30, 2008




Image




CONTINUING
OPERATIONS




Our Continuing Operations are
separated into three major categories:  EPP, Wind-down and
Corporate.  In addition to the discussion below,Note
11—Segment Informationto our Consolidated Financial
Statements provides detailed information about the profitability of each of
these three major categories.




Electronic
Payment Processing, or EPP.EPP
provides government, educational institutions, utility companies and
public-sector clients with electronic payment processing alternatives for
collecting taxes, fees and other obligations.  In fiscal year 2008,
our client base included the U.S. Internal Revenue Service, 25 states, the
District of Columbia and over 3,300 local governments and other public sector
clients.  EPP revenues represented 95.5% of our revenues from
Continuing Operations.  EPP has a large number of clients; however,
during fiscal 2008, our contract with the U.S. Internal Revenue Service
generated 26.6% of our revenues from Continuing Operations.




Clients who use our
electronic payment processing services can offer their customers the ability to
pay government obligations, tuition and utility bills with a credit or debit
card or an electronic check.  Our secure electronic payment processing
services help our clients reduce the cost of processing payments, increase
collection speed and provide convenient payment alternatives to their
constituents.




During the last
decade, increased consumer acceptance of electronic media, such as interactive
voice response systems and the Internet, have led to greater reliance on
“cashless” payment methods, including credit and debit cards and electronic
checks.  However, many government entities, educational institutions
and utility companies have neither the technical expertise nor the personnel to
develop, implement and maintain electronic payment processes or to accept
Internet or telephonic originated payments.  As a result, they rely on
external service providers, such as Tier, to perform this function.




3




During fiscal year
2008, we processed 10.3 million transactions, representing nearly
$5.9 billion of payments collected in the following market segments, which
we refer to as "verticals":




·
            Federal,
      state and local governments;




·
            Property
      tax;




·
            Education;




·
            Insurance;




·
            Utilities;




·
            Court fees
      and fines; and




·
            Property
      management.




The revenues we
receive for payment services are transaction-based.  Increases and
decreases in these revenues typically represent changes in the volume of
transactions and associated dollars that we process.  This volume, in
turn, reflects the size of our client base, the level of customer acceptance of
electronic payment processing alternatives, the number and type of complementary
partnership relationships and the variety of payment alternatives
offered.  Typically, EPP revenues are higher in the second and third
quarters of our fiscal year as a result of the seasonal surge in income tax
payments in March and April.




Wind-down
Operations.  Our Wind-down Operations consist of two businesses
from our former GBPO and PSSI segments whose operations are neither compatible
with our long-term strategic direction nor complementary with the other business
units that we were divesting.  We have decided to complete, and in
some cases extend, the term of existing contracts for these
businesses.  We believe that these two businesses will be phased out
within four years.  The businesses included in our Wind-down
Operations include: (1) our Voice and Systems Automation business, or VSA,
which provides interactive voice response systems and support services,
including customization, installation and maintenance and (2) our Public Pension
Administration Systems practice, which provides services to support the design,
development and implementation of pension applications for state, county and
city governments.  Our Wind-down business units serve approximately
300 customers, primarily served by our VSA business.  In fiscal year
2008, VSA revenues represented 90.4% of our revenues from Wind-down
Operations.




Corporate
Operations.  Our Corporate Operations represent those functions
in the company that support our corporate governance, including the costs
associated with our Board of Directors and executive management team, as well as
accounting, finance, legal and the costs of maintaining our corporate
headquarters in Reston, Virginia.  In addition, corporate costs
include functions that provide shared-services that have supported operations
throughout the company, such as information technology and business
development.  As we continue to streamline our focus on our EPP
business and divest the two remaining business operations, we expect that the
size and associated costs to operate our corporate functions will decline
significantly in the future.  SeeItem
7—Management's Discussion and Analysis of Financial Condition and Results of
Operationsfor
additional information associated with our Corporate
Operations.




DISCONTINUED
OPERATIONS




Our
Discontinued Operations consist of two business operations from our former PSSI
segment that are currently held-for-sale and operations within our former GBPO
and PSSI segments that have been divested.  Additional information can
be found in Note
14—Discontinued Operations to our Consolidated Financial
Statements about the profitability and total assets of these held-for-sale
operations.




4




HELD-FOR-SALE




Our two remaining
business operations held-for-sale as of September 30, 2008 include the
following former PSSI operations:




·
            Financial
      Management Systems—develops, implements and supports financial
      management and purchasing systems for state and local governments;
      and




·
            Unemployment
      Insurance Systems—provides software application, development and
      integration services to state governments that are reforming unemployment
      insurance systems.




In November 2008 we
completed the sale of our Financial Management Systems operations.  We
expect to sell our Unemployment Insurance Systems operation in early fiscal
2009.  These business operations are reported as Discontinued
Operations for all periods presented.




The revenues
generated by these former PSSI operations are driven primarily by the size of
its customer base, the addition of new service offerings and new partner
relationships with complementary service and technology
providers.  During fiscal 2008, these held-for-sale operations
provided services to 63 clients nationwide.  During fiscal year 2008,
these held-for-sale operations contributed $16.9 million, or 37.8% to
revenues from our Discontinued Operations, of which one contract generated
12.2%.  Revenues recognized by these former PSSI operations reflect
the specific contract deliverables and are not influenced by seasonal
changes.




DIVESTED
OPERATIONS




Government
Business Process Outsourcing, or GBPO.During
fiscal year 2008 we sold our GBPO operation which focused on child support
payment processing, child support financial institution data match services, or
FIDM, and call center support services.  During fiscal 2008, these
divested GBPO operations contributed $20.2 million, or 45.1% to revenues
from our Discontinued Operations.




Packaged
Software and Systems Integration, or PSSI.During
fiscal year 2008 we sold two operations within our former PSSI segment: (1)
State Systems Integration, which provided information technology development,
integration and maintenance support projects, and (2) Independent Validation and
Verification, which provided quality assurance reviews of third-party
software.  During fiscal 2008 these divested units contributed
$7.7 million, or 17.1%, to revenues from our Discontinued
Operations.




SALES AND
MARKETING




Our sales and
marketing objective is to develop relationships with customers and clients that
result in repeat long-term and cross-sale engagements.  In fiscal
2008, we made the transition to a sales and marketing organization that was
dedicated to the EPP business.




In fiscal 2009, we
will focus our future sales efforts on growing our EPP business.  In
addition to our sales force, we also rely on the business development
capabilities of our senior EPP executives as a supplemental sales and delivery
resource.  Additionally, we look to partner with systems integrators
and tax software developers.  Members of our executive team have a
wide range of industry contacts and established reputations in the electronic
payments industry.  They play a key role in developing, selling and
managing major engagements.  As a result of our market-focused sales
approach, we believe that we are able to identify and qualify for opportunities
quickly and cost-effectively.




5




We strive to
generate new business by increasing brand awareness and recognition of our
biller direct offerings using a variety of media.  Our most
significant marketing and advertising program involves the promotion of
electronic payment solutions offered by our subsidiary Official Payments
Corporation, or OPC.  We work with our clients to publicize our
services through advertisements in payment invoices, publications and web sites,
typically at little or no cost to us. We also enter into cooperative advertising
and marketing arrangements with our card partners (e.g. American Express,
Discover, MasterCard, Visa) and leading card-issuing banks.  In fiscal
2008, we used national and regional media including newspapers, magazines,
radio, internet and public relations campaigns.  These broad scale
awareness efforts were supplemented with online and offline targeted promotion
via email, direct mail, statement inserts, online statements, newsletters and
other direct-to-customer marketing channels.




COMPETITION




The biller direct
payments category is highly competitive and served by a wide array of
organizations involved in transaction processing markets including Link2Gov,
BillMatrix, Online Resources, Govolution, SallieMae, EDS, and TouchNet
Information Systems, Inc.  We believe that the principal competitive
factors in our markets include reputation, industry expertise, client breadth,
speed of development and implementation, technical expertise, effective
marketing programs, competitive pricing and the ability to deliver
results.




INTELLECTUAL
PROPERTY RIGHTS




Our success
depends, in part, on our protection of our methodologies, solutions and
intellectual property rights. We rely upon a combination of nondisclosure,
licensing and other contractual arrangements, as well as trade secret, copyright
and trademark laws to protect our proprietary rights and the proprietary rights
of third parties from whom we license intellectual property.  The
remaining life of our trademarks is four-to-five years.  We enter into
nondisclosure agreements with all our employees, subcontractors and parties with
whom we team.  In addition, we control and limit distribution of
proprietary information.  We cannot assure that these steps will be
adequate to deter the misappropriation of proprietary information or that we
will be able to detect unauthorized use of this information and take appropriate
steps to enforce our intellectual property rights.




We have developed
and acquired proprietary software that is licensed to clients pursuant to
license agreements and other contractual arrangements.  We use
intellectual property laws, including copyright and trademark laws, to protect
our proprietary rights.  Part of our business also develops software
applications for specific client engagements and customizes existing software
products for specific clients.  Ownership of developed software and
customizations to existing software is subject to negotiation with individual
clients and is typically assigned to the client.  In some situations,
we may retain ownership or obtain a license from our client, which permits us or
a third party to use and market the developed software or the customizations for
the joint benefit of the client and us or for our sole benefit.




AVAILABLE
INFORMATION




Our Internet
address is www.tier.com.  There we make available, free of charge, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and any amendments to these reports, as soon as reasonably
practicable after we electronically file such material with or furnish it to the
Securities and Exchange Commission, or SEC.  Our SEC reports can be
accessed through the Investor Relations section of our Web site.  The
information found on our Web site is not part of this or any other report we
file with or furnish to the SEC.




6




ITEM 1A—RISK FACTORS




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




The following
factors and other risk factors could cause our actual results to differ
materially from those contained in forward-looking statements in this Form
10-K.




We
have incurred losses in the past and may not be profitable in the
future.  We have incurred losses in the past, and we may do so
in the future.  While we reported net income in fiscal year 2005, we
have reported net losses of $27.4 million in fiscal 2008, $3.0 million
in fiscal 2007, $9.5 million in fiscal 2006, $63,000 in fiscal 2004 and
$5.4 million in fiscal 2003.




Our
revenues and operating margins may decline and may be difficult to forecast,
which could result in a decline in our stock price.  Our
revenues, operating margins and cash flows are subject to significant variation
from quarter to quarter due to a number of factors, many of which are outside
our control.  These factors include:




·
            economic conditions in the marketplace including
      recession;




·
            loss of
      significant clients;




·
            demand for
      our services;




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




·
            timing of
      service and product
implementations;




·
            unplanned
      increases in costs;




·
            delays in
      completion of projects;




·
            intense
      competition;




·
            costs of
      compliance with laws and government regulations;
  and




·
            integration
      and costs of acquisitions.




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




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


7




We
may not be successful in divesting certain assets and liabilities, and our
anticipated divestiture could disrupt our operations.  We have
completed divestment of certain operations and portions of the business
inclusive of BPO, FIDM, SSI, FMS and other operations, and we are in the process
of divestment of our UI business unit. We may not be able to obtain reasonable
offers for the fair value of the remaining assets and liabilities that we are
divesting.  In that event, we may be required to recognize additional
impairment losses or to terminate the planned divestiture of the remaining
operations.  Further, current economic conditions may reduce interest
in the remaining business subject to divestiture, which may make it more
difficult for us to dispose of these business operations.  Also,
negotiations of potential dispositions could disrupt our business by diverting
management attention away from day-to-day operations.  Furthermore,
our announced divestiture plan has resulted in additional turnover of employees
and has had an adverse impact on our ability to attract and retain customers,
which, in turn, has had, and will continue to have, an adverse impact on the
revenues generated by the remaining businesses subject to
divestiture.  In addition, if our estimates of the fair value of these
businesses are not accurate, we may incur additional impairment losses or other
losses on the divestiture of these businesses.  Divestiture of certain
portions of these businesses has been delayed, and may be further delayed, or
may be unsuccessful, resulting in business disruption and increased costs of
running and completing certain projects.  We may not receive the
expected benefits from the divestitures, or they may take longer to be realized
than we expect.




We
could suffer material losses as a result of our transition to, and primary focus
on, the payment processing business.As a result of our
divestiture plan, we have sold, and are in the process of selling, a number of
our business units and operations that provided diversified sources of revenue
and services, including our software licensing and government system integration
businesses.  We continue to divest additional historical business
operations, as we become increasingly primarily focused on the electronic
payment processing business.  Our focus on payment processing and our
divestiture of the majority of our legacy business units that are unrelated to
payment processing has resulted in, and will continue to result in, loss of
clients, loss of historical revenue sources, and a decrease in diversification
of services and markets.  These changes could negatively impact
revenues in the event of a business downturn in the payment processing business,
or in the event of unexpected costs, disruption in services, a change in laws,
or other changes related to our payment processing business which may have a
disproportionate negative impact on our revenues.




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




We
may not be successful in identifying acquisition candidates, and, if we
undertake acquisitions, they could be expensive, increase our costs or
liabilities or disrupt our business.One of our strategies is
to pursue growth through acquisitions.  We may not be able to identify
suitable acquisition candidates at prices that we consider appropriate or to
finance acquisitions at favorable terms.  If we do identify an
appropriate acquisition candidate, we may be unsuccessful in negotiating the
terms of the acquisition, financing the acquisition or, if the acquisition
occurs, integrating the acquired business into our existing
business.  Negotiations of potential acquisitions and the integration
of acquired business operations could disrupt our business by diverting
management attention away from day-to-day operations.  Acquisitions of
businesses or other material operations may require additional debt or equity
financing, resulting in leverage or dilution of ownership.  We also
may not realize cost efficiencies or synergies that we anticipated when
selecting our


8




acquisition
candidates.  In addition, we may need to record write-downs from
future impairments of identified intangible assets and goodwill, which could
reduce our future reported earnings.  Acquisition candidates may have
liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition.  Any costs, liabilities or
disruptions associated with any future acquisitions we may pursue could harm our
operating results.




Our current and future information
technology infrastructure and platform may not meet our requirements for the
sustainable and economical growth of our EPP business, and consolidation of our
payment processing platforms involves significant risk.Our
EPP business is highly dependent upon having a safe and secure information
technology platform with sufficient capacity to meet the future growth of our
business.  If our ability to develop and/or acquire upgrades or
replacements of our existing platform does not keep pace with the growth of our
business, we may not be able to meet our growth
expectations.  Furthermore, if we are not able to acquire or develop
these systems on a timely and economical basis, the profitability of our EPP
business may be adversely affected.  We currently maintain two
processing platforms, one in San Ramon, California, and a another in Auburn,
Alabama.  We are in the process of integrating and consolidating our
technology platforms.  Failure to timely, effectively, and efficiently
consolidate our payment processing platforms could result in significant risks
including restricted and limited transaction volume, operational inefficiencies,
inability to add new products or services, inability to expand existing products
and services, significant development costs,  increased hardware and
software costs, inability provide certain functionality, system and service
disruption or failure.   If we are unable to successfully
integrate and consolidate these payment processing platforms it could result in
a significant loss of clients and revenues and risk of liability.




Our
revenues and cash flows could decline significantly if we were unable to retain
our largest client, or a number of significant clients.  The majority of our client contracts, including our
contract with the U.S. Internal Revenue Service, allow clients to terminate all
or part of their contrats on short notice, or provide notice of non-renewal with
little prior notification.Our contract with the IRS has
historically generated about 33% of our annual revenues from electronic payment
processing.  In November 2008 this contract was extended for an
additional year by the IRS, and is scheduled to expire November 30, 2009 if the
IRS does not exercise another option to renew.  Our operating results
and cash flows could decline significantly if we were unable to retain this
client, or replace it in the event it is terminated, or if we were unable to
renew this contract or are unsuccessful in future re-bids of this
contract.  Termination or non-renewal of a number of client contracts, or
certain significant client contracts, including the IRS contract, could result
in significant loss of revenues and reduction in
profitability.




Security
breaches or improper access to confidential data and personally identifiable
information in our facilities, computer networks, or databases, or those of our
suppliers, may cause harm to our business and result in liability and systems
interruptions.  Our business requires us to obtain, process,
use, and destroy confidential and personally identifiable data and
information.  Despite security measures we have taken, our systems may
be vulnerable to physical break-ins, fraud, computer viruses, attacks by hackers
and similar problems, causing interruption in service and loss or theft of
confidential data and personally identifiable information that we store and/or
process.  It is possible that our security controls over confidential
information and personal data, our training on data security, and other
practices we follow may not prevent the improper disclosure or unauthorized
access to confidential data and personally identifiable
information.  Our third-party suppliers also may experience security
breaches involving the unauthorized access of confidential data and personally
identifiable information.  A security breach could result in theft,
loss, publication, deletion or modification of such data and information, and
could cause harm to our business and reputation, liability for fines and
damages, and a loss of clients and revenue.




We
could suffer material losses if our operations or systems or platforms fail to
perform properly or effectively.The continued efficiency and
proper functioning of our technical systems, platforms, and operational
infrastructure is integral to our performance. Failure of any or all of these
resources subjects us to significant risks. This includes but is not limited to
operational or technical failures of our systems and platforms, human error,
failure of third-party support and services, as well as the loss of key
individuals or failure to perform on the part of the key
individuals.  Our EPP segment processes a high volume of
time-




9




sensitive payment
transactions.  The majority of our tax-related transactions are
processed in short periods of time, including between April 1 and April 15 of
each tax year for federal tax payments.  If there is a defect in our
system software or hardware, an interruption or failure due to loss of system
functionality, a delay in our system processing speed, a lack of system
capacity, or loss of employees on short notice, even if for a short period of
time, our ability to process transactions and provide services may be
significantly limited, delayed or eliminated, resulting in lost business and
revenue and harm to our reputation.  Our insurance may not be adequate
to compensate us for all losses that may occur as a result of any such event, or
any system, security or operational failure or disruption.




Changes
in laws and government and regulatory compliance requirements may result in
additional compliance costs and may adversely impact our reported
earnings.  Our business is subject to numerous federal, state
and local laws, government regulations, corporate governance standards,
compliance controls, accounting standards, licensing and bonding requirements,
industry/association rules, and public disclosure requirements including under
the Sarbanes Oxley Act of 2002, SEC regulations, and Nasdaq Stock Market
rules.  Changes in these laws, regulations, standards and requirements
and compliance with these laws, regulations, standards and requirements may
result in increased general and administrative expenses for outside services,
increased risks associated with compliance, and a diversion of management time
and attention from revenue-generating activities and curtailing growth of the
business.




Violation
of any existing or future laws or regulations related to our EPP business,
including laws governing money transmitters, could expose us to substantial
liability and fines, force us to cease providing our services, or force us to
change our business practices.Our EPP segment is subject to
numerous federal and state laws and regulations, some states’ money transmitter
regulations, and related licensing requirements.  Compliance with
federal and state laws and government regulations regarding money transmitters,
money laundering, privacy, data security, fraud, and other laws and regulations
associated with financial transaction processing is critical to our
business.  New laws and regulations in these areas may be enacted, or
existing ones changed, which could negatively impact services, restrict or
eliminate our ability to provide services, make our services unprofitable, or
create significant liability.  We have applications for licensure as a
money transmitter pending in several states. We have been notified by one state
that we are subject to payment of penalties for unlicensed activity prior to our
submission of the money transmitter application, and additional states could
impose such fines and fees.  In the future we may be subject to additional
states’ money transmitter regulations, federal money laundering regulations and
regulation of internet transactions.  We are also subject to the
applicable rules of the credit/debit card association, the National Automated
Clearing House Association (NACHA), and other industry standards.  If
we are found to be in violation of any such laws, rules, regulations or
standards, we could be exposed to significant financial liability, substantial
fines and penalties, cease and desist orders, and other sanctions that could
restrict or eliminate our ability to provide our services in one or more states
or accept certain types of transactions in one or more states, or could force us
to make costly changes to our business practices.  Even if we are not
forced to change our business practices, the cost of compliance, and obtaining
necessary licenses and regulatory approvals could be
substantial.




We
operate in highly competitive markets.  If we do not compete
effectively, we could face price reductions, reduced profitability and loss of
market share.  Our business is focused on electronic payment
transaction processing and 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.




10




The
revenues generated by our electronic payment processing operations may
fluctuate, and our ability to maintain profitability is
uncertain.  Our EPP business primarily provides credit and
debit card and electronic check payment options for the payment of federal and
state personal income taxes, real estate and personal property taxes, business
taxes, fines for traffic violations and parking citations, and educational,
utility and rent obligations.  The revenues earned by our EPP business
depend on consumers’ continued willingness to pay a convenience fee and our
relationships with clients, such as government taxing authorities, educational
institutions, public utilities and their respective
constituents.  Demand for electronic payment processing services could
decline if consumers are not receptive to paying a convenience fee; if card
associations change their rules, or laws are passed that do not allow us to
charge the convenience fees; or if credit or debit card issuers or marketing
partners eliminate or reduce the value of rewards to consumers under their
respective rewards programs.  The processing fees charged by
credit/debit card associations and financial institutions can be increased with
little or no notice, which could reduce our margins and harm our
profitability.




Demand for
electronic payment processing services could also be affected adversely by a
decline in the use of the Internet, economic factors such as a decline in
availability of credit, increased unemployment, or consumer migration to a new
or different technology or payment method.  The use of credit and
debit cards and electronic checks to make payments to government agencies is
subject to increasing competition and rapid technological change.  If
we are not able to develop, market and deliver competitive technologies, our
market share will decline and our operating results and financial condition
could suffer.




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




The
success of our business is based largely on our ability to attract and retain
talented and qualified employees and contractors.  The market
for skilled workers in our industry is extremely competitive.  In
particular, qualified project managers and senior technical and professional
staff are in great demand.  If we are not successful in our recruiting
efforts or are unable to retain key employees, our ability to staff projects and
deliver products and services may be adversely affected.  We believe
our success also depends upon the continued services of senior management and a
number of key employees whose employment may terminate at any
time.  If one or more key employees resigns to join a competitor, to
form a competing company, or as a result of termination or a divestiture, the
loss of such personnel and any resulting loss of existing or potential clients
could harm our competitive position.




We
depend on third parties for our products and services.  Failure by
these third parties to perform their obligations satisfactorily could hurt our
reputation, operating results and competitiveness.  Our
business is highly dependent on working with other companies and organizations
to bid on and perform complex multi-party projects.  We may act as a
prime contractor and engage subcontractors, or we may act as a subcontractor to
the prime contractor.  We use third-party software, hardware and
support service providers to perform joint engagements.  We depend on
licensed software and other technology from a small number of primary vendors.
We also rely on a third-party co-location facility for our primary data center,
use third-party processors to complete payment transactions and use third-party
software providers for system solutions, security and
infrastructure.  Our systems are dependent on integration and
implementation of complex third-party products and services including software
and hardware.  The failure of any of these third parties to meet their
contractual obligations, our inability to obtain favorable contract terms,
failures or defects attributable to these third parties or their products,
including in connection with system or software defects, implementation or
testing, or the discontinuation of the services of a key subcontractor or vendor
could result in degraded functionality or system failure, significant cost and
liability, diminished profitability and damage to our reputation and competitive
position.




11




If
we are not able to protect our intellectual property, our business could suffer
serious harm.Our systems and operating platforms, scripts, software code
and other intellectual property are generally proprietary, confidential, and may
be trade secrets.  We protect our intellectual property rights through
a variety of methods, such as use of nondisclosure and license agreements and
use of trade secret, copyright and trademark laws.  Ownership of
developed software and customizations to software are the subject of negotiation
and license arrangements with individual clients.  Despite our efforts
to safeguard and protect our intellectual property and proprietary rights, there
is no assurance that these steps will be adequate to avoid the loss or
misappropriation of our rights or that we will be able to detect unauthorized
use of our intellectual property rights.  If we are unable to protect
our intellectual property, competitors could market services or products similar
to ours, and demand for our offerings could decline, resulting in an adverse
impact on revenues.




We
may be subject to infringement claims by third parties, resulting in increased
costs and loss of business.  From time to time we receive
notices from others claiming we are infringing on their intellectual property
rights.  Defending a claim of infringement against us could prevent or
delay our providing products and services, cause us to pay substantial costs and
damages or force us to redesign products or enter into royalty or licensing
agreements on less favorable terms.  If we are required to enter into
such agreements or take such actions, our operating margins could
decline.




If
we are not able to obtain adequate or affordable insurance coverage or bonds, we
could face significant liability claims and increased premium costs and our
ability to compete for business could be compromised.  We
maintain insurance to cover various risks in connection with our
business.  Additionally, our business includes projects that require
us to obtain performance, statutory and bid bonds from a licensed
surety.  There is no guarantee that such insurance coverage or bonds
will continue to be available on reasonable terms, or at all.  If we
are unable to obtain or maintain adequate insurance and bonding coverage,
potential liabilities associated with the risks discussed in this report could
exceed our coverage, and we may not be able to obtain new contracts or continue
to provide existing services, which could result in decreased business
opportunities and declining revenues.




Our
markets are changing rapidly.  If we are not able to adapt to changing
conditions, we may lose market share and may not be able to compete
effectively.  The markets for our products are characterized by
rapid changes in technology, client expectations and evolving industry
standards.  Our future success depends on our ability to innovate,
develop, acquire and introduce successful new products and services for our
target markets and to respond quickly to changes in the market.  If we
are unable to address these requirements, or if our products or services do not
achieve market acceptance, we may lose market share, and our revenues could
decline.




Our
business is subject to increasing performance requirements, which could result
in reduced revenues and increased liability.  The failure to
meet client expectations could damage our reputation and compromise our ability
to attract new business.  On certain projects we make performance
guarantees, based upon defined operating specifications, service levels and
delivery dates, which are sometimes backed by contractual guarantees and
performance, statutory or bid bonds.  Unsatisfactory performance of
services, disruption of services, or unanticipated difficulties or delays in
processing payments or providing contracted services may result in termination
of the contract, a reduction in revenues, liability for penalties and damages,
or claims against a bond.






ITEM
1B—UNRESOLVED STAFF COMMENTS




There are no
unresolved written comments that were received from the Securities and Exchange
Commission’s staff 180 days or more before the end of our fiscal year 2008
regarding our periodic or current reports under the Securities Exchange Act of
1934.




12




ITEM
2—PROPERTIES




As of September 30,
2008, we leased over 72,000 square feet of space throughout the country, which
includes our 41,000 square-foot corporate headquarters in Reston,
Virginia.  We also leased 28,000 square feet of space in Georgia,
Connecticut, and California, to house our subsidiary operations for EPP and to
provide general office space to support our projects and our
clients.  We also lease 3,000 square feet of office space in New
Mexico which we have subleased to a third party.  Finally, we own a
28,060 square-foot building in Alabama which houses certain administrative,
call center, warehouse and other operations.






ITEM
3—LEGAL PROCEEDINGS




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 us, our reputation could
be impaired.  We have cooperated, and intend to continue to cooperate,
fully with this investigation.






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




No matters were
submitted to a vote of our stockholders during the fourth quarter of fiscal
2008.




13




EXECUTIVE
OFFICERS




The names, ages and
positions of our executive officers at December 1, 2008, are listed in the
following table, together with their business experience during the past five
years.  Unless otherwise specified, all officers served continuously
since the date indicated.




Name,
      age and position with Registrant
            Date
      elected
              or
      appointedRonald
      L. Rossetti, Age 65 (a)Chairman
      of the Board, Chief Executive Officer
            May
      2006Ronald
      W. Johnston, Age 62 (b)Senior
      Vice President, Chief Financial Officer
            July
      2008Nina
      K. Vellayan, Age 41 (c)Senior
      Vice President, Chief Operating Officer
            October
      2008Kevin
      C. Connell, Age 42 (d)Senior
      Vice President, Sales & Marketing
            November
      2006Keith
      S. Kendrick, Age 51 (e)Senior
      Vice President, Strategic Marketing
            June
      2008Keith
      S. Omsberg, Age 47 (f)Vice
      President, General Counsel and Corporate Secretary
            April
      2008(a)
      Mr. Rossetti served as President of Riverside Capital Partners, Inc., a
      venture capital investment firm since 1997.  Since 1997, Mr.
      Rossetti has also been a general partner in several real estate general
      partnerships, all commonly controlled by Riverside Capital
      Holdings.(b)
      Mr. Johnston served as a CFO partner with Tatum LLC from August 2007
      through June 2008; CFO and Treasurer for Grantham Education Corporation
      from October 2004 through March 2007; and CFO for WorldSpace Corporation
      from September 2002 through September 2004.(c)Ms.
      Vellayan served as President of Business Office Solutions, a division of
      Sallie Mae Inc., from 2001 through September 2008.(d)Mr.
      Connell served as Senior Vice President, Business Development of OPC, a
      wholly-owned subsidiary of Tier from July 2003 to November 2006, and Vice
      President, Business Development of OPC from August 2002 to July
      2003.(e)Mr. Kendrick served as Senior Vice President, Corporate Marketing
      and Strategy with EFunds Corporation from December 2005 through September
      2007 and co-founder and Chief Executive Officer of Vericate Corporation
      from January 2003 through March 2005.(f)Mr.
      Omsberg served as Assistant General Counsel of Tier from June 2002 to
      April 2008.




PART
II




ITEM
5—MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES




Our common stock is
quoted on the Nasdaq Global Market under the symbol TIER.  On
November 28, 2008, there were 215 record holders of our common
stock.  The quarterly high and low prices per share during fiscal 2008
and 2007 were as follows:




Fiscal
      year ended September 30,2008
            
            
            2007High
            
            
            Low
            
            
            High
            
            
            LowFirst
      quarter
            
            $
            11.01
            
            
            $
            7.94
            
            
            $
            7.30
            
            
            $
            6.35Second
      quarter
            
            $
            9.26
            
            
            $
            6.75
            
            
            $
            8.90
            
            
            $
            5.85Third
      quarter
            
            $
            8.75
            
            
            $
            7.03
            
            
            $
            10.05
            
            
            $
            8.25Fourth
      quarter
            
            $
            8.48
            
            
            $
            7.06
            
            
            $
            10.26
            
            
            $
            8.33




14


We have never
declared or paid cash dividends on our common stock and do not anticipate doing
so for the foreseeable future.  Instead, we intend to retain our
current and future earnings to fund the development and growth of our
business.  Our current credit facility prohibits us from declaring
dividends.




COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN




The
following graph compares the percentage change in cumulative stockholder return
on our common stock for the period September 30, 2003 through
September 30, 2008, with the cumulative total return on the NASDAQ
Composite Index and the Russell 2000 Index.  The comparison assumes
$100.00 was invested on September 30, 2003 in our common stock and in each
of the foregoing indices and assumes reinvestment of all dividends, if
any.






Image


Measurement
              Date
            
            Tier
              Technologies,
      Inc.
            
            
            NASDAQ
              Composite
            
            
            Russell
              20009/30/03
            
            $
            100.00
            
            
            $
            100.00
            
            
            $
            100.009/30/04
            
            
            108.31
            
            
            
            107.74
            
            
            
            118.779/30/05
            
            
            97.08
            
            
            
            123.03
            
            
            
            140.099/30/06
            
            
            76.32
            
            
            
            131.60
            
            
            
            154.009/30/07
            
            
            114.48
            
            
            
            158.88
            
            
            
            173.009/30/08
            
            
            82.60
            
            
            
            119.05
            
            
            
            147.94




The information
included under the heading "Comparison of 5 Year Cumulative Total Return" in
Item 5 of this Annual Report on Form 10-K is "furnished" and not "filed" and
shall not be deemed to be "soliciting material" or subject to Regulation 14A,
shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to
the liabilities of that section, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933, as amended, or the
Exchange Act.




15




ITEM 6—SELECTED FINANCIAL DATA






The following table summarizes
selected consolidated financial data for the fiscal years ended
September 30, 2004 through 2008.  You should read the following
selected consolidated financial data in conjunction with the financial
statements, including the related notes, andItem
7—Management's Discussion and Analysis of Financial Condition and Results of
Operations.  Historical results are
not necessarily indicative of results to be expected for any future
period.  Certain historical information in the following table has
been reclassified to conform to the current year
presentation.




Fiscal
      years ended September 30,(in
      thousands, except per share data)
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Revenues
            
            $
            122,571
            
            
            $
            108,306
            
            
            $
            90,916
            
            
            $
            74,307
            
            
            $
            55,251Costs
      and expenses
            
            
            137,259
            
            
            
            130,724
            
            
            
            113,956
            
            
            
            92,211
            
            
            
            77,273Loss
      before discontinued and other income
            
            
            (14,688
            )
            
            
            (22,418
            )
            
            
            (23,040
            )
            
            
            (17,904
            )
            
            
            (22,022
            )Other
      income
            
            
            2,731
            
            
            
            4,094
            
            
            
            3,470
            
            
            
            874
            
            
            
            835Loss
      before income taxes & discontinued operations
            
            
            (11,957
            )
            
            
            (18,324
            )
            
            
            (19,570
            )
            
            
            (17,030
            )
            
            
            (21,187
            )Income
      tax provision
            
            
            87
            
            
            
            76
            
            
            
            45
            
            
            
            127
            
            
            
            —Loss
      from continuing operations
            
            
            (12,044
            )
            
            
            (18,400
            )
            
            
            (19,615
            )
            
            
            (17,157
            )
            
            
            (21,187
            )(Loss)
      income from discontinued operations, net
            
            
            (15,401
            )
            
            
            15,366
            
            
            
            10,164
            
            
            
            18,283
            
            
            
            21,124Net
      (loss) income
            
            $
            (27,445
            )
            
            $
            (3,034
            )
            
            $
            (9,451
            )
            
            $
            1,126
            
            
            $
            (63
            )Total
      assets
            
            $
            137,351
            
            
            $
            166,424
            
            
            $
            169,860
            
            
            $
            176,742
            
            
            $
            171,980Long-term
      obligations, less current portion
            
            $
            136
            
            
            $
            200
            
            
            $
            1,359
            
            
            $
            1,479
            
            
            $
            1,785(Loss)
      earnings per share—Basic and diluted:Continuing
      operations
            
            $
            (0.61
            )
            
            $
            (0.94
            )
            
            $
            (1.00
            )
            
            $
            (0.88
            )
            
            $
            (1.11
            )Discontinued
      operations
            
            $
            (0.79
            )
            
            $
            0.78
            
            
            $
            0.52
            
            
            $
            0.94
            
            
            $
            1.11(Loss)
      earnings per share—Basic and diluted
            
            $
            (1.40
            )
            
            $
            (0.16
            )
            
            $
            (0.48
            )
            
            $
            0.06
            
            
            $
            —Weighted
      average common shares used in computing:Basic
      and diluted (loss) earning per share
            
            
            19,616
            
            
            
            19,512
            
            
            
            19,495
            
            
            
            19,470
            
            
            
            18,987




16




ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements.  We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events.  Our actual performance could differ materially from
the expectations and beliefs reflected in the forward-looking statements in this
section and throughout this report, as a result of the risks, uncertainties and
assumptions discussed under Item 1A—Risk Factors of this Annual Report on Form
10-K and other factors discussed in this section.  For information
regarding what constitutes a forward-looking statement refer to Private
Securities Litigation Reform Act Safe Harbor Statement on
page 2.




OVERVIEW




We
provide federal, state and local government, educational institutions, utility
companies and other public sector clients with biller direct electronic payment
and other transaction processing services, as well as software and systems
integration services.  As explained more fully in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations, we are
in the process of divesting a number of incompatible businesses and dedicating
an increasing amount of effort toward expanding our core business—Electronic
Payment Processing, or EPP.




Key
Events in Fiscal 2008




Fiscal 2008
continued to be a transitional year for our company.  During fiscal
2008 we divested five business units classified as held-for-sale during fiscal
2007: (1) Independent Validation and Verification, (2) Health and Human
Services, (3) Call Center, (4) State System Integration and (5) Government
Business Process Outsourcing, or GBPO.  The results of these
operations are classified as (Loss)
income from discontinued operations, net in our Consolidated Statement of
Operations.




As of
September 30, 2008, we continued to seek a buyer for our business
operations that were formerly part of our Packaged Software Systems Integration,
or PSSI, segment: (1) Financial Management Systems and (2) Unemployment
Insurance Systems.  In November 2008, we completed the sale of
our Financial Management Systems operations.  We expect to divest our
Unemployment Insurance Systems business in the early part of fiscal
2009.




SUMMARY
OF FISCAL 2008 OPERATING RESULTS




The
following table provides a summary of our fiscal 2008 operating results for our
Continuing and Discontinued Operations:




(in
      thousands, except per share)
            
            Net
      (loss) income
            
            
            (Loss)
      earnings per shareContinuing
      Operations:EPP
            
            $
            3,245
            
            
            $
            0.17Wind-down
            
            
            (723
            )
            
            
            (0.04
            )Corporate
            
            
            (14,566
            )
            
            
            (0.74
            )Total
      Continuing Operations
            
            $
            (12,044
            )
            
            $
            (0.61
            )Discontinued
      Operations:GBPO
            
            $
            5,420
            
            
            $
            0.27PSSI
            
            
            (21,588
            )
            
            
            (1.10
            )Corporate
      (eliminations)
            
            
            767
            
            
            
            0.04Total
      Discontinued Operations
            
            $
            (15,401
            )
            
            $
            (0.79
            )Net
      loss
            
            $
            (27,445
            )
            
            $
            (1.40
            )


17




Our Continuing
Operations consists of our Electronic Payment Processing, or EPP, operations,
certain operations we intend to wind down over the next four years and our
corporate costs that support our business.  Our EPP operations
reported net income of $3.2 million in fiscal 2008 as a result of adding
over 300 new clients during fiscal 2008 and increasing transaction volume by
27.6%.  Our Wind-down operations reported a $0.7 million loss for
fiscal 2008.  Although we continue to reduce direct costs and general
and administrative and selling expenses associated with those operations
compared to prior years, the amortization of intangible assets assigned to our
Voice Systems Automation, or VSA, operations has caused a net loss for the
fiscal year.  Our Corporate expenses contributed $14.6 million to
the overall net loss for Continuing Operations primarily due to general and
administrative labor and labor-related expenses to support our business
operations.




Our Discontinued
Operations consists of businesses we have divested during fiscal 2008 as well as
two business operations for which we continued to seek buyers as of
September 30, 2008.  The held-for-sale business operations were
portions of our former PSSI business.  In November 2008, we completed
the sale of one of those operations—our Financial Management Systems
business.  Our Discontinued Operations reported a net loss of
$15.4 million for fiscal 2008.  During fiscal 2008 we recognized
$17.8 million in impairment charges to write down our divested and
held-for-sale assets to fair market value.






EXPECTATIONS
AND STRATEGY FOR 2009




During fiscal 2009
we expect to complete our transition from a diversified government outsourcing
provider to a company focused exclusively on providing electronic payment
solutions in the biller direct space. We anticipate minimal revenue growth
during fiscal 2009 as we believe the current macroeconomic climate will reduce
the average payment size in key vertical categories including federal tax and
real property tax payments.  Nevertheless for the remainder of fiscal
2009 we expect to see continued transaction growth in our EPP business driven by
increasing consumer demand for electronic payment options, as well as pursuing
key strategic initiatives that leverage our lead position in the biller direct
space and are designed to facilitate the growth and maximize
efficiencies.  These initiatives include the following:




·
            Analyze and
      consolidate our processing platforms and infrastructure to improve
      efficiency and reduce costs, while providing the capacity for future
      growth.  Based on our current plan, we expect to complete the
      consolidation of our current EPP technology platforms in fiscal
      2009.




·
            Expand our
      biller direct services beyond our government, education and utility
      clients to begin focusing on commercial biller-direct payment
      categories.  We expect to increase client acquisitions by
      increasing sales and marketing programs and expanded channel
      selling.




·
            Increase
      customer adoption and utilization through increased marketing and
      promotions, expanded cross-selling capabilities and enhanced My Account
      functionality.




·
            Develop and
      launch new products and payment
services.




·
            Enter new
      biller direct markets.




In addition, we
have completed the consolidation of some of our EPP operations, facilities,
departments and positions in San Ramon, California with our operations in
Auburn, Alabama.  We expect this operations consolidation to increase
efficiencies, reduce costs and eliminate duplicative operations and
functions.  We also intend to right-size our corporate overhead once
the disposition of our non-core assets is complete.  During the early
part of fiscal 2009, we also expect to finalize the divestiture of the
held-for-sale businesses and use the proceeds from these dispositions to fund
future growth in our EPP business.




18




RESULTS
OF OPERATIONS—2008 COMPARED WITH 2007




The following table
provides an overview of our results of operations for fiscal years 2008 and
2007:




Year
      ended September 30,
            
            
            Variance(in
      thousands, except percentages)
            
            2008
            
            
            2007
            
            
            $
      Amount
            
            
            %Revenues
            
            $
            122,571
            
            
            $
            108,306
            
            
            $
            14,265
            
            
            
            13.2
            %Costs and
      expenses
            
            
            137,259
            
            
            
            130,724
            
            
            
            6,535
            
            
            
            5.0
            %Loss from
      continuing operations before other income and income taxes
            
            
            (14,688
            )
            
            
            (22,418
            )
            
            
            7,730
            
            
            
            (34.5
            )%Other
      income
            
            
            2,731
            
            
            
            4,094
            
            
            
            (1,363
            )
            
            
            (33.3
            )%Loss from
      continuing operations before income taxes
            
            
            (11,957
            )
            
            
            (18,324
            )
            
            
            6,367
            
            
            
            (34.8
            )%Income tax
      provision
            
            
            87
            
            
            
            76
            
            
            
            11
            
            
            
            14.5
            %Loss from
      continuing operations
            
            
            (12,044
            )
            
            
            (18,400
            )
            
            
            6,356
            
            
            
            (34.5
            )%(Loss) income
      from discontinued operations, net
            
            
            (15,401
            )
            
            
            15,366
            
            
            
            (30,767
            )
            
            
            *Net
      loss
            
            $
            (27,445
            )
            
            $
            (3,034
            )
            
            $
            (24,411
            )
            
            
            **
      Not meaningful




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




Continuing
Operations




The
Continuing Operations section of our Consolidated Statements of Operations
includes the results of operations of our core EPP business, certain businesses
that we expect to wind-down over the next four years and general corporate
costs.  The following table presents the revenues and expenses for our
Continuing Operations for fiscal years 2008 and 2007.  This table is
followed by an analysis summarizing reasons for variances in these financial
results.




Year
      ended September 30,(in
      thousands)
            
            2008
            
            
            2007Revenues
            
            $
            122,571
            
            
            $
            108,306Costs
      and expenses:Direct
      costs
            
            
            95,234
            
            
            
            82,668General
      and administrative
            
            
            28,020
            
            
            
            26,372Selling
      and marketing
            
            
            8,677
            
            
            
            7,950Depreciation
      and amortization
            
            
            5,328
            
            
            
            4,573Write-down
      of goodwill and intangibles
            
            
            —
            
            
            
            9,161Total
      costs and expenses
            
            
            137,259
            
            
            
            130,724Loss
      from continuing operations before other income and income
      taxes
            
            
            (14,688
            )
            
            
            (22,418
            )Other
      income
            
            
            2,731
            
            
            
            4,094Loss
      from continuing operations before income taxes
            
            
            (11,957
            )
            
            
            (18,324
            )Income
      tax provision
            
            
            87
            
            
            
            76Loss
      from continuing operations
            
            $
            (12,044
            )
            
            $
            (18,400
            )




19




Revenues
(Continuing Operations)




The
following table provides a year-over-year comparison of revenues generated by
our Continuing Operations during fiscal years 2008 and 2007.




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2008
            
            
            2007
            
            
            $
            
            
            
            %RevenuesEPP
            
            $
            117,072
            
            
            $
            99,433
            
            
            $
            17,639
            
            
            
            17.7
            %Wind-down
            
            
            5,930
            
            
            
            9,258
            
            
            
            (3,328
            )
            
            
            (36.0
            )%Eliminations
            
            
            (431
            )
            
            
            (385
            )
            
            
            (46
            )
            
            
            (12.0
            )%Total
            
            $
            122,571
            
            
            $
            108,306
            
            
            $
            14,265
            
            
            
            13.2
            %




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




EPP
Revenues:  EPP provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients.  EPP’s revenues reflect the number of contracts with clients,
the volume of transactions processed under each contract and the rates that we
charge for each transaction that we process.  EPP revenues are
seasonal in nature, primarily due to federal, state and local mandated due dates
for property and income taxes.




EPP
generated $117.1 million of revenue during fiscal 2008, a
$17.6 million, or 17.7%, increase over fiscal 2007.  In fiscal
2008, we processed 27.6% more transactions than we processed in fiscal 2007;
representing 24.3% more total dollars.  Transaction growth rate during
fiscal 2008 ranged from 4.3% to 73.3% for all payment processing markets, except
our educational institution market, which incurred an 8.5% decrease, primarily
due to the cancellation of one contract.  Our property tax processing
market grew 73.3% over the same period last year, while our federal income tax
processing market grew 4.3%.




During
fiscal 2008, our contract with the U.S. Internal Revenue Service, or IRS,
provided nearly 27% of our annual revenues from Continuing
Operations.  Currently we are operating under a contract extension
which expires November 30, 2009.  In October 2008, the IRS issued
a Request for Proposal, or RFP, for a contract period commencing in
2010.  As an increasing number of public and private sector entities
strive to meet rising consumer demand for electronic payment alternatives, we
believe our renewed focus on our core EPP business will continue to produce
significant revenue growth for the foreseeable future.




Wind-down Revenues:  During fiscal 2008, our
Wind-down operations generated $5.9 million in revenues, a
$3.3 million, or 36.0%, decrease from fiscal 2007.  The overall
revenue decrease was due primarily to the completion or near completion of
several projects during fiscal 2008 and 2007.  Approximately
$5.4 million of the revenues reported for fiscal 2008 were generated by our
Voice and Systems Automation, or VSA, business.  We expect to continue
to support and renew existing maintenance contracts; however, we do not expect
that we will actively pursue new contracts for the VSA business.  The
remaining fiscal 2008 Wind-down revenues were generated by our Pension business,
which we expect to wind down during fiscal 2009.




Corporate Operations/Eliminations: During fiscal 2008, we eliminated
$0.4 million of revenues for transactions processed by EPP for our former
GBPO business (which is included in Discontinued Operations). This amount was
$46,000 greater than the amount eliminated during 2007, because of a rise in the
number of transactions that EPP processed for our former GBPO
business.




20




Direct
Costs (Continuing Operations)




Direct
costs, which represent costs directly attributable to providing services to
clients, include: payroll and payroll-related costs; credit card interchange
fees and assessments; travel-related expenditures; amortization of intellectual
property; amortization and depreciation of project-related equipment, hardware
and software purchases; and the cost of hardware, software and equipment sold to
clients.  Our EPP business direct costs are seasonal in nature, and
consistent with the seasonality of its revenues.  The following table
provides a year-over-year comparison of direct costs incurred by our Continuing
Operations during fiscal years 2008 and 2007:




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2008
            
            
            2007
            
            
            $
            
            
            
            %Direct
      costsEPP
            
            $
            91,290
            
            
            $
            76,388
            
            
            $
            14,902
            
            
            
            19.5
            %Wind-down
            
            
            3,944
            
            
            
            6,280
            
            
            
            (2,336
            )
            
            
            (37.2
            )%Total
            
            $
            95,234
            
            
            $
            82,668
            
            
            $
            12,566
            
            
            
            15.2
            %




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




EPP
Direct Costs:  Consistent with the year-over-year growth in our
EPP revenues, EPP’s direct costs rose $14.9 million, or 19.5%, in fiscal
2008.  These increases directly reflect interchange and processing
fees charged to us to process the previously described increase in the number
and volume of electronic payments processed for our electronic payment
processing clients. We expect to see continued increases in our EPP direct costs
as we strive to grow this business and as more clients move toward electronic
payment processing options.




Wind-down
Direct Costs:  Direct costs from our Wind-down operations
decreased $2.3 million, or 37.2%, during fiscal 2008 from fiscal 2007
results.  The year-over-year reduction in direct costs during fiscal
2008 reflects the completion and near-completion of contracts, which, in turn,
caused a reduction in the level of subcontractor and labor and labor-related
costs that we incurred.  During fiscal 2008 our Pension operations
decreased $1.2 million and our VSA operations costs decreased
$1.1 million.  As we wind down these operations, we expect that
the direct costs of these operations will continue to decrease during fiscal
2009.






General
and Administrative (Continuing Operations)




General and
administrative expenses consist primarily of payroll and payroll-related costs
for general management, administrative, accounting, legal and information
systems, as well as fees paid to our directors and auditors.  The
following table provides a year-over-year comparison of general and
administrative costs incurred by our Continuing Operations during fiscal years
2008 and 2007:




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2008
            
            
            2007
            
            
            $
            
            
            
            %General
      and administrativeEPP
            
            $
            11,065
            
            
            $
            7,057
            
            
            $
            4,008
            
            
            
            56.8
            %Wind-down
            
            
            1,088
            
            
            
            3,284
            
            
            
            (2,196
            )
            
            
            (66.9
            )%Corporate
            
            
            15,867
            
            
            
            16,031
            
            
            
            (164
            )
            
            
            (1.0
            )%Total
            
            $
            28,020
            
            
            $
            26,372
            
            
            $
            1,648
            
            
            
            6.3
            %




21




EPP General and
Administrative:  During fiscal 2008, EPP incurred
$11.1 million of general and administrative expenses, a $4.0 million,
or 56.8%, increase over fiscal 2007. These increases are attributable primarily
to a $1.8 million increase for labor and labor-related expenses as a result
of a realignment of resources from Discontinued Operations, the shift of staff
from our Wind-down VSA operations to our EPP operations, to support our
strategic growth initiatives and the consolidation of our San Ramon, California
with our Auburn, Alabama facility.  We also incurred a
$0.9 million increase for consulting services to develop and implement key
strategic initiatives; a $0.5 million increase in legal fees associated
with applying for money transmitter licenses; a $0.3 million increase in
bad debt expense; $0.3 million increase in miscellaneous office expenses;
and a $0.2 million increase in travel and travel related expenses primarily
associated with the consolidation of our EPP operations to our Auburn, Alabama
location.




During
fiscal 2009, we expect that general and administrative expenses for our EPP
operations will increase. Specifically, in fiscal 2008 we commenced an
initiative that will establish a common platform for processing electronic
payments.  Currently, we process payments on multiple platforms at
multiple locations.  By continuing to invest in a common platform in
fiscal 2009, we believe the long-term efficiency and cost-effectiveness of our
EPP operations will improve and we will have the capacity to process
significantly more transactions.




Wind-down
General and Administrative:  During fiscal 2008, our Wind-down
operations incurred $1.1 million of general and administrative expenses, a
$2.2 million, or 66.9%, decrease over fiscal 2007.  During fiscal
2007 we recorded a contract settlement for one of our Pension projects, which
contributed $1.3 million to the decline in expenses in fiscal
2008.  Labor and labor-related expenses contributed $1.0 million
to the overall decline, primarily as a result of the shift of resources from our
VSA operations to EPP operations to support our strategic growth
initiatives.  Miscellaneous office and business-related expenses
decreased $0.1 million, while bad debt expense increased $0.2 million
during the current fiscal year.




We expect that the
administrative and general costs associated with these operations will decrease
during fiscal 2009 as we continue to wind down these operations.




Corporate
General and Administrative:  Our Corporate operations represent
those functions that support our corporate governance, including the costs
associated with our Board of Directors and executive management team, as well as
accounting, finance, legal and the costs of maintaining our corporate
headquarters in Reston, Virginia.  In addition, corporate costs
include functions that provide shared-services that support operations
throughout our organization, such as information technology and business
development.




During fiscal 2008,
our corporate operations incurred $15.9 million of general and
administrative expenses, a $0.2 million, or 1.0%, decrease from fiscal
2007.  Labor and labor-related expenses decreased $0.6 million
overall, consisting of a $1.0 million decrease due to a reduction in work
force and a reduction in bonus expense of $0.4 million, offset by
additional share-based payment expense, primarily attributable to the
acceleration of vesting of options for our Board of Directors of
$0.5 million and severance expense of $0.3 million.  Legal
fees decreased $0.3 million in fiscal 2008 as a result of the reversal of a
legal reserve related to an investigation previously conducted by the US
Department of Justice, which was dismissed in February
2008.  Miscellaneous office and travel expenses contributed another
$0.2 million to the overall decline in expenses.  Offsetting
these expenses is a $0.7 million increase for recruiting and consulting
services as a result of two executive placement searches and additional support
for our legal, human resources and accounting functions and a $0.2 million
increase in tax expense.




22




We believe that the
divestiture of portions of our former GBPO and PSSI operations during fiscal
2008, the November 2008 sale of our Financial Management Systems operations and
the anticipated sales of the remaining former PSSI operation classified as
held-for-sale will reduce the need for corporate support.  Therefore,
during fiscal 2009, we anticipate reductions in corporate general and
administrative expenses as these divestitures complete.




Selling and Marketing
(Continuing Operations)




Selling and
marketing expenses consist primarily of payroll and payroll-related costs,
commissions, advertising and marketing expenditures and travel-related
expenditures.  We expect selling and marketing expenses to fluctuate
from quarter to quarter due to a variety of factors, such as increased
advertising and marketing expenses incurred in anticipation of the April 15th
federal tax season.  The following table provides a year-over-year
comparison of selling and marketing costs incurred by our Continuing Operations
during fiscal years 2008 and 2007.




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2008
            
            
            2007
            
            
            $
            
            
            
            %Selling
      and marketingEPP
            
            $
            7,966
            
            
            $
            6,848
            
            
            $
            1,118
            
            
            
            16.3
            %Wind-down
            
            
            191
            
            
            
            1,091
            
            
            
            (900
            )
            
            
            (82.5
            )%Corporate
            
            
            520
            
            
            
            11
            
            
            
            509
            
            
            
            *Total
            
            $
            8,677
            
            
            $
            7,950
            
            
            $
            727
            
            
            
            9.1
            %*
      Not meaningful




EPP Selling and
Marketing:  During fiscal 2008, EPP incurred $8.0 million
of selling and marketing expenses, a $1.1 million, or 16.3%, increase over
fiscal 2007.  Of the overall increase, $1.0 million is
attributable to an increase in labor and labor-related expenses, primarily due
to an increase in marketing efforts as a result of our strategic initiative to
grow our EPP operations, and $0.3 million is attributable to an increase in
travel expenses.  Offsetting these increases is a $0.2 million
decrease in strategic partnership costs.  During fiscal 2009, we
expect that EPP’s direct sales and marketing expenses will remain consistent
with fiscal 2008 costs as we manage our expenses.




Wind-down
Selling and Marketing:  During fiscal 2008, our Wind-down
operations incurred $0.2 million in selling and marketing expenses, a
$0.9 million, or 82.5%, decrease over the same period last
year.  The decrease is primarily due to the absence of labor and
labor-related expenses as a result of the shift in marketing efforts to our EPP
strategic initiatives.  We do not expect to incur significant selling
and marketing expenses for our wind-down operations in fiscal
2009.




Corporate
Selling and Marketing: During fiscal 2008 and 2007, we
assigned sales and marketing expenses to the specific businesses that benefited
from the associated sales and marketing efforts.  During fiscal 2008
we reported $0.5 million in selling and marketing expenses, which is a
$0.5 million increase over the same period last year consisting primarily
of an increase in labor and labor-related expenses of $1.5 million which
could not be assigned to specific businesses, offset by decreases in travel
expenses of $0.4 million, advertising of $0.3 million and
miscellaneous office and consulting services of
$0.3 million.  During fiscal 2009, we expect to continue to
assign corporate sales and marketing expenses to individual operations that
directly benefit from these efforts, primarily EPP.




23




Depreciation
and Amortization (Continuing Operations)




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




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2008
            
            
            2007
            
            
            $
            
            
            
            %Depreciation
      and amortizationEPP
            
            $
            3,503
            
            
            $
            3,206
            
            
            $
            297
            
            
            
            9.3
            %Wind-down
            
            
            1,428
            
            
            
            763
            
            
            
            665
            
            
            
            87.2
            %Corporate
            
            
            397
            
            
            
            604
            
            
            
            (207
            )
            
            
            (34.3
            )%Total
            
            $
            5,328
            
            
            $
            4,573
            
            
            $
            755
            
            
            
            16.5
            %




During
the fourth quarter of fiscal 2007 we reclassified our VSA operation from
held-for-sale to Wind-down and subsequently resumed depreciating and amortizing
its assets.  As a result, our depreciation and amortization expense
increased $0.7 million in fiscal 2008 over the same period last
year.  In addition, during fiscal 2008 we reclassified some of our IT
assets from Corporate to EPP, thereby reducing Corporate depreciation and
amortization expense and increasing EPP expense.




Other
Income (Continuing Operations)




Interest income, net:Interest income earned during fiscal
2008 decreased $0.6 million, or 17.2%, from interest income earned during
fiscal 2007.  The decrease in interest rates earned on our
investments, consistent with interest rate changes in the marketplace, is the
primary cause of the decline.  Our interest income is earned by our
EPP and Corporate operations.




Income
Tax Provision (Continuing Operations)




We reported income
tax provisions of $87,000 for fiscal 2008, compared with $76,000 reported for
fiscal 2007.  The provision for income taxes represents federal and
state tax obligations incurred by our EPP operations.  Our
Consolidated Statements of Operations do not reflect a federal tax provision
because of offsetting adjustments to our valuation allowance.  Our
effective tax rates differ from the federal statutory rate due to state income
taxes, tax-exempt interest income and the charge for establishing a valuation
allowance on our net deferred tax assets.  Our future tax rate may
vary due to a variety of factors, including, but not limited to:  the
relative income contribution by tax jurisdiction; changes in statutory tax
rates; the amount of tax exempt interest income generated during the year;
changes in our valuation allowance; our ability to utilize net operating losses
and any non-deductible items related to acquisitions or other nonrecurring
charges.






Discontinued
Operations




Our Discontinued
Operations primarily consists of portions of our former GBPO and PSSI businesses
that we divested during fiscal 2008.  It also includes portions of our
former PSSI business classified as held-for-sale, for which we are currently
seeking buyers.  As of September 30, 2008, we continued to own and
operate those businesses.  However, Statement of Financial Accounting
Standards No. 144—Impairment
or Disposal of Long-Lived Assets, or SFAS 144, requires that we report
those businesses as “discontinued” on our Consolidated Statements of Operations,
because we do not expect to have continuing involvement in, or cash flows from,
those operations after their divestiture.  As such, we reclassified
revenues and costs associated with the portions of those segments held-for-sale
to Discontinued Operations for all periods represented.




24




The following table
summarizes our results of operations from Discontinued Operations for fiscal
2008 and 2007.  Immediately following this table is a discussion of
key variances in these results:




Year
      ended September 30, 2008
            
            
            Year
      ended September 30, 2007(in
      thousands)
            
            GBPO
            
            
            PSSI
            
            
            Other
      and Eliminations
            
            
            Total
            
            
            GBPO
            
            
            PSSI
            
            
            Other
      and Eliminations
            
            
            TotalRevenues
            
            $
            20,235
            
            
            $
            24,608
            
            
            $
            —
            
            
            $
            44,843
            
            
            $
            37,677
            
            
            $
            31,372
            
            
            $
            —
            
            
            $
            69,049Costs
      and expenses:Direct
      costs
            
            
            10,634
            
            
            
            20,650
            
            
            
            (431
            )
            
            
            30,853
            
            
            
            24,696
            
            
            
            21,557
            
            
            
            (386
            )
            
            
            45,867General
      and administrative
            
            
            2,282
            
            
            
            6,262
            
            
            
            (242
            )
            
            
            8,302
            
            
            
            2,636
            
            
            
            6,717
            
            
            
            (49
            )
            
            
            9,304Selling
      and marketing
            
            
            729
            
            
            
            1,668
            
            
            
            (83
            )
            
            
            2,314
            
            
            
            1,098
            
            
            
            2,621
            
            
            
            (18
            )
            
            
            3,701Depreciation
      and
              amortization
            
            
            1
            
            
            
            78
            
            
            
            —
            
            
            
            79
            
            
            
            2
            
            
            
            95
            
            
            
            —
            
            
            
            97Write-down
      of goodwill and
              intangibles
            
            
            141
            
            
            
            17,623
            
            
            
            —
            
            
            
            17,764
            
            
            
            2,671
            
            
            
            120
            
            
            
            —
            
            
            
            2,791Total
      costs and expenses
            
            
            13,787
            
            
            
            46,281
            
            
            
            (756
            )
            
            
            59,312
            
            
            
            31,103
            
            
            
            31,110
            
            
            
            (453
            )
            
            
            61,760(Loss)
      income before gain
              ondiscontinued
              operations
            
            
            6,448
            
            
            
            (21,673
            )
            
            
            756
            
            
            
            (14,469
            )
            
            
            6,574
            
            
            
            262
            
            
            
            453
            
            
            
            7,289(Loss)
      gain on discontinued
              operations
            
            
            (1,028
            )
            
            
            85
            
            
            
            11
            
            
            
            (932
            )
            
            
            —
            
            
            
            —
            
            
            
            8,077
            
            
            
            8,077(Loss)
      income from
              discontinued
      operations, net
            
            $
            5,420
            
            
            $
            (21,588
            )
            
            $
            767
            
            
            $
            (15,401
            )
            
            $
            6,574
            
            
            $
            262
            
            
            $
            8,530
            
            
            $
            15,366




Revenues (Discontinued
Operations)




GBPO
Revenues:  During fiscal 2008, revenues from
discontinued GBPO operations decreased $17.4 million, or 46.3%, from fiscal
2007 results.  During fiscal 2008 we divested our former GBPO
operations which were classified as held-for-sale during fiscal
2007.  The decrease in revenues from prior years is primarily
attributable to the absence of revenues in the current fiscal year associated
with the timing of the sales of the businesses.  The
$17.4 million decrease is made up of the following: $13.1 million
attributable to Payment Processing Centers, or PPC; $2.4 million
attributable to Health and Human Services, or HHS; $1.4 million
attributable to Call Center; and $0.5 million attributable to Financial
Institution Data Match, or FIDM.




PSSI
Revenues:  During fiscal 2008, revenues from
discontinued PSSI operations decreased $6.7 million, or 21.6%, from fiscal
2007 results.  The sale of two businesses within PSSI operations
contributed $3.8 million to the overall decline in revenues, of which
$2.0 million is attributable to State Systems Integration, or SSI and
$1.8 million is attributable to Independent Validation and Verification, or
IV&V.  The remaining $2.9 million decline is attributable to
our held-for-sale PSSI operations.  Our Financial Management Systems,
or FMS, revenues declined $1.8 million due to the completion or near
completion of several maintenance projects, of which three contracts contributed
$1.3 million to the decline.  Our Unemployment Insurance, or UI,
revenues contributed $1.1 million to the overall
decline.  Contracts which completed or are nearing completion during
fiscal 2008 contributed $4.4 million to the overall decline, of which
$4.2 million is attributable to two contracts. Offsetting the decline is
$3.3 million in revenues from two contracts which commenced during fiscal
2007 and fiscal 2008.




Direct Costs (Discontinued
Operations)




GBPO
Direct Costs:  During fiscal 2008, direct costs
from discontinued GBPO operations decreased $14.1 million, or 56.9%, from
fiscal 2007.  The decrease in costs from prior years is primarily
attributable to the absence of expense in the current fiscal year associated
with the timing of the sales of the businesses.  The
$14.1 million decrease is made up of the following: $9.7 million
attributable to PPC, $2.0 million attributable to HHS; $2.2 million
attributable to Call Center; and $0.2 million attributable to
FIDM.




25




PSSI
Direct Costs:  During fiscal 2008, direct costs
from discontinued PSSI operations decreased $0.9 million, or 4.2%, from
fiscal 2007 results.  The sale of two businesses within PSSI
operations contributed $3.1 million to the overall decline in direct costs,
of which $1.8 million is attributable to SSI and $1.4 million is
attributable to IV&V.  Offsetting these decreases are increased
expenses for UI of $1.6 million and FMS of
$0.7 million.




Other Expenses (Discontinued
Operations)




GBPO
Other Expenses:  During fiscal 2008, general and administrative
expenses for our GBPO discontinued operations decreased $0.4 million, and
selling and marketing expenses decreased $0.4 million over the same period
last year, as a result of the sale of GBPO operations during fiscal
2008.  During fiscal 2008, we recognized a $0.1 million
impairment loss on our discontinued GBPO assets to write these assets down to
fair value.




PSSI
Other Expenses:  During fiscal 2008, general and administrative
expenses for discontinued PSSI operations decreased $0.5 million, and
selling and marketing expenses decreased $1.0 million over the same period
last year, primarily as a result of the sale of SSI and IV&V operations
during fiscal 2008.  During fiscal 2008, we recognized a
$17.7 million impairment loss on our discontinued PSSI assets to write
these assets down to fair value.




Gain/Loss on Discontinued
Operations




During fiscal 2008
we recognized a $1.0 million loss on the sale of our GBPO operations and a
$0.1 million gain on the sale of the portions of our former PSSI operations
that were sold during fiscal 2008.




RESULTS
OF OPERATIONS—2007 COMPARED WITH 2006




The following table
provides an overview of our results of operations for fiscal years 2007 and
2006:




Year
      ended September 30,
            
            
            Variance(in
      thousands, except percentages)
            
            2007
            
            
            2006
            
            
            $
      Amount
            
            
            %Revenues
            
            $
            108,306
            
            
            $
            90,916
            
            
            $
            17,390
            
            
            
            19.1
            %Costs
      and expenses
            
            
            130,724
            
            
            
            113,956
            
            
            
            16,768
            
            
            
            14.7
            %Loss
      from continuing operations before other income and income
      taxes
            
            
            (22,418
            )
            
            
            (23,040
            )
            
            
            622
            
            
            
            2.7
            %Other
      income
            
            
            4,094
            
            
            
            3,470
            
            
            
            624
            
            
            
            18.0
            %Loss
      from continuing operations before income taxes
            
            
            (18,324
            )
            
            
            (19,570
            )
            
            
            1,246
            
            
            
            6.4
            %Income
      tax provision
            
            
            76
            
            
            
            45
            
            
            
            31
            
            
            
            69.0
            %Loss
      from continuing operations
            
            
            (18,400
            )
            
            
            (19,615
            )
            
            
            1,215
            
            
            
            6.2
            %Income
      from discontinued operations, net
            
            
            15,366
            
            
            
            10,164
            
            
            
            5,202
            
            
            
            51.2
            %Net
      loss
            
            $
            (3,034
            )
            
            $
            (9,451
            )
            
            $
            6,417
            
            
            
            67.9
            %




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




26




Continuing
Operations




The following table
presents the revenues and expenses for our Continuing Operations for fiscal
years 2007 and 2006.  This table is followed by an analysis
summarizing reasons for variances in these financial results.




Year
      ended September 30,(in
      thousands)
            
            2007
            
            
            2006Revenues
            
            $
            108,306
            
            
            $
            90,916Costs
      and expenses:Direct
      costs
            
            
            82,668
            
            
            
            68,447General
      and administrative
            
            
            26,372
            
            
            
            32,310Selling
      and marketing
            
            
            7,950
            
            
            
            8,076Depreciation
      and amortization
            
            
            4,573
            
            
            
            5,123Write-down
      of goodwill and intangibles
            
            
            9,161
            
            
            
            —Total
      costs and expenses
            
            
            130,724
            
            
            
            113,956Loss
      from continuing operations before other income and income
      taxes
            
            
            (22,418
            )
            
            
            (23,040
            )Other
      income
            
            
            4,094
            
            
            
            3,470Loss
      from continuing operations before income taxes
            
            
            (18,324
            )
            
            
            (19,570
            )Income
      tax provision
            
            
            76
            
            
            
            45Loss
      from continuing operations
            
            $
            (18,400
            )
            
            $
            (19,615
            )




Revenues (Continuing
Operations)




The
following table provides a year-over-year comparison of revenues generated by
our Continuing Operations during fiscal years 2007 and 2006.




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %RevenuesEPP
            
            $
            99,433
            
            
            $
            78,578
            
            
            $
            20,855
            
            
            
            26.5
            %Wind-down
            
            
            9,258
            
            
            
            12,489
            
            
            
            (3,231
            )
            
            
            (25.9
            )%Eliminations
            
            
            (385
            )
            
            
            (151
            )
            
            
            (234
            )
            
            
            *Total
            
            $
            108,306
            
            
            $
            90,916
            
            
            $
            17,390
            
            
            
            19.1
            %*
      Not meaningful




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




EPP
Revenues:  EPP generated $99.4 million of revenues during
fiscal 2007, a $20.9 million, or 26.5%, increase over fiscal
2006.  In fiscal 2007, we processed 36.7% more transactions than we
processed in fiscal 2006; representing 31.2% more total
dollars.  Transaction growth rate during fiscal 2007 ranged from 10.5%
to 75.1% for all payment processing markets.  Our education processing
market grew 75.1% over the same period last year, while our state income tax
processing market grew 10.5%.  Our contract with the IRS made up 28.3%
of the revenues for EPP.




Wind-down
Revenues:  During fiscal 2007, our Wind-down
operations generated $9.3 million in revenues, a $3.2 million, or
25.9%, decrease from fiscal 2006.  The overall revenue decrease was
due primarily to the completion or near completion of several projects during
fiscal 2007 and 2006.  Of the overall decline, the




27




completion of
projects within our Pension operations contributed $2.4 million, of which
$2.0 million is attributable to one state contract that we completed
mid-year 2007.  The remaining $0.8 million of the decline is
attributable to the completion of maintenance projects within our VSA
operations.




Corporate
Operations/Eliminations:  During fiscal 2007, we eliminated
$0.4 million of revenues for transactions processed by EPP for our former
GBPO business (which is included in Discontinued Operations). This amount was
$0.2 million greater than the amount eliminated during 2006, because of a
rise in the number of transactions that EPP processed for our former GBPO
business.




Direct
Costs (Continuing Operations)




The following table
provides a year-over-year comparison of direct costs incurred by our Continuing
Operations during fiscal years 2007 and 2006:




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %Direct
      costsEPP
            
            $
            76,388
            
            
            $
            61,505
            
            
            $
            14,883
            
            
            
            24.2
            %Wind-down
            
            
            6,280
            
            
            
            7,104
            
            
            
            (824
            )
            
            
            (11.6
            )%Eliminations
            
            
            —
            
            
            
            (162
            )
            
            
            162
            
            
            
            100.0
            %Total
            
            $
            82,668
            
            
            $
            68,447
            
            
            $
            14,221
            
            
            
            20.8
            %




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




EPP
Direct Costs:  Consistent with the year-over-year growth in our
EPP revenues, EPP’s direct costs rose $14.9 million, or 24.2%, in fiscal
2007.  These increases directly reflect interchange fees charged to us
to process the previously described increase in the number and volume of
electronic payments processed for our electronic payment processing
clients.  In addition, during fiscal 2007 we received a
$0.2 million benefit for a legal settlement refunding excess interchange
fees.




Wind-down
Direct Costs:  Direct costs from our Wind-down operations
decreased $0.8 million, or 11.6%, during fiscal 2007 from fiscal 2006
results.  The year-over-year reduction in direct costs during fiscal
2007 primarily reflects the completion and near-completion of contracts, which,
in turn, caused a reduction in the level of subcontractor and labor and
labor-related costs that we incurred.  During fiscal 2007 our Pension
operations costs decreased $1.1 million while our VSA operations costs
increased $0.3 million.




General and Administrative
(Continuing Operations)




The following table
provides a year-over-year comparison of general and administrative costs
incurred by our Continuing Operations during fiscal years 2007 and
2006:




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %General
      and administrativeEPP
            
            $
            7,057
            
            
            $
            5,510
            
            
            $
            1,547
            
            
            
            28.1
            %Wind-down
            
            
            3,284
            
            
            
            2,005
            
            
            
            1,279
            
            
            
            63.8
            %Corporate
            
            
            16,031
            
            
            
            24,795
            
            
            
            (8,764
            )
            
            
            (35.4
            )%Total
            
            $
            26,372
            
            
            $
            32,310
            
            
            $
            (5,938
            )
            
            
            (18.4
            )%




28




EPP General and
Administrative:  During fiscal 2007, EPP incurred
$7.1 million of general and administrative expenses, a $1.5 million,
or 28.1%, increase over fiscal 2006. These increases are attributable primarily
to a $1.3 million increase for labor and labor-related expenses, including
shared-service cost provided specifically for EPP by Corporate and
$0.4 million in additional travel, consulting and miscellaneous office
expenses.  Offsetting these increases is a decrease in bad debt
expense of $0.2 million, reflecting successful collection efforts during
fiscal 2007.




Wind-down
General and Administrative:  During fiscal 2007, our Wind-down
operations incurred $3.3 million of general and administrative expenses, a
$1.3 million, or 63.8%, increase over fiscal 2006.  Approximately
$1.3 million of the increase is attributable to a contract settlement
associated with a pension-related project.  In addition, we incurred
$1.0 million in additional labor and labor-related
expenses.  Partially offsetting these increases was a
$0.6 million decrease in bad debt expense attributable to successful
collection efforts and a $0.4 million decrease in miscellaneous
office-related and travel related expenses.




Corporate
General and Administrative:  During fiscal 2007, our corporate
operations incurred $16.0 million of general and administrative expenses,
an $8.8 million, or 35.4%, decrease from fiscal 2006.  The
largest factor for this decrease was associated with the absence of expenses
related to the restatement of our financial statements that occurred during
fiscal 2006.  During fiscal 2007 our accounting and legal fees
decreased by $6.6 million due to the absence of costs associated with the
restatement of our financials and the Audit Committee investigation conducted
during fiscal 2006.  Our labor and labor-related expenses decreased
overall by $2.5 million in fiscal 2007 compared to fiscal 2006, primarily
as a result of allocating shared-service costs to the operations they
support.  Within our labor and labor-related costs: our severance
expense decreased $1.1 million as a result of the absence of costs
associated with the departure of our former Chief Executive Officer; share-based
payment expense decreased $0.3 million primarily due to the absence in
fiscal 2007 of expense associated with acceleration of options for our former
Chief Executive Office and the award of options to our current Chief Executive
Officer; and we incurred an increase in bonus expense of $1.1 million
relating to employment agreements entered into during fiscal
2007.  Further contributing to the decrease in expenses is a reduction
in tax expense of $0.3 million.  Offsetting the decreases is an
increase in consulting services of $0.6 million in fiscal 2007 as a result
of our strategic initiatives.






Selling and Marketing
(Continuing Operations)




The following table
provides a year-over-year comparison of selling and marketing costs incurred by
our Continuing Operations during fiscal years 2007 and 2006.




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %Selling
      and marketingEPP
            
            $
            6,848
            
            
            $
            4,924
            
            
            $
            1,924
            
            
            
            39.1
            %Wind-down
            
            
            1,091
            
            
            
            1,033
            
            
            
            58
            
            
            
            5.6
            %Corporate
            
            
            11
            
            
            
            2,119
            
            
            
            (2,108
            )
            
            
            (99.5
            )%Total
            
            $
            7,950
            
            
            $
            8,076
            
            
            $
            (126
            )
            
            
            (1.6
            )%




EPP Selling and
Marketing:  During fiscal 2007, EPP incurred $6.8 million
of selling and marketing expenses, a $1.9 million, or 39.1%, increase over
fiscal 2006.  Of the overall increase, $1.2 million is
attributable to an increase in advertising and strategic partnership costs, and
$0.7 million is attributable to an increase in labor and labor-related
expenses, primarily due to an increase in marketing efforts as a result of our
strategic initiative to grow our EPP operations.




29




Wind-down
Selling and Marketing:  During fiscal 2007, our Wind-down
operations incurred $1.1 million in selling and marketing expenses, a
$0.1 million, or 5.6%, increase over the same period in fiscal
2006.  The minor increase is attributable primarily to an increase in
labor and labor-related expenses of $0.4 million, partially offset by a
decrease in travel and travel related expenses of
$0.3 million.




Corporate
Selling and Marketing:  During fiscal 2007, we assigned sales
and marketing expenses to the specific businesses that benefited from the
associated sales and marketing efforts.  In previous years, a
significant portion of these costs were charged to corporate.  During
fiscal 2007 we reported $11,000 in selling and marketing expenses, consisting
primarily of labor and labor-related expenses, which could not be assigned to
specific businesses.  This is a $2.1 million decrease over the
same period in fiscal 2006 as a result of the change to assigning the costs to
specific businesses.






Depreciation and
Amortization (Continuing Operations)




The
following table provides a year-over-year comparison of depreciation and
amortization costs incurred by our Continuing Operations during fiscal years
2007 and 2006:




Year
      ended September 30,
            
            
            Variance(in
      thousands)
            
            2007
            
            
            2006
            
            
            $
            
            
            
            %Depreciation
      and amortizationEPP
            
            $
            3,206
            
            
            $
            3,169
            
            
            $
            37
            
            
            
            1.2
            %Wind-down
            
            
            763
            
            
            
            1,504
            
            
            
            (741
            )
            
            
            (49.3
            )%Corporate
            
            
            604
            
            
            
            450
            
            
            
            154
            
            
            
            34.2
            %Total
            
            $
            4,573
            
            
            $
            5,123
            
            
            $
            (550
            )
            
            
            (10.7
            )%




Depreciation
and amortization in fiscal 2007 decreased $0.6 million, or 10.7% from the
same period in fiscal 2006. This decline is primarily because of the absence of
depreciation and amortization on assets as they became fully depreciated as well
as the absence of depreciation and amortization for VSA assets originally
classified as held-for-sale during most of fiscal 2007.




Write-down of Goodwill and
Intangible Assets (Continuing Operations)




During
fiscal 2007, we recorded a $9.2 million impairment on assets included in
our Wind-down operations.  This impairment reduced the carrying value
of goodwill and intangible assets reported on our Consolidated Balance
Sheets.  Note 6—Goodwill and Other Intangible Assets to our
Consolidated Financial Statements, provides a detailed discussion about our
analysis and the need for this impairment.




Other Income (Continuing
Operations)




Equity
in net income of unconsolidated affiliate:  Equity in net
income of unconsolidated affiliate represents our share of the net income and
losses from CPAS, Inc. an entity in which we held 46.96% of the outstanding
common stock until June 2007.  During fiscal 2007 we recorded net
income of $0.5 million associated with our equity interest in
CPAS.  On June 29, 2007, we sold our 46.96% equity interest in
CPAS back to CPAS.  As a result of that transaction, we realized
$239,000 foreign currency gain, plus an $80,000 gain on the sale of this equity
investment.




Interest
income, net:Interest
income earned during fiscal 2007 increased $0.3 million, or 11.8%, from
interest income earned during fiscal 2006.  Although the average daily
balance in our investment portfolio increased during fiscal 2007, the interest
rates we received on these investments declined during fiscal 2007 consistent
with interest rate changes in the marketplace.  Our interest income
was earned by our EPP and Corporate operations.




30




Income
Tax Provision (Continuing Operations)




We reported income
tax provisions of $76,000 for fiscal 2007, compared with $0.5 million
reported for fiscal 2006, representing provisions for state tax obligations
incurred by our EPP operations.




Discontinued
Operations




The following table
summarizes our results of operations from Discontinued Operations for fiscal
2007 and 2006. Immediately following this table is a discussion of key variances
in these results:




Year
      ended September 30, 2007
            
            
            Year
      ended September 30, 2006(in
      thousands)
            
            GBPO
            
            
            PSSI
            
            
            Other
      and Eliminations
            
            
            Total
            
            
            GBPO
            
            
            PSSI
            
            
            Other
      and Eliminations
            
            
            TotalRevenues
            
            $
            37,677
            
            
            $
            31,372
            
            
            $
            —
            
            
            $
            69,049
            
            
            $
            45,478
            
            
            $
            32,337
            
            
            $
            —
            
            
            $
            77,815Costs
      and expenses:Direct
      costs
            
            
            24,696
            
            
            
            21,557
            
            
            
            (386
            )
            
            
            45,867
            
            
            
            36,157
            
            
            
            22,448
            
            
            
            331
            
            
            
            58,936General
      and administrative
            
            
            2,636
            
            
            
            6,717
            
            
            
            (49
            )
            
            
            9,304
            
            
            
            1,400
            
            
            
            4,251
            
            
            
            116
            
            
            
            5,767Selling
      and marketing
            
            
            1,098
            
            
            
            2,621
            
            
            
            (18
            )
            
            
            3,701
            
            
            
            623
            
            
            
            1,702
            
            
            
            33
            
            
            
            2,358Depreciation
      and
              amortization
            
            
            2
            
            
            
            95
            
            
            
            —
            
            
            
            97
            
            
            
            2
            
            
            
            132
            
            
            
            —
            
            
            
            134Write-down
      of goodwill and
              intangibles
            
            
            2,671
            
            
            
            120
            
            
            
            —
            
            
            
            2,791
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      costs and
              expenses
            
            
            31,103
            
            
            
            31,110
            
            
            
            (453
            )
            
            
            61,760
            
            
            
            38,182
            
            
            
            28,533
            
            
            
            480
            
            
            
            67,195Income
      (loss) before income taxes
            
            
            6,574
            
            
            
            262
            
            
            
            453
            
            
            
            7,289
            
            
            
            7,296
            
            
            
            3,804
            
            
            
            (480
            )
            
            
            10,620Income
      tax provision
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            456
            
            
            
            456Income
      (loss) before gain
              ondiscontinued
              operations
            
            
            6,574
            
            
            
            262
            
            
            
            453
            
            
            
            7,289
            
            
            
            7,296
            
            
            
            3,804
            
            
            
            (936
            )
            
            
            10,164Gain
      on discontinued
              operations
            
            
            —
            
            
            
            —
            
            
            
            8,077
            
            
            
            8,077
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Income
      (loss) from
              discontinued
      operations, net
            
            $
            6,574
            
            
            $
            262
            
            
            $
            8,530
            
            
            $
            15,366
            
            
            $
            7,296
            
            
            $
            3,804
            
            
            $
            (936
            )
            
            $
            10,164




Revenues (Discontinued
Operations)




GBPO
Revenues:  During fiscal 2007, revenues from discontinued GBPO
operations decreased $7.8 million, or 17.2%, from fiscal 2006
results.  Our PPC operations reported a $7.6 million decrease in
revenues for fiscal 2007 over the same periods in fiscal 2006.  The
absence of revenues from three projects that completed during fiscal 2006 and
mid-year fiscal 2007 contributed $4.7 million to the decline, while a shift
to lower cost, state-mandated electronic payment alternatives at other
processing centers contributed $2.9 million to the decline. Our HHS
operations contributed $2.7 million to the decline, primarily attributable
to the absence of revenues from the completion of one project during fiscal
2006.  Offsetting these decreases is an increase in revenues for our
Call Center operations of $2.3 million which commenced during fiscal 2006,
and an increase in FIDM revenues of $0.2 million.




PSSI
Revenues:  During fiscal 2007, revenues from discontinued PSSI
operations decreased $1.0 million, or 3.0%, from fiscal 2006
results.  Our SSI operations reported a $2.2 million decrease in
revenues during fiscal 2007 primarily as a result of the completion and
reduction of work for one state client.  The completion of projects
within our FMS operations contributed $0.6 million to the
decline.  The completion of a project within our E-Gov operations
during fiscal 2006 contributed $0.4 million to the overall
decline.  Partially offsetting the overall decrease is an increase in
revenues of $1.5 million from our IV&V operations, primarily
attributable to a project which commenced mid-year 2006.  Revenues
from our UI operations increased $0.7 million during fiscal 2007 primarily
due to the recognition of revenue on three projects which commenced mid-year
fiscal 2006 and 2007 of $3.2 million, offset by the completion of one state
project during fiscal 2007 of $2.5 million.




31




Direct Costs (Discontinued
Operations)




GBPO
Direct Costs:  During fiscal 2007, direct costs from
discontinued GBPO operations decreased $11.5 million, or 31.7%, from fiscal
2006.  Our PPC operations reported a $9.1 million decrease in
costs primarily attributable to the completion of two projects in fiscal 2006
and during fiscal 2007 which contributed $4.9 million to the decrease and a
shift to lower cost, state-mandated electronic payment alternatives at two
processing centers, which contributed $4.2 million to the
decrease.  Our HHS operations reported a $2.3 million decrease
during fiscal 2007 over the same period in fiscal 2006, primarily due to the
completion of several projects in fiscal 2006 and during fiscal
2007.  The remaining variance is attributable to the completion of
projects within our FIDM operations.




PSSI
Direct Costs:  During fiscal 2007, direct costs from
discontinued PSSI operations decreased $0.9 million, or 4.0%, from fiscal
2006 results.  Our SSI operations decreased $0.8 million and our
FMS operations decreased $0.6 million during fiscal 2007 compared to the
same period in fiscal 2006 as a result of the completion of several
projects.  Our UI operations decreased $0.3 million overall due
to the completion of one project which decreased costs by $1.8 million
offset by additional costs from projects which commenced during fiscal 2006 and
2007 of $1.5 million.  Our E-Gov operations costs decreased
$0.3 million in fiscal 2007 as a result of the completion of one
project.  Offsetting these decreases is an increase in costs
associated with an IV&V project which commenced during fiscal 2006 of
$1.1 million.




Other Expenses (Discontinued
Operations)




GBPO
Other Expenses:  During fiscal 2007, general and administrative
expenses for our GBPO discontinued operations increased $1.2 million
primarily because of increased labor and labor-related expenses, including
subcontractor expense for administrative support services of $1.3 million,
offset by a decrease in bad debt expense of $0.1 million. Selling and
marketing expenses increased $0.5 million over the same period last year,
primarily due to the allocation of corporate sales and marketing expenses to the
specific operations they support. During fiscal 2007 we recognized a
$2.7 million impairment loss on our discontinued GBPO assets to write these
down to fair value.




PSSI
Other Expenses:  During fiscal 2007, general and administrative
expenses for discontinued PSSI operations increased $2.5 million over the
same period in fiscal 2006, primarily because of the recognition of
$1.8 million of preliminary technical feasibility work on an internally
developed software project and $0.7 million increase in the bad debt
reserve for a specific account.  Selling and marketing expenses
increased $0.9 million over the same period in fiscal 2006, primarily from
the allocation of corporate selling and marketing expenses to the specific
businesses they support of $1.3 million offset by $0.4 million
decreases in travel and travel-related expenses and advertising
expenses.




Income
Tax Provision (Discontinued Operations)




We
recorded tax provisions of $0.5 million in fiscal 2006 relating to our
discontinued Australian operations.  Details about the disposal of the
Australian operations can be found in the Gain on Discontinued Operations
section below.




Gain
on Discontinued Operations




In
fiscal 2002, we disposed of most of our Australian operations and in fiscal 2003
we requested and received $6.5 million of federal income tax refunds
associated with this disposal.  Although we received the refund in
October 2003, we fully reserved the entire balance because of uncertainty about
the final review and resolution of this transaction by the Internal Revenue
Service.  From October 2003 to February 2007, we increased our reserve
by $1.1 million to recognize the potential interest and penalties we could
have incurred if the Internal Revenue Service made an unfavorable
decision.




32




In March 2007, we
were notified by the Internal Revenue Service that its Joint Committee on
Taxation had completed its review and had approved the $6.5 million of
refund.  As a result, during the second quarter of fiscal 2007, we
reversed the $6.5 million of reserve for the refund and the
$1.1 million reserve for potential interest and penalties.  This
$7.6 million reversal has been recorded on our Consolidated Statements of
Operations as (Loss) income
from discontinued operations in accordance with SFAS 144.




This
$7.6 million reversal has been recorded on our Consolidated Statements of
Operations as Income
from discontinued operations, net in accordance with SFAS
144.  In May 2007, we were notified by the Australian government that
our operations in Australia, which were primarily disposed of in fiscal 2002,
were able to be fully liquidated.  In fiscal year 2007, we recorded
$0.5 million of net income associated with the reversal of certain accruals
that had been recorded in anticipation of costs, which did not actualize,
associated with the final close-out of the Australian operations.




LIQUIDITY
AND CAPITAL RESOURCES




Our principal
capital requirement is to fund working capital to support our organic growth,
including potential future acquisitions.  Under our Third Amendment to
Amended and Restated Credit and Security Agreement, as amended, with our lender,
we may obtain up to $7.5 million of letters of credit.  The
agreement also grants the lender a perfected security interest in cash
collateral in an amount equal to all issued and to be issued letters of
credit.  At September 30, 2008, we had $1.8 million of
letters of credit outstanding under this credit facility, which are fully
collateralized.  These letters of credit were issued to secure
performance bonds, insurance and a property lease.




During fiscal 2008,
we began classifying our Auction Rate Securities as long-term investments in
marketable securities.  Previously, we had classified these securities
as current investments in marketable securities.  Although our
securities are AAA-rated auction rate municipal bonds collateralized with
student loans, we decided to reclassify the securities due to the lack of an
active market for these securities.  Until an active market is
restored, the issuer refinances the debt or our investment manager repurchases
the securities subject to the conditions of a rights offering, we may not be
able to liquidate these investments.




Beginning in March
2008, we began valuing these securities using a discounted cash flow
model.  For periods prior to March 2008, these securities were valued
at par because of our ability to liquidate the security at each reset interest
rate—typically every 28 days.  Using the results of our discounted
cash flow model, we reduced the par value of these investments $2.5 million
to arrive at their estimated fair value.  The decline in fair value is
attributable to liquidity concerns and not the underlying collateral securing
the debt.  Changes in fair value may continue as interest rate changes
and macro economic credit concerns continue to affect financial
markets.




We recorded an
unrealized loss in Other
comprehensive (loss) income on our Consolidated Balance
Sheets.  We consider impairment temporary and anticipate realizing par
value on settlement of these securities because of continued government actions
to restore liquidity and our acceptance into our investment manager's rights
offering to repurchase at par value these securities in a settlement with the
Securities and Exchange Commission and other state regulatory
agencies.




Net
Cash from Continuing Operations—Operating Activities.  During fiscal 2008, our operating
activities from Continuing Operations used $3.4 million of cash.  This
reflects a net loss of $12.0 million from Continuing Operations offset by $8.4
million of non-cash items.  During fiscal 2008, $0.5 million of cash was
generated by a decrease in accounts receivable and unbilled receivables. 
The receivables decrease is primarily from collections within our Pension and
VSA wind-down operations as we complete projects.  A decrease in prepaid
expenses and other current assets provided $0.3 million of cash and an increase
in accounts payable and accrued liabilities provided $0.3 million of
cash.




33




Net
Cash from Continuing Operations—Investing Activities.  Net cash provided by our investing activities from
Continuing Operations for fiscal 2008 was $34.5 million, including
$33.8 million of cash provided by sales and maturities of marketable
securities, $1.3 million of cash from sales and maturities of restricted
investments, offset by $7.3 million of cash used to purchase marketable
securities. In addition, $8.7 million of cash was generated from sale of
our Discontinued Operations, and $2.0 million of cash was used to purchase
equipment and software.




Net
Cash from Continuing Operations—Financing Activities.  Net cash
provided by our financing activities from Continuing Operations for fiscal 2008
was $1.2 million, including $1.3 million of cash provided by the
exercise of options to purchase our common stock, partially offset by the use of
$0.1 million for capital lease obligations.




Net Cash from
Discontinued Operations—Operating Activities.  During fiscal 2008,
our operating activities from Discontinued Operations provided $3.9 million of
cash.  This reflects $15.4 million of net loss offset by $18.7 million of
non-cash items, of which $17.8 million relates to the write down and impairment
of goodwill and held-for-sale assets and a $0.9 million loss recognized on the
sale of our Discontinued Operations.  In additiona, the net effect of
changes in  discontinued assets and liabilities provided $0.6 million of
cash.




Net
Cash from Discontinued Operations—Investing Activities.  Net
cash used in our investment activities from Discontinued Operations for fiscal
2008 was $5.1 million, primarily used to purchase equipment and software,
and fund internal development of software.




Net
Cash from Discontinued Operations—Financing Activities.  Net
cash used in our financing activities from Discontinued Operations for fiscal
2008 was $4,000 for capital lease obligations.




In our Note
3—Investments we disclose that at September 30, 2008, our investment
portfolio included $28.8 million of AAA-rated auction rate municipal bonds
that were collateralized with student loans.  Beginning in February
2008, we began to experience unsuccessful auctions.  An unsuccessful
auction occurs when there are insufficient buyers for the securities at the
reset date. If there are no buyers in the market for a particular auction rate
security, the security holder is unable to sell the
security.  Therefore, the security becomes illiquid until such time
that the market provides sufficient buyers for the security, the issuer
refinances the obligation, or the obligation reaches final
maturity.  The securities that we own became illiquid in connection
with the disruption of the credit markets generally and concerns about
mortgage-backed securities, particularly securities backed by sub-prime
mortgages.  Through September 30, 2008, we liquidated as many of
these securities as possible and invested the funds in money market
accounts.  Securities collateralized with student loans are guaranteed
by the issuing state and the Federal Family Education Loan
Program.  Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy.  Because of this, we
continue to believe the credit quality of these securities is high and the
principal collectible.  Until liquidity is restored, we may not be
able to liquidate these investments in a timely manner or at par
value.




We expect to
generate cash flows from operating activities over the long term; however, we
may experience significant fluctuations from quarter to quarter resulting from
the timing of billing and collections. We anticipate that our existing capital
resources, including our cash balances, cash that we anticipate will be provided
by operating activities and our available credit facilities will be adequate to
fund our operations for at least fiscal year 2009.  There can be no
assurance that changes will not occur that would consume available capital
resources before such time.  Our capital requirements and capital
resources depend on numerous factors, including:  potential
acquisitions; capital expenditures supporting continued growth of our EPP
business; contingent payments earned; new and existing contract requirements;
the timing of the receipt of accounts receivable, including unbilled
receivables; the timing and ability to sell investment securities held in our
portfolio without a loss of principal; our ability to draw on our bank facility;
and employee growth.  To the extent that our existing




34




capital resources
are insufficient to meet our capital requirements, we will have to raise
additional funds.  There can be no assurance that additional funding,
if necessary, will be available on favorable terms, if at all.  The
raising of additional capital may dilute our shareholders’ ownership in
us.




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




CRITICAL
ACCOUNTING POLICIES




Our
discussion and analysis of our financial condition and results of operations is
based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.  Note
2—Summary of Significant Accounting Policies of our Notes to
Consolidated Financial Statements contains a summary of our significant
accounting policies, many of which require the use of estimates and
assumptions.  We believe that of our significant policies, the
following are the most noteworthy because they are based upon estimates and
assumptions that require complex subjective judgments by management, which can
have a material effect on our reported results.  Changes in these
estimates or assumptions could materially impact our financial condition and
results of operations.  Actual results could differ materially from
management’s estimates.




Revenue
Recognition.  Certain judgments affect the application of our
revenue policy.  We derive revenues primarily from transaction and
payment processing, systems design and integration, and maintenance and support
services.  We recognize revenues in accordance with accounting
principles generally accepted in the United States, which, in some cases,
require us to estimate costs and project status.  The primary methods
that we use to recognize revenues are described below:




·
            Transaction-based
      contracts—revenues are recognized based on fees charged on a
      per-transaction basis or fees charged as a percentage of dollars
      processed;




·
            Fixed-price
      contracts—revenues are recognized either on a
      percentage-of-completion basis or when our customers accept the services
      we provide;




·
            Time
      and materials contracts—revenues are recognized when we perform
      services and incur expenses;




·
            Delivery-based
      contracts—revenues are recognized when we have delivered, and the
      customer has accepted, the product or
  service;




·
            Software
      licenses—revenues are recognized for perpetual software licenses
      upon delivery when the fees are fixed and determinable, collection is
      probable and specific objective evidence exists to determine the value of
      any undeliverable elements of the arrangement.  Revenues for
      software licenses with a fixed term are recognized on a straight-line
      period over the term of the license;
and




·
            Software
      maintenance contracts—revenues are recognized on a straight-line
      basis over the contract term, which is typically one
      year.




35




Any given contract
may contain one or more elements with attributes of more than one of the
contract types described above.  In those cases, we account for each
element separately, using the applicable accounting standards.  In
addition, we also establish an allowance for credit card reversals and
charge-backs as part of our revenue recognition practices.  For all
our operations, the amount and timing of our revenue is difficult to predict.
Any shortfall in revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter and could result
in future operating losses.




Collectibility
of Receivables.Accounts
receivable includes funds that are due to us to compensate us for the services
we provide to our customers.  We have established an allowance for
doubtful accounts, which represents our best estimate of probable losses
inherent in the accounts receivable balance.  Each quarter we adjust
this allowance based upon management’s review and assessment of each category of
receivable.  Factors that we consider to establish this adjustment
include the age of receivables, past payment history and the demographics of the
associated debtors.  Our allowance for uncollectible accounts is based
both on the performance of specific debtors and upon general categories of
debtors.




Goodwill
and Other Intangible Assets.We
review goodwill and purchased intangible assets with indefinite lives for
impairment annually at the reporting unit level (operating segment) and whenever
events or changes indicate that the carrying value of an asset may not be
recoverable in accordance with the Financial Accounting Standards Board, or
FASB, Statement of Financial Accounting Standards, or SFAS, No. 142—Goodwill
and Other Intangible Assets,or SFAS 142.  These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition, or sale or disposition
of a significant portion of a reporting unit.  Application of the
goodwill impairment test requires judgment, including the identification of
reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units and determination of the fair value of
each reporting unit.  The fair value of each reporting unit is
estimated using a discounted cash flow methodology.  This requires
significant judgments, including estimation of future cash flows, which is
dependent on internal forecasts, estimation of the long-term rate of growth for
our business, the useful life over which cash flows will occur and determination
of our weighted-average cost of capital.  Changes in these estimates
and assumptions could materially affect the determination of fair value and/or
goodwill impairment for each reporting unit.




Held-For-Sale
Assets and Liabilities.Held-for-sale
assets and liabilities are presented on our Consolidated Balance Sheet at the
lower of their carrying value or fair value less costs to sell, once the
criteria for held-for-sale status has been met.  In accordance with
Statement of Financial Accounting Standards No. 144—Impairment
or Disposal of Long-Lived Assets, or SFAS 144, assets are not depreciated
or amortized while they are classified as held-for-sale.  When an
asset group is classified as held-for-sale and during subsequent interim
periods, we also evaluate goodwill for impairment at the segment level whenever
the businesses classified as held-for-sale have been fully integrated into the
segment, and the acquired goodwill benefits the rest of the reporting
unit.  Otherwise, the carrying value of the acquired goodwill is
included in the carrying amount of the business to be disposed of in accordance
with SFAS 142.




Investments.We
review our investments quarterly to identify other-than-temporary impairments in
accordance with SFAS 115—Accounting
for Certain Investments in Debt and Equity Securities and SEC Staff
Accounting Bulletin No 59—Accounting
for Noncurrent Marketable Equity Securities.  This
determination requires us to use significant judgment in evaluating a number of
factors, including: the duration and extent to which the fair value of an
investment is less than its cost; the financial health of and near-term business
outlook for the investee, including factors such as industry and sector
performance, changes in technology and operational and financing cash flow; and
our intent and ability to hold the investment.  When investments
exhibit unfavorable attributes in these and other areas, we conduct additional
analyses to determine whether the fair value of the investment is
other-than-temporarily impaired.




36




Contingencies.The
outcomes of legal proceedings and claims brought against us are subject to
significant uncertainty.  SFAS 5—Accounting
for Contingencies, which requires that an estimated loss from a loss
contingency such as a legal proceeding or claim should be accrued by a charge to
income if it is probable that an asset has been impaired or a liability has been
incurred and the amount of the loss can be reasonably
estimated.  Disclosure of a contingency is required if there is at
least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued, we evaluate a number of factors, including the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss.  Changes in these factors
could materially impact our financial position and our results of
operations.




Income
Taxes.SFAS
109—Accounting for Income Taxes, or SFAS 109, establishes financial
accounting and reporting standards for the effect of income
taxes.  The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity’s financial statements or tax
returns.  Accruals for uncertain tax positions are provided for in
accordance with the requirements of FASB Interpretation No. 48—Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
109, or FIN 48.  FIN 48 states we may recognize a tax benefit
from an uncertain tax position only if it is more-likely-than-not that the tax
position will be sustained on examination by the taxing authorities, based on
technical merits.  Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns.  Variations in the actual outcome of these future tax
consequences could materially impact our financial position, results of
operations or cash flows.




Discontinued
Operations.SFAS
144 provides guidance on the presentation of discontinued operations from the
disposal of a segment to the disposal of a component of the entity, as well as
the timing of this presentation.  We must use our judgment to
determine whether particular operations are considered a component of the entity
and when the operations should no longer be classified as continuing
operations.




Share-Based
Compensation.SFAS
123(R)—Share-Based Payment, or SFAS 123R, requires public companies to
expense employee share-based payments based on fair value.  We must
use our judgment to determine key factors in determining the fair value of the
share-based payment, such as volatility, forfeiture rates and the expected term
in which the options will be outstanding.




RECENT
ACCOUNTING STANDARDS




SFAS
157—Fair Value Measurements.  In October 2006,
FASB issued Statement of Financial Accounting Standards No. 157—Fair
Value Measurements, or SFAS
157.  This standard establishes a framework for measuring fair value
and expands disclosures about fair value measurement of a company’s assets and
liabilities.  This standard also requires that the fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability.  SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and, generally, must be applied
prospectively.  We expect to adopt this standard beginning in October
2008.  We do not expect that the adoption of SFAS 157 will have a
material effect on our financial position or results of
operations.




In February 2008,
FASB issued FASB Staff Position FAS 157-1—Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement Under Statement 13.  This FSP
removes leasing transactions accounted for under Statement of Financial
Accounting Standards No. 13—Accounting
for Leases and its related guidance from SFAS 157.  In February
2008, FASB also issued FASB Staff Position FAS 157-2—Effective
Date of FASB Statement No. 157.  This FSP delays the effective
date of Statement 157 for all nonrecurring fair value measurements of
nonfinancial assets and nonfinancial liabilities until fiscal years beginning
after November 15, 2008.  We do not expect that the adoption of
these FSPs will have a material effect on our financial position or results of
operations.


37




SFAS
159—The Fair Value Option for Financial Assets and Financial
Liabilities.  In February 2007, FASB issued Statement of
Financial Accounting Standard No. 159—The
Fair Value Option for Financial Assets and Financial Liabilities, or SFAS
159, which allows companies to choose to measure many financial instruments and
certain other items at fair value.  Entities that elect the fair value
option will report unrealized gains and losses in earning at each subsequent
reporting date.  The principle can be applied on an instrument by
instrument basis, is irrevocable and must be applied to the entire
instrument.  SFAS 159 amends previous guidance to extend the use of
the fair value option to available-for-sale and held-to-maturity
securities.  SFAS 159 also establishes presentation and disclosure
requirements to help financial statement users understand the effect of the
election.  SFAS 159 is effective as of the beginning of each reporting
fiscal year beginning after November 15, 2007.  We do not believe
that the adoption of SFAS 159 will have a material effect on our financial
position or results of operations.




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




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




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




OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS




Indemnification
Agreements




We
have indemnification agreements with each of our directors and executive
officers and one non-executive officer.  These agreements provide such
persons with indemnification, to the maximum extent permitted by our Articles of
Incorporation or Bylaws or by the General Corporation Law of the State of
Delaware, against all expenses, claims, damages, judgments and other amounts
(including amounts paid in settlement) for which such persons become liable as a
result of acting in any capacity on behalf of Tier, subject to certain
limitations.




38




Employment
Agreements




As of
September 30, 2008, we have employment and change of control agreements
with five executives and 18 other key managers.  If certain
termination or change of control events were to occur under the 23 contracts, as
of September 30, 2008, we could be required to pay up to
$10.0 million.  In October 2008, we entered into agreements
with one executive and one key manager.  See Note
16—Subsequent Eventsfor information regarding those
agreements.




As of
September 30, 2008, we had an employment agreement with an executive in
which the change of control provision was met.  Under the agreement we
could be obligated to pay the executive $0.5 million, which consists of
two-year's base salary payable within 30 days of his termination date of
September 30, 2008 plus COBRA premiums up to 18 months from his termination
date.  We have entered into an Independent Contractor Agreement with
this former executive to provide consulting services to assist us in the
transition of services to the purchaser of the GBPO business.  Under
the terms of the agreement we are required to pay the former executive $19,866
per month from October 1, 2008 to November 30,
2008.




As of
September 30, 2008, we also had agreements with 18 key employees under
which these individuals would be entitled to receive three to twelve months of
their base salaries over a one-to-two year period, after completing defined
employment service periods.  We expect to recognize a maximum expense
of $0.4 million during fiscal year 2009 and $39,000 during fiscal year 2010
for these agreements.




As of
September 30, 2008, we had change of control agreements with 11 key
employees within our held-for-sale operations, which we entered into in February
2007.  Under these agreements, individuals are entitled to receive
three to twelve months of their base salaries plus three to twelve months of
COBRA benefits should certain change of control events occur.  Under
these agreements we would be required to pay up to $0.9 million if a change
of control occurred.




We
believe it is important to have these contracts in place in order to retain key
individuals and to ensure a continuity of operations, especially in fiscal 2009
when we expect to finalize the divestiture of certain business units and to
restructure our corporate operations.




Contractual
Obligations




We
have contractual obligations to make future payments on lease agreements, none
of which have remaining terms that extend beyond five
years.  Additionally, in the normal course of business, we enter into
contractual arrangements whereby we commit to future purchases of products or
services from unaffiliated parties.  Purchase obligations are legally
binding arrangements whereby we agree to purchase products or services with a
specific minimum quantity defined at a fixed minimum or variable price over a
specified period of time.  The most significant purchase obligation is
for contracts with our subcontractors.  The following table presents
our expected payments for contractual obligations that were outstanding at
September 30, 2008.  All of our contractual obligations expire by
2011.




Payments
      due by period(in
      thousands)
            
            Total
            
            
            2009
            
            
            
            2010-2011Capital lease obligations
      (equipment) (1)
            
            $
            55
            
            
            $
            27
            
            
            $
            28Operating
      lease obligations:Facilities
      leases
            
            
            2,896
            
            
            
            1,807
            
            
            
            1,089Equipment
      leases
            
            
            26
            
            
            
            20
            
            
            
            6Purchase
      obligations:Subcontractor
            
            
            2,257
            
            
            
            2,244
            
            
            
            13Purchase
      order
            
            
            390
            
            
            
            390
            
            
            
            —Total
      contractual obligations
            
            $
            5,624
            
            
            $
            4,488
            
            
            $
            1,136(1)
      Includes interest payments of $5,700.




39




ITEM 7A—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
September 30, 2008 the fair value of the portfolio would decline by about
$8,000.




40




ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              42CONSOLIDATED
      BALANCE SHEETS
              43CONSOLIDATED
      STATEMENTS OF OPERATIONS
              44CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY
              45CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
              46CONSOLIDATED
      STATEMENTS OF CASH FLOWS
              47NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
              49NOTE
      1—NATURE OF OPERATIONS
              49NOTE
      2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              49NOTE
      3—INVESTMENTS
              55NOTE
      4—CUSTOMER CONCENTRATION AND RISK
              57NOTE
      5—PROPERTY, EQUIPMENT AND SOFTWARE
              58NOTE
      6—GOODWILL AND OTHER INTANGIBLE ASSETS
              59NOTE
      7—INCOME TAXES
              60NOTE
      8—CONTINGENCIES AND COMMITMENTS
              62NOTE
      9—RELATED PARTY TRANSACTIONS
              65NOTE
      10—RESTRUCTURING
              65NOTE
      11—SEGMENT INFORMATION
              66NOTE
      12—SHAREHOLDERS' EQUITY
              68NOTE
      13—SHARE-BASED PAYMENT
              69NOTE
      14—DISCONTINUED OPERATIONS
              70NOTE
      15—(LOSS) EARNINGS PER SHARE
              73NOTE
      16—SUBSEQUENT EVENTS
              73SELECTED
      QUARTERLY FINANCIAL DATA
              74SCHEDULE
      II—VALUATION AND QUALIFYING ACCOUNTS
              75
  41


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM


To the
Board of Directors and Shareholders
 Tier
Technologies, Inc.
 Reston,
Virginia
 
 We have
audited the accompanying consolidated balance sheets of Tier Technologies, Inc.
and subsidiaries as of September 30, 2008 and 2007, and the related consolidated
statements of operations, shareholders’ equity, comprehensive (loss) income, and
cash flows for each of the three years in the period ended September 30,
2008.  Our audits also included the financial statement schedule of
Tier Technologies, Inc. and subsidiaries listed in Item 15(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Tier Technologies, Inc. and
subsidiaries as of September 30, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2008, in conformity with U.S. generally accepted accounting
principles.  Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Tier Technologies, Inc. and subsidiaries’
internal control over financial reporting as of September 30, 2008, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated December 9, 2008, expressed an
unqualified opinion on the effectiveness of Tier Technologies, Inc. and
subsidiaries internal control over financial reporting.
 
 
 /s/ McGladrey & Pullen,
LLP
 Vienna,
VA
 December
9, 2008
  42


TIER
TECHNOLOGIES, INC.


CONSOLIDATED
      BALANCE SHEETS


(in
      thousands)
            
            September 30,
              2008
            
            
            September 30,
              2007ASSETS:Current
      assets:Cash
      and cash equivalents
            
            $
            47,735
            
            
            $
            16,516Investments
      in marketable securities
            
            
            2,415
            
            
            
            57,815Accounts
      receivable, net
            
            
            4,209
            
            
            
            4,909Unbilled
      receivables
            
            
            532
            
            
            
            545Prepaid
      expenses and other current assets
            
            
            1,331
            
            
            
            2,169Assets
      of discontinued operations
            
            
            —
            
            
            
            672Current
      assets—held-for-sale
            
            
            11,704
            
            
            
            36,196Total
      current assets
            
            
            67,926
            
            
            
            118,822Property,
      equipment and software, net
            
            
            4,479
            
            
            
            3,743Goodwill
            
            
            14,526
            
            
            
            14,526Other
      intangible assets, net
            
            
            13,455
            
            
            
            17,640Investments
      in marketable securities
            
            
            28,821
            
            
            
            —Restricted
      investments
            
            
            7,861
            
            
            
            11,526Other
      assets
            
            
            283
            
            
            
            167Total
      assets
            
            $
            137,351
            
            
            $
            166,424LIABILITIES
      AND SHAREHOLDERS’ EQUITY:Current
      liabilities:Accounts
      payable
            
            $
            918
            
            
            $
            877Accrued
      compensation liabilities
            
            
            4,289
            
            
            
            4,653Accrued
      subcontractor expenses
            
            
            348
            
            
            
            504Accrued
      discount fees
            
            
            5,243
            
            
            
            4,529Other
      accrued liabilities
            
            
            4,319
            
            
            
            4,213Deferred
      income
            
            
            1,790
            
            
            
            2,649Liabilities
      of discontinued operations
            
            
            —
            
            
            
            421Current
      liabilities—held-for-sale
            
            
            9,061
            
            
            
            10,864Total
      current liabilities
            
            
            25,968
            
            
            
            28,710Other
      liabilities
            
            
            136
            
            
            
            200Total
      liabilities
            
            
            26,104
            
            
            
            28,910Commitments
      and contingencies (Note 8)Shareholders’
      equity:Preferred
      stock, no par value; authorized shares:  4,579;
              no
      shares issued and outstanding
            
            
            —
            
            
            
            —Common
      stock and paid-in capital; shares authorized: 44,260;
              shares
      issued: 20,619 and 20,425; shares outstanding: 19,735 and
      19,541
            
            
            190,099
            
            
            
            186,417Treasury
      stock—at cost, 884 shares
            
            
            (8,684
            )
            
            
            (8,684
            )Accumulated
      other comprehensive loss
            
            
            (2,504
            )
            
            
            —Accumulated
      deficit
            
            
            (67,664
            )
            
            
            (40,219
            )Total
      shareholders’ equity
            
            
            111,247
            
            
            
            137,514Total
      liabilities and shareholders’ equity
            
            $
            137,351
            
            
            $
            166,424


See
Notes to Consolidated Financial Statements


43


TIER
TECHNOLOGIES, INC.


CONSOLIDATED
      STATEMENTS OF OPERATIONS




Year
      ended September 30,(in
      thousands, except per share data)
            
            2008
            
            
            2007
            
            
            2006Revenues
            
            $
            122,571
            
            
            $
            108,306
            
            
            $
            90,916Costs
      and expenses:Direct
      costs
            
            
            95,234
            
            
            
            82,668
            
            
            
            68,447General
      and administrative
            
            
            28,020
            
            
            
            26,372
            
            
            
            32,310Selling
      and marketing
            
            
            8,677
            
            
            
            7,950
            
            
            
            8,076Depreciation
      and amortization
            
            
            5,328
            
            
            
            4,573
            
            
            
            5,123Write-down
      of goodwill and intangible assets
            
            
            —
            
            
            
            9,161
            
            
            
            —Total
      costs and expenses
            
            
            137,259
            
            
            
            130,724
            
            
            
            113,956Loss
      from continuing operations before other income and income
      taxes
            
            
            (14,688
            )
            
            
            (22,418
            )
            
            
            (23,040
            )Other
      income:Income
      from investments:Equity
      in net income of unconsolidated affiliate
            
            
            —
            
            
            
            475
            
            
            
            445Realized
      foreign currency gain
            
            
            —
            
            
            
            239
            
            
            
            —Gain
      on sale of unconsolidated affiliate
            
            
            —
            
            
            
            80
            
            
            
            —Interest
      income, net
            
            
            2,731
            
            
            
            3,300
            
            
            
            2,951Other
      income
            
            
            —
            
            
            
            —
            
            
            
            74Total
      other income
            
            
            2,731
            
            
            
            4,094
            
            
            
            3,470Loss
      from continuing operations before income taxes
            
            
            (11,957
            )
            
            
            (18,324
            )
            
            
            (19,570
            )Income
      tax provision
            
            
            87
            
            
            
            76
            
            
            
            45Loss
      from continuing operations
            
            
            (12,044
            )
            
            
            (18,400
            )
            
            
            (19,615
            )(Loss)
      income from discontinued operations, net
            
            
            (15,401
            )
            
            
            15,366
            
            
            
            10,164Net
      loss
            
            $
            (27,445
            )
            
            $
            (3,034
            )
            
            $
            (9,451
            )(Loss)
      earnings per share—Basic and diluted:From
      continuing operations
            
            $
            (0.61
            )
            
            $
            (0.94
            )
            
            $
            (1.00
            )From
      discontinued operations
            
            $
            (0.79
            )
            
            $
            0.78
            
            
            $
            0.52(Loss)
      earnings per share—Basic and diluted
            
            $
            (1.40
            )
            
            $
            (0.16
            )
            
            $
            (0.48
            )Weighted
      average common shares used in computing:Basic
      and diluted (loss) earning per share
            
            
            19,616
            
            
            
            19,512
            
            
            
            19,495


See
Notes to Consolidated Financial Statements


44


TIER
TECHNOLOGIES, INC.


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY


Common Stock
      Issued
              
              
              
              Paid-in-
              
              
              
              Treasury
      Stock
              
              
              
              Notes
      receivable  from related
              
              
              
              Accumulated
      other comprehensive
              
              
              
              Accumulated
              
              
              
              Total 
      shareholders'(in
      thousands)
              
              
              Shares
              
              
              
              Amount
              
              
              
              capital
              
              
              
              Shares
              
              
              
              Amount
              
              
              
              parties
              
              
              
              (loss)
      income
              
              
              
              deficit
              
              
              
              equityBalance
      at September 30, 2005
              
              
              20,374
              
              
              $
              204
              
              
              $
              181,862
              
              
              
              (884
              )
              
              $
              (8,684
              )
              
              $
              (3,998
              )
              
              $
              (111
              )
              
              $
              (27,734
              )
              
              $
              141,539Net loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (9,451
              )
              
              
              (9,451
              )Exercise of stock
                options
              
              
              9
              
              
              
              —
              
              
              
              69
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              69Interest receivable
                from
      related
                parties
              
              
              —
              
              
              
              —
              
              
              
              277
              
              
              
              —
              
              
              
              —
              
              
              
              (277
              )
              
              
              —
              
              
              
              —
              
              
              
              —Share-based
                payment
              
              
              —
              
              
              
              —
              
              
              
              1,975
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,975Unrealized gain on
                investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              53
              
              
              
              —
              
              
              
              53Foreign currency
                translation
                adjustment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              25
              
              
              
              —
              
              
              
              25Balance
      at
                September
      30, 2006
              
              
              20,383
              
              
              
              204
              
              
              
              184,183
              
              
              
              (884
              )
              
              
              (8,684
              )
              
              
              (4,275
              )
              
              
              (33
              )
              
              
              (37,185
              )
              
              
              134,210Net loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (3,034
              )
              
              
              (3,034
              )Exercise of stock
                options
              
              
              42
              
              
              
              —
              
              
              
              213
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              213Payment on notes
                and
      interest
                receivable
      from
                related
      parties
              
              
              —
              
              
              
              —
              
              
              
              126
              
              
              
              —
              
              
              
              —
              
              
              
              4,275
              
              
              
              —
              
              
              
              —
              
              
              
              4,401Share-based
                payment
              
              
              —
              
              
              
              —
              
              
              
              1,691
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,691Unrealized gain on
                investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2
              
              
              
              —
              
              
              
              2Impact of realized
                foreigncurrency
                gains
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (239
              )
              
              
              —
              
              
              
              (239
              )Foreign currency
                translation
                adjustment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              270
              
              
              
              —
              
              
              
              270Balance
      at
                September
      30, 2007
              
              
              20,425
              
              
              
              204
              
              
              
              186,213
              
              
              
              (884
              )
              
              
              (8,684
              )
              
              
              —
              
              
              
              —
              
              
              
              (40,219
              )
              
              
              137,514Net loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (27,445
              )
              
              
              (27,445
              )Exercise of stock
                options
              
              
              194
              
              
              
              2
              
              
              
              1,281
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,283Share-based
                payment
              
              
              —
              
              
              
              —
              
              
              
              2,399
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,399Unrealized loss on
                investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2,504
              )
              
              
              —
              
              
              
              (2,504
              )Balance
      at
                September
      30, 2008
              
              
              20,619
              
              
              $
              206
              
              
              $
              189,893
              
              
              
              (884
              )
              
              $
              (8,684
              )
              
              $
              —
              
              
              $
              (2,504
              )
              
              $
              (67,664
              )
              
              $
              111,247
 See
Notes to Consolidated Financial Statements


45


TIER
TECHNOLOGIES, INC.


CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE (LOSS) INCOME





Year
      ended September 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006Net
      loss
            
            $
            (27,445
            )
            
            $
            (3,034
            )
            
            $
            (9,451
            )Other
      comprehensive (loss) income, net of taxes:Investments
      in marketable securities:Unrealized
      (loss) gain
            
            
            (2,504
            )
            
            
            2
            
            
            
            53Foreign
      currency translation:Foreign
      currency translation adjustment
            
            
            —
            
            
            
            270
            
            
            
            25Less
      impact of realized gains (transferred from accumulated other comprehensive
      income and included in net loss)
            
            
            —
            
            
            
            (239
            )
            
            
            —Other
      comprehensive (loss) income
            
            
            (2,504
            )
            
            
            33
            
            
            
            78Comprehensive
      loss
            
            $
            (29,949
            )
            
            $
            (3,001
            )
            
            $
            (9,373
            )





See
Notes to Consolidated Financial Statements


46


TIER
TECHNOLOGIES, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS




Year
      ended September 30,(In
      thousands)
            
            2008
            
            
            2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (27,445
            )
            
            $
            (3,034
            )
            
            $
            (9,451
            )Less: (Loss)
      income from discontinued operations, net
            
            
            (15,401
            )
            
            
            15,366
            
            
            
            10,164Loss from
      continuing operations, net
            
            
            (12,044
            )
            
            
            (18,400
            )
            
            
            (19,615
            )Non-cash items
      included in net income from continuing operations:Depreciation
      and amortization
            
            
            5,497
            
            
            
            4,744
            
            
            
            5,479Provision for
      doubtful accounts
            
            
            239
            
            
            
            (42
            )
            
            
            809Accrued
      forward loss on contracts
            
            
            (12
            )
            
            
            25
            
            
            
            (270
            )Equity in net
      income of unconsolidated affiliate
            
            
            —
            
            
            
            (475
            )
            
            
            (445
            )Gain on sale
      of unconsolidated affiliate
            
            
            —
            
            
            
            (80
            )
            
            
            —Foreign
      currency translation gain realized on sale of
              unconsolidated
      affiliate
            
            
            —
            
            
            
            (239
            )
            
            
            —Settlement of
      pension contract
            
            
            —
            
            
            
            1,254
            
            
            
            —Share-based
      compensation
            
            
            2,224
            
            
            
            1,514
            
            
            
            1,768Write-down of
      obsolete inventory
            
            
            442
            
            
            
            —
            
            
            
            —Write-down of
      goodwill and intangible assets
            
            
            —
            
            
            
            9,192
            
            
            
            —Other
            
            
            23
            
            
            
            8
            
            
            
            76Net effect of
      changes in assets and liabilities:Accounts
      receivable and unbilled receivables
            
            
            473
            
            
            
            (1,413
            )
            
            
            1,193Prepaid
      expenses and other assets
            
            
            261
            
            
            
            3,050
            
            
            
            (228
            )Accounts
      payable and accrued liabilities
            
            
            311
            
            
            
            (142
            )
            
            
            949Income taxes
      receivable
            
            
            19
            
            
            
            3
            
            
            
            (336
            )Deferred
      income
            
            
            (859
            )
            
            
            129
            
            
            
            (70
            )Cash used in
      operating activities from continuing operations
            
            
            (3,426
            )
            
            
            (872
            )
            
            
            (10,690
            )Cash provided
      by operating activities from
              discontinued
      operations
            
            
            3,955
            
            
            
            14,645
            
            
            
            15,450Cash provided
      by operating activities
            
            
            529
            
            
            
            13,773
            
            
            
            4,760CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases of
      marketable securities
            
            
            (7,325
            )
            
            
            (21,012
            )
            
            
            (45,950
            )Sales and
      maturities of marketable securities
            
            
            33,815
            
            
            
            3,550
            
            
            
            44,278Purchases of
      restricted investments
            
            
            —
            
            
            
            (22,611
            )
            
            
            (14,255
            )Sales and
      maturities of restricted investments
            
            
            1,250
            
            
            
            20,098
            
            
            
            6,571Purchase of
      equipment and software
            
            
            (1,951
            )
            
            
            (931
            )
            
            
            (1,310
            )Repayment of
      notes and accrued interest from related parties
            
            
            —
            
            
            
            4,401
            
            
            
            —Proceeds from
      sale of discontinued operations and equity investment
            
            
            8,735
            
            
            
            4,784
            
            
            
            —Other
      investing activities
            
            
            —
            
            
            
            (164
            )
            
            
            —Cash provided
      by (used in) investing activities for continuing
              operations
            
            
            34,524
            
            
            
            (11,885
            )
            
            
            (10,666
            )Cash used in
      investing activities for discontinued operations
            
            
            (5,057
            )
            
            
            (4,010
            )
            
            
            (3,461
            )Cash provided
      by (used in) investing activities
            
            
            29,467
            
            
            
            (15,895
            )
            
            
            (14,127
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net proceeds
      from issuance of common stock
            
            
            1,283
            
            
            
            213
            
            
            
            69Capital lease
      obligations and other financing arrangements
            
            
            (56
            )
            
            
            (26
            )
            
            
            (38
            )Cash provided
      by financing activities from continuing operations
            
            
            1,227
            
            
            
            187
            
            
            
            31Cash used in
      financing activities for discontinued operations
            
            
            (4
            )
            
            
            (6
            )
            
            
            (45
            )Cash provided
      by (used in) financing activities
            
            
            1,223
            
            
            
            181
            
            
            
            (14
            )Effect of
      exchange rate changes on cash
            
            
            —
            
            
            
            (11
            )
            
            
            17Net increase
      (decrease) in cash and cash equivalents
            
            
            31,219
            
            
            
            (1,952
            )
            
            
            (9,364
            )Cash and cash
      equivalents at beginning of period
            
            
            16,516
            
            
            
            18,468
            
            
            
            27,832Cash and cash
      equivalents at end of period
            
            $
            47,735
            
            
            $
            16,516
            
            
            $
            18,468




47




TIER
TECHNOLOGIES, INC.


CONSOLIDATED
      SUPPLEMENTAL CASH FLOW INFORMATION




Year
      ended September 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
            
            $
            11
            
            
            $
            13
            
            
            $
            13Income
      taxes paid, net
            
            $
            24
            
            
            $
            128
            
            
            $
            248SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING
              ACTIVITIES:Interest
      accrued on shareholder notes
            
            $
            —
            
            
            $
            126
            
            
            $
            277Equipment
      acquired under capital lease obligations and other financing
      arrangements
            
            $
            28
            
            
            $
            26
            
            
            $
            78Investments
      released from restriction
            
            $
            2,415
            
            
            $
            3,414
            
            
            $
            —


See
Notes to Consolidated Financial Statements


48




NOTES TO
      CONSOLIDATED FINANCIAL
STATEMENTS




NOTE
      1—NATURE OF OPERATIONS




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




·
            Federal,
      state and local governments;




·
            Property
      tax;




·
            Education;




·
            Insurance;




·
            Utilities;




·
            Court fees
      and fines; and




·
            Property
      management.




We
also operate in several other business areas which we are winding down or which
are currently reported as held-for-sale as we are seeking buyers for these
areas.  These operations include:




·
            Wind-down
      Operations—represents portions of our former GBPO and PSSI
      operations that we expect to wind-down over a four-year period because
      they are neither compatible with our long-term strategic direction nor
      complementary with the other businesses that we are
      divesting.  These operations
  include:




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




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




·
            Held-for-sale
      Operations—represents
      portions of our former PSSI operations for which we are seeking buyers,
      including the following:




o
            Financial
      Management Systems—develops, implements and supports financial
      management and purchasing systems for state and local governments;
      and




o
            Unemployment
      Insurance Systems—provides software
      application, development and integration services to state governments
      that are reforming unemployment insurance
  systems;




All
historical financial information presented in our Consolidated Financial
Statements and Notes to Our Consolidated Financial Statements has been
reclassified to conform to the current year’s presentation.  For
additional information about our EPP and Wind-down Operations, see Note
11—Segment Information.  For
additional information about the businesses that we have classified as
held-for-sale, see Note
14—Discontinued Operations.






NOTE
      2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




SIGNIFICANT
ACCOUNTING POLICIES




Basis
of Presentation.  These financial statements and the
accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America and conform to Regulation S-X
under the Securities Exchange Act of 1934, as amended.  We believe we
have made all necessary adjustments so that the financial statements are
presented fairly and that all such adjustments are of a normal recurring
nature.




49




Principles
of Consolidation.  The financial statements include the
accounts of Tier Technologies, Inc. and its
subsidiaries.  Intercompany transactions and balances have been
eliminated.  Prior to the sale of our investment in CPAS, Inc. (an
investment in which we exercised significant influence, but did not control or
act as the primary beneficiary) in June 2007, we accounted for our 46.96%
interest in CPAS using the equity method, under which our share of CPAS’ net
income (loss) was recognized in the period in which it was earned by
CPAS.




Use
of Estimates.  Preparing financial statements requires
management 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 reasonably impact the following
estimates:  project costs and percentage of completion; effective tax
rates; deferred taxes and associated valuation allowances; collectibility of
receivables; share-based compensation; and valuation of goodwill, intangibles
and investments.  Although we believe the estimates and assumptions
used in preparing our Consolidated Financial Statements and notes thereto are
reasonable in light of known facts and circumstances, actual results could
differ materially.




Foreign
Currencies.  We use the local foreign currency as the
functional currency to translate our investment in certain inactive operations
and our former investment in CPAS.  The assets and liabilities of the
subsidiaries are translated into U.S. dollars using exchange rates in effect at
the balance sheet date, revenues and expenses are translated using the average
exchange rate for the period and gains and losses from this translation process
are included in Other
comprehensive income in the shareholders’ equity section of our
Consolidated Balance Sheets.




Cash
and Cash Equivalents.  Cash equivalents are highly liquid
investments with maturities of three months or less at the date of purchase and
are stated at amounts that approximate fair value, based on quoted market
prices.  Cash equivalents consist principally of investments in
interest-bearing demand deposit accounts with financial
institutions.




Revenue
Recognition and Credit Risk.  We recognize revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable.  We assess
collectibility based upon our clients’ financial condition and prior payment
history, as well as our performance under the contract. When we enter into
certain arrangements where we are obligated to deliver multiple products and/or
services, we account for each unit of the contract separately when each unit
provides value to the customer on a standalone basis and there is objective
evidence of the fair value of the standalone unit.




Continuing
Operations




Our Electronic
Payment Processing, or EPP, operations offer payment processing services to our
clients, which allow them to offer their constituents (individuals or
businesses) the ability to pay certain financial obligations with their credit
or debit cards or with an electronic check.  Our revenue is generated
in the form of the convenience fee we are permitted to charge the constituent
for the electronic payment processing service provided.  Depending on
the agreement with the client, the convenience fee can be a fixed fee or a
percentage of the payment processed.  In more than 90% of our
arrangements, this fee is charged directly to the constituent and is added to
their payment obligation at the point the payment is processed.  We
recognize the revenue in the month in which the service is
provided.




We use the
percentage-of-completion method to recognize revenue associated with our Pension
wind-down operations.  This method of revenue recognition is discussed
in more detail in the following Discontinued
Operations section.




Our remaining
Wind-down operations include software sales and maintenance and support, as well
as non-essential training and consulting.  We recognize the revenues
on training and consulting projects in the month the services are
performed.  The method of revenue recognition for software sales and
maintenance and support is discussed in more detail in the following Discontinued
Operations section.




50




Discontinued
Operations




Typically, our
payment processing and call center operations earn revenues based upon a
specific fee per transaction or percentage of the dollar amount
processed.  We recognize these revenues in the month that the service
is provided.  As of September 30, 2008 our payment processing and
call center operations were completely divested.




We use the
percentage-of-completion method to recognize revenues for software licenses and
related services for projects that require significant modification or
customization that is essential to the functionality of the
software.  We record a provision in those instances in which we
believe it is probable that a contract will generate a net loss and we can
reasonably estimate this loss.  If we cannot reasonably estimate the
loss, we limit the amount of revenue that we recognize to the costs we have
incurred, until we can estimate the total loss. Advance payments from clients
and amounts billed to clients in excess of revenue recognized are recorded as
deferred revenue.  Amounts recognized as revenue in advance of
contractual billing are recorded as unbilled receivables.




For the sale of
software that does not require significant modification, we recognize revenues
from license fees when persuasive evidence of an agreement exists, delivery of
the software has occurred, no significant implementation or integration
obligations exist, the fee is fixed or determinable and collectibility is
probable.  If we do not believe it is probable that we will collect a
fee, we do not recognize the associated revenue until we collect the
payment.




For software
license arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenues to each component of the
arrangement using the residual value method of accounting based on the fair
value of the undelivered elements, which is specific to our
company.  Fair value for the maintenance and support obligations for
software licenses is based upon the specific renewal rates.




Our
license agreements do not offer return rights or price protection; therefore, we
do not have provisions for sales returns on these types of
agreements.  We do, however, offer routine, short-term warranties that
our proprietary software will operate free of material defects and in conformity
with written documentation.  Under these agreements, if we have an
active maintenance agreement, we record a liability for our estimated future
warranty claims, based on historical experience.  If there is no
maintenance contract, the warranty is considered implied maintenance and we
defer revenues consistent with other maintenance and support
obligations.




When we provide
ongoing maintenance and support services, the associated revenueis
deferred and recognized on a straight-line basis over the life of the related
contract—typically one year.  Generally, we recognize the revenues
earned for non-essential training and consulting support when the services are
performed.




Finally, under the
terms of a number of our contracts, we are reimbursed for certain costs that we
incur to support the project, including travel, postage, stationery and
printing.  We include the amounts that we are entitled to be
reimbursed and any associated mark-up on these expenses in Revenues
and include the expenses as a direct cost in (Loss)
income from discontinued operations, net on our Consolidated Statements
of Operations.




Allowance
for Doubtful Accounts.  The allowance for doubtful accounts
reflects our best estimate of probable losses inherent in the accounts
receivable balance.  We determine the allowance based on known
troubled accounts, historical experience and other currently available
evidence.  In addition, our OPC subsidiary records a sales return
allowance, calculated monthly at 0.35% of gross revenues on the applicable
contracts, to establish an allowance for the reversal of convenience
fees.  Convenience fees are charged to cardholders on a per
transaction basis and are reinstated to cardholders upon an approved payment
reversal.  Additions to the provision for bad debts are included in
General
and administrative on our Consolidated Statements of Operations, while
the provision for sales return allowance is included as a reduction against
Revenues.  The
balance of our allowance for doubtful accounts for Continuing Operations was
$0.3 million at September 30, 2008 and $1.2 million at
September 30, 2007.




51




Fair
Value of Financial Instruments.  The carrying amounts of
certain financial instruments, including cash equivalents, restricted cash,
accounts receivable, accounts payable and accrued liabilities, approximate fair
value due to their short maturities.




Investments
in Marketable Securities.  Investments in marketable securities
are composed of available-for-sale securities. Restricted investments pledged in
connection with performance bonds and real estate operating leases are reported
as Restricted
investments on the Consolidated Balance Sheets.  Unrestricted
investments with remaining maturities of 90 days or less (as of the date
that we purchased the securities) are classified as cash
equivalents.  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.  Our investments are categorized as
available-for-sale and recorded at estimated fair value, based on quoted market
prices, or financial models if quoted market prices are
unavailable.  Increases and decreases in fair value are recorded as
unrealized gains and losses in Other
comprehensive income.  Realized gains and losses and declines
in fair value judged to be other-than-temporary are included in the Consolidated
Statement of Operations as a Gain/(loss) on sale of
investment.  Interest earned is included in Interest
income, net.




Our securities are
municipal bonds collateralized with student loans.  These municipal
bonds are bought and sold in the marketplace through a bidding process sometimes
referred to as a "Dutch Auction."  Beginning in February 2008 we began
to experience unsuccessful auctions resulting from the uncertainty and turmoil
of the credit markets, particularly with the concerns about mortgage-backed
securities.  Due to the lack of liquidity in the current market,
during fiscal 2008 we began classifying our investments in marketable securities
as long-term.  We will continue to classify our securities as
long-term until market conditions improve and liquidity
returns.  Prior to fiscal 2007, we classified them as current
investments in marketable securities.




Advertising
Expense.  We expense advertising costs, net of cooperative
advertising cash contributions received from partners, during the period the
advertising takes place.  We incurred $0.5 million during fiscal
year 2008, $0.7 million during fiscal 2007 and $0.4 million during
fiscal 2006, of net advertising expenses from Continuing
Operations.




Property,
Equipment and Software.  Property, equipment and software are
stated at cost and depreciated using the straight-line method over the shorter
of the estimated useful lives of the assets or the lease terms, ranging from
three to seven years.  When assets are retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations in the period
realized.




We expense the cost
of software that we expect to sell, lease or market as research and development
costs, prior to the time that technical feasibility is
established.  Once technical feasibility is established, we capitalize
software development costs until the date that the software is available for
sale.  Similarly, we expense the costs incurred for software that we
expect to use internally until the preliminary project stage has been
completed.  Subsequently, we capitalize direct service and material
costs, as well as direct payroll and payroll-related costs and interest costs
incurred during development.  We amortize capitalized software costs
at the greater of (a) the ratio of current revenues to total projected revenues
or (b) the straight-line method over the estimated remaining economic life of
the software.  During the fourth quarter ended September 30, 2008
we recorded a net impairment of $1.7 million.




Goodwill.  Goodwill
is typically tested for impairment on an annual basis at the end of each fiscal
year and between annual tests if indicators of potential impairment exist, using
a fair-value based approach.  Subsequent to the decision during fiscal
2007 to divest certain portions of our operations, we have tested our goodwill
for impairment on a quarterly basis.  Impairment for the operations
classified as held-for-sale is recorded in Discontinued Operations and
impairment for all other operations, including Wind-down Operations is recorded
in Continuing Operations.  During fiscal 2008 we recorded goodwill
impairment and sale-related write downs of $8.8 million for Discontinued
Operations.  During fiscal 2007 we recorded goodwill impairment of
$8.5 million for Continuing Operations and $2.5 million for
Discontinued Operations.




52




Intangible
Assets.  We amortize intangible assets with finite lives using
the straight-line method over their estimated benefit period, ranging from five
to ten years.  We evaluate the recoverability of intangible assets
periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists.  No
impairment existed during fiscal 2008.  In April 2007, we classified
our Voice and Systems Automation, or VSA, operations as
held-for-sale.  At that time we suspended all depreciation and
amortization of long-term VSA assets in accordance with Statement of Financial
Accounting Standards No. 144—Impairment
or Disposal of Long-Lived Assets, or SFAS 144.  When we
reclassified the VSA assets back to held and used in September 2007, we
determined that the carrying value at March 31, 2007, adjusted for
depreciation that would have been recognized through September 2007, was less
than fair value at September 30, 2007.  To recognize this
impairment, we reduced the fair value of our intangible assets by
$0.7 million during fiscal 2007.




Held-For-Sale
Assets and Liabilities.Held-for-sale
assets and liabilities are presented on our Consolidated Balance Sheet at the
lower of their carrying value or fair value less costs to sell, once the
criteria for held-for-sale status has been met.  In accordance with
SFAS 144, assets are not depreciated or amortized while they are classified as
held-for-sale. At the time the asset group is classified as held-for-sale and
during each subsequent reporting period, we also evaluate goodwill for
impairment at the segment level, whenever the businesses classified as
held-for-sale have been fully integrated into the segment and the acquired
goodwill benefits the rest of the reporting unit.  In the event that
the asset group being disposed of represents a business that is part of a
segment, we allocate goodwill to be included in the carrying amount of the
business based on the relative fair values of the business to be disposed of in
relation to the remaining businesses in the segment, in accordance with
Statement of Financial Accounting Standards No. 142—Goodwill
and Other Intangibles.




(Loss)
Earnings Per Share.  Basic (loss) earnings per share are
computed by dividing net (loss) income by the weighted-average number of shares
of common stock outstanding for the period.  Diluted earnings per
share reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.




Share-Based
Payment.  We account for share-based compensation in accordance
with Statement of Financial Accounting Standards No. 123(R)—Share-Based
Payment, or SFAS 123R. Under the fair value recognition provisions of
SFAS 123R, share-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense over the applicable
vesting period of the award (typically three to five years) using the ratable
method.




Income
Taxes.  Deferred income taxes are provided for the tax effect
of temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements.  The liability
method is used to account for income taxes, which requires deferred taxes to be
recorded at the statutory rate expected to be in effect when the taxes are paid
or the differences are reversed.  Valuation allowances are established
against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be
realized.




On October 1, 2007, we adopted
FASB Interpretation No. 48—Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,or FIN 48.  This interpretation provides a financial statement
recognition threshold and measurement attribute for a tax position taken or
expected to be taken in a tax return.  We recognize the tax benefit
from an uncertain tax position only if it is more-likely-than-not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position.  For more information on our
adoption of FIN 48 seeNote
7—Income Taxes.  The cumulative effect
of adopting FIN 48 was immaterial.




Comprehensive
(Loss) Income.  Our comprehensive (loss) income is composed of
net (loss) income, foreign currency translation adjustments and unrealized gains
(losses) on marketable investment securities, net of related
taxes.




53




Guarantees.  We
record guarantees at the fair value of the guarantee at its inception when a
guarantor is required to make payments to the guaranteed party upon failure of
the third party to perform under the obligations of the
contract.




Accrued
Discount Fees.  Our direct costs for our EPP operations
primarily consist of credit card interchange fees, in addition to assessments
and other costs passed onto us by our processors.  Collectively, these
fees and costs are considered to be discount fees.  Discount fees are
charged to us as a percentage of the dollar volume we transact, and for expense
purposes, are incurred during the month that the related transaction is
authorized for payment.  Accrued discount fees represent the total
amount of discount fees which have been incurred by us on authorized
transactions, but have yet to be remitted by us as of the reporting
date.  Discount fees are typically remitted by us in the calendar
month which follows the date of transaction authorization.




RECENT
ACCOUNTING PRONOUNCEMENTS




SFAS
157—Fair Value Measurements.  In October 2006,
FASB issued Statement of Financial Accounting Standards No. 157—Fair
Value Measurements, or SFAS
157.  This standard establishes a framework for measuring fair value
and expands disclosures about fair value measurement of a company’s assets and
liabilities.  This standard also requires that the fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability.  SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and, generally, must be applied
prospectively.  We expect to adopt this standard beginning in October
2008.  We do not expect that the adoption of SFAS 157 will have a
material effect on our financial position or results of
operations.




In
February 2008, FASB issued FASB Staff Position FAS 157-1—Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
Under Statement 13.  This FSP removes leasing transactions
accounted for under Statement of Financial Accounting Standards No. 13—Accounting for Leases and its
related guidance from SFAS 157.  In February 2008, FASB also issued
FASB Staff Position FAS 157-2—Effective Date of FASB Statement No.
157.  This FSP delays the effective date of Statement 157 for
all nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15,
2008.  We do not expect that the adoption of these FSPs will have a
material effect on our financial position or results of operations.




SFAS
159—The Fair Value Option for Financial Assets and Financial
Liabilities.  In February 2007, FASB issued Statement of
Financial Accounting Standard No. 159—The
Fair Value Option for Financial Assets and Financial Liabilities, or SFAS
159, which allows companies to choose to measure many financial instruments and
certain other items at fair value.  Entities that elect the fair value
option will report unrealized gains and losses in earning at each subsequent
reporting date.  The principle can be applied on an instrument by
instrument basis, is irrevocable and must be applied to the entire
instrument.  SFAS 159 amends previous guidance to extend the use of
the fair value option to available-for-sale and held-to-maturity
securities.  SFAS 159 also establishes presentation and disclosure
requirements to help financial statement users understand the effect of the
election. SFAS 159 is effective as of the beginning of each reporting fiscal
year beginning after November 15, 2007.  We do not believe that
the adoption of SFAS 159 will have a material effect on our financial position
or results of operations.




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




54




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




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




NOTE
      3—INVESTMENTS




Debt
and Equity Securities




Investments are
composed 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 $1.9 million
at September 30, 2008 and $5.5 million at September 30, 2007 were
pledged in connection with performance bonds and real estate operating leases
and will be restricted for the terms of the project performance periods and
lease periods, the latest of which is estimated to end in March
2010.  At both September 30, 2008 and 2007, we used a
$6.0 million money market investment as a compensating balance for a bank
account used for certain operations.  These investments are reported
as Restricted
investments on the Consolidated Balance Sheets.




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




At
September 30, 2008 and September 30, 2007, our investment portfolio
included $28.8 million and $54.4 million, respectively, of municipal
bonds that were collateralized with student loans.  These municipal
bonds are bought and sold in the marketplace through a bidding process sometimes
referred to as a “Dutch Auction.”  After the initial issuance of the
securities, the interest rate on the securities is reset at prescribed intervals
(typically every 28 days), based upon the market demand for the securities on
the reset date.  Beginning in February 2008, some of the auctions for
these securities were unsuccessful.  Our investments are rated AAA,
are current on all obligations, and we continued to earn interest on our auction
rate security investments at the maximum contractual rate.  However,
the uncertainty of the credit markets has resulted in negative impacts to
liquidity and fair value of these investments.  Through
September 30, 2008, we liquidated as many of these securities as possible
and invested the funds in money market accounts.  As a result of the
unsuccessful auctions and the uncertainty in the credit market, the estimated
fair value of the remaining investments no longer approximated par
value.  During the fiscal year ended September 30, 2008, we
recorded an unrealized loss of $2.5 million, which is included in Accumulated
other comprehensive loss on our Consolidated Balance Sheets, to write
down the book value of the investments to fair market value.  We
determined fair market value of our investments using a discounted cash flow
approach.  During fiscal 2008 we reclassified these securities from
current Investments
in marketable securities to long-term Investments
in marketable securities on our Consolidated Balance Sheets as a result
of the lack of liquidity due to current market conditions.


55




The funds
associated with failed auctions will not be accessible until a successful
auction occurs, the issuer calls or restructures the underlying security, the
underlying security matures and is paid (all of our securities have maturities
in excess of ten years) or a buyer outside the auction process
emerges.  We do not believe the unsuccessful auctions experienced to
date are the result of the deterioration of the underlying credit quality of
these securities, since our securities are municipal bonds collateralized with
student loans.  Securities collateralized with student loans are
guaranteed by the issuing state and the Federal Family Education Loan
Program.  Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy.  We have recorded the
impairment as temporary as we have the intent and ability to hold these
investments until one of the previously mentioned scenarios
occurs.  We believe that our cash and cash equivalents balances of
$47.7 million at September 30, 2008 are sufficient and we do not
anticipate the lack of liquidity in the credit and capital markets will have a
material impact on our cash flows or the ability to conduct our
business.




If the current
market conditions continue or the anticipated recovery in market values does not
occur, we may be required to record other-than-temporary impairment charges in
the future.  Our investment manager agreed to an Auction Rate Security
buyback program in August 2008, in which the target date for corporations is set
for June 2010.  Our investment manager has also decided to participate
in the US Treasury's Temporary Guarantee Program.  Even with these
assurances, we intend to convert our investments in auction rate securities to
money market funds as liquidity returns and conditions permit.




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




If we determine
that impairment is other-than-temporary, we reduce the recorded book value of
the investment by the amount of the impairment and recognize a realized loss on
the investment.  At September 30, 2008 and September 30,
2007, we did not believe any of our investments were other-than-temporarily
impaired.




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:




September
      30, 2008
            
            
            September
      30, 2007(in
      thousands)
            
            Amortized
      cost
            
            
            Unrealized
      loss
            
            
            Estimated
              fair
      value
            
            
            Amortized
      cost
            
            
            Unrealized
      loss
            
            
            Estimated
      fair valueCash
      equivalents:Money
      market
            
            $
            30,308
            
            
            $
            —
            
            
            $
            30,308
            
            
            $
            7,798
            
            
            $
            —
            
            
            $
            7,798Total
      investments included in
              cashand
      cash
              equivalents
            
            
            30,308
            
            
            
            —
            
            
            
            30,308
            
            
            
            7,798
            
            
            
            —
            
            
            
            7,798Investments
      in marketable securities:Debt
      securities (State and local bonds)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            54,400
            
            
            
            —
            
            
            
            54,400Certificates
      of deposit
            
            
            2,415
            
            
            
            —
            
            
            
            2,415
            
            
            
            3,415
            
            
            
            —
            
            
            
            3,415Total
      marketable securities
            
            
            2,415
            
            
            
            —
            
            
            
            2,415
            
            
            
            57,815
            
            
            
            —
            
            
            
            57,815Long-term
      investments:Debt
      securities (State and local bonds)
            
            
            31,325
            
            
            
            (2,504
            )
            
            
            28,821
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      long-term investments
            
            
            31,325
            
            
            
            (2,504
            )
            
            
            28,821
            
            
            
            —
            
            
            
            —
            
            
            
            —Restricted
      investments:Money
      market
            
            
            6,000
            
            
            
            —
            
            
            
            6,000
            
            
            
            6,000
            
            
            
            —
            
            
            
            6,000Certificates
      of deposit
            
            
            1,861
            
            
            
            —
            
            
            
            1,861
            
            
            
            5,526
            
            
            
            —
            
            
            
            5,526Total
      restricted investments
            
            
            7,861
            
            
            
            —
            
            
            
            7,861
            
            
            
            11,526
            
            
            
            —
            
            
            
            11,526Total
      investments
            
            $
            71,909
            
            
            $
            (2,504
            )
            
            $
            69,405
            
            
            $
            77,139
            
            
            $
            —
            
            
            $
            77,139




56




As of
September 30, 2008, all of the debt securities that were included in
marketable securities had remaining maturities in excess of ten
years.  While all of these debt securities have long-term maturities,
all of our debt securities are auction rate securities with interest that
typically resets every 28 days.




Equity
Investments




In
June 2007 we sold our 46.96% investment of the outstanding common stock of CPAS,
a Canadian-based supplier of pension administration software systems, back to
CPAS for $4.8 million (USD).  The sale price was approximately
equal to the US-dollar equivalent of our book value in the CPAS investment as of
June 30, 2007, plus estimated taxes and other disposal costs.  In
June 2007, we recorded a gain of $80,000 on the sale of this investment and
realized a foreign currency gain on the investment of
$239,000.






NOTE
      4—CUSTOMER CONCENTRATION AND RISK




We
derive a significant portion of our revenue from a limited number of
governmental customers.  Typically, the contracts allow these
customers to terminate all or part of the contract for convenience or
cause.  We have one client, the Internal Revenue Service, or IRS,
whose revenues exceeds 10% of revenues from Continuing
Operations.




The
following table shows the revenues for our contract with the
IRS:




Year ended September
      30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006Revenue
            
            $
            32,572
            
            
            $
            28,138
            
            
            $
            24,997Percentage of
      Continuing Operations revenue
            
            
            26.6
            %
            
            
            26.0
            %
            
            
            27.5
            %




Our current
contract extension with the IRS expires November 30, 2009.  In
October 2008, the IRS issued a Request for Proposal for a contract period
commencing in 2010.




Accounts
receivable, net.
As of September 30, 2008 and 2007, we reported $4.2 million and
$4.9 million, respectively, in Accounts
receivable, neton our Consolidated Balance Sheets.  This item
represents theshort-term
portion of receivables from our customers and other parties and retainers that
we expect to receive.  Approximately 32.7% and 63.2% of the balances
reported at September 30, 2008 and 2007, respectively, represent accounts
receivable, net that are attributable to operations that we intend to wind down
during the course of the next four years (SeeNote
11—Segment Information, for additional information about
our Wind-down operations).  The remainder of the Accounts
receivable, net balance is composed of receivables from certain of our
EPP customers.  None of our customers have receivables that exceed 10%
of our total receivable balance.  As of September 30, 2008 and
2007, Accounts
receivable, net included an allowance for uncollectible accounts of
$0.3 million and $1.2 million, respectively, which represents the
balance of receivables that we believe are likely to become
uncollectible.




Certain of our
contracts allow customers to retain a portion of the amounts owed to us until
predetermined milestones are achieved or until the project is
completed.  At September 30, 2008 and 2007, Accounts
receivable, netincluded $0.4 million and $0.8 million,
respectively, of retainers that we expected to receive in one year.




Unbilled
receivables represent revenues that we have earned for the work that has
been performed to date that cannot be billed under the terms of the applicable
contract until we have completed specific project milestones or the customer has
accepted our work.  At September 30, 2008, total unbilled
receivables, which are expected to become billable in one year, were
$0.5 million, all of which is attributable to one customer.  At
September 30, 2007, total unbilled receivables, all of which are expected
to become billable in one year, were $0.5 million, of which one customer
accounted for 56.2% of the total and another customer accounted for the
remaining 43.8% of the total.




57




All of the retainers and unbilled
receivable balances discussed above are associated with businesses that we
intend to wind down over the next four years (SeeNote
11—Segment Information).






NOTE
      5—PROPERTY, EQUIPMENT AND SOFTWARE




Property,
equipment and software, net consist of the following:




September
      30,(in
      thousands)
            
            2008
            
            
            2007Software
            
            $
            1,728
            
            
            $
            749Computer
      equipment
            
            
            6,650
            
            
            
            5,324Furniture
      and equipment
            
            
            2,279
            
            
            
            3,055Land
      and building
            
            
            2,651
            
            
            
            2,452Leasehold
      improvements
            
            
            411
            
            
            
            508Total
      property, equipment and software, gross
            
            
            13,719
            
            
            
            12,088Less:
      Accumulated depreciation and amortization
            
            
            (9,240
            )
            
            
            (8,345
            )Total
      property, equipment and software, net
            
            $
            4,479
            
            
            $
            3,743




We depreciate fixed
assets on a straight-line basis over their estimated useful
lives.  Leasehold improvements are amortized over the lesser of the
estimated remaining life of the leasehold or the remaining term of the lease.
Depreciation and amortization expense associated with property, equipment and
software that we held and used for our Continuing Operations is reported on the
following lines on our Consolidated Statements of Operations:




Year ended September
      30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006Depreciation
      and amortization expenses for property, equipment and
      software:Included in Direct
      costs:Software
            
            $
            12
            
            
            $
            12
            
            
            $
            4Equipment
            
            
            78
            
            
            
            77
            
            
            
            183Total included in Direct
      costs
            
            
            90
            
            
            
            89
            
            
            
            187Included in
      Depreciation
      and amortization:Software
            
            
            180
            
            
            
            171
            
            
            
            95Equipment
            
            
            964
            
            
            
            828
            
            
            
            695Total included in Depreciation
      and amortization
            
            
            1,144
            
            
            
            999
            
            
            
            790Total
      depreciation and amortization expense for property, equipment and
      software
            
            $
            1,234
            
            
            $
            1,088
            
            
            $
            977




In addition to the
depreciation and amortization reflected in the above table, the line titled
Income
from discontinued operations, net on our Consolidated Statements of
Operations included depreciation and amortization expenses of $79,000 for fiscal
2008, $1.9 million for fiscal 2007 and $3.6 million for fiscal
2006.  These amounts represent depreciation and amortization expense
that was recorded until these assets were classified as held for
sale.  Property, equipment, software and capitalized leases used by
our operations that are held-for-sale are reported as Current
assets—held-for-sale on our Consolidated Balance Sheets.  SeeNote
14—Discontinued Operationsfor
additional information.




The
cost of assets acquired under capital leases for our Continuing Operations was
approximately $0.3 million at September 30, 2008 and
September 30, 2007. The related accumulated depreciation and amortization
was $0.2 million at September 30, 2008 and September 30,
2007.




58




NOTE
      6—GOODWILL AND OTHER INTANGIBLE
ASSETS




Goodwill




The following table summarizes
changes in the carrying amount of goodwill during fiscal years 2008 and 2007 for
our Continuing and Discontinued Operations.  The goodwill for our
Continuing Operations is reported on the line titled Goodwillon our Consolidated Balance Sheets, while the goodwill for our
Discontinued Operations is included in the line titled Current
assets—held-for-sale.




Continuing
      Operations
            
            
            Discontinued
      Operations(in
      thousands)
            
            EPP
            
            
            Wind-down
            
            
            Total
            
            
            GBPO
            
            
            PSSI
            
            
            Total
            
            
            TotalBalance
      at
              September
      30, 2006
            
            $
            14,526
            
            
            $
            8,454
            
            
            $
            22,980
            
            
            $
            5,680
            
            
            $
            8,907
            
            
            $
            14,587
            
            
            $
            37,567Fiscal
      year 2007
              goodwill
              impairment
            
            
            —
            
            
            
            (8,454
            )
            
            
            (8,454
            )
            
            
            (2,461
            )
            
            
            —
            
            
            
            (2,461
            )
            
            
            (10,915
            )Balance
      at
              September
      30, 2007
            
            
            14,526
            
            
            
            —
            
            
            
            14,526
            
            
            
            3,219
            
            
            
            8,907
            
            
            
            12,126
            
            
            
            26,652Fiscal
      year 2008
              goodwill
              impairment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (141
            )
            
            
            (8,470
            )
            
            
            (8,611
            )
            
            
            (8,611
            )Goodwill
      write-off
              (divestitures)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,078
            )
            
            
            (437
            )
            
            
            (3,515
            )
            
            
            (3,515
            )Balance
      at
              September
      30, 2008
            
            $
            14,526
            
            
            $
            —
            
            
            $
            14,526
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            14,526




As a general
practice, we test goodwill for impairment during the fourth quarter of each
fiscal year at the reporting unit level using a fair value approach in
accordance with SFAS 142.  If an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying value, we would evaluate goodwill for impairment between annual
tests.  One such triggering event is when there is a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed
of.  Consequently, we tested goodwill for impairment on a quarterly
basis for those portions of our former GBPO and PSSI businesses classified as
held-for-sale subsequent to the April 1, 2007 decision to divest those
businesses.




In the quarter
ended September 30, 2008, we reviewed for impairment the goodwill assets
classified as held-for-sale, as well as goodwill for our assets classified as
held and used.  As a result of the quarterly and September reviews, we
identified the need to reduce goodwill for our Discontinued Operations by
$8.8 million.  We recorded an additional $3.3 million
reduction of goodwill associated with the divestiture of certain business
units.  At September 30, 2007 our review resulted in a need to
reduce goodwill by $8.5 million for our Wind-down operations and
$2.5 million for our Discontinued Operations.




Other
Intangible Assets, Net




Initially in April
2007, we classified our VSA operations as held-for-sale.  At that time
we suspended all depreciation and amortization of long-term VSA assets in
accordance with SFAS 144.  As of September 30, 2007, we removed
our VSA business from the held-for-sale classification.  We made this
decision because the VSA business supports a portion of our EPP segment and
because we believe the return for our stockholders would be greater if we were
to continue to operate the VSA business for the near term.  At that
time we reclassified the VSA assets back to held and used and we determined that
the carrying value at April 2007, adjusted for depreciation and amortization
that would have been recognized through September 2007, was less than fair value
at September 30, 2007.  As a result, we were required to
recognize an impairment loss of $0.7 million.  This impairment
loss was allocated to our intangible assets based upon the amortization we would
have accrued if VSA had never been classified as held-for-sale.  The
following table summarizes our Other
intangible assets, net, for our continuing
operations:




59


September
      30, 2008
            
            
            September
      30, 2007(in
      thousands)
            Amortization
      period
            
            Gross
            
            
            Accumulated
      amortization
            
            
            Net
            
            
            Gross
            
            
            Accumulated
      amortization
            
            
            NetClient
      relationships
            8
      -10 years
            
            $
            28,408
            
            
            $
            (16,829
            )
            
            $
            11,579
            
            
            $
            28,749
            
            
            $
            (13,840
            )
            
            $
            14,909Impairment
              write-down
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (341
            )
            
            
            —
            
            
            
            (341
            )28,408
            
            
            
            (16,829
            )
            
            
            11,579
            
            
            
            28,408
            
            
            
            (13,840
            )
            
            
            14,568Technology
      and research and development
            5
      years
            
            
            3,966
            
            
            
            (3,317
            )
            
            
            649
            
            
            
            4,289
            
            
            
            (2,444
            )
            
            
            1,845Impairment
              write-down
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (323
            )
            
            
            —
            
            
            
            (323
            )3,966
            
            
            
            (3,317
            )
            
            
            649
            
            
            
            3,966
            
            
            
            (2,444
            )
            
            
            1,522Trademarks
            6
      -10 years
            
            
            3,200
            
            
            
            (1,973
            )
            
            
            1,227
            
            
            
            3,214
            
            
            
            (1,664
            )
            
            
            1,550Other
      intangible assets, net
            
            
            $
            35,574
            
            
            $
            (22,119
            )
            
            $
            13,455
            
            
            $
            35,588
            
            
            $
            (17,948
            )
            
            $
            17,640




Amortization
expense for other intangible assets was $4.2 million for fiscal year 2008,
$3.6 million for fiscal year 2007 and $4.3 million for fiscal year
2006, all of which is related to Continuing Operations.  As of
September 30, 2008, we expect to recognize the following amortization
expense on other intangible assets over the next five years:




(in
      thousands)
            
            Future
              expenseYears
      ending September 30,2009
            
            $
            4,4842010
            
            
            3,8552011
            
            
            2,7742012
            
            
            2,3142013
            
            
            14Thereafter
            
            
            14Total
      future amortization expense
            
            $
            13,455




NOTE
      7—INCOME TAXES




The components of
deferred tax liabilities and assets are as follows:




September 30,(in
      thousands)
            
            2008
            
            
            2007Deferred
      tax liabilities:Internally
      developed software
            
            $
            2,104
            
            
            $
            2,088Intangibles
            
            
            —
            
            
            
            1,688Other
      deferred tax liabilities
            
            
            322
            
            
            
            581Investment
      in subsidiary
            
            
            287
            
            
            
            106Total
      deferred tax liabilities
            
            
            2,713
            
            
            
            4,463Deferred
      tax assets:Accrued
      expenses
            
            
            2,587
            
            
            
            2,842Depreciation
            
            
            151
            
            
            
            416Accounts
      receivable allowance
            
            
            240
            
            
            
            719Intangibles
            
            
            1,941
            
            
            
            —Other
      deferred tax assets
            
            
            1,263
            
            
            
            847Net
      operating loss carryforward
            
            
            33,229
            
            
            
            27,948Foreign
      tax credit carryforward
            
            
            —
            
            
            
            566Valuation
      allowance
            
            
            (36,698
            )
            
            
            (28,875
            )Total
      deferred tax assets
            
            
            2,713
            
            
            
            4,463Net
      deferred tax assets (liabilities)
            
            $
            —
            
            
            $
            —




At
September 30, 2008, we had $89.5 million of federal net operating loss
carryforwards, which expire beginning in fiscal 2018.  At September
30, 2008, we had $65.1 million of state net operating loss carryforwards,
the bulk of which begin to expire after fiscal 2010.  Of these
amounts, $48.6 million of federal net operating loss
carryforwards


60




and
$29.6 million of state net operating loss carryforwards were acquired in
the acquisition of OPC during fiscal 2002.  Our ability to utilize the
acquired federal net operating loss carryforward is limited to $3,350,000 per
year pursuant to Internal Revenue Code Section 382, which imposes an annual
limitation on the utilization of net operating loss carryforwards following
ownership changes.




At September 30,
2008, we maintained a full valuation allowance against the net deferred tax
assets due to the uncertainty regarding their utilization.  As of
September 30, 2008, a total of $23.4 million of the valuation allowance
related to deferred tax assets for which any subsequently recognized tax
benefits would first reduce goodwill and any remaining valuation allowance
related to deferred tax assets would increase equity.




Our fiscal 2002 tax
return included a $22.5 million loss on disposal of Australian
operations.  In fiscal 2003 we requested and received
$6.5 million of federal income tax refunds associated with this
disposal.  Although we received the refund in October 2003, we fully
reserved the entire balance because of uncertainty about the final review and
resolution of this transaction by the Internal Revenue Service.  From
October 2003 to February 2007, we increased our reserve by $1.1 million to
recognize the potential interest and penalties we could have incurred if the
Internal Revenue Service had made an unfavorable decision.




In March 2007, we
were notified by the Internal Revenue Service that its Joint Committee on
Taxation had completed its review and had approved the $6.5 million
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 2007 Consolidated Statement
of Operations as (Loss)/income
from discontinued operations.




Significant
components of the provision for income taxes are as follows:




Continuing
      Operations
            
            
            Discontinued
      OperationsYear
      ended September 30,
            
            
            Year
      ended September 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006
            
            
            2008
            
            
            2007
            
            
            2006Current
      income tax provision:Federal
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (7,599
            )
            
            $
            456State
            
            
            87
            
            
            
            76
            
            
            
            45
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      provision for
              income
      taxes
            
            $
            87
            
            
            $
            76
            
            
            $
            45
            
            
            $
            —
            
            
            $
            (7,599
            )
            
            $
            456




There were no
deferred income tax provisions or benefits during the years ended September 30,
2008, 2007 or 2006.




The effective tax
rate differs from the applicable U.S. statutory federal income tax rate as
follows:




Year
      ended September 30,2008
            
            
            2007
            
            
            2006U.S.
      statutory federal tax rate
            
            
            34.0
            %
            
            
            34.0
            %
            
            
            34.0
            %State
      taxes, net of federal tax benefit
            
            
            4.1
            %
            
            
            3.9
            %
            
            
            3.5
            %Tax
      exempt interest income
            
            
            0.1
            %
            
            
            0.2
            %
            
            
            0.3
            %Meals
      and entertainment
            
            
            (0.6
            )%
            
            
            (0.9
            )%
            
            
            (1.5
            )%Goodwill
      and intangible asset impairment
            
            
            —
            
            
            
            (27.7
            )%
            
            
            —Valuation
      allowance
            
            
            (34.1
            )%
            
            
            (7.0
            )%
            
            
            (32.1
            )%Stock-based
      compensation
            
            
            (3.6
            )%
            
            
            (3.2
            )%
            
            
            (4.2
            )%Other
            
            
            (0.6
            )%
            
            
            —
            
            
            
            (5.6
            )%Effective tax
    rate
            
            
            (0.7
            )%
            
            
            (0.7
            )%
            
            
            (5.6
            )%






61




FIN
48




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




The adoption of FIN
48 had no material impact on our Consolidated Balance Sheets or our Consolidated
Statements of Operations.  After examining the current and past tax
positions taken, we concluded that it is more-likely-than-not these tax
positions will be sustained in the event of an examination and that there would
be no material impact to our effective tax rate.  No interest or
penalties have been accrued associated with any tax positions
taken.  In the event interest or penalties had been accrued, our
policy is to include these amounts related to unrecognized tax benefits in
income tax expense.  However, as of September 30, 2008, we had no
accrued interest or penalties related to uncertain tax positions.  Our
audit with the IRS for tax year ended September 30, 2005, which was
conducted during fiscal 2008, concluded during the fourth quarter of fiscal 2008
and no interest or penalties were imposed.  We file tax returns in
various states in which the statute of limitations may go back to tax year ended
September 30, 2004.






As of
September 30, 2008, we had approximately $42,000 of unrecognized tax
benefits.  Our policy is to include interest and penalties related to
unrecognized tax benefits in income tax expense.  Interest totaled
$8,000 in fiscal 2008. The following table summarizes our unrecognized tax
benefits:




(in
      thousands)Balance
      at September 30, 2007
            
            $
            —Increases for
      tax positions related to prior years
            
            
            42Balance
      at September 30, 2008
            
            $
            42




NOTE
      8—CONTINGENCIES AND COMMITMENTS




LEGAL
ISSUES




From time to time
during the normal course of business, we are a party to litigation and/or other
claims.  At September 30, 2008, none of these matters were
expected to have a material impact on our financial position, results of
operations or cash flows.  At September 30, 2008 and 2007, we had
legal accruals of $0.8 million and $1.1 million based upon estimates
of key legal matters.




In
November 2003, we were granted conditional amnesty in relation to a
Department of Justice Antitrust Division investigation involving the child
support payment processing industry.  We fully cooperated with this
investigation. In January 2008, we were advised by the DOJ that they will no
longer pursue this investigation.




On May 31,
2006, we received a subpoena from the Philadelphia District Office of the
Securities and Exchange Commission requesting documents relating to financial
reporting and personnel issues.  We have cooperated, and will continue
to cooperate fully, in this investigation.




62




On
November 20, 2006, we were served with a purported class action lawsuit
filed with the United States District Court for the Eastern District of Virginia
on behalf of purchasers of our common stock.  The suit alleged that
Tier and certain of its former officers issued false and misleading
statements.  On July 24, 2007, the United States District Court
for the Eastern District of Virginia entered into an order denying the
plaintiff's motion for class certification for the purported class action
lawsuit.  On December 3, 2007, the court granted our motion to
dismiss plaintiff's complaint, but permitted plaintiff an opportunity to file an
amended complaint.  On January 29, 2008, we settled the matter
for a nominal sum and entered into a mutual settlement agreement and
release.  On February 19, 2008, the United States District Court
for the Eastern District of Virginia dismissed the case with
prejudice.




BANK
LINES OF CREDIT




At
September 30, 2008, we had a credit facility that allowed us to obtain
letters of credit up to a total of $7.5 million.  This credit
facility, which is scheduled to mature on September 30, 2009, grants the
lender a perfected security interest in cash collateral in an amount equal to
all issued and to be issued letters of credit.  We pay 0.75% per annum
for outstanding letters of credit, but are not assessed any fees for the unused
portion of the line.  As of September 30, 2008, $1.9 million
of letters of credit were outstanding under this credit
facility.  These letters of credit were issued to secure performance
bonds and a facility lease.




CREDIT
RISK




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




At
September 30, 2008, our investment portfolio included $28.8 million of
AAA-rated auction rate municipal bonds that were collateralized with student
loans.  These municipal bonds are bought and sold in the marketplace
through a bidding process sometimes referred to as a “Dutch
Auction.”  After the initial issuance of the securities, the interest
rate on the securities is reset at a prescribed interval (typically every 28
days), based upon the demand for these securities.  In mid-February
2008, we began to experience unsuccessful auctions.  An unsuccessful
auction happens when there are insufficient buyers for the securities at the
reset date.  If there are no buyers in the market for a particular
auction rate security, the security holder is unable to sell the
security.  Therefore, the security becomes illiquid until such time
that the market provides sufficient buyers for the security, the issuer
refinances the obligation, or the obligation reaches final
maturity.  This was caused by concerns in the sub-prime mortgage
market and overall credit market issues.  Because of the unsuccessful
auctions and lack of liquidity, the fair value of our auction rate securities
declined.  All of our securities are collateralized with student
loans.  Securities collateralized with student loans are guaranteed by
the issuing state and the Federal Family Education Loan
Program.  Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy.  Because of this, we
continue to believe the credit quality of these securities is high and the
principal collectible.  Until liquidity is restored, we may not be
able to liquidate these investments in a timely manner or at par
value.




OPERATING
AND CAPITAL LEASE OBLIGATIONS




We lease our
principal facilities and certain equipment under non-cancelable operating and
capital leases, which expire at various dates through fiscal year
2011.  Future minimum lease payments for non-cancelable leases with
terms of one year or more are as follows:




63


(in
      thousands)
            
            Operating
      leases
            
            
            Capital
              leases(1)
      (2)
            
            
            TotalYear
      ending September 30,2009
            
            $
            1,827
            
            
            $
            27
            
            
            $
            1,8542010
            
            
            1,094
            
            
            
            24
            
            
            
            1,1182011
            
            
            1
            
            
            
            4
            
            
            
            5Total
      minimum lease payments
            
            $
            2,922
            
            
            $
            55
            
            
            $
            2,977(1)On
      our Consolidated Balance Sheets, the amount due in fiscal year 2009 is
      included in Total
      current liabilities, while the liability for capital lease payments
      due in fiscal years 2010 through 2011 is included in Other
      liabilities.
              (2)Total
      amount includes interest payments of $5,700.




Certain leases
contain provisions for rental options and rent escalations based on scheduled
increases, as well as increases resulting from a rise in certain costs incurred
by the lessor.  We recorded rent expense of $1.9 million during
fiscal 2008, $2.8 million during fiscal 2007 and $2.8 million during
fiscal 2006.




GUARANTEES




In conjunction with
our participation as a subcontractor in a three-year contract for unemployment
insurance-related services, we guaranteed the performance of the prime
contractor on the project.  The contract does not establish a
limitation to the maximum potential future payments under the guarantee;
however, we estimate that the maximum potential undiscounted cost of the
guarantee is $4.5 million.  In accordance with FASB
Interpretation No. 45—Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, we valued this guarantee based upon
the sum of probability-weighted present values of possible future cash
flows.  We believe that the probability is remote that the guarantee
provision of this contract will be invoked.




PERFORMANCE
AND GUARANTEE PAYMENT BONDS




Under certain
contracts, we are required to obtain performance bonds from a licensed surety
and to post the performance bonds with our customers.  Fees for
obtaining the bonds are expensed over the life of each bond.  At
September 30, 2008, we had $18.2 million of bonds posted with
clients.  There were no claims pending against any of these
bonds.




Pursuant to the
terms of money transmitter licenses we obtain with individual states, we are
required to provide guarantee payment bonds from a licensed
surety.  At September 30, 2008, we had $1.9 million of bonds
posted with nine states.  There were no claims pending against any of
these bonds.




EMPLOYMENTAGREEMENTS




As of September 30, 2008, we
have employment and change of control agreements with five executives and 18
other key managers.  If certain termination or change of control
events were to occur under the 23 contracts, as of September 30, 2008, we
could be required to pay up to $10.0 million.  In
October 2008, we entered into agreements with one executive and one key
manager.  SeeNote
16—Subsequent Eventsfor
information regarding those agreements.




As of
September 30, 2008, we had an employment agreement with an executive in
which the change of control provision was met.  Under the agreement we
could be obligated to pay the executive $0.5 million, which consists of
two-year's base salary payable within 30 days of his termination date of
September 30, 2008 plus COBRA premiums up to 18 months from his termination
date.  We have entered into an Independent Contractor Agreement with
this former executive to provide consulting services to assist us in the
transition of services to the purchaser of the GBPO business.  Under
the terms of the agreement we are required to pay the former executive $19,866
per month from October 1, 2008 to November 30,
2008.




64




On
September 24, 2008, another of our executives terminated his employment
with us.  Under the terms of his employment agreement, we could be
obligated to pay this former executive up to $0.3 million, which is one
year base salary plus COBRA premiums up to 12 months.




As of
September 30, 2008, we also had agreements with 18 key employees under
which these individuals would be entitled to receive three to twelve months of
their base salaries over a one-to-two year period, after completing defined
employment service periods.  We expect to recognize a maximum expense
of $0.4 million during fiscal year 2009 and $39,000 during fiscal year 2010
for these agreements.




As of
September 30, 2008, we had change of control agreements with 11 key
employees within our held-for-sale operations, which we entered into in February
2007.  Under these agreements, individuals are entitled to receive
three to twelve months of their base salaries plus three to twelve months of
COBRA benefits should certain change of control events occur.  Under
these agreements we would be required to pay up to $0.9 million if a change
of control occurred.




INDEMNIFICATIONAGREEMENTS




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






NOTE
      9—RELATED PARTY TRANSACTIONS




ITC
Deltacom, Inc.




During the fiscal
year ended September 30, 2008, 2007 and 2006, we purchased
$0.6 million, $0.3 million and $0.2 million, respectively, of
telecom services from ITC Deltacom, Inc., a company affiliated with a member of
our Board of Directors.




Nuance
Communications, Inc.




During the fiscal
year ended September 30, 2007 and 2006, we purchased $0.1 million and
$0.5 million, respectively, of software licenses, maintenance and related
services from Nuance Communications, Inc., a company affiliated with a member of
our Board of Directors.






NOTE
      10—RESTRUCTURING




As part of our
strategic initiative, during fiscal 2008 we incurred restructuring liabilities
of $0.9 million for severance and facility closing
costs.  Severance costs relate to combining certain operational
functions within our EPP operations and the wind down of our VSA
operations.  Facility closing costs relate to our decision to close
our New Mexico shared-service facility.




The following table
summarizes restructuring charges we incurred relating to our Continuing
Operations during fiscal years 2008, 2007 and 2006.  The restructuring
charges are included in General
and administrative on our Consolidated Statement of
Operations.




Year
      ended September 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006Office
      closure costs (net of sublease income)
            
            $
            6
            
            
            $
            —
            
            
            $
            32Severance
      costs
            
            
            845
            
            
            
            —
            
            
            
            3Total
      restructuring charges
            
            $
            851
            
            
            $
            —
            
            
            $
            35






65




The following table
summarizes restructuring liabilities associated with Continuing Operations for
fiscal years 2008 and 2007:




(in
      thousands)
            
            Severance
            
            
            Facilities
      closures
            
            
            TotalBalance
      at September 30, 2006
            
            $
            —
            
            
            $
            401
            
            
            $
            401Additions
            
            
            —
            
            
            
            —
            
            
            
            —Cash
      payments
            
            
            —
            
            
            
            (221
            )
            
            
            (221
            )Balance
      at September 30, 2007
            
            
            —
            
            
            
            180
            
            
            
            180Additions
            
            
            845
            
            
            
            6
            
            
            
            851Cash
      payments
            
            
            (249
            )
            
            
            (186
            )
            
            
            (435
            )Balance
      at September 30, 2008
            
            $
            596
            
            
            $
            —
            
            
            $
            596




At
September 30, 2008, we had $0.6 million of restructuring liabilities
associated with our Continuing Operations which is included in Other
current liabilities on our Consolidated Balance Sheet.  At
September 30, 2007, we had $0.2 million of restructuring liabilities
associated with our Continuing Operations which is included in Other
current liabilities.  We expect to pay the remaining
$0.6 million liability during fiscal year 2009.




NOTE
      11—SEGMENT INFORMATION




Our business consists of two
reportable segments: Continuing Operations and Discontinued
Operations.  Within our Continuing Operations segment, we allocate
resources to and assess the performance of our operations in three major areas:
our EPP Operations, certain Wind-down Operations and our Corporate
Operations.  Our Discontinued Operations includes portions of our
operations that have been sold or for which we are seeking buyers and includes
portions of our former GBPO and PSSI operations.  Information
regarding our Discontinued Operations can be found inNote
14—Discontinued Operations.




The following table
presents the results of operations for our EPP operations and our Wind-down
operations for fiscal years 2008, 2007 and 2006.  The Corporate &
Eliminations column of the following table includes corporate overhead and other
costs that could not be directly assigned either to our EPP operations or to our
Discontinued Operations, as well as eliminations for transactions between our
Continuing and Discontinued Operations.  The operations reported for
fiscal years 2007 and 2006 are consistent with those reported for the fiscal
year ended September 30, 2008.




Continuing
      Operations(in
      thousands)
            
            EPP
            
            
            Wind-
              down
            
            
            Corporate
      &
              Eliminations
            
            
            TotalFiscal
      year ended September 30, 2008:Revenues
            
            $
            117,072
            
            
            $
            5,930
            
            
            $
            (431
            )
            
            $
            122,571Costs
      and expenses:Direct
      costs
            
            
            91,290
            
            
            
            3,944
            
            
            
            —
            
            
            
            95,234General
      and administrative
            
            
            11,065
            
            
            
            1,088
            
            
            
            15,867
            
            
            
            28,020Selling
      and marketing
            
            
            7,966
            
            
            
            191
            
            
            
            520
            
            
            
            8,677Depreciation
      and amortization
            
            
            3,503
            
            
            
            1,428
            
            
            
            397
            
            
            
            5,328Total
      costs and expenses
            
            
            113,824
            
            
            
            6,651
            
            
            
            16,784
            
            
            
            137,259(Loss)
      income from continuing operations before
              other
      income and income taxes
            
            
            3,248
            
            
            
            (721
            )
            
            
            (17,215
            )
            
            
            (14,688
            )Other
      income (expense):Interest
      income (expense)
            
            
            (3
            )
            
            
            (2
            )
            
            
            2,736
            
            
            
            2,731Total
      other income (expense)
            
            
            (3
            )
            
            
            (2
            )
            
            
            2,736
            
            
            
            2,731(Loss)
      income from continuing operations before taxes
            
            
            3,245
            
            
            
            (723
            )
            
            
            (14,479
            )
            
            
            (11,957
            )Income
      tax provision
            
            
            —
            
            
            
            —
            
            
            
            87
            
            
            
            87(Loss)
      income from continuing operations
            
            $
            3,245
            
            
            $
            (723
            )
            
            $
            (14,566
            )
            
            $
            (12,044
            )




66




Continuing
      Operations(in
      thousands)
            
            EPP
            
            
            Wind-
              down
            
            
            Corporate
      &
              Eliminations
            
            
            TotalFiscal
      year ended September 30, 2007:Revenues
            
            $
            99,433
            
            
            $
            9,258
            
            
            $
            (385
            )
            
            $
            108,306Costs
      and expenses:Direct
      costs
            
            
            76,388
            
            
            
            6,280
            
            
            
            —
            
            
            
            82,668General
      and administrative
            
            
            7,057
            
            
            
            3,284
            
            
            
            16,031
            
            
            
            26,372Selling
      and marketing
            
            
            6,848
            
            
            
            1,091
            
            
            
            11
            
            
            
            7,950Depreciation
      and amortization
            
            
            3,206
            
            
            
            763
            
            
            
            604
            
            
            
            4,573Write
      down of goodwill and intangible assets
            
            
            —
            
            
            
            9,161
            
            
            
            —
            
            
            
            9,161Total
      costs and expenses
            
            
            93,499
            
            
            
            20,579
            
            
            
            16,646
            
            
            
            130,724(Loss)
      income from continuing operations before
              other
      income and income taxes
            
            
            5,934
            
            
            
            (11,321
            )
            
            
            (17,031
            )
            
            
            (22,418
            )Other
      income:Interest
      income
            
            
            —
            
            
            
            —
            
            
            
            3,300
            
            
            
            3,300Income
      from equity investments
            
            
            —
            
            
            
            —
            
            
            
            794
            
            
            
            794Other
      income
            
            
            —
            
            
            
            —
            
            
            
            4,094
            
            
            
            4,094(Loss)
      income from continuing operations before taxes
            
            
            5,934
            
            
            
            (11,321
            )
            
            
            (12,937
            )
            
            
            (18,324
            )Income
      tax provision
            
            
            76
            
            
            
            —
            
            
            
            —
            
            
            
            76(Loss)
      income from continuing operations
            
            $
            5,858
            
            
            $
            (11,321
            )
            
            $
            (12,937
            )
            
            $
            (18,400
            )





Continuing
      Operations(in
      thousands)
            
            EPP
            
            
            Wind-
              down
            
            
            Corporate
      &
              Eliminations
            
            
            TotalFiscal
      Year Ended September 30, 2006:Revenues
            
            $
            78,578
            
            
            $
            12,489
            
            
            $
            (151
            )
            
            $
            90,916Costs
      and expenses:Direct
      costs
            
            
            61,505
            
            
            
            7,104
            
            
            
            (162
            )
            
            
            68,447General
      and administrative
            
            
            5,510
            
            
            
            2,005
            
            
            
            24,795
            
            
            
            32,310Selling
      and marketing
            
            
            4,924
            
            
            
            1,033
            
            
            
            2,119
            
            
            
            8,076Depreciation
      and amortization
            
            
            3,169
            
            
            
            1,504
            
            
            
            450
            
            
            
            5,123Total
      costs and expenses
            
            
            75,108
            
            
            
            11,646
            
            
            
            27,202
            
            
            
            113,956(Loss)
      income from continuing operations before
              other
      income and income taxes
            
            
            3,470
            
            
            
            843
            
            
            
            (27,353
            )
            
            
            (23,040
            )Other
      income:Interest
      income
            
            
            2,136
            
            
            
            —
            
            
            
            815
            
            
            
            2,951Gain
      from equity investments
            
            
            —
            
            
            
            —
            
            
            
            519
            
            
            
            519Total
      other income
            
            
            2,136
            
            
            
            —
            
            
            
            1,334
            
            
            
            3,470(Loss)
      income from continuing operations before taxes
            
            
            5,606
            
            
            
            843
            
            
            
            (26,019
            )
            
            
            (19,570
            )Income
      tax provision
            
            
            45
            
            
            
            —
            
            
            
            —
            
            
            
            45(Loss)
      income from continuing operations
            
            $
            5,561
            
            
            $
            843
            
            
            $
            (26,019
            )
            
            $
            (19,615
            )






67




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




As of September
      30,(in
      thousands)
            
            2008
            
            
            2007Continuing
      Operations:EPP
            
            $
            102,451
            
            
            $
            96,527Wind-down
            
            
            4,932
            
            
            
            8,508Corporate (1)
            
            
            18,264
            
            
            
            24,521Assets for
      continuing operations
            
            
            125,647
            
            
            
            129,556Asset of
      discontinued operations
            
            
            —
            
            
            
            672Assets-held-for-sale
            
            
            11,704
            
            
            
            36,196Total
      assets
            
            $
            137,351
            
            
            $
            166,424(1)Represents assets for our continuing businesses
      that are not assignable to a specific operation.




SeeNote
14—Discontinued Operationsfor
a breakdown of assets that are classified as held-for-sale.






NOTE
      12—SHAREHOLDERS’ EQUITY




As of September 30,
2008, a total of 44,259,762 shares of $0.01 par value common stock were
authorized, of which 19,734,863 shares were outstanding, and a total of
4,579,047 shares of preferred stock were authorized, of which none were
outstanding.  Under our current credit facility, we are prohibited
from declaring or paying any dividends (seeNote
8—Contingencies and Commitments).




COMMON
STOCK REPURCHASE PROGRAM




In
October 1998, our Board of Directors authorized the repurchase of up to one
million shares of common stock. The purchases were to be made in the open market
or in privately negotiated transactions at the discretion of our management,
depending on financial and market conditions or as otherwise provided by the
Securities and Exchange Commission and the Nasdaq rules and
regulations.  In April 2003, our Board increased the number of
shares authorized for repurchase to two million shares.  As of
September 30, 2008, we had repurchased 884,400 shares of common stock for
$8.7 million.  All such repurchases of our common stock were made
prior to fiscal 2004.  All stock purchased under the common stock
repurchase program is reported as Treasury
stock on our Consolidated Balance Sheets.




STOCKHOLDER
RIGHTS PLAN




On July 12,
2007, we amended our Stockholder Rights Plan, or the Rights Plan.  The
amendment increased the beneficial ownership threshold for an acquiring person
from 10% to 15%.  The adoption of the Rights Plan was originally
approved by our Board of Directors on January 10, 2006.  On that
date, our Board of Directors declared a dividend distribution of one right for
each outstanding share of our common stock to stockholders of record on the
close of business on January 23, 2006.  Upon the occurrence of
certain events, each right entitles the registered holder to purchase from us
one one-thousandth of a share of Series A Junior Participating Preferred Stock,
$0.01 par value per share, at a purchase price of $50.00 in cash, subject to
adjustment.  The rights are intended to protect our stockholders in
the event of an unfair or coercive offer to acquire us and to provide our Board
of Directors with adequate time to evaluate unsolicited offers.




EQUITY
INCENTIVE PLAN




Under our Amended
and Restated 2004 Stock Incentive Plan, options for 3,202,357 shares of common
stock were outstanding at September 30, 2008.  Of those shares,
500,000 are restricted stock units which vest when both the price target is
achieved and the required service period is met.




68




NOTE
      13—SHARE-BASED PAYMENT




Stock
options and restricted stock units are issued under the Amended and Restated
2004 Stock Incentive Plan, or the Plan.  The Plan provides our Board
of Directors discretion in creating employee equity incentives, including
incentive and non-statutory stock options.  At September 30,
2008, there were 1,038,049 shares of common stock reserved for future grants
under the Plan.




STOCK
OPTIONS




Stock-based
compensation expense for all stock-based compensation awards granted was based
on the grant-date fair value using the Black-Scholes model.  We
recognize compensation expense for stock option awards on a ratable basis over
the requisite service period of the award.  Stock-based compensation
expense was $2.1 million for fiscal year 2008, $1.7 million for fiscal
year 2007 and $2.0 million for fiscal year 2006.  Generally stock
options vest as to 20% of the underlying shares each year on the anniversary of
the date granted and expire in ten years.




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




September
      30,2008
            
            
            2007
            
            
            2006Weighted-average
      assumptions used in Black-Scholes model:Expected
      period that options will be outstanding (in
      years)
            
            
            5.00
            
            
            
            5.00
            
            
            
            5.00Interest
      rate (based on U.S.
      Treasury yields at time of grant)
            
            
            3.52
            %
            
            
            4.66
            %
            
            
            4.87
            %Volatility
            
            
            42.87
            %
            
            
            47.54
            %
            
            
            48.21
            %Dividend
      yield
            
            
            —
            
            
            
            —
            
            
            
            —Weighted-average
      fair value of options granted
            
            $
            3.98
            
            
            $
            3.53
            
            
            $
            2.95Intrinsic
      value of options exercised (in
      thousands)
            
            $
            251
            
            
            $
            122
            
            
            $
            7




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




Stock
option activity for the fiscal year ended September 30, 2008 is as
follows:




Weighted-average(in
      thousands, except per share data)
            
            Shares
      under option
            
            
            Exercise
      price
            
            Remaining
      contractual term
            
            Aggregate
      intrinsic valueOptions
      outstanding at October 1, 2007
            
            
            2,113
            
            
            $
            8.54Granted
            
            
            1,299
            
            
            
            9.41Exercised
            
            
            (194
            )
            
            
            6.60Forfeitures
      or expirations
            
            
            (516
            )
            
            
            8.67Options
      outstanding at September 30, 2008
            
            
            2,702
            
            
            $
            9.07
            
            7.37
      years
            
            $
            749Options
      vested and expected to vest at
              September
      30, 2008
            
            
            2,576
            
            
            $
            9.07
            
            7.28
      years
            
            $
            744Options
      exercisable at September 30, 2008
            
            
            1,417
            
            
            $
            8.93
            
            5.86
      years
            
            $
            696




As of
September 30, 2008, a total of $3.6 million of unrecognized
compensation cost related to stock options, net of estimated forfeitures, was
expected to be recognized over a 3.71 year weighted-average
period.




RESTRICTED
STOCK UNITS




On
April 30, 2008, we granted 550,000 restricted stock units which vest when
both the price target is achieved and the required service period is
met.  Pursuant to the Plan, 500,000 shares can be payable in shares of
our common stock.  The remaining 50,000 shares may be payable in cash
and are recorded at their fair value as Other liabilities on our
Consolidated Balance Sheets.  We used a Monte Carlo simulation option
pricing model to estimate the grant-date fair value using the following
assumptions:


69




September
      30, 2008Payable
      in shares
            
            
            Payable
      in cashWeighted-average
      assumptions used in Monte Carlo simulation:Expected
      period that options will be outstanding (in
      years)
            
            
            3.00
            
            
            
            2.58Interest
      rate (based on U.S.
      Treasury yields at time of grant)
            
            
            2.48
            %
            
            
            2.15
            %Volatility
            
            
            39.07
            %
            
            
            38.31
            %Dividend
      yield
            
            
            —
            
            
            
            —Weighted-average
      fair value of options granted
            
            $
            3.63
            
            
            $
            1.77




Restricted
stock unit activity for the equity portion of the awards for the fiscal year
ended September 30, 2008 is as follows:




Restricted
      shares (in thousands,
      except per share data)
            
            SharesRestricted
      at October 1, 2007
            
            
            —Granted(1)
            
            
            500Vested
            
            
            —Forfeited
            
            
            —Restricted
      at September 30, 2008
            
            
            500(1)
      Of the 550,000 restricted stock units awarded, 500,000 are payable in
      shares.




As of
September 30, 2008 we recorded $0.3 million in expense related to the
award.  As of September 30, 2008, we have $1.7 million in
unrecognized compensation cost, expected to be recognized over approximately
three years.




NOTE
      14—DISCONTINUED OPERATIONS




DIVESTITURES




On
December 31, 2007, we sold our rights to service a contract for Independent
Validation and Verification, or IV&V, services to a third party for
$0.2 million in cash.  Under the terms of the agreement, we
assigned our future rights and obligations under the contract to the third
party.  However, we retained ownership of all assets and liabilities
for our IV&V business that were on our balance sheet as of December 31,
2007, including $0.1 million of deferred revenues.  The reversal
of these deferred revenues, combined with the cash that the buyer paid for this
business, resulted in a $0.3 million gain, which we recorded as (Loss)
income from discontinued operations, net on our Consolidated Statements
of Operations.  On March 1, 2008, we sold our rights to service a
contract for Health and Human Services, or HHS, to a third party, which resulted
in a $25,000 gain, which we recorded as (Loss)
income from discontinued operations, net on our Consolidated Statements
of Operations.




On April 1,
2008, we sold our rights to service our Call Center project to a third party for
$1.  Under the terms of the agreement, we assigned our future rights
and obligations under the contract to the third party, including certain assets
and liabilities for our call center project that were on our balance sheet as of
April 1, 2008.  We have entered into an extended warranty
plan to provide transition and support services until June 30,
2009.  In addition, we have reserved $0.2 million in escrow,
which will be released back to us if the buyer is successful in winning the June
2009 re-bid for the contract.  As a result of this sale, we were able
to eliminate our accrued forward loss liability of
$0.9 million.  The transaction resulted in a $0.1 million
loss, which is recorded as (Loss)
income from discontinued operations, net on our Consolidated Statement of
Operations.




On May 30,
2008, we completed the sale of our assets, operations and certain liabilities of
our State System Integration, or SSI, business to a third party.  The
sale was completed pursuant to an Asset Purchase Agreement dated May 23,
2008 for $0.7 million.  The sale resulted in a $0.2 million
loss which was recorded as (Loss)
income from discontinued operations, net on our Consolidated Statement of
Operations.




70




On
June 30, 2008, we completed the sale of the assets, operations and certain
liabilities of our Government Business Process Outsourcing business, or GBPO, to
Informatix, Inc., a privately held company.  The sale was completed
pursuant to a Purchase and Sale Agreement dated June 9, 2008 between Tier
and Informatix for a purchase price of $8.0 million in cash, subject to a
working capital adjustment.  The agreement also provides for earn-out
payments of up to $1 million per year for fiscal years 2008, 2009 and 2010,
if the revenues of the business meet the targets set forth in the agreement for
those respective fiscal years.  We did not meet the target set forth
in the agreement relating to the earn-out for fiscal 2008.  The sale
resulted in a $1.0 million loss which is recorded as (Loss)
income from discontinued operations, net on our Consolidated Statement of
Operations.




The
following schedule shows the current carrying value of the assets and
liabilities for the IV&V, HHS, Call Center, SSI and GBPO businesses included
in Assets
of discontinued operations and Liabilities
of discontinued operationson our Consolidated Balance
Sheets.




Year ended September
      30,(in
      thousands)
            
            2008
            
            
            2007Assets
      of discontinued operations:Current
      assets
            
            $
            —
            
            
            $
            578Goodwill
            
            
            —
            
            
            
            91Property &
      equipment
            
            
            —
            
            
            
            2Other
      assets
            
            
            —
            
            
            
            1Total
      assets
            
            
            —
            
            
            
            672Liabilities of
      discontinued operations:Current
      liabilities
            
            
            —
            
            
            
            421Total
      liabilities
            
            
            —
            
            
            
            421Net assets and
      liabilities of disposal group
            
            $
            —
            
            
            $
            251




ASSET
GROUPS HELD-FOR-SALE




Early
in fiscal 2007, we undertook a strategic initiative to determine how we could
best utilize our financial and management resources.  As a result of
that initiative, we concluded that shareholder value could be maximized if we
focused on our core business—Electronic Payment Processing.  As a
result, in April 2007, we announced our intention to seek buyers for the
divestiture of the majority of our PSSI and GBPO segments.  We
completed the sale of the GBPO segment in June 2008 and we have two remaining
PSSI practice areas for which we are still seeking buyers as of
September 30, 2008.  We classified the assets and liabilities
associated with those practice areas to be divested as Current
assets—held-for-saleand Current
liabilities—held-for-salein accordance with SFAS 144—Accounting
for the Impairment or Disposal of Long-Lived Assets.  Because
the practice areas within the PSSI segment are so diverse, they are being
marketed for divestiture separately; and as such, we expect to divest these
practice areas as separate transactions.






The following
schedule shows the current carrying value of the assets and liabilities in the
GBPO and PSSI segments that are in the disposal group.




Year ended September
      30,2008
            
            
            2007(in
      thousands)
            
            PSSI
            
            
            Total
            
            
            GBPO
            
            
            PSSI
            
            
            Eliminations
            
            
            TotalAssets:Current
      assets
            
            $
            6,190
            
            
            $
            6,190
            
            
            $
            4,009
            
            
            $
            6,548
            
            
            $
            39
            
            
            $
            10,596Property,
      equipment and
              software,
      net
            
            
            5,512
            
            
            
            5,512
            
            
            
            5,606
            
            
            
            6,657
            
            
            
            (476
            )
            
            
            11,787Goodwill
            
            
            —
            
            
            
            —
            
            
            
            3,219
            
            
            
            8,816
            
            
            
            —
            
            
            
            12,035Other
      assets
            
            
            2
            
            
            
            2
            
            
            
            —
            
            
            
            1,778
            
            
            
            —
            
            
            
            1,778Total
      assets
            
            
            11,704
            
            
            
            11,704
            
            
            
            12,834
            
            
            
            23,799
            
            
            
            (437
            )
            
            
            36,196Liabilities:Current
      liabilities
            
            
            9,061
            
            
            
            9,061
            
            
            
            2,944
            
            
            
            7,619
            
            
            
            —
            
            
            
            10,563Other
      liabilities
            
            
            —
            
            
            
            —
            
            
            
            283
            
            
            
            18
            
            
            
            —
            
            
            
            301Total
      liabilities
            
            
            9,061
            
            
            
            9,061
            
            
            
            3,227
            
            
            
            7,637
            
            
            
            —
            
            
            
            10,864Net assets and
      liabilities of
              disposal
      group
            
            $
            2,643
            
            
            $
            2,643
            
            
            $
            9,607
            
            
            $
            16,162
            
            
            $
            (437
            )
            
            $
            25,332




71


We performed impairment analysis of
all held-for-sale assets in accordance with SFAS 144 and
SFAS 142.  As a result of this analysis, we determined that one
of our former GBPO businesses and our two remaining PSSI businesses had carrying
values that exceeded fair value.  As a result, during the fiscal year
ended September 30, 2008 we recorded impairment expense of
$17.8 million of which $8.8 million relates to goodwill impairment
under SFAS 142, $7.3 million relates to long-lived asset impairment under
SFAS 144 and $1.7 million relates to impairment of internally developed
software under Statement of Financial Accounting Standard No. 86—Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed.  During the fiscal year ended September 30, 2007
we recorded impairment expense of $2.8 million, of which $2.5 million
relates to goodwill impairment and $0.3 million relates to long-lived asset
impairment.  This impairment is included in (Loss)
income from discontinued operations on our Consolidated Statement of
Operations.






SUMMARY
OF REVENUE AND NET (LOSS) INCOME—DISCONTINUED
OPERATIONS




Except for minor
transitional activities, we do not believe that we will have any ongoing
involvement or cash flows in any businesses that we classified as held-for-sale
or that we have divested.  Thus, we classified the results of
operations for these businesses as (Loss)
income from discontinued operations, net on our Consolidated Statements
of Operations in accordance with SFAS 144.  The following table
summarizes our revenue and net (loss) income generated by these operations
during the fiscal years ended September 30, 2008, 2007 and
2006.




Year
      ended September 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006Revenues
      (Discontinued operations):GBPO
            
            $
            20,235
            
            
            $
            37,677
            
            
            $
            45,478PSSI
            
            
            24,608
            
            
            
            31,372
            
            
            
            32,337Total
      revenues
            
            $
            44,843
            
            
            $
            69,049
            
            
            $
            77,815(Loss)
      income before gain
              (Discontinued
      operations):GBPO
            
            $
            6,448
            
            
            $
            6,574
            
            
            $
            7,296PSSI
            
            
            (21,674
            )
            
            
            263
            
            
            
            3,804Other/eliminations
            
            
            757
            
            
            
            452
            
            
            
            (936
            )(Loss)
      income before (loss) gain on
              discontinued
      operations
            
            
            (14,469
            )
            
            
            7,289
            
            
            
            10,164(Loss)
      gain on disposal of
              discontinued
      operations
            
            
            (932
            )
            
            
            8,077
            
            
            
            —Net
      (loss) income
            
            $
            (15,401
            )
            
            $
            15,366
            
            
            $
            10,164




AUSTRALIAN
OPERATIONS




In
fiscal 2002, we disposed of most of our Australian operations and in fiscal 2003
we requested and received $6.5 million of federal income tax refunds
associated with this disposal.  Although we received the refund in
October 2003, we fully reserved the entire balance because of uncertainty about
the final review and resolution of this transaction by the Internal Revenue
Service.  From October 2003 to February 2007, we increased our reserve
by $1.1 million to recognize the potential interest and penalties we could
have incurred if the Internal Revenue Service made an unfavorable
decision.




In
March 2007, we were notified by the Internal Revenue Service that its Joint
Committee on Taxation had completed its review and had approved the
$6.5 million of refund.  As a result, during the second quarter
of fiscal 2007, we reversed the $6.5 million of reserve for the refund and
the $1.1 million reserve for potential interest and
penalties.  This $7.6 million reversal has been recorded on our
Consolidated Statements of Operations as (Loss) income
from discontinued operations in accordance with SFAS
144.




72




In May 2007 we were
notified by the Australian government that our operations in Australia, which
were primarily disposed of in fiscal 2002, were able to be fully
liquidated.  During the quarter ended June 30, 2007, we recorded
net income of $0.5 million associated with the reversal of certain accruals
that had been recorded in anticipation of costs, which did not actualize,
associated with the final close-out of the Australian operations.




NOTE 15—(LOSS) EARNINGS PER SHARE




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




Year
      ended September 30,(in
      thousands, except per share data)
            
            2008
            
            
            2007
            
            
            2006Numerator:
              (Loss)
      income from:Continuing
      operations, net of income taxes
            
            $
            (12,044
            )
            
            $
            (18,400
            )
            
            $
            (19,615
            )Discontinued
      operations, net of income taxes
            
            
            (15,401
            )
            
            
            15,366
            
            
            
            10,164Net
      loss
            
            $
            (27,445
            )
            
            $
            (3,034
            )
            
            $
            (9,451
            )Denominator:Weighted-average
      common shares outstanding
            
            
            19,616
            
            
            
            19,512
            
            
            
            19,495Effects
      of dilutive common stock options
            
            
            —
            
            
            
            —
            
            
            
            —Adjusted
      weighted-average shares
            
            
            19,616
            
            
            
            19,512
            
            
            
            19,495(Loss)
      earnings per basic and diluted shareFrom
      continuing operations
            
            $
            (0.61
            )
            
            $
            (0.94
            )
            
            $
            (1.00
            )From
      discontinued operations
            
            $
            (0.79
            )
            
            $
            0.78
            
            
            $
            0.52(Loss)
      earnings per basic and diluted share
            
            $
            (1.40
            )
            
            $
            (0.16
            )
            
            $
            (0.48
            )




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




Year
      ended September 30,(in
      thousands)
            
            2007
            
            
            2006
            
            
            2005Weighted-average
      options excluded from computation of
              diluted
      (loss) earnings per share
            
            
            1,709
            
            
            
            1,523
            
            
            
            2,022




Due to net losses
from Continuing Operations, we have excluded an additional 234,270 shares at
September 30, 2008, 154,500 shares at September 30, 2007 and 91,000
shares at September 30, 2006, of common stock equivalents from the
calculation of diluted loss per share since their effect would have been
anti-dilutive.  We have also excluded 500,000 shares of restricted
stock from the computation of diluted (loss) earnings per share since their
effect would have been anti-dilutive.




NOTE
      16—SUBSEQUENT EVENTS




DIVESTITURES




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




EMPLOYMENTAGREEMENTS




In
October 2008 we entered into employment agreements with one executive and one
key manager, whereby if certain termination or change of events were to occur we
would be obligated to pay those individuals up to
$0.8 million.




73




SELECTED
      QUARTERLY FINANCIAL DATA
(UNAUDITED)




The following
tables set forth certain unaudited consolidated quarterly statements of
operations data for each of the eight fiscal quarters ended September 30,
2008.  In our opinion, this information has been prepared on the same
basis as the audited Consolidated Financial Statements contained
herein.  This information should be read in conjunction with our
Consolidated Financial Statements and the notes thereto appearing elsewhere in
this report.  Our operating results for any one quarter are not
necessarily indicative of results for any future period.




2008
      fiscal quarters
              
              
              2007
      fiscal quarters(In thousands, except per
      share data)
              
              Fourth
              
              
              Third
              
              
              Second
              
              
              First
              
              
              Fourth
              
              
              Third
              
              
              Second
              
              
              FirstConsolidated
      statement of operations data:Revenues
              
              $
              22,759
              
              
              $
              44,896
              
              
              $
              25,961
              
              
              $
              28,955
              
              
              $
              20,610
              
              
              $
              40,098
              
              
              $
              22,797
              
              
              $
              24,801Costs
      and expenses:Direct
      costs
              
              
              17,108
              
              
              
              36,374
              
              
              
              19,518
              
              
              
              22,234
              
              
              
              15,347
              
              
              
              32,030
              
              
              
              17,147
              
              
              
              18,144General
      and
                administrative
              
              
              7,544
              
              
              
              6,494
              
              
              
              6,873
              
              
              
              7,109
              
              
              
              5,992
              
              
              
              6,470
              
              
              
              8,528
              
              
              
              5,382Selling
      and marketing
              
              
              2,066
              
              
              
              2,492
              
              
              
              2,005
              
              
              
              2,114
              
              
              
              1,718
              
              
              
              2,479
              
              
              
              1,964
              
              
              
              1,789Depreciation
      and
                amortization
              
              
              1,355
              
              
              
              1,347
              
              
              
              1,330
              
              
              
              1,296
              
              
              
              956
              
              
              
              951
              
              
              
              1,334
              
              
              
              1,332Impairment
      of goodwill & held-for-sale assets
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              576
              
              
              
              8,585
              
              
              
              —
              
              
              
              —Loss
      from continuing operations
              
              
              (5,314
              )
              
              
              (1,811
              )
              
              
              (3,765
              )
              
              
              (3,798
              )
              
              
              (3,979
              )
              
              
              (10,417
              )
              
              
              (6,176
              )
              
              
              (1,846
              )Total
      other income
              
              
              437
              
              
              
              503
              
              
              
              824
              
              
              
              967
              
              
              
              996
              
              
              
              628
              
              
              
              784
              
              
              
              1,686(Loss)
      from continuing operations before income taxes
              
              
              (4,877
              )
              
              
              (1,308
              )
              
              
              (2,941
              )
              
              
              (2,831
              )
              
              
              (2,983
              )
              
              
              (9,789
              )
              
              
              (5,392
              )
              
              
              (160
              )Income
      tax provision (benefit)
              
              
              36
              
              
              
              23
              
              
              
              12
              
              
              
              16
              
              
              
              16
              
              
              
              (7
              )
              
              
              7
              
              
              
              60Loss
      from continuing operations
              
              
              (4,913
              )
              
              
              (1,331
              )
              
              
              (2,953
              )
              
              
              (2,847
              )
              
              
              (2,999
              )
              
              
              (9,782
              )
              
              
              (5,399
              )
              
              
              (220
              )(Loss)
      income from discontinued operations, net
              
              
              (3,951
              )
              
              
              (12,282
              )
              
              
              (584
              )
              
              
              1,416
              
              
              
              (268
              )
              
              
              4,063
              
              
              
              9,137
              
              
              
              2,434Net
      (loss) income
              
              $
              (8,864
              )
              
              $
              (13,613
              )
              
              $
              (3,537
              )
              
              $
              (1,431
              )
              
              $
              (3,267
              )
              
              $
              (5,719
              )
              
              $
              3,738
              
              
              $
              2,214Weighted
      average shares issued and outstanding:Basic
              
              
              19,616
              
              
              
              19,635
              
              
              
              19,551
              
              
              
              19,543
              
              
              
              19,512
              
              
              
              19,511
              
              
              
              19,501
              
              
              
              19,499Diluted
              
              
              19,616
              
              
              
              19,635
              
              
              
              19,551
              
              
              
              19,543
              
              
              
              19,512
              
              
              
              19,511
              
              
              
              19,501
              
              
              
              19,499Performance
      ratios:Return
      on average assets
              
              
              (6.16
              )%
              
              
              (8.79
              )%
              
              
              (2.16
              )%
              
              
              (0.86
              )%
              
              
              (1.94
              )%
              
              
              (3.34
              )%
              
              
              2.16
              %
              
              
              1.29
              %Return
      on average
                shareholders'
      equity
              
              
              (7.66
              )%
              
              
              (10.77
              )%
              
              
              (2.62
              )%
              
              
              (1.04
              )%
              
              
              (2.35
              )%
              
              
              (4.00
              )%
              
              
              2.65
              %
              
              
              1.63
              %Total
      ending equity to total
                ending
      assets
              
              
              80.99
              %
              
              
              79.90
              %
              
              
              83.18
              %
              
              
              81.39
              %
              
              
              82.63
              %
              
              
              82.59
              %
              
              
              84.35
              %
              
              
              79.06
              %Total
      average equity to total
                average
      assets
              
              
              80.42
              %
              
              
              81.58
              %
              
              
              82.26
              %
              
              
              82.01
              %
              
              
              82.61
              %
              
              
              83.47
              %
              
              
              81.70
              %
              
              
              79.04
              %Per
      share of common stock
                data:(Loss)
      earnings per share—Basic & Diluted:Continuing
      operations(1)
              
              $
              (0.25
              )
              
              $
              (0.07
              )
              
              $
              (0.15
              )
              
              $
              (0.14
              )
              
              $
              (0.15
              )
              
              $
              (0.50
              )
              
              $
              (0.28
              )
              
              $
              (0.01
              )Discontinued
      operations(1)
              
              $
              (0.20
              )
              
              $
              (0.62
              )
              
              $
              (0.03
              )
              
              $
              0.07
              
              
              $
              (0.02
              )
              
              $
              0.21
              
              
              $
              0.47
              
              
              $
              0.12(Loss)
      earnings per share—
                Basic
      & Diluted
              
              $
              (0.45
              )
              
              $
              (0.69
              )
              
              $
              (0.18
              )
              
              $
              (0.07
              )
              
              $
              (0.17
              )
              
              $
              (0.29
              )
              
              $
              0.19
              
              
              $
              0.11Book
      value
              
              $
              5.67
              
              
              $
              6.12
              
              
              $
              6.78
              
              
              $
              7.01
              
              
              $
              7.05
              
              
              $
              7.19
              
              
              $
              7.42
              
              
              $
              6.98Average
      balance sheet data:Total
      assets
              
              $
              143,892
              
              
              $
              154,953
              
              
              $
              163,858
              
              
              $
              167,333
              
              
              $
              165,158
              
              
              $
              171,249
              
              
              $
              172,808
              
              
              $
              171,435Total
      liabilities
              
              $
              28,174
              
              
              $
              28,537
              
              
              $
              29,068
              
              
              $
              30,107
              
              
              $
              29,248
              
              
              $
              28,299
              
              
              $
              31,620
              
              
              $
              35,938Total
      shareholders' equity
              
              $
              115,718
              
              
              $
              126,416
              
              
              $
              134,790
              
              
              $
              137,226
              
              
              $
              138,910
              
              
              $
              142,950
              
              
              $
              141,188
              
              
              $
              135,497Market
      price per share of common stock:High
              
              $
              8.48
              
              
              $
              8.75
              
              
              $
              9.26
              
              
              $
              11.01
              
              
              $
              10.26
              
              
              $
              10.05
              
              
              $
              8.90
              
              
              $
              7.30Low
              
              $
              7.06
              
              
              $
              7.03
              
              
              $
              6.75
              
              
              $
              7.94
              
              
              $
              8.33
              
              
              $
              8.25
              
              
              $
              5.85
              
              
              $
              6.35(1)
      The sum of quarterly per share amounts may not equal annual per share
      amounts as the quarterly calculations are based on varying number of
      shares of common stock.
  74


SCHEDULE II


Valuation
and Qualifying Accounts




(in
      thousands)
            
            Balance
      at beginning of period
            
            
            Additions/
      (reductions)
            
            
            Write-offs
            
            
            Balance
      at
              end
      of periodYear
      ended September 30, 2008:Allowance
      for receivables
            
            $
            1,195
            
            
            $
            (557
            )
            
            $
            (292
            )
            
            $
            346Deferred
      tax asset valuation allowance
            
            
            28,875
            
            
            
            7,823
            
            
            
            —
            
            
            
            36,698Inventory
      allowance
            
            
            75
            
            
            
            390
            
            
            
            (465
            )
            
            
            —Year
      ended September 30, 2007:Allowance
      for receivables
            
            $
            926
            
            
            $
            452
            
            
            $
            (183
            )
            
            $
            1,195Deferred
      tax asset valuation allowance
            
            
            27,997
            
            
            
            878
            
            
            
            —
            
            
            
            28,875Inventory
      allowance
            
            
            75
            
            
            
            —
            
            
            
            —
            
            
            
            75Year
      ended September 30, 2006:Allowance
      for receivables
            
            $
            378
            
            
            $
            570
            
            
            $
            (22
            )
            
            $
            926Deferred
      tax asset valuation allowance
            
            
            25,754
            
            
            
            2,243
            
            
            
            —
            
            
            
            27,997Inventory
      allowance
            
            
            75
            
            
            
            —
            
            
            
            —
            
            
            
            75


75




ITEM
9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE






None.




ITEM
9A—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 September 30, 2008.  The term “disclosure controls and
procedures” means controls and other procedures that are designed to ensure that
information required to be disclosed by a company in the 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 September 30, 2008, our Chief Executive
Officer and our Chief Financial Officer concluded that as of that date, our
disclosure controls and procedures were effective at the reasonable assurance
level.




MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company.  Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company’s principal executive and principal financial
officers and effected by the company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:




·
            pertain to
      the maintenance of records that in reasonable detail accurately and fairly
      reflect the transactions and dispositions of the assets of the
      company;




·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and




·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.




Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




Our
management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2008. In making this assessment, our
management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework.




Based
on our assessment, management concluded that, as of September 30, 2008, our
internal control over financial reporting is effective based on those
criteria.




Our
independent auditors have issued an audit report on our internal control over
financial reporting.  This report appears on page
77.




76




ATTESTATION
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To the
Board of Directors and Shareholders
 Tier
Technologies, Inc.
 Reston
Virginia
 
 We have
audited Tier Technologies, Inc. and subsidiaries’ internal control over
financial reporting as of September 30, 2008, based on criteria established in
Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Tier Technologies, Inc. and subsidiaries’
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting.  Our
responsibility is to express an opinion on the company's internal control over
financial reporting based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audit also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that
(a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (c)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 In our
opinion, Tier Technologies, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of September
30, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of September
30, 2008, and the related consolidated statements of operations, shareholders’
equity, comprehensive income (loss) and cash flows for the year then ended of
Tier Technologies, Inc. and subsidiaries and our report dated December 9, 2008
expressed an unqualified opinion.
  
 /s/ McGladrey & Pullen,
LLP
 Vienna,
VA
 December
9, 2008
  77




CHANGES IN INTERNAL
CONTROL OVER FINANCIAL REPORTING




There have been no
changes in our internal control over financial reporting during the quarter
ended September 30, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.






ITEM
9B—OTHER INFORMATION






None.






PART
III






ITEM
10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




A
list of our executive officers and their biographical information appears in
Part I, Item 1 of this report.  Information about our Directors
may be found under the caption Election
of Directorsof our Proxy Statement for the Annual Meeting of
Stockholders to be held timely, or the Proxy Statement.  That
information is incorporated herein by reference.




The
information in the Proxy Statement set forth under the captionsAudit Committee Financial Expert, Audit CommitteeandSection 16(a) Beneficial Ownership Reporting Complianceis incorporated
herein by reference.




We
have adopted the Tier Technology Code
of Ethics, a code of ethics that applies to our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer, Corporate Controller and
other finance organization employees. The code of ethics is available publicly
on our website at www.Tier.com. If we make any amendments to the Code
of Ethics or grant any waiver, including any implicit waiver, from a
provision of the code to our Chief Executive Officer, Chief Financial Officer,
Chief Accounting Officer, or the Corporate Controller, we will disclose the
nature of such amendment or waiver on our website or in a report on Form
8-K.




ITEM
11—EXECUTIVE COMPENSATION




The information in
the Proxy Statement set forth under the captions Compensation
and Analysis, Executive Compensation, Director Compensation, Compensation
Committee Interlocks and Insider ParticipationandCompensation Committee Report is incorporated herein by
reference.




ITEM
12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The information in
the Proxy Statement set forth under the captions Stock
OwnershipandEquity Compensation Plan Informationis incorporated herein by
reference.




ITEM
13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


AND
DIRECTOR INDEPENDENCE




The
information set forth under the captions Certain
Relationships and Related TransactionsandDirector Independence of the Proxy Statement is incorporated herein by
reference.




ITEM
14—PRINCIPAL ACCOUNTING FEES AND SERVICES




Information
concerning principal accountant fees and services appears in the Proxy Statement
under the heading Principal
Accounting Fees and Servicesand is incorporated herein by
reference.




78




PART
IV




ITEM
15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES




(a)           The
following documents are filed as part of the report:




·
            Financial Statements – The
      financial statements are set forth under Item 8 of this Annual Report on
      Form 10-K.  See Financial
      Statements and Supplementary Data on page 41.




·
            Financial Statement Schedules
      – Schedule
      II—Valuation and Qualifying Accounts is set forth under Item 8
      of this Annual Report on Form 10-K on page 75.  All other
      schedules have been omitted because they were either not required or not
      applicable or because the information is otherwise
      included.




·
            Exhibits




Exhibit
      number
            Exhibit
      description2.1
            Purchase
      and Sale Agreement between Tier Technologies, Inc. and Informatix, Inc.,
      dated June 30, 2008 (1)3.1
            Restated
      Certificate of Incorporation (2)3.2
            Amended
      and Restated Bylaws of Tier Technologies, Inc., as amended (3)3.3
            Certificate
      of Designations of Series A Junior Participating Preferred Stock (4)4.1
            Form
      of common stock certificate (2)4.2
            See
      Exhibits 3.1, 3.2 and 3.3, for provisions of the Restated Certificate of
      Incorporation and Amended and Restated Bylaws, as amended of the
      Registrant defining rights of the holders of common stock of the
      Registrant4.3
            Rights
      Agreement, dated as of January 10, 2006, by and between Tier Technologies,
      Inc. and American Stock Transfer & Trust Company, as Rights Agent
      (4)4.4
            Form
      of Rights Certificate (4)4.5
            First
      Amendment to Rights Agreement, dated July 12, 2007, by and between Tier
      Technologies, Inc. and American Stock Transfer & Trust Company, as
      Rights Agent (5)10.1
            Amended
      and Restated 1996 Equity Incentive Plan, dated January 28, 1999 (6)*10.2
            Form
      of Incentive Stock Option Agreement under the Registrant’s Amended and
      Restated 1996 Equity Incentive Plan (7)*10.3
            Form
      of Nonstatutory Stock Option Agreement under the Registrant’s Amended and
      Restated 1996 Equity Incentive Plan (7)*10.4
            Amended
      and Restated 2004 Stock Incentive Plan (8)*10.5
            Form
      of Incentive Stock Option Agreement under the Registrant’s Amended and
      Restated 2004 Stock Incentive Plan (8)*10.6
            Form
      of Nonstatutory Stock Option Agreement under the Registrant’s Amended and
      Restated 2004 Stock Incentive Plan (8)*10.7
            Form
      of Restricted Stock Agreement under the Registrant’s Amended and Restated
      2004 Stock Incentive Plan (8)*10.8
            Form
      of California Indemnification Agreement (9)10.9
            Form
      of Delaware Indemnification Agreement for officers (10)10.10
            Form
      of Delaware Indemnification Agreement for directors (10)10.11
            Tier
      Corporation 401(k) Plan, Summary Plan Description (9)*10.12
            Supplemental
      Indemnity Agreement by and between Registrant and Bruce R. Spector, dated
      September 2, 2004 (11)*10.13
            Employment
      Agreement dated July 1, 2004 between Tier and Ms. Deanne M. Tully (10)*10.14
            Executive
      Severance and Change in Control Benefits Agreement (10)*




79


Exhibit
      number
            Exhibit
      description10.15
            Shareholder
      Rights Plan and Rights Agreement, dated January 10, 2006 (12)10.16
            Amended
      and Restated Credit and Security Agreement between the Registrant,
      Official Payments Corporation, EPOS Corporation and City National Bank
      (13)10.17
            Form
      of Employment Security Agreements between Tier Technologies, Inc., and
      each of Steven Beckerman, Todd Vucovich, and Michael Lawler, dated March
      28, 2006 (14)
      *10.18
            Employment
      Agreement between Tier Technologies, Inc., and Ronald L. Rossetti, dated
      July 26, 2006 (15)*10.19
            Non-Statutory
      Stock Option Agreement between Tier and Ronald L. Rossetti, dated July 26,
      2006 (15)*10.20
            Option
      Grants awarded to David E. Fountain, Steven M. Beckerman, Michael Lawler,
      Deanne Tully, Stephen Wade, Charles Berger, Samuel Cabot, Morgan Guenther,
      T. Michael Scott Bruce Spector, and fifteen other employees, dated August
      24, 2006 (16)*10.21
            Employment
      Agreement between Tier Technologies, Inc. and David E. Fountain, dated
      December 11, 2006 (17)*10.22
            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 (18)10.23
            Second
      Amendment to Amended and Restated Credit and Security Agreement dated
      September 26, 2007 between the Registrant, Official Payments Corporation,
      EPOS Corporation and City National Bank (19)10.24
            Share
      Repurchase Agreement between CPAS Systems, Inc., Tier Ventures Corporation
      and Tier Technologies, Inc. dated June 29, 2007 (20)10.25
            Employment
      Agreement between Tier Technologies, Inc., and Kevin Connell, dated August
      9, 2007 (21)*10.26
            Transition
      Agreement between Tier Technologies, Inc., and Deanne M. Tully dated
      December 12, 2007 (10)*10.27
            Separation
      Agreement and Release between Tier Technologies, Inc., and Todd F.
      Vucovich,
              dated
      February 12, 2007 (10)*10.28
            Amendment
      to the Separation Agreement and Release between Tier Technologies, Inc.,
      and Todd F. Vucovich, dated November 15, 2007 (10)*10.29
            Employment
      Agreement between Tier Technologies, Inc. and Ronald L. Rossetti, dated
      April 30, 2008. (22)*10.30
            Employment
      Agreement between Tier Technologies, Inc. and Keith Kendrick, dated June
      30, 2008 (23)*10.31
            Employment
      Agreement between Tier Technologies, Inc. and Ronald W. Johnston, dated
      July 1, 2008 (23)*10.32
            Independent
      Contractor Agreement between Tier Technologies, Inc. and Steven M.
      Beckerman,
              dated
      August 6, 2008 (24)
      *10.33
            Third
      Amendment to Amended and Restated Credit and Security Agreement between
      Tier Technologies, Inc., Official Payments Corporation, EPOS Corporation
      and City National Bank dated September 29, 2008 (25)10.32
            Employment
      Agreement between Tier Technologies, Inc. and Nina K. Vellayan, dated
      September 22, 2008 *21.1
            Subsidiaries
      of the Registrant23.1
            Consent
      of McGladrey & Pullen, LLP, Independent Registered Public Accounting
      Firm31.1
            Certification
      of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 193431.2
            Certification
      of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 193432.1
            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
  200232.2
            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




80








Exhibit
      number
            Exhibit
      description




*Management contract or compensatory plan required to be filed as an
      exhibit to this report
              (1)
      Filed as an exhibit to Form 10-Q, filed August 7, 2008, and incorporated
      herein by reference
              (2)Filed as an exhibit to Form 8-K, filed on July 19, 2005, and
      incorporated herein by reference
              (3)
      Filed as an exhibit to Form 10-Q/A, filed November 3, 2008, and
      incorporated herein by reference
              (4)Filed as an exhibit to Form 8-K, filed January 11, 2006, and
      incorporated herein by reference
              (5)
      Filed as an exhibit to Form 8-K, filed July 12, 2007, and incorporated
      herein by reference
              (6)Filed as an exhibit to Form 10-Q, filed May 11, 2001, and
      incorporated herein by reference
              (7)Filed as an exhibit to Form 8-K, filed November 12, 2004, and
      incorporated herein by reference
              (8)Filed as an exhibit to Form 8-K, filed July 5, 2005 and
      incorporated herein by reference
              (9)Filed as an exhibit to Form S-1 (No. 333-37661), filed on October
      10, 1997, and incorporated herein by reference
              (10)
      Filed as an exhibit to Form 10-K, filed October 27, 2006, and incorporated
      herein by reference
              (11).Filed
      as an exhibit to Form 10-Q, filed May 6, 2005, and incorporated herein by
      reference
              (12)
      Filed as an exhibit to Form 8-K, filed January 11, 2006, and incorporated
      herein by reference
              (13)
      Filed as an exhibit to Form 8-K, filed March 9, 2006, and incorporated
      herein by reference
              (14)
      Filed as an exhibit to Form 8-K, filed April 3, 2006, and incorporated
      herein by reference
              (15)
      Filed as an exhibit to Form 8-K, filed August 1, 2006, and incorporated
      herein by reference
              (16)
      Filed as an exhibit to Form 8-K, filed August 29, 2006, and incorporated
      herein by reference
              (17)
      Filed as an exhibit to Form 10-K, filed December 13, 2006, and
      incorporated herein by reference
              (18)
      Filed as an exhibit to Form 8-K, filed March 28, 2007, and incorporated
      herein by reference
              (19)
      Filed as an exhibit to Form 8-K, filed September 27, 2007, and
      incorporated herein by reference
              (20)
      Filed as an exhibit to Form 8-K, filed July 3, 2007, and incorporated
      herein by reference
              (21)
      Filed as an exhibit to Form 10-Q, filed August 9, 2007, and incorporated
      herein by reference
              (22)
      Filed as an exhibit to Form 10-Q, filed May 6, 2008, and incorporated
      herein by reference
              (23)
      Filed as an exhibit to Form 8-K, filed July 7, 2008, and incorporated
      herein by reference
              (24)
      Filed as an exhibit to Form 8-K, filed August 7, 2008, and incorporated
      herein by reference
              (25)
      Filed as an exhibit to Form 8-K, filed October 3, 2008, and incorporated
      herein by reference


81




SIGNATURES






Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has dulycausedthis report
to be signed on its behalf by the undersigned, thereunto duly authorized.







Tier
      Technologies, Inc.Dated: 
      December 8, 2008
            By:
            /s/
      RONALD L. ROSSETTI
              Ronald
      L. Rossetti
              Chief
      Executive Officer




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons in the capacities and on the dates
indicated.




Signature
            Title
            Date/s/
      RONALD L. ROSSETTI
              Ronald
      L. Rossetti
            Chief
      Executive Officer and Chairman of the Board (principal executive
      officer)
            December
      8, 2008/s/
      RONALD W. JOHNSTON
              Ronald
      W. Johnston
            Chief
      Financial Officer (principal financial officer and principal accounting
      officer)
            December
      8, 2008/s/
      CHARLES W. BERGER
              Charles
      W. Berger
            Director
            December
      8, 2008/s/
      SAMUEL CABOT III
              Samuel
      Cabot III
            Director
            December
      8, 2008/s/
      JOHN J. DELUCCA
              John
      J. Delucca
            Director
            December
      8, 2008/s/
      MORGAN P. GUENTHER
              Morgan
      P. Guenther
            Director
            December
      8, 2008/s/
      PHILIP G. HEASLEY
              Philip
      G. Heasley
            Director
            December
      8, 2008/s/
      DAVID A. POE
              David
      A. Poe
            Director
            December
      8, 2008/s/
      JAMES R. STONE
              James
      R. Stone
            Director
            December
      8, 2008





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