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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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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, 2004
|Or                                          
|o                                            | TRANSITION REPORT PURSUANT TO   SECTION 13 OR 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934 | 

Commission file number 000-23195

TIER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

|California                                                       |  | 94-3145844                               
|---------------------------------------------------------------- |  | -----------------------------------------
|(State or   other jurisdiction of incorporation or organization) |  | (I.R.S.   Employer Identification Number)

10780 Parkridge Blvd., 4th Floor Reston, Virginia  20191(571) 382-1090
(Address of principal executive offices and registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Class B common stock, no par value

Indicate by check mark whether the
     registrant (1) has filed all reports required to be filed by
     Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
     preceding 12 months (or for such shorter period that the registrant
     was required to file such reports), and (2) has been subject to such
     filing requirements for the past 90 days.   Yes
     


x   No  
o

Indicate by check mark 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.
o

Indicate by check mark whether the
     Registrant is an accelerated filer (as defined in Rule 12b-2 of the
     Exchange Act). Yes
     
x   No  
o

The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $191,632,000 on March 31, 2004 based on the last reported sale price of the registrants Class B common stock on the NASDAQ National Market on such date.

As of December 6, 2004, the number of shares outstanding of the registrants Class B common stock was 19,440,204.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended September 30, 2004.  Portions of such proxy statement are incorporated by reference into Part III of this report.

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TIER TECHNOLOGIES, INC. FORM 10-K TABLE OF CONTENTS

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|---------- | --------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                 |     
|PART I     |                                                                                                                
|Item 1.    | Business                                                                                                        | 3   
|           |                                                                                                                 |     
|Item 2.    | Properties                                                                                                      | 11  
|           |                                                                                                                 |     
|Item 3.    | Legal Proceedings                                                                                               | 11  
|           |                                                                                                                 |     
|Item 4.    | Submission of Matters to a Vote of Security Holders                                                             | 11  
|           |                                                                                                                 |     
|PART II    |                                                                                                                
|           |                                                                                                                
|Item 5.    | Market for Registrants Common Equity, Related Stockholder Matters,   and Issuer Purchases of Equity Securities | 12  
|           |                                                                                                                 |     
|Item 6.    | Selected Financial Data                                                                                         | 13  
|           |                                                                                                                 |     
|Item 7.    | Managements Discussion and Analysis of Financial Condition and   Results of Operations                         | 14  
|           |                                                                                                                 |     
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk                                                      | 41  
|           |                                                                                                                 |     
|Item 8.    | Financial Statements and Supplementary Data                                                                     | 41  
|           |                                                                                                                 |     
|Item 9.    | Changes in and Disagreements With Accountants on Accounting and   Financial Disclosure                          | 41  
|           |                                                                                                                 |     
|Item 9A.   | Controls and Procedures                                                                                         | 41  
|           |                                                                                                                 |     
|Item 9B.   | Other Information                                                                                               | 42  
|           |                                                                                                                 |     
|PART III   |                                                                                                                
|           |                                                                                                                
|Item 10.   | Directors and Executive Officers of the Registrant                                                              | 43  
|           |                                                                                                                 |     
|Item 11.   | Executive Compensation                                                                                          | 43  
|           |                                                                                                                 |     
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management                                                  | 43  
|           |                                                                                                                 |     
|Item 13.   | Certain Relationships and Related Transactions                                                                  | 43  
|           |                                                                                                                 |     
|Item 14.   | Principal Accounting Fees and Services                                                                          | 43  
|           |                                                                                                                 |     
|PART IV    |                                                                                                                
|           |                                                                                                                
|Item 15.   | Exhibits and Financial Statement Schedules                                                                      | 43  
|           |                                                                                                                 |     
|SIGNATURES |                                                                                                                

| | Private Securities Litigation Reform Act   Safe Harbor Statement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Certain   statements contained in this report, including statements regarding the   development of and demand for our services and our markets, anticipated   trends in various expenses, expected costs of legal proceedings and other   statements that are not historical facts, are forward-looking statements   within the meaning of the federal securities laws. These forward-looking   statements relate to future events or our future financial and/or operating   performance and can generally be identified as such because the context of   the statement will include words such as may, will, intends, plans,   believes, anticipates, expects, estimates, shows, predicts,   potential, continue, or opportunity, the negative of these words or   words of similar import. These forward-looking statements are subject to   risks
and uncertainties, including the risks and uncertainties described and   referred to under Factors That May Affect Future Results beginning on page   30, that could cause actual results to differ materially from those   anticipated as of the date of this report.    We undertake no obligation to publicly updated or revise any   forward-looking statements, whether as a result of new information, future   events or otherwise.

2



PART I

Item 1. Business

GENERAL

We provide transaction processing services and software and systems integration services primarily to federal, state and local government and other public sector clients. Our clients outsource portions of their business processes to us, and rely on us for our industry-specific information technology expertise and solutions.  We reported approximately $127.9 million in revenues for fiscal year 2004.  We were incorporated in California in 1991, and are based in Reston, Virginia.

Our core services are providing secure, efficient and reliable transaction processing options and industry-specific software and systems integration services to our clients.  Our transaction processing services primarily consist of child support payment processing and related services for state government clients, and electronic payment processing services for federal, state, and local government clients, which allow those clients to offer their constituents the option of paying governmental obligations, such as taxes and other fees, using credit or debit cards or electronic checks.  Our software and systems integration services primarily involve integrating our proprietary software products and licensed third-party software products into our clients business operations.  In fiscal year 2004, approximately two thirds of our revenues were derived from transaction processing based
operations, and approximately one third of our revenues were derived from software and systems integration operations.  For most of our services, we generate revenue from fees received directly from our client, but in the case of our electronic payment processing services, most of our revenues are derived from convenience fees paid by the individual taxpayer or other end user of our service.

We provide our services through the following three business units:

| |  | Government   Business Process Outsourcing, which focuses on child support payment   processing, child support financial institution data match services, health and   human services consulting, and other related system integration services.                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Packaged   Software and Systems Integration, which provides software and systems   implementation services through practice areas in financial management   systems, public pension administration systems, unemployment insurance   administration systems, electronic government services, systems integration   services for the State of Missouri, and interactive voice response systems.
| |   |                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Electronic   Payment Processing, which provides electronic payment processing options   including payment of taxes, fees and other obligations owed to government   entities, educational institutions and other public sector clients.                                                                                                                                                       

We target industry sectors that we believe are driven by forces that make demand for our services less discretionary and are likely to provide us with recurring revenue streams through long-term contracts.  The forces driving the need for our services tend to involve federal or state mandated services, such as child support payment collection and disbursement, and involve fundamental shifts in consumer transaction preferences, such as the increased usage of electronic payment methods relative to cash or paper checks among U.S. consumers.  Our clients generally outsource portions of their business processes to us in order to rapidly provide their customers with technologically advanced services, and achieve cost efficiencies.

INDUSTRY OVERVIEW

Todays government and public sector entities are facing an increasingly competitive and complex operating environment. Demographic shifts, continuous regulatory changes, the need for real-time information, the expansion of the Internet as an informational as well as transactional channel, the development of complex technologies, and advanced operational systems are all dramatically impacting the way these entities conduct business.

3



The state child support payment industry has been revolutionized by regulatory initiatives, including the U.S. Personal Responsibility and Work Opportunity Reconciliation Act of 1996.  This act required every state, as a condition of receiving federal funds, to develop an automated and centralized process for collecting and disbursing child support payments.  This act also created the Financial Institution Data Match program, which required states to match delinquent obligations against records held by every financial institution doing business within that state.  Once a match is identified, the state child support enforcement agencies can issue liens or levies on respective financial accounts to expedite the collection of past due child support obligations.  Child support payments in the United States for the federal 2003 fiscal year rose to a record high of $21.2 billion. State and
local government entities are increasing child support services due to the growth in caseloads and their desire to improve enforcement systems.

The expansion of the Internet has facilitated a profound change in the way governments interact with their constituents.  A paperless environment not only increases the speed of interaction and accessibility to information, but also dramatically reduces cost while increasing user convenience and efficiency.  In 1998, the Internal Revenue Service Restructuring and Reform Act established the goal that by the year 2007, at least 80% of all federal tax and information returns would be filed electronically.  According to the Internal Revenue Service 2004 Filing Season Statistics weekly report, 61.0 million individual federal returns for the 2003 tax year were electronically filed as of August 27, 2004, amounting to approximately 48% of total returns filed.

The drive towards electronic filing has also increased the need for electronic payment options, including the ability to make tax and other payments with a credit or debit card or electronic check.  According to the U.S. Payment Card Information Network, approximately 83% of U.S. households have at least one credit card.  According to the Bureau of Economic Analysis, federal, state and local taxes and fees from individuals and businesses totaled $3.0 trillion in 2003. Many government entities lack the technical expertise and personnel required to efficiently develop, implement and maintain a process to accept electronic payments from consumers using the Internet or over the telephone.  These government entities increasingly rely on external service providers to outsource this function.

Advances in telephone call center technologies, combined with the need for governments and other public sector entities to reduce operating costs while improving service delivery to their constituents, have resulted in these entities considering new ways to accomplish their missions.  Recent advances in technologies such as natural language speech recognition have enabled the delivery of a wide variety of services through automated telephone-based interactive voice response systems that formerly required a live telephone attendant.  Automated call centers can now provide interactive services twenty-four hours a day, seven days a week, ranging from basic information delivery, to more complex transaction and payment processing services.  These automated services can generally be provided at a savings relative to the cost of a live telephone attendant.

The changing regulatory needs of government, coupled with the increasing reliance on Internet-based communication, are prompting state and local governmental entities to evaluate, upgrade and modify their financial management applications. The potential market for the development, delivery and operation of financial management applications for governmental entities is large. According to the 2002 U.S. Census of Governments, in addition to the federal and 50 state governmental entities, there were 87,849 units of local governments. Of these, 38,971 are general-purpose local entities  3,034 county governments, 19,431 municipal and 16,506 town or township governments. The remainder, which comprise over one-half of the total, are special purpose local governments, including 13,522 school districts and 35,356 special district governments.

Demographic and regulatory forces have also driven significant change within the public retirement systems industry.  Increased life expectancy, an aging population, new investment vehicles, outdated legacy systems, increased focus on retirement security and a dynamic regulatory environment have resulted in a significant increase in the complexity and administration of state and local government public pension organizations.  These organizations provide a myriad of services and benefits to their membership, including pension benefits and disability benefits, retirement planning and education, death benefits and retiree healthcare.  To address these issues, public pension organizations have increasingly been required to provide additional services, such as on-line access to benefits, to meet the growing needs of their membership.  Additionally, the Economic Growth and Tax Relief
Reconciliation Act of 2001 called for extensive changes to the rules relating to
individual retirement arrangements and qualified pension plans, increasing
contribution limits and catch-up contributions to IRAs while adding
new provisions for government employee pension
plans. According to the U.S. Census Bureau 2002 Census of Governments, there
were 2,670 state and local government retirement systems, with a membership of
17.2 million persons who could be eligible for regular benefit payments in the
future. Cash and security investment holdings of these organizations totaled
$2.2 trillion.

4



The Job Creation and Worker Assistance Act, signed into law in March 2002, was designed to stimulate the economy and included, among other provisions, a special distribution, commonly called the Reed Act Distribution, of $8 billion to state unemployment insurance trust funds. While much of this money is being used to support the solvency of the funds, additional unemployment benefits, and lower unemployment insurance taxes, the U.S. Department of Labor recommended that states consider setting aside a portion of the distribution for unemployment insurance automation costs to assure that states have sufficient funds to invest in large computer installations and upgrades. According to the U.S. Department of Labor, Employment and Training Administration, $41.3 billion in unemployment insurance benefits were paid through the 50 state unemployment insurance agencies in calendar year 2003.

Challenging economic conditions as well as rapid changes in technology and dynamic market forces are affecting the way government and public sector entities do business today.  These entities are increasingly employing external service providers such as Tier to efficiently outsource strategic business operations, and develop and implement broad information technology strategies that leverage existing strengths and provide a solid foundation for future success.

BUSINESS STRATEGY

We believe that we are able to add significant value to our clients as a result of our comprehensive service offerings and industry-specific knowledge in the sectors in which we operate.  In fiscal 2004, we focused on transaction processing and packaged software and systems implementations for government and other public sector clients, and have eliminated all business units and segments not core to these two focal areas.  We intend to focus on the following growth strategies.

Penetrate and expand our presence in non-discretionary markets

We intend to continue to focus on markets that are driven either by state or federal mandates that require immediate operating changes or by intense competitive pressures that drive significant business process changes. We believe that the demand by our clients for services to implement these changes is in large part non-discretionary.

Build recurring revenue streams

We intend to build recurring revenue streams by offering differentiated services under multi-year arrangements to clients that are outsourcing significant components of their ongoing operations, systems maintenance and systems development activity. These arrangements provide continuity of services to our clients and minimize disruption to our clients operations. We believe that our industry expertise, our proprietary applications and the portability of our prior project experience motivate our clients to enter into these arrangements and to select us for follow-on and extended projects.

Leverage proprietary applications

We intend to leverage our proprietary software applications and acquire or invest in additional proprietary applications that allow us to gain market share quickly in the industry sectors in which we operate. We currently have proprietary software applications that target the health and human services and financial management segments of the state and local government market, as well as government back-office administration and electronic payment channels.

5



Leverage expertise in the industry sectors in which we operate

We intend to attract new clients and provide additional services to existing clients by leveraging our expertise in the industry sectors in which we operate.   We have developed expertise in areas such as child support payment processing and related services, electronic payment processing of tax and other government payments, public pension systems, unemployment insurance systems, government accounting, financial management and procurement systems, and interactive voice response systems.

Provide end-to-end solutions

We differentiate ourselves by being able to provide our clients with end-to-end solutions for their projects, including implementation and operation. We can rapidly deploy a team of senior experts with proven industry expertise and extensive technology capabilities.

Attract and retain high-value employees

We strive to attract and retain highly skilled professionals in order to deliver high quality services to clients.  Our goal is to offer competitive compensation packages, technical training programs and attractive career advancement opportunities. Our sales force is supplemented by industry experts who have the ability to translate industry-specific challenges into business development opportunities.

Develop partnership relationships and complete strategic acquisitions

We intend to develop partnership relationships with service and technology providers in the pursuit of new business development opportunities. In addition to broadening our client base, we believe these relationships enable us to maintain our technological leadership through the deployment of leading edge applications. We also evaluate potential acquisitions that may expand our presence in key marketplaces, provide us the advantage of owning or influencing the intellectual property that we offer to our clients, supplement our industry expertise, or provide us with additional human resources or client relationships. Since October 2001, we have completed four such acquisitions.

SERVICES

We categorize our service offerings as transaction and payment processing, systems design and integration, and maintenance and support services. We provide suites of services under each of these offerings. Several of our engagements involve providing a combination of services from different offerings as part of the overall project. Net revenue contributed by offering is as follows:

|                                     |  | Year ended   September 30, |        
|------------------------------------ |  | -------------------------- | -------
|                                     |  |                            |        
|                                     |  | 2004                       |        
|                                     |  |                            |        
|                                     |  | ($ in   thousands)         |        
|Transaction   and payment processing |  | $                          | 82,820 
|Systems   design and integration     |  |                            | 19,349 
|Maintenance   and support services   |  |                            | 20,338 
|Products   sales and other services  |  |                            | 5,430  
|                                     |  |                            |        
|Total                                |  | $                          | 127,937
|                                     |  |                            |        

Transaction and payment processing

We use our
proprietary software applications, Kids1st®, VIPRS®and
FundFinder®, to process business transactions related to payment of child
support obligations and enforcement. We believe our ability to customize our
core proprietary software applications reduces the costs and risks inherent in
software implementation and makes our solution a scalable and flexible option
for our clients. Our expertise in child support payment processing, regulatory
and banking issues and our proprietary financial institution data match software
application, FundFinder, have enabled us to be a leader in the
implementation of financial institution data match programs. As of September 30,
2004, we were providing financial institution data match services utilizing
FundFinder to 16 states.  As of September 30, 2004, we had child support
payment processing operations in nine states where we were processing
approximately $3.8 billion of child support payments on an annualized
basis.

6



Our payment processing operations, through the use of Kids1st and VIPRS,
provide many services on behalf of our clients, including the handling of
payment collections, the electronic imaging of checks and other supporting
documentation, the application of payments to the appropriate child support
court orders, the entry of new court orders into the payment system, the
creation and maintenance of payment histories, the creation and mailing of child
support disbursements, and the creation and maintenance of direct deposits of
child support payments.



Our clients can choose from an array of service offerings including full customer service/call center operations, a government-to-consumer web application, interface between the states financial institutions and its child support enforcement division to assist in the location and seizure of delinquent child support and full processing of child support payments.

We provide electronic transaction and payment processing services through our wholly owned subsidiaries Official Payments Corp. and EPOS Corporation.  We acquired Official Payments Corp. in July 2002, and EPOS in June 2004.  Official Payments Corp. provides proprietary telephone and Internet systems for electronic payment options to the IRS, 24 states, the District of Columbia, and over 1,500 local and municipal governments. EPOS is a provider of interactive communications and transaction processing technologies.  In fiscal year 2004, we processed over 2.6 million transactions, collecting more than $1.6 billion in government taxes and fees, including federal and state personal income taxes, state business taxes, and local taxes and fees such as property taxes, utilities, parking citations, traffic violations and local licenses. By utilizing our electronic payment processing services,
governments and other public sector clients reduce remittance-processing costs, increase speed of pay and provide added convenience to their constituents.

Our transaction processing revenue is typically paid by our government and public sector clients and is largely based on a per-transaction fee applied to the number of transactions processed for our child support payment processing operations.  Our electronic payment processing revenue is generally derived from transaction convenience fees, based on a percentage of the payment amount or a flat fee, paid by individual taxpayers and other end users of these services.

Systems design and integration

We implement software applications that enhance our clients operating functionality. Our proven ability to integrate enterprise-wide applications in government and other public sector markets has strengthened our expertise and credentials.     We offer these services through the following practice areas:

| |  | Financial   Management Systems  Develops, implements and supports financial management   and purchasing systems for state and local governments using our ONLINE FAMISTM, and Performance SeriesTM suites of proprietary products.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Public   Pension Administration Systems  Provides a full range of services to support   the design, development and implementation of pension applications in the   state, county and city market place.                          
| |  | Unemployment   Insurance Systems  Provides software application integration services to   state governments reforming unemployment insurance systems.                                                                             
| |  | Electronic   Government Systems  Systems integration and strategy services for the   creation of government Web portals.                                                                                                          
| |  | State   Systems Integration  Provides information technology development,   integration and maintenance support projects for the State of Missouri.                                                                               
| |  | EPOS Systems   Integration  Provides services to support the customization, installation   and maintenance of our EPOS transaction processing and interactive voice   response FirstLine EncoreTM system.                         

Our systems design and integration revenue is generally derived on a time and materials or fixed price contract basis for software systems design and integration projects.

7



Maintenance and support services

We provide product maintenance and support services of our proprietary software systems to clients in the public sector.  We have a support team based in Reston, Virginia to answer questions and resolve software discrepancies that may arise in the normal operation of the software.  A toll-free, staff-supported voice hotline is available from 7:30 a.m. to 8:30 p.m. EST, Monday through Friday, except holidays.

EPOS provides product maintenance and support services of our proprietary software and third party hardware and software included in our solutions.  EPOS maintains a staff-supported call center available by phone or email from 8:00 a.m. to 5:00 p.m. CST, Monday through Friday, except holidays, for primary support of our maintenance customers.  In addition, 24/7 and onsite options are available for emergency support.

Clients are eligible to receive new releases of the baseline licensed software and corresponding supporting documentation.  All released software patches are available on our self-service web site.  Clients can also review the on-line knowledge base and potentially resolve a problem prior to submitting an issue to our support team.  In addition, questions can be submitted by email.  Some clients also take advantage of enhanced support services on a time and materials basis, typically performed on-site.

Products sales and other services

We provide automated telephony, license and call center hardware systems and services for re-designing web portals for state and local government clients.

CLIENTS

Our clients consist primarily of federal, state and local government and other public sector entities.  We provided our services to clients in 49 states during the fiscal year ended September 30, 2004.  For the fiscal year ended September 30, 2004, our net revenues were derived from sales to government agencies, public sector entities, and from convenience fees paid by their constituents. We believe that most of our total future net revenues will continue to be attributable to sales to government agencies and other public sector entities such as educational institutions and public utilities.

We derive a significant portion of our net revenues from a limited number of large clients.  For the fiscal year ended September 30, 2004, the revenues from IRS taxpayers accounted for 12.2% of our net revenues.  Most of our contracts are terminable by the client following limited notice and without significant penalty to the client, and the completion, cancellation or significant reduction in the scope of a large project could have a material adverse effect on our business, financial condition and results of operations. In addition, we performed child support payment processing services for three different state governments as a subcontractor to ACS State and Local Solutions, Inc., a division of Affiliated Computer Services, Inc., or ACS.  For the fiscal year ended September 30, 2004, work performed under these three subcontracts accounted for 11.1% of our net revenues.  In
June 2004, we were notified by ACS of its decision not to renew one of our subcontracts effective June 30, 2004.

In
  December 2001, we entered into a contract with the California Public Employees
  Retirement System, or CalPERS, to integrate the contributions reporting function
  of a third party software product into CalPERS legacy environment. In
  the fourth quarter of fiscal 2003, our contract with CalPERS was terminated. 
  As a result, we recorded an adjustment to revenue of approximately $12.8 million
  in that quarter to write down the total value of our unbilled receivable from
  CalPERS.  For fiscal year 2002, net revenues from CalPERS represented approximately
  12.9% of our total net revenues.

SALES AND MARKETING

Our sales and
marketing objective is to develop relationships with clients that result in both
repeat and long-term engagements. Rather than using only a commissioned sales
force, we also utilize the thought leadership of our consultants within the
markets as a key sales and delivery resource. Members of our management team
have a wide range of industry contacts and
established reputations in the applicable industries and 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 penetrate markets
quickly and with lower client acquisition costs.

8



Through our marketing efforts we seek to increase brand awareness, raise awareness of our electronic payment options, and generate new business.  We have worked with our government clients to publicize our services through advertisements in payment invoices, publications and web sites, which typically occurs without charge to us.  We entered into cooperative advertising and marketing arrangements with our credit and debit card partners and major card-issuing banks, which included advertising campaigns and promotion of our services via print and online. We utilized newspaper, television, radio and public relations campaigns to supplement these efforts in 2004.

EMPLOYEES

As of September 30, 2004, we had a workforce of 860, which included 808 employees and 52 independent contractors.

We believe that there is significant competition for seasoned professionals and that our future success is highly dependent upon our ability to attract, train, motivate, mentor and retain skilled consultants with the advanced technical skills necessary to perform the services we offer.

COMPETITION

The transaction processing and software and systems integration markets are highly competitive and are served by numerous international, national and local firms. Representative market participants in transaction processing markets include Affiliated Computer Systems, Inc., Bank of America Corp., Systems and Methods, Inc., and Link2Gov.  Competition in the software and systems integration market includes U.S. and international consulting and integration firms, the internal information systems groups of our prospective clients, professional services companies, hardware and application software vendors, and divisions of large integrated technology companies and outsourcing companies.  Representative market participants include Accenture, CGI-AMS, BearingPoint, Covansys, Deloitte, IBM, Tata (TCS America), Ciber, NIC Inc., Lawson, and Tyler Technologies.

We believe that the principal competitive factors in our markets include reputation, project management expertise, industry expertise, speed of development and implementation, technical expertise, competitive pricing and the ability to deliver results on a fixed price or transaction basis as well as a time and materials basis. We believe that our ability to compete also depends in part on a number of competitive factors outside our control, including the ability of our clients or competitors to hire, retain and motivate project managers and other senior technical staff, the ownership by competitors of software used by potential clients, the price at which others offer comparable services, greater financial resources of our competitors, the ability of our clients to perform the services themselves, and the extent of our competitors responsiveness to client needs.

INTELLECTUAL PROPERTY RIGHTS

Our success depends, in part, on our methodologies, solutions and protection of intellectual property rights. We rely upon a combination of nondisclosure, licensing agreements 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. We enter into non-disclosure agreements with all our employees, subcontractors and the parties we team with for contracts and with many of our clients.  We also control and limit distribution of proprietary information. We cannot assure that the steps we take in this regard 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.

9



We have developed and acquired proprietary software that is licensed to clients pursuant to license agreements and other contractual arrangements. We utilize intellectual property laws, including copyright and trademark laws, to protect our proprietary rights. A portion of our business also involves the development of software applications for specific client engagements and the customization of existing software products for specific clients. Ownership of the developed software and the customizations to the existing software is the subject of negotiation with each particular client 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

We make copies of our filings with the Securities and Exchange Commission, or the SEC, available to investors on our website without charge as soon as reasonably practicable after we file them with the SEC.  Our SEC filings can be found on the Investors page of our website at www.tier.com.

EXECUTIVE OFFICERS

The following persons were our executive officers as of the date of the filing:

|Name                    |  | Age |  | Position                                                          
|----------------------- |  | --- |  | ------------------------------------------------------------------
|                        |  |     |  |                                                                   
|James R.   Weaver       |  | 47  |  | President,   Chief Executive Officer and Director                 
|Jeffrey A.   McCandless |  | 46  |  | Senior Vice   President, Chief Financial Officer and Treasurer    
|Donald R.   Fairbairn   |  | 48  |  | Senior Vice   President, Human Resources                          
|Michael A.   Lawler     |  | 41  |  | Senior Vice   President, Electronic Payment Processing            
|Todd F.   Vucovich      |  | 40  |  | Senior Vice   President, Packaged Software and Systems Integration
|Stephen V.   Wade       |  | 43  |  | Senior Vice   President, Business Development                     

Mr. Weaver was elected Chairman of the Board in January 2004, elected to the Board of Directors in October 2003, was appointed Chief Executive Officer in August 2003, and was appointed President in January 2002.  He was Chief Operating Officer from November 2002 through August 2003.  Mr. Weaver joined us as President, Government Services Division in May 1998 and became President, U.S. Operations in August 2000.  From June 1997 until May 1998, Mr. Weaver served as Vice President, Government Solutions of BDM International, Inc., an information technology company. From March 1995 until June 1997, he served as National Program Director, Public Sector for Unisys Corporation, an information technology company. Prior to that time, he served as Director, Public Sector Services with Lockheed Martin Information Management Services and District Manager with the Commonwealth of Virginia, Division of
Child Support Enforcement. Mr. Weaver received a Bachelors of Arts Degree in Psychology from California University of Pennsylvania.

Mr. McCandless joined us as Senior Vice President, Chief Financial Officer and Treasurer in July 2003.  From April 2000 to July 2003, Mr. McCandless served as Senior Vice President and Chief Financial Officer of Interelate, an application services provider firm.  From 1997 to April 2000, Mr. McCandless was Chief Financial Officer at Mastech Corp., now iGATE Corp., a global information technology company.  Mr. McCandless received a Bachelor of Arts Degree in Business Administration from Westminster College.

Mr. Fairbairn joined us as Senior Vice President, Human Resources in September 2003. From April 2002 to June 2003, he served as Senior Vice President, Human Resources for HCL Technologies America, a global IT services and product engineering company. Mr. Fairbairn was Vice President of Human Resources for Getronics, now part of BAE Systems, a computer services company, from August 1997 to March 2002. Mr. Fairbairn has earned certifications as a Senior Professional in Human Resources, a Certified Compensation Professional, and a Certified Benefits Professional. He received a Bachelor of Arts Degree in Human Resources from Michigan State University and completed the Strategic Human Resource Management Program at Harvard Business School.

10



Mr. Lawler joined us as Senior Vice President, Electronic Payment Processing in June 2004, with the acquisition of EPOS.  Mr. Lawler was President of EPOS beginning November 1989 and Chairman of EPOS beginning in September 1991.   He received a Bachelor of Computer Engineering and Master of Science degrees from Auburn University.

Mr. Vucovich is Senior Vice President, Packaged Software and Systems Integration and has served in this capacity since November 2004.  He has 18 years of experience in the development and implementation of information systems, including seven years in a business development role and eight years in a managerial capacity.  Mr. Vucovich has been with us since December 1995.  From September 2000 until November 2004, Mr. Vucovich served as Vice President, Quality Assurance and Resource Management.  From October 1997 to September 2000, he was Business Development Manager, Government Services Division.  Mr. Vucovich received a Bachelor of Science Degree in Computer Science from the University of Southern Mississippi.

Mr. Wade was appointed Sr. Vice President, Strategy and Business Development in October 2003.    Prior to this appointment, Mr. Wade was Vice President, Business Development and Sales from June 1999 through September 2003.  Prior to his joining Tier, Mr. Wade was Director, Business Development at TRW, System and Information Technology Group from 1997-1999 and Director, Business Development at BDM, International from 1990-1996.

Item 2.  Properties

Our headquarters and principal administrative functions are located in approximately 41,000 square feet of leased space in Reston, Virginia. The lease for this space expires in 2010. We also operate through leased facilities in seventeen additional states, which are used by all of our business units.  The leases for these facilities expire in 2005 through 2008.  As a result of our corporate restructuring in 2003, we closed four offices in fiscal 2004.

Item 3.  Legal Proceedings

In June 2003, we announced that we had received a subpoena from a grand jury in the Southern District of New York to produce certain documents pursuant to an investigation involving the child support payment processing industry by the United States Department of Justice, or DOJ, Antitrust Division.  We have fully cooperated, and intend to continue to cooperate fully, with the subpoena and with the DOJs investigation.  On November 20, 2003, the DOJ granted conditional amnesty to us pursuant to the Antitrust Divisions Corporate Leniency Policy.  Consequently, the DOJ will not bring any criminal charges against us, our officers, directors and employees, as long as we continue to comply with the Corporate Leniency Policy, which requires, among other things, our full cooperation in the investigation and restitution payments if it is determined that parties were injured as a result of



impermissible anti-competitive conduct.  During the fiscal year 2003, we incurred approximately $1.3 million of legal costs to comply with the investigation, which includes approximately $305,000 paid under officers and directors indemnification agreements.  During the fiscal year 2004, we incurred approximately $770,000 of legal costs to comply with the subpoena which included costs of approximately $211,000 incurred under indemnification agreements partially offset by a claim payment received from our insurance carrier for approximately $227,000.

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our shareholders during the fourth quarter of the fiscal year ended September 30, 2004.

11



PART II

Item 5.  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our Class B common stock is quoted on the NASDAQ National Market under the symbol TIER. The table below sets forth the high and low sales price for our Class B common stock as reported by the NASDAQ National Market for the periods indicated:

|                                      |  | High |       | Low |  
|------------------------------------- |  | ---- | ----- | --- | -
|                                      |  |      |       |     |  
|Fiscal Year Ended September 30, 2003: |  |      |       |     |  
|First Quarter                         |  | $    | 20.46 |     | $
|Second Quarter                        |  |      | 17.60 |     |  
|Third Quarter                         |  |      | 10.34 |     |  
|Fourth Quarter                        |  |      | 11.86 |     |  
|                                      |  |      |       |     |  
|                                      |  | High |       | Low |  
|                                      |  |      |       |     |  
|Fiscal Year Ended September 30, 2004: |  |      |       |     |  
|First Quarter                         |  | $    | 10.75 |     | $
|Second Quarter                        |  |      | 11.69 |     |  
|Third Quarter                         |  |      | 12.05 |     |  
|Fourth Quarter                        |  |      | 10.10 |     |  

We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings to fund the development and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors; however, under our current credit facility, we are prohibited from declaring dividends.

As of December 6, 2004, there were 275 holders of record of our Class B common stock.

Securities

The following table sets forth information about our equity compensation plans as of September 30, 2004 (in thousands, except exercise price):

Equity Compensation Plan Information

|Plan category                                                |  | Number of   securities to be issued   upon exercise of outstanding   options, warrants and rights |       | Weighted-average   exercise   price of outstanding   options, warrants and rights |  | Number of   securities remaining available for   future issuance under equity   compensation plans (1) | 
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | 
|                                                             |  |                                                                                                   |       |                                                                                   |  |                                                                                                        | 
|Equity   compensation plans approved by security holders     |  |                                                                                                   | 2,456 |                                                                                   |  | $ 11.00                                                                                                | 
|Equity   compensation plans not approved by security holders |  |                                                                                                   | -0-   |                                                                                   |  | -0-                                                                                                    | 

| |    
| | ---
| | (1)

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Item 6.  Selected Financial Data

The following table summarizes our selected consolidated financial data. The historical results are not necessarily indicative of results to be expected for any future period.

|                                                                                                                |  | Year ended   September 30,                 |        
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | -------
|                                                                                                                |  |                                            |        
|Consolidated statement of operations data:                                                                      |  | 2004                                       |        
|                                                                                                                |  |                                            |        
|                                                                                                                |  | (in   thousands, except per share amounts) |        
|Net revenues                                                                                                    |  | $                                          | 127,937
|Costs and   expenses:                                                                                           |  |                                            |        
|Direct costs                                                                                                    |  |                                            | 83,637 
|Selling and marketing                                                                                           |  |                                            | 7,161  
|General and administrative                                                                                      |  |                                            | 27,959 
|Restructuring and other charges                                                                                 |  |                                            | 3,493  
|Depreciation and amortization                                                                                   |  |                                            | 4,977  
|                                                                                                                |  |                                            |        
|Income   (loss) from continuing operations                                                                      |  |                                            | 710    
|Interest   income (expense), net                                                                                |  |                                            | 1,149  
|                                                                                                                |  |                                            |        
|Income   (loss) from continuing operations before income taxes                                                  |  |                                            | 1,859  
|Provision   (benefit) for income taxes                                                                          |  |                                            | 105    
|                                                                                                                |  |                                            |        
|Income   (loss) from continuing operations, net of income taxes                                                 |  | $                                          | 1,754  
|                                                                                                                |  |                                            |        
|Basic income   (loss) from continuing operations, net of income taxes per share(1)                              |  | $                                          | 0.09   
|                                                                                                                |  |                                            |        
|Shares used   in computing basic income (loss) from continuing operations, net of income   taxes per share(1)   |  |                                            | 18,987 
|                                                                                                                |  |                                            |        
|Diluted   income (loss) from continuing operations, net of income taxes per share(1)                            |  | $                                          | 0.09   
|                                                                                                                |  |                                            |        
|Shares used   in computing diluted income (loss) from continuing operations, net of income   taxes per share(1) |  |                                            | 19,322 
|                                                                                                                |  |                                            |        

|                                                    |  | September   30,  |        
|--------------------------------------------------- |  | ---------------- | -------
|                                                    |  |                  |        
|Consolidated balance sheet data:                    |  | 2004             |        
|                                                    |  |                  |        
|                                                    |  | (in   thousands) |        
|Cash, cash   equivalents and short-term investments |  | $                | 56,460 
|Working   capital                                   |  |                  | 53,785 
|Total assets                                        |  |                  | 177,469
|Long-term   debt, less current portion              |  |                  | 89     
|Total   shareholders equity                        |  |                  | 145,950

|   
|---
|(1)

13



Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We provide transaction processing services and software and systems integration services primarily to federal, state and local government and other public sector clients. Our clients outsource portions of their business processes to us, and rely on us for our industry-specific information technology expertise and solutions.

From October 1, 2001 through September 30, 2004, we completed four acquisitions for a total cost of approximately $99.8 million using cash and Class B common stock.   In our most recent acquisition, effective June 1, 2004, we purchased all of the outstanding stock of EPOS Corporation, an Alabama corporation that supplies interactive voice response communication and electronic transaction processing technologies.  The total purchase price was approximately $20.1 million and was comprised of approximately $15.6 million in cash and 402,422 shares of Class B common stock valued at approximately $4.5 million, based on the closing price of Class B common stock on June 1, 2004.

Our workforce, composed of employees, independent contractors and subcontractors, increased to 860 on September 30, 2004 from 769 on September 30, 2003, primarily due to our acquisition of EPOS in June 2004.

In fiscal year 2003, we operated our business through four strategic business units:  U.S. Government Services, U.S. Commercial Services, OPC and United Kingdom Operations.  In the fourth quarter of fiscal year 2003, we completed a strategic review of all business units and began a restructuring plan which renewed our focus on our core Government Services businesses while exiting other unprofitable or marginal business operations.  As of December 31, 2003, we had exited the United Kingdom business unit, the U.S. Commercial Services business unit, which includes the Systems and Technology Training division, and the Justice & Public Safety and Strategies divisions of our former U.S. Government Services business unit. The financial position, results of operations and cash flows for the U.S. Commercial Services and United Kingdom business units are reported as discontinued operations for
each period in this report.  We also created two new business units from our U.S. Government Services business unit:  the Government Business Process Outsourcing, GBPO, business unit and the Government Systems Integration, Government SI, business unit.

In connection with our acquisition of EPOS, we renamed our Government SI business unit as Packaged Software and Systems Integration, PSSI, and the OPC business unit as Electronic Payment Processing, EPP.  Our GBPO business unit includes our child support payment processing business, our health and human services consulting business, and the financial institution data match business. We expect to see significant proposal activity in the child support payment processing market over the next six months as we believe approximately three states intend to issue new requests for proposals. Our PSSI business unit includes our pension contracts, unemployment insurance contracts, financial management systems, or FMS, contracts, our e-Government contracts, the State of Missouri contracts and the EPOS computer telephony and call center contracts.  We have shifted our systems integration model from custom
developed solutions to implementation and modification of packaged software. We believe this strategy of implementing pre-existing software applications that include customizations to meet our particular clients needs will combine the potential for greater profitability with less risk compared to our earlier strategy of building a system based upon a set of functional requirements.  Our EPP business unit includes the electronic payment processing business of OPC and EPOS.

We derive net revenues primarily from transaction and payment processing services, systems design and integration services, and maintenance and support services.  For transaction and payment processing services, we bill clients on a per-transaction basis, a fixed price basis or a time and materials basis.  We recognize net revenues from transaction-based contracts based on fees charged on a per-transaction basis or fees charged as a percentage of dollars processed.  We recognize net revenues from software licenses that include significant implementation or customization services on the percentage-of-completion method of accounting based upon the ratio of costs incurred to total estimated project costs.  We recognize net revenues from software licenses that do not include significant implementation or customization services upon delivery to the licensee when the fees are fixed and
determinable, collection is probable and vendor specific objective evidence
exists to determine the value of any undeliverable elements of the
arrangement.  We recognize fixed price net revenues for other projects as
services are provided and accepted by our clients, if applicable.  We
recognize time and materials net revenues as we perform services and incur
expenses. Net revenues from software maintenance contracts are recognized
ratably over the term of the contract, typically one year.

14



During the year ended September 30, 2004, we generated 62.3% of our net revenues on a per-transaction basis, 19.4% on a fixed price basis, and 18.0% on a time and material basis.  During the year ended September 30, 3003, we generated 63.3% of our net revenues on a per-transaction basis, 18.2% on a fixed price basis, and 18.4% on a time a time and material basis.  Substantially all of our contracts are terminable by the client following limited notice and without significant penalty to the client.  From time to time, in the regular course of our business, we negotiate the modification, termination, renewal or transition of time and materials, fixed price and per-transaction based contracts that may involve an adjustment to the scope, duration or nature of the project, billing rates or price.  If we significantly overestimate the volume for transaction-based contracts or underestimate
the resources, costs or time required for fixed price or per-transaction based contracts, our financial condition and results of operations would be materially and adversely affected. Unsatisfactory performance of services or proprietary software or unanticipated difficulties or delays in completing projects may result in client dissatisfaction and a reduction in payment to us, termination of a contract, or payment of damages or penalties by us as a result of litigation or otherwise.

We have derived a significant portion of our net revenues from a small number of large clients or their constituents. For some of these clients, we perform a number of different projects pursuant to multiple contracts or purchase orders. For the year ended September 30, 2004, revenues from the Internal Revenue Service contract accounted for 12.2% of our total net revenues. In addition, we performed child support payment processing services for three different state governments as a subcontractor to ACS during the year ended September 30, 2004 which accounted for 11.1% of total net revenues.  In June 2004, we were notified by ACS of its unilateral decision not to renew one of our subcontracts effective June 30, 2004.  This subcontract accounted for approximately 4.3% of total net revenues for the fiscal year ended September 30, 2004.  We anticipate that a substantial portion of our net
revenues will continue to be derived from a small number of large clients.

Personnel expenses represent a significant percentage of our operating expenses and are relatively fixed in advance of any particular quarter. We manage our personnel utilization rates by carefully monitoring our needs and anticipating personnel increases based on specific project requirements. To the extent net revenues do not increase at a rate commensurate with these additional expenses, our results of operations could be materially and adversely affected. In addition, to the extent that we are unable to hire and retain salaried employees to staff new or existing client engagements or retain hourly employees or contractors, due to economic or technical skill set constraints our financial results could suffer.

In connection with our acquisitions from October 1, 2001 through September 30, 2004, we incurred $1.0 million in cumulative compensation charges related to business combinations and $1.3 million in cumulative business combination integration charges. Generally, we record contingent payments as additional goodwill at the time the payment can be determined beyond a reasonable doubt. If a contingent payment is based, in part, on a sellers continuing employment with us, the payments are recorded as compensation expense under U.S. generally accepted accounting principles over the vesting period when the amount is deemed probable.

In June 2004, we completed the consolidation of our Walnut Creek, California and Reston, Virginia offices.  As part of the office consolidation, we relocated the accounting, financial planning, information technology, legal, human resources and facilities corporate functions to the Reston office and closed the Walnut Creek office.  We believe that the office consolidation will improve the efficiency of our workforce, reduce our cost structure, assist in developing a consistent corporate culture and streamline the overall back office operations.  As anticipated, some members of the staff formerly resident in Walnut Creek have relocated to the Reston office as part of the office consolidation, and we hired new staff for the Reston office to perform functions formerly carried out in Walnut Creek.  During fiscal year 2004, we incurred restructuring and other related pre-tax charges
totaling approximately $2.9 million in connection with the office consolidation.  The charges are comprised of approximately $385,000 in severance payments for employees who did not relocate to the Reston office, $1.3 million in facility closure costs, net of estimated sublease income of $1.5 million and approximately $1.2 million in other charges, such as relocation and temporary labor cost, related to the office consolidation.

15



Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, net revenues and expenses, and our related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, costs, collectibility of receivables, goodwill and intangible assets, income taxes, restructuring obligations and discontinued operations.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.   Such experience and assumptions form the basis of judgments



about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies and the related judgments and estimates significantly affect the preparation of our consolidated financial statements:

Basis of Presentation.  During the quarter ended March 31, 2002, we adopted a plan to sell our Australian operation, and in September 2002, we completed the sale.  The Australian operations were accounted for as a discontinued operation under Accounting Principles Board Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions and, accordingly, amounts in the consolidated financial statements and related notes for all periods presented reflect discontinued operation accounting.  During the year ended September 30, 2003, we adopted SFAS 144, Accounting for the Impairment and Disposal of Long Lived Assets which broadened the presentation of discontinued operations from the disposal of a segment to the disposal of a component of
the entity.  SFAS 144 also changed the timing of presentation from the point of commitment to the point of actual disposal of the operations. During the year ended September 30, 2003, we completed a plan to exit the operations of our U.S. Commercial Services business unit, our United Kingdom Operations business unit and the Justice and Public Safety and Strategies divisions within the U.S. Government Services business unit.  Effective October 1, 2003, the remaining U.S. Government Services business unit was split into our GBPO and PSSI business units. During the quarter ended December 31, 2003, we exited the U.S. Commercial Services and United Kingdom Operations business units and the financial position, results of the operations and cash flows of these components are reported as discontinued operations for each period in this report.  We must use our judgment to determine whether particular operations are considered a component of the entity and when the operations have been
disposed.

Revenue Recognition.  Certain judgments affect the application of our revenue policy.  Our EPP and GBPO business units generate transaction and payment processing revenues. Net revenues from transaction and payment processing contracts are recognized based on fees charged on a per-transaction basis or fees charged as a percentage of total dollars processed.  We establish the per-transaction fee or transaction fee percentage in our contracts based on estimated future costs and the estimate of transaction volume over the life of the contract.  The estimated average length of the transaction processing contracts in our GBPO business unit is approximately three years plus optional client renewals averaging approximately two and one-half years.  We use our historical experience and mathematical models to estimate transaction volumes.  We monitor transaction volume on a
monthly basis.  Any significant variance from the estimated number of transactions or average transaction dollars processed could significantly impact the resulting revenues and operating profit.  For example, our monthly transaction volume at our child support payment processing centers, which were active for the entire year, varied between 111% and 83% from the average monthly volume during fiscal year 2004.  If the volume of transactions processed at all child support payment processing centers decreased 10% from the volume processed during fiscal year 2004, our transaction processing revenues would have decreased approximately $3.0 million. Additionally, if the average volume of dollars processed by OPC for each payment type decreased 10% from the average volume processed by OPC for each payment type during fiscal year 2004, our transaction and payment processing revenues would have decreased by approximately $3.9 million.

16



For EPP business unit electronic payment transactions, we use judgment and historical experience to estimate sales returns and allowances attributable to credit card reversals and chargebacks in determining net revenues. When estimating these reserves, we analyze historical trends, our specific customer experience and current economic conditions. Within our EPP business unit, on-line payment processing revenues are typically generated by consumer payments.  Before our EPP business unit processes payment transactions, each consumer must agree to pay us a processing fee by making the appropriate selection on our web site or telephone system.  Credit card reversal and chargebacks of convenience fees were $199,000 and $119,000 or 0.5% and 0.3% of EPP business unit net revenues for the years ended September 30, 2004 and 2003, respectively.

Our PSSI business unit generates systems design and integration revenues. Net license and services revenues from contracts involving significant modification, customization or services which are essential to the functionality of the software are recognized using the percentage-of-completion method of accounting based upon the ratio of costs incurred to total estimated project costs.  The total estimated cost is calculated using financial models and is based on our historical experience and expected project time and effort.  Any significant changes in total estimated costs could significantly impact the recognition of net revenue.  We monitor the costs incurred and evaluate variances between budgeted and actual costs in our fixed price contracts on a monthly basis.  To the extent there are changes in the total estimated costs, we adjust the percentage of revenues recognized.  For
example, if the total estimated costs of each of our percentage-of-completion contracts in process as of September 30, 2004 increased 10%, our fixed price revenues for the year ended September 30, 2004 would have decreased by $1.0 million.  Provided the arrangement does not require significant implementation or customization of the software, software license net revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collectibility is probable and delivery to the client has occurred.  Revenues for software license fees not requiring significant modification were $403,000, $75,000 and $329,000 for the years ended September 30, 2004, 2003 and 2002, respectively.

Our PSSI business unit also generates maintenance and support services revenues.  Net revenues from software maintenance contracts are recognized ratably over the term of the contract, typically one year.  Non-essential support services, including training and consulting, are also provided on a time and materials basis.  Revenue is recognized as the services are performed.  Maintenance and non-essential support services revenues were $20.3 million, $17.0 million and $15.3 million for the years ended September 30, 2004, 2003 and 2002, respectively.

Generally our government contracts are subject to fiscal funding clauses, which entitle the client, in the event of budgetary constraints, to reduce or eliminate the services we are to provide, with a corresponding reduction in the fee the client must pay under the terms and conditions of the original contract.  Net revenues are recognized under such contracts only when we consider the likelihood of cancellation of funding to be remote.  Within the EPP business unit, the consumer generally bears the transaction fee, not the government entity, so EPP business unit contracts are not generally subject to fiscal funding issues.  For the years ended September 30, 2004 and 2003, revenues recognized under contracts subject to fiscal funding clauses were 68.2% and 68.1%, respectively, of total net revenues.

For all our business units, the amount and timing of our net revenue is difficult to predict, and any shortfall in net revenue or delay in recognizing net revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

Cost and Volume Estimates.  For our transaction and payment processing business, we establish the per-transaction fee or transaction fee percentage in our client contracts based on estimated future costs and estimates of transaction and dollar volume over the life of the contract.  Included in our cost estimates for certain child support payment processing contracts are estimates regarding misapplied payments and payments that are rejected due to insufficient funds to the extent we are to bear these costs. Actual misapplied payments and amounts for insufficient funds checks are held as receivables until collected or written off, as deemed appropriate.  Included in our EPP business unit cost estimates are processing fees that are subject to change with limited or no notice.  We use our judgment and review historical trends, our specific experience and current economic conditions
in order to estimate these costs.  Any significant variance from our estimates could significantly impact our operating profit.  For the years ended September 30, 2004 and 2003, expenses incurred by us related to misapplied payments and insufficient funds checks were $932,000 and $440,000, respectively.

17



We recognize fixed price net revenues for our systems design and integration projects using the percentage-of-completion method, based upon the ratio of costs incurred to total estimated project costs.  Any significant changes in total estimated project costs could significantly affect our operating profit.

Collectibility
  of Receivables.  A considerable amount of judgment is required to assess
  the likelihood of the ultimate realization of receivables, including assessing
  the probability of collection and the current credit worthiness of our clients. 
  Probability of collection is based upon the assessment of the clients
  financial condition through the review of its current financial statements or
  credit reports.  For follow-on sales to existing clients, prior payment
  history is also used to evaluate probability of collection. We maintain an allowance
  for doubtful accounts for all receivable balances, including accounts and notes
  receivable, receivables resulting from misapplied payments and payments that
  are rejected due to insufficient funds, and a sales return and allowance provision
  for reversals and chargebacks from consumers who use our credit or debit card
  payment services.  At September 30, 2004 and 2003, the combined balance
  of the allowance accounts was $2.6 million and $1.8 million, respectively.  
  We have several large accounts receivable and unbilled receivable balances,
  and any dispute, early contract termination or other collection issues could
  have a material adverse impact on our financial condition and results of operations. 
  For example, during the fourth quarter of fiscal year 2003, our contract with
  CalPERS was terminated.  As a result, we recorded a charge against revenues
  of $12.8 million to write down the total value of unbilled receivables from
  CalPERS.  At September 30, 2004, $7.6 million of our accounts receivable
  and $3.6 million of our unbilled receivables balances were balances owed by
  five clients for amounts greater than $1.0 million each.

Goodwill
     and Other Intangible Assets.  Consideration paid in connection
     with acquisitions is required to be allocated to the acquired assets,
     including identifiable intangible assets, and liabilities acquired. 
     Acquired assets and liabilities are recorded based on our estimate of fair
     value, which requires significant judgment with respect to future cash
     flows and discount rates.  We utilize historical experience as well as
     external specialists to estimate fair value.  For intangible assets,
     we are required to estimate the useful life of the asset or determine if it
     has an indefinite useful life.  We use our judgment to evaluate
     potential indicators of impairment of goodwill and other intangible
     assets.  Our judgments regarding the existence of impairment
     indicators are based on market conditions, operational performance of our
     acquired businesses and identification of reporting units.  Future events could cause us to conclude that
     impairment indicators exist and that goodwill and other intangible assets
     associated with our acquired businesses are impaired.  Beginning
     October 1, 2002, we adopted Statement of Financial Accounting Standards No.
     142 Goodwill and Other Intangible Assets.  Accordingly,
     our goodwill and other intangible assets that have an indefinite useful
     life are not amortized but instead are reviewed at least annually for
     impairment.  Impairment tests involve the use of estimates related to
     the fair market value of the business operations with which goodwill is
     associated.  During the fourth quarter of fiscal year 2003, we decided
     to shut down the U.S. Commercial Services business unit and the United
     Kingdom Operations business unit and accordingly recorded a charge of $17.6
     million to write down goodwill to its fair value as determined by
     calculating the expected cash flows from the remaining contractual
     obligations of those business units.  During the quarter ended
     December 31, 2003, we wrote down the remaining goodwill associated with
     these business units.  In the fourth quarter of fiscal year 2004, we
     performed our annual impairment test to determine if the remaining goodwill
     associated with our continuing business units was impaired. Our estimate of
     fair value did not indicate any impairment.  The fair market value of
     the remaining business units was determined using forecasted future cash
     flows.  Those cash flows were forecasted using significant assumptions
     including: future revenues and expenses, future growth rates and discount
     rates.  A change of 1.0% in the discount rate reduces the fair value calculated in the analysis by $52.8 million.  These growth rates and
     other assumptions are consistent with our past plans and present
     experience.

18





Income
  Taxes.  We are required to estimate our income taxes in each of the
  jurisdictions in which we operate as part of the process of preparing our consolidated
  financial statements.  This process involves estimating our actual current
  tax liability, including assessing temporary differences resulting from differing
  tax treatment of items, such as the difference in amortizable lives for intangible
  assets for tax and accounting purposes.  These differences result in deferred
  tax assets and liabilities.  At September 30, 2004 and September 30, 2003,
  we had a net deferred tax asset of $21.4 million and $23.2 million, respectively,
  comprised of net operating loss carryforwards, foreign tax credit carryforwards
  and other deductible temporary differences, against which we are carrying a
  $21.4 million and $23.2 million valuation allowance, respectively. At September
  30, 2004, we had a valuation allowance of $21.4 million.  Statement of
  Financial Accounting Standards No. 109 Accounting for Income Taxes
  requires that the deferred tax assets be reduced by a valuation allowance if,
  based on the weight of available evidence, it is more likely than not that some
  portion or all of the recorded deferred tax assets will not be realized in future
  periods.  In evaluating our ability to recover our deferred tax assets
  we consider all available positive and negative evidence including our past
  operating results, the existence of cumulative losses in the most recent fiscal
  years and our forecast of future taxable income.  In determining future
  taxable income, we are responsible for assumptions utilized including the amount
  of federal and state pre-tax operating income, the reversal of temporary differences
  and the implementation of feasible and prudent tax planning strategies. 
  These assumptions require significant judgment about the forecasts of future
  taxable income and are consistent with the plans and estimates we are using
  to manage the underlying businesses.  Management concluded to establish
  a full valuation allowance as of September 30, 2003.  As of September 30,
  2004, management concluded to maintain the full valuation allowance.  We
  intend to maintain this valuation allowance until sufficient positive evidence
  exists to support reversal of the valuation allowance.  Our income tax
  expense recorded in the future will be reduced to the extent of offsetting decreases
  in our valuation allowance.  In addition, the calculation of tax liabilities
  involves significant judgment in estimating the impact of uncertainties in the
  application of complex tax laws.  Although we believe that our estimates
  are reasonable, resolution of these uncertainties in a manner inconsistent with
  managements expectations could have a material impact on our financial
  position and cash flows.

Determination of Restructuring Obligations.  As a result of our acquisition of OPC in July 2002, we assumed certain liabilities for restructuring costs that OPC had previously recognized in connection with the termination of employees and the consolidation of facilities.  During the quarter ended June 30, 2004, we relocated the accounting, financial planning, information technology, legal, human resources and facilities corporate functions to Reston, Virginia and closed the Walnut Creek, California office.  We have recorded restructuring charges related to this office consolidation.  The restructuring liability for consolidation of facilities is the estimated net obligation payable on abandoned office facilities.  The estimated net obligation includes the gross obligation payable under existing lease agreements through estimated disposition dates, estimated costs of
abandonment or lease transfer, as offset by estimated sublease income.  The estimated sublease income was calculated based on executed subleases.  At September 30, 2004 and 2003, we had restructuring liabilities totaling approximately $2.0 million and $2.3 million, respectively.

Statements of Operations

The following is a description of certain line items from our statement of operations, which include the operations of EPOS from June 1, 2004, the date of acquisition.

Direct costs consists primarily of those costs directly attributable to providing services to a client, including employee salaries and incentive compensation, independent contractor and subcontractor costs, credit and debit card discount fees, employee benefits, payroll taxes, travel-related expenditures, amortization of intellectual property and any project-related equipment, hardware or software purchases. For state child support payment processing center operations, direct costs also include facility, depreciation and amortization expense and direct overhead costs.

Selling and marketing expenses consist primarily of personnel costs, sales commissions, advertising and marketing expenditures, and travel-related expenditures.

General and administrative expenses consist primarily of personnel costs related to general management and administrative functions, human resources, resource management, regulatory compliance, EPPs engineering, client service and customer service departments, staffing, accounting and finance, legal, facilities, information systems, as well as professional fees related to legal, audit, tax, external financial reporting and investor relations matters and bad debt expense.

Depreciation and amortization consists primarily of expenses associated with depreciation of equipment and leasehold improvements and amortization of other intangible assets resulting from acquisitions and other intellectual property not directly attributable to client projects.  Prior to October 1, 2002, depreciation and amortization also included goodwill amortization.  Project-related depreciation and amortization is included in direct costs.  For OPC, no depreciation and amortization expense is included in direct costs.

19



RESULTS OF OPERATIONS

The following table summarizes our operating results as a percentage of net revenues for each of the periods indicated:

|                                                                |  | Year ended   September 30, |      
|--------------------------------------------------------------- |  | -------------------------- | -----
|                                                                |  |                            |      
|                                                                |  | 2004                       |      
|                                                                |  |                            |      
|Net revenues                                                    |  |                            | 100.0
|Costs and   expenses:                                           |  |                            |      
|Direct costs                                                    |  |                            | 65.3 
|Selling and marketing                                           |  |                            | 5.6  
|General and administrative                                      |  |                            | 21.9 
|Restructuring and other charges                                 |  |                            | 2.7  
|Depreciation and amortization                                   |  |                            | 3.9  
|                                                                |  |                            |      
|Income (loss)   from continuing operations                      |  |                            | 0.6  
|Interest   income, net                                          |  |                            | 0.9  
|                                                                |  |                            |      
|Income   (loss) from continuing operations before income taxes  |  |                            | 1.5  
|Provision   (benefit) for income taxes                          |  |                            | 0.1  
|                                                                |  |                            |      
|Income   (loss) from continuing operations, net of income taxes |  |                            | 1.4  
|                                                                |  |                            |      

FISCAL YEARS ENDED SEPTEMBER 30, 2004 AND 2003

Net revenues

Net revenues increased 10.4% to $127.9 million for the fiscal year ended September 30, 2004 from $115.9 million for the fiscal year ended September 30, 2003.  This increase resulted primarily from an increase in PSSI net revenues of approximately $12.4 million and an increase in EPP net revenues of $3.7 million offset by a decrease in GBPO net revenues of approximately $4.0 million.  The following table presents the net revenues for the fiscal years ended September 30, 2004 and 2003 for each of the three reportable segments:

|      |  | Year ended   September 30, |        
|----- |  | -------------------------- | -------
|      |  |                            |        
|      |  | 2004                       |        
|      |  |                            |        
|      |  | (in   thousands)           |        
|GBPO  |  | $                          | 44,715 
|PSSI  |  |                            | 42,553 
|EPP   |  |                            | 40,669 
|      |  |                            |        
|Total |  | $                          | 127,937
|      |  |                            |        

The $4.0 million decrease in GBPO net revenues resulted primarily from the end of contract terms for two contracts that ended in fiscal year 2003 and in the first half of 2004 which generated an additional $4.0 million in revenues during the fiscal year ended September 30, 2003.  The $12.4 million increase in PSSI net revenues resulted primarily from increased revenues related to our unemployment services of approximately $3.3 million, additional revenues of approximately $1.6 million related to e-Government services, and $4.2 million in revenues from EPOS. In addition, the increase reflects the fact that the fiscal 2003 PSSI net revenues included the adjustment to write down the total value of unbilled receivables from CalPERS resulting in negative PSSI revenues of $3.4 million,. The $3.7 million increase in EPP net revenues resulted primarily from an increase in adoption rates of OPC services with
increased revenue of $2.3 million and $1.4 million in revenues from EPOS.

20



The following table presents net revenues for the last two fiscal years by offering:

|                                     |  | Year ended   September 30, |        
|------------------------------------ |  | -------------------------- | -------
|                                     |  |                            |        
|                                     |  | 2004                       |        
|                                     |  |                            |        
|                                     |  | (in   thousands)           |        
|Transaction   and payment processing |  | $                          | 82,820 
|Systems   design and integration     |  |                            | 19,349 
|Maintenance   and support services   |  |                            | 20,338 
|Product   sales and other services   |  |                            | 5,430  
|                                     |  |                            |        
|Total                                |  | $                          | 127,937
|                                     |  |                            |        

Net
  revenues from transaction and payment processing services increased 2.7% to
  $82.8 million in the fiscal year ended September 30, 2004 compared to $80.6
  million in the fiscal year ended September 30, 2003 primarily as a result of
  the $3.7 million increase in EPP net revenues offset by a decline in GBPOs
  child support processing center net revenues of $1.3 million.  Net revenues
  from systems design and integration services increased 17.7% to $19.3 million
  in the fiscal year ended September 30, 2004 compared to $16.4 million in the
  fiscal year ended September 30, 2003 primarily due to increased revenues of
  approximately $4.3 million related to our unemployment and pension services
  partially offset by decreased revenues of approximately $4.5 million from four
  contracts, which ended in fiscal year 2004.  In addition, the increase
  reflects the fact that the fiscal 2003 systems design and integration services
  revenues included the adjustment to write down the total value of unbilled receivables
  from CalPERS resulting in negative revenues of $3.4 million.  Net revenues
  from maintenance and support services increased 19.4% to $20.3 million in the
  fiscal year ended September 30, 2004 compared to $17.0 million in the fiscal
  year ended September 30, 2003 primarily as a result of increased revenues of
  $2.8 million from our State of Missouri practice.   Net revenues from
  product sales and other services increased 184.2% to $5.4 million in the fiscal
  year ended September 30, 2004 compared to $1.9 million in the fiscal year ended
  September 30, 2003 primarily due to increased growth in new practice areas,
  including web portal services, with revenues of $1.8 million and product sales
  revenues of $2.2 million from EPOS both during the fiscal year ended September
  30, 2004.

Reimbursement and software license revenues for each fiscal year were each less than 10% of total net revenues for the period.

Direct costs

Direct
  costs decreased 6.7% to $83.6 million for the fiscal year ended September 30,
  2004 from $89.6 million for the fiscal year ended September 30, 2003,
  respectively. Direct costs include depreciation and amortization of $2.3 million
  and $2.2 million for the fiscal year ended September 30, 2004 and 2003,
  respectively.  The decrease in direct costs resulted primarily from the
  costs incurred on the CalPERS project for which we recorded an adjustment to
  decrease revenues by $12.8 million to write down the total value of the unbilled
  receivables from CalPERS in the fiscal year end September 30, 2003 offset by
  increases in primarily direct labor related to our increase in net revenues
  for the fiscal year ended September 30, 2004.

Selling and marketing

Selling
  and marketing expenses increased 22.0% to $7.2 million for the fiscal year
  ended September 30, 2004 from $5.9 million for the fiscal year ended
  September 30, 2003. As a percentage of net revenues, selling and marketing
  expenses increased slightly to 5.6% for the fiscal year ended September 30,
  2004 from 5.1% for the fiscal year ended September 30, 2003.  The
  increase in selling and marketing expenses was primarily attributable to the
  inclusion of expenses of $726,000 related to EPOS and sales and marketing expences
  relating to OPC advertising of $450,000.

21



General and administrative

General and
administrative expenses increased 18.6% to $28.0 million for the fiscal
year ended September 30, 2004 from $23.6 million for the fiscal year
ended September 30, 2003. As a percentage of net
revenues, general and administrative expenses increased to 21.9% for the fiscal
year ended September 30, 2004 from 20.3% for the fiscal year ended
September 30, 2003.  The increase in general and administrative
expenses resulted primarily from $1.3 million in legal and other costs related
to the terminated CalPERS contract and the shareholder lawsuits that were
dismissed in December 2003 and March 2004, $2.2 million in other costs related
to the office consolidation and inclusion of expenses related to our acquisition
of EPOS of $1.5 million.

Restructuring and other charges

The following table presents the restructuring and other charges for the fiscal years ended September 30, 2004 and 2003:

|                                                     |  | Year ended   September 30, |      
|---------------------------------------------------- |  | -------------------------- | -----
|                                                     |  |                            |      
|                                                     |  | 2004                       |      
|                                                     |  |                            |      
|                                                     |  | (in   thousands)           |      
|Asset   impairment charges                           |  | $                          | 571  
|Severance   charge resulting from restructuring      |  |                            | 1,846
|Office   closure charge resulting from restructuring |  |                            | 1,076
|                                                     |  |                            |      
|Total                                                |  | $                          | 3,493
|                                                     |  |                            |      

During the fiscal year ended September 30, 2004, we recorded asset impairment charges totaling $571,000 resulting from assets written off due to the closure of two offices.   The severance charge of $1.8 million represented severance costs of $1.5 million resulting from the signing of a termination agreement with our former chief executive officer and including a charge due to the modification of his stock options based on the price of our Class B common stock on April 1, 2004 and severance costs of $385,000 resulting from our consolidation of our Walnut Creek, CA and Reston, VA offices.  The office closure charge of $1.1 million represented costs incurred for the closure of two offices, net of estimated sublease income of $1.5 million.

Depreciation and amortization

Depreciation and amortization decreased 5.7% to $5.0 million for the fiscal year ended September 30, 2004 from $5.3 million for the fiscal year ended September 30, 2003. As a percentage of net revenues, depreciation and amortization decreased to 3.9% for the fiscal year ended September 30, 2004 from 4.6% for the fiscal year ended September 30, 2003. The decrease in depreciation and amortization resulted primarily from decreased capital expenditures in the first six months of the fiscal year and assets that became fully depreciated or amortized.

Interest income, net

Net interest income was consistent at $1.2 million for both fiscal years due to higher investment balances offset by lower rates in each respective period.

Provision (benefit) for income taxes

The provision for income taxes was $105,000 for the fiscal year ended September 30, 2004 as compared to a benefit for income taxes on a loss from continuing operations of $2.8 million for the fiscal year ended September 30, 2003.  The provision for income taxes for the fiscal year ended September 30, 2004 represents the expected minimum state tax payments.  No tax provision on the net income for the fiscal year ended September 30, 2004 was recorded due to an offsetting decrease in our valuation allowance.  Our effective tax rate was 37.9% for the fiscal year ended September 30, 2003.  These rates differ from the federal statutory rate due to state and foreign income taxes, tax-exempt interest income and the charge for establishing a valuation allowance on our net deferred tax assets. The 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, the ability to utilize foreign tax credits and net operating losses, and any non-deductible items related to acquisitions or other nonrecurring charges.  We will continue to closely monitor the effective tax rate.

22



In fiscal 2003, we recorded a $9.1 million increase in our valuation allowance which reduced our net deferred tax assets to zero. We intend to maintain this valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.  Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance.

Discontinued operations

We had a loss from our discontinued operations, net of income taxes, of $1.4 million for the fiscal year ended September 30, 2004 compared to a loss of $19.2 million for the fiscal year ended September 30, 2003.   The losses represents the historical operating results of our U.S. Commercial Services, including the Systems and Technology Training division, and United Kingdom segments and the asset impairment and restructuring charges recorded as a result of discontinuing these segments.

FISCAL YEARS ENDED SEPTEMBER 30, 2003 AND 2002

Net revenues

Net revenues increased 36.8% to $115.9 million for the fiscal year ended September 30, 2003 from $84.7 million for the fiscal year ended September 30, 2002.  The following table presents the net revenues for the fiscal years ended September 30, 2003 and 2002 for each of the three reportable segments:

|      |  | Year ended   September 30, |        
|----- |  | -------------------------- | -------
|      |  |                            |        
|      |  | 2003                       |        
|      |  |                            |        
|      |  | (in   thousands)           |        
|GBPO  |  | $                          | 48,715 
|PSSI  |  |                            | 30,197 
|EPP   |  |                            | 37,005 
|      |  |                            |        
|Total |  | $                          | 115,917
|      |  |                            |        

The $8.1 million increase in GBPO net revenues resulted primarily from new child support payment processing contracts in the amount of $3.2 million and increased revenues on existing contracts of approximately $5.8 million due primarily to the inclusion of these contracts for the entire fiscal year. The $10.2 million decrease in PSSI net revenues resulted primarily from the adjustment of $12.8 million to write down the total value of the unbilled receivables from CalPERS as a result of the dispute with CalPERS, which was partially offset by an increase in net revenues from our unemployment services of approximately $3.7 million.  The increase in EPP net revenues resulted primarily from a full year of OPC operations in fiscal 2003 compared to two months of operations in fiscal 2002 following our acquisition of OPC in late July 2002 in addition to an increase in all revenues categories primarily
driven by higher adoption rates by consumers.

The following table presents net revenues for the fiscal years ended September 30, 2003 and 2002 by offering:

|                                     |  | Year ended   September 30, |        
|------------------------------------ |  | -------------------------- | -------
|                                     |  |                            |        
|                                     |  | 2003                       |        
|                                     |  |                            |        
|                                     |  | (in thousands)             |        
|Transaction   and payment processing |  | $                          | 80,555 
|Systems   design and integration     |  |                            | 16,397 
|Maintenance   and support services   |  |                            | 17,032 
|Product   sales and other services   |  |                            | 1,933  
|                                     |  |                            |        
|Total                                |  | $                          | 115,917
|                                     |  |                            |        

23



Net revenues from transaction and payment processing services increased 116.2% in fiscal year 2003 primarily as a result of the inclusion of a full year of OPC operations as well as net revenues from new child support payment processing contracts in our GBPO segment.  Net revenues from systems design and integration services decreased 45.2% in fiscal year 2003 primarily due to the $12.8 million charge to revenues to write down the total value of the CalPERS unbilled receivables in our PSSI segment.  Net revenues from maintenance and support services increased 12.5% in fiscal year 2003 primarily from the inclusion of a full year of revenues from the Government Solutions Center (GSC) which we acquired from KPMG Consulting Inc. (now BearingPoint, Inc.) in March 2002.  Net revenues from product sales and other services, which declined 15.9% in fiscal 2003, were affected by a
reduction in client IT spending.

Reimbursement and software license revenues for each fiscal year were each less than 10% of total net revenues for the period.

Direct costs

Direct costs increased 69.9% to $89.7 million for the fiscal year ended September 30, 2003 from $52.8 million for the fiscal year ended September 30, 2002. Direct costs include depreciation and amortization of $2.2 million for the year ended September 30, 2003 and $2.1 million for the year ended September 30, 2002.  The increase in direct costs resulted from the increase in net revenues as well as costs incurred on the CalPERS project for which we recorded an adjustment to decrease revenues by $12.8 million to write down the total value of the unbilled receivables from CalPERS as mentioned above.

Selling and marketing

Selling and marketing expenses increased 51.3% to $5.9 million for the fiscal year ended September 30, 2003 from $3.9 million for the fiscal year ended September 30, 2002. As a percentage of net revenues, selling and marketing expenses increased to 5.1% for the fiscal year ended September 30, 2003 from 4.6% for the fiscal year ended September 30, 2002. The increase in selling and marketing expenses in total dollars was primarily attributable to the addition of OPCs sales and marketing costs for a full year in 2003.

General and administrative

General and administrative expenses increased 63.9% to $23.6 million for the fiscal year ended September 30, 2003 from $14.4 million for the fiscal year ended September 30, 2002. As a percentage of net revenues, general and administrative expenses increased to 20.3% for the fiscal year ended September 30, 2003 from 17.0% for the fiscal year ended September 30, 2002. The increase in general and administrative expense in total dollars was primarily attributable to the addition of OPCs general and administrative costs for a full year in 2003, an increase in rent expense due to more office locations, increasing business insurance costs and $1.3 million in legal costs to comply with the DOJ investigation.

Depreciation and amortization

Depreciation and amortization increased 39.5% to $5.3 million for the fiscal year ended September 30, 2003 from $3.8 million for the fiscal year ended September 30, 2002. As a percentage of net revenues, depreciation and amortization increased to 4.6% for the fiscal year ended September 30, 2003 from 4.4% for the fiscal year ended September 30, 2002. The increase in depreciation and amortization expense was primarily attributable to increased amortization of acquired intangibles from the OPC acquisition.

Interest income net

We had net interest income of $1.2 million for the fiscal year ended September 30, 2003 compared to net interest income of $1.6 million for the fiscal year ended September 30, 2002. This decrease was primarily attributable to a lower investment balance and lower investment yields.

24



Provision (benefit) for income taxes

The benefit for income taxes on loss from continuing operations was $2.8 million for the fiscal year ended September 30, 2003, as compared to provision for income taxes on income from continuing operations of $4.1 million for the fiscal year ended September 30, 2002.  The effective tax rate on loss from continuing operations for the fiscal year ended September 30, 2003 was 37.9%. The effective tax rate on income from continuing operations for the fiscal year ended September 30, 2002 was 35.9%. These rates differ from the federal statutory rate due to state and foreign income taxes, tax-exempt interest income and the charge for establishing a valuation allowance on our net deferred tax assets. The 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, the ability to utilize foreign tax credits and net operating losses, and any non-deductible items related to acquisitions or other nonrecurring charges.

In fiscal 2003, we recorded a $9.1 million increase in our valuation allowance which reduced our net deferred tax assets to zero. We intend to maintain this valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.  Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance.

Discontinued operations

The loss on disposal of the discontinued operation represents the total loss on the disposal and wind-down of the Australian operation.  The losses from operations represent the historical operating results of our former U.S. Commercial Services and United Kingdom business units and Australian operations.

25



SELECTED QUARTERLY STATEMENTS OF OPERATIONS

The following tables set forth certain unaudited consolidated quarterly statements of operations data for each of the eight fiscal quarters ended September 30, 2004. 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.

|                                                                   |  | Three   months ended                  |       
|------------------------------------------------------------------ |  | ------------------------------------- | ------
|                                                                   |  |                                       |       
|Consolidated statement of operations data:                         |  | Sept. 30,   2004                      |       
|                                                                   |  |                                       |       
|                                                                   |  | (in thousands, except per share data) |       
|Net revenues                                                       |  | $                                     | 31,035
|Costs and   expenses:                                              |  |                                       |       
|Direct costs                                                       |  |                                       | 18,159
|Selling and marketing                                              |  |                                       | 2,025 
|General and administrative                                         |  |                                       | 8,415 
|Restructuring and other charges                                    |  |                                       | 385   
|Depreciation and amortization                                      |  |                                       | 1,579 
|                                                                   |  |                                       |       
|Income   (loss) from continuing operations                         |  |                                       | 472   
|Interest   income, net                                             |  |                                       | 274   
|                                                                   |  |                                       |       
|Income   (loss) from continuing operations before income taxes     |  |                                       | 746   
|Provision   (benefit) for income taxes                             |  |                                       |      
|                                                                   |  |                                       |       
|Income   (loss) from continuing operations, net of income taxes    |  |                                       | 746   
|                                                                   |  |                                       |       
|Income   (loss) from discontinued operations, net of income taxes  |  |                                       | (22   
|                                                                   |  |                                       |       
|Net income   (loss)                                                |  | $                                     | 724   
|                                                                   |  |                                       |       
|Income   (loss) from continuing operations, net of income taxes    |  |                                       |       
|Per basic share                                                    |  | $                                     | 0.04  
|                                                                   |  |                                       |       
|Per diluted share                                                  |  | $                                     | 0.04  
|                                                                   |  |                                       |       
|Income   (loss) from discontinued operations, net of income taxes: |  |                                       |       
|Per basic share                                                    |  | $                                     | 0.00  
|                                                                   |  |                                       |       
|Per diluted share                                                  |  | $                                     | 0.00  
|                                                                   |  |                                       |       
|Net income   (loss):                                               |  |                                       |       
|Per basic share                                                    |  | $                                     | 0.04  
|                                                                   |  |                                       |       
|Per diluted share                                                  |  | $                                     | 0.04  
|                                                                   |  |                                       |       
|Shares used   in computing basic net income (loss) per share       |  |                                       | 19,396
|                                                                   |  |                                       |       
|Shares used   in computing diluted net income (loss) per share     |  |                                       | 19,592
|                                                                   |  |                                       |       

26



|                                                                |  | Three   months ended |      
|--------------------------------------------------------------- |  | -------------------- | -----
|                                                                |  |                      |      
|As a percentage of net revenues:                                |  | Sept. 30   2004      |      
|                                                                |  |                      |      
|Net revenues                                                    |  |                      | 100.0
|Costs and   expenses:                                           |  |                      |      
|Direct costs                                                    |  |                      | 58.5 
|Selling and marketing                                           |  |                      | 6.5  
|General and administrative                                      |  |                      | 27.1 
|Restructuring and other charges                                 |  |                      | 1.3  
|Depreciation and amortization                                   |  |                      | 5.1  
|                                                                |  |                      |      
|Income   (loss) from continuing operations                      |  |                      | 1.5  
|Interest   income, net                                          |  |                      | 0.9  
|                                                                |  |                      |      
|Income   (loss) from continuing operations before income taxes  |  |                      | 2.4  
|Provision   (benefit) for income taxes                          |  |                      |     
|                                                                |  |                      |      
|Income   (loss) from continuing operations, net of income taxes |  |                      | 2.4  
|                                                                |  |                      |      

LIQUIDITY AND CAPITAL RESOURCES

Our
  principal capital requirement is to fund working capital to support our growth,
  including potential future acquisitions and potential contingent payments due
  to prior acquisitions. We maintain a $15.0 million revolving credit facility
  that expires on January 31, 2005, of which $15.0 million may be used for letters
  of credit and additional borrowing. The credit facility bears interest at the
  adjusted LIBOR rate plus 2.25% or the lenders announced prime rate at
  our option. At September 30, 2004, there was approximately 1,735,000 of standby
  letters of credit outstanding under this facility.  The credit facility
  is collateralized by first priority liens and security interests in our assets.
  The credit facility contains certain restrictive covenants, including, but not
  limited to, limitations on the amount of loans we may extend to officers and
  employees, the payment of dividends, the repurchase of common stock and the
  incurrence of additional debt. The credit facility requires the maintenance
  of certain financial convents including positive quarterly net income after
  taxes from continuing operations, minimum cash flow from operations to debt
  service of 1.35 to 1.0, a ratio of debt to tangible net worth not to exceed
  0.65 to 1.0 and a minimum ratio of liquid assets to current liabilities of 1.25
  to 1.0. As of September 30, 2004, there were no outstanding borrowings
  under this facility and we were in compliance with all of the financial covenants
  of the facility.

In April 2004, we issued a letter of credit in the amount of $935,000, which was used to guarantee the performance bond of CPAS Systems, Inc., or CPAS, required by a project contract that is anticipated to be completed in August 2005.  On October 1, 2004, we acquired 45% of the common stock of CPAS.  In conjunction with this guarantee, we entered into an indemnification agreement with CPAS which pledges to hold harmless, indemnify and make us whole from and against any and all amounts actually claimed or withdrawn and other business related consideration.  In accordance with FIN 45, we recorded a liability for the fair value of $935,000 in accrued liabilities and an equal receivable in prepaid expenses and other current assets.  The recorded amounts will be eliminated if we are released from the risk upon expiration or settlement of the obligation.

In addition to the letters of credit issued under the credit facility mentioned above, we had letters of credit totaling approximately $3,151,000, which were collateralized by certain securities in our long-term investment portfolio at September 30, 2004.  Furthermore, OPC had a letter of credit outstanding in the amount of approximately $138,000 secured by a certificate of deposit.  The majority of these letters of credit were issued to secure performance bonds and to meet various facility lease requirements.

27



Net cash from continuing operations provided by operating activities was $22.8 million, $1.8 million and $7.7 million in the fiscal years ended September 30, 2004, 2003 and 2002. Net cash from continuing operations provided by operating activities for fiscal year ended September 30, 2004 resulted primarily from income from continuing operations, net of income taxes, adjusted for depreciation and amortization, a decrease in accounts receivable due to increased collection activities and an increase in income taxes payable resulting from income tax return due to our net operating losses.  Net cash from continuing operations provided by operating activities for fiscal year ended September 30, 2003 resulted primarily from loss from continuing operations, net of income taxes, offset by non-cash charges for depreciation and amortization.  Net cash from continuing operations provided by
operating activities for fiscal year ended September 30, 2002 resulted primarily from income from continuing operations, net of income taxes, adjusted for depreciation and amortization and non-cash charge for the tax benefit of stock operations exercised offset by an increase in accounts receivable balances resulting from increased sales.

Net
  cash from continuing operations used in investing activities was $9.9 million
  in the fiscal year ended September 30, 2004, $9.3 million in the fiscal
  year ended September 30, 2003, and $64.7 million in the fiscal year
  ended September 30, 2002.  Net cash from continuing operations used
  in investing activities for the fiscal year ended September 30, 2004 resulted
  primarily from our acquisition of EPOS and capital expenditures offset by net
  maturities of securities available-for-sale.  Net cash from continuing
  operations used in investing activities for the fiscal year ended September
  30, 2003 primarily consisted of net purchases of securities available-for-sale
  and capital expenditures.  Net cash from continuing operations used in
  investing activities in the fiscal year ended September 30, 2002 primarily resulted
  from the acquisition of OPC for approximately $70.6 million (equivalent to $30.7
  million, net of cash, restricted cash and short-term and long-term investments
  acquired) and the acquisition of GSC for approximately $8.4 million offset by
  net maturities of securities available-for-sale.

Capital expenditures, including equipment acquired under capital lease but excluding assets acquired or leased through business combinations, were approximately $3.4 million in the fiscal year ended September 30, 2004, $1.7 million in the fiscal year ended September 30, 2003, and $2.1 million in the fiscal year ended September 30, 2002. Capital expenditures were primarily attributable to our purchase of an e-procurement software solution and related assets for $1.3 million, geographic expansion, establishment of child support payment processing centers, other project-related capital expenditures and development of our technology infrastructure. Future capital expenditures may continue to fluctuate. We anticipate that we will continue to have capital expenditures in the near-term related to, among other things, purchases of computer equipment and software to enhance our operations
and support our growth, as well as potential expenditures related to the establishment or expansion of child support payment processing and other transaction processing centers.

Net cash from continuing operations provided by financing activities totaled $2.2 million in the fiscal year ended September 30, 2004 and $80.8 million in the fiscal year ended September 30, 2002 compared to net cash from continuing operations used in financing activities of $5.5 million in the fiscal year ended September 30, 2003.  Net cash from continuing operations provided by financing activities for the fiscal year ended September 30, 2004 resulted primarily from proceeds from the issuance of Class B common stock from the exercise of stock options and issuance of stock under our employee stock purchase plan.  Net cash from continuing operations used in financing activities for the fiscal year ended September 30, 2003 resulted primarily from the repurchase of Class B common stock under our stock repurchase program, partially offset by the issuance of Class B common stock.  Net cash from



continuing operations provided by financing activities in the fiscal year ended September 30, 2002 was primarily the result of the proceeds of our follow-on stock offering and the proceeds from the exercise of employee stock options, partially offset by the repayment of the bank line of credit.

We expect to generate cash flows from operating activities over the long-term; however, we may experience significant fluctuations from quarter to quarter resulting from the timing of the billing and collection of large project milestones.  We anticipate that our existing capital resources, including our cash balances, cash that we anticipate will be provided by operating activities and our available credit facilities will be adequate to fund our operations for at least the next 12 months. There can be no assurance that changes will not occur that would consume available capital resources before such time.  Our capital requirements and capital resources depend on numerous factors, including potential acquisitions; contingent payments earned; new and existing contract requirements; the timing of the receipt of accounts receivable, including unbilled receivables; legal costs incurred to comply
with the DOJ investigation; our ability to draw on our bank facility and
employee growth.  To the extent that our existing capital resources are
insufficient to meet our capital requirements, we will have to raise additional
funds. There can be no assurance that additional funding, if necessary, will be
available on favorable terms, if at all.  The raising of additional capital
may dilute our shareholders ownership in us.

28



During the fourth quarter of fiscal year 2003, we initiated a strategic review of our business units.  This review was completed in the fourth quarter of fiscal year 2003, and we decided to renew our focus on our core Government Services businesses while exiting unprofitable or marginal business operations.  As a result of this review, we recorded charges of approximately $19.8 million during the quarter ended September 30, 2003.  This charge was comprised of $18.2 million of goodwill, intangible and tangible asset impairment charges, $882,000 related to the closure of several offices, net of estimated sublease income of $115,000, and $707,000 of severance related to the termination of employees in the exited businesses, of which $529,000 was paid in fiscal year 2003.  The restructuring plan included the termination of approximately 50 employees, of which approximately 20 employees
were terminated in the three months ended September 30, 2003 and the remaining employees were terminated in the three months ended December 31, 2003. Goodwill and intangible asset impairment charges of approximately $1.3 million were incurred for the fiscal year ended September 30, 2004, of which approximately $571,000 was included in restructuring charges and approximately $752,000 was included in loss from discontinued operations.  Additional severance of $2.3 million, of which approximately $1.5 million resulted from the signing of a termination agreement with our former chief executive officer, was included in restructuring and other charges and approximately $830,000 was included in loss from discontinued operations.  Also included in restructuring charges for the fiscal year ended September 30, 2004 was $1.1 million comprised of $222,000 related to estimated closure costs for one additional office and $854,000 for closure of our Walnut Creek, California office, net of estimated
sublease income of $1.5 million.

As a result of the acquisition of OPC in July 2002, we assumed certain liabilities for restructuring costs that OPC had previously recognized in connection with the involuntary termination of employees of $2.7 million and the consolidation of facilities of $546,000, net of sublease income of $295,000. The assumed severance liability included severance for 27 individuals and the closing of certain office space.  During fiscal year 2004, we made cash payments of $501,000 for severance and $91,000 for facilities.

During the fiscal year ended September 30, 2004, we made restructuring cost cash payments of $2.0 million for severance and $1.1 million for facilities.

Due to the current economic climate, the performance bond market has substantially changed, 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.

Disclosures About Contractual Obligations And Commercial Commitments

As of September 30, 2004, we had the following obligations and commitments to make future payments under contracts, contractual obligations and commercial commitments (in thousands):

|                             |  | Payments due by period |       
|---------------------------- |  | ---------------------- | ------
|                             |  |                        |       
|Contractual Cash Obligations |  | Total                  |       
|                             |  |                        |       
|Debt,   including interest   |  | $                      | 218   
|Operating   leases           |  |                        | 11,350
|Restructuring   liability    |  |                        | 2,033 
|                             |  |                        |       
|Total                        |  | $                      | 13,601
|                             |  |                        |       

29



|                             |  | Amount of commitment expiration per period |       
|---------------------------- |  | ------------------------------------------ | ------
|                             |  |                                            |       
|Other Commercial Commitments |  | Total   amounts   committed                |       
|                             |  |                                            |       
|Standby   letters of credit  |  | $                                          | 5,024 
|Performance   bonds          |  |                                            | 27,115
|                             |  |                                            |       
|Total                        |  | $                                          | 32,139
|                             |  |                                            |       

Recent Accounting Standards

In March 2003, the Emerging Issues Task Force, EITF, reached a consensus on recognition and measurement guidance discussed under EITF Issue No.  03-01.  The consensus clarified the meaning of other-than-temporary impairment and its application to debt and equity investments accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other investments accounted for under the cost method.  The recognition and measurement guidance for which the consensus was reached in March 2004 is to applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004.  We will evaluate the effect of adopting the recognition and measurement guidance when the final consensus is reached.  The consensus reached in March 2004, also provided for certain disclosure requirements for fiscal years ending after June
15, 2004.  In September 2004, the FASB issued a final FASB Staff Position that delays the effective date for the measurement and recognition guidance for all investments within the scope of EITF Issue No. 03-1.

In
  October 2004, the EITF reached a consensus on determining whether to aggregate
  operating segments that do not meet the quantitative thresholds discussed under
  EITF No. 04-10.  The consensus provided guidance on aggregating operating
  segments if an operating segment does not meet one quantitative threshold. 
  It allows an entity to combine information segments to produce a reportable
  segment if the segments have similar economic characteristics and share a majority
  of aggregation criteria.  The consensus is effective for fiscal year ending
  after October 13, 2004.

The American Job Creation Act of 2004 (AJCA), which has been approved by Congress
  and is expected to be signed by the President, replaces an export incentive
  with a deduction from domestic manufacturing income. If signed, this change
  should have no material impact on the Company's income tax provision.

Factors That May Affect Future Results

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.

Our quarterly net revenues, operating results and cash flows are volatile, may fluctuate significantly from quarter to quarter and may be difficult to forecast, which may cause the market price of our Class B common stock to decline.

Our net revenues, operating results 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.  Among other things, these factors include:

| | the number, size and scope   of projects in which we are engaged;                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                             
| | economic conditions in the   markets we serve;                                                                                                                              
|  |                                                                                                                                                                             
| | demand for our services   generated by strategic partnerships and certain prime contractors;                                                                                
|  |                                                                                                                                                                             
| | our consultant utilization   rates and the number of billable days in a particular quarter which may be   significantly impacted by increased vacations and public holidays;
|  |                                                                                                                                                                             

30



| | the seasonality of OPCs business,
due primarily to the fact that the majority of federal and state personal income
tax payments are made in March and April and real estate and personal property
tax payments may be made annually or semi-annually in many
jurisdictions;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                             
| | changes to processing fees   charged to our EPP business unit by its credit/debit card partners and   financial institutions for processing payment transactions;                                                                                                           
|  |                                                                                                                                                                                                                                                                             
| | the contractual terms and   degree of completion of projects;                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                             
| | any delays or costs   incurred in connection with, or early termination of, a project;                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                             
| | the amount and timing of   costs related to our sales and marketing and other initiatives;                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                             
| | variability of software   license fee revenue in a particular quarter;                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                             
| | start-up costs incurred in   connection with the initiation of large projects;                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                             
| | the integration of   acquisitions, including EPOS, without disruption to our other business   activities; and                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                             
| | our ability to staff   projects with our own salaried employees rather than hourly employees, hourly   independent contractors and sub-contractors.                                                                                                                         

The timing and realization of opportunities in our sales pipeline make the timing and variability of net revenues difficult to forecast. A high percentage of our operating expenses, particularly personnel, facility and depreciation and amortization, are relatively fixed in advance. Because of the variability of our quarterly operating results, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, should not be relied upon as indications of future performance and may result in volatility and declines in the price of our Class B common stock. In addition, our operating results may from time to time fall below the expectations of analysts and investors. If so, the market price of our Class B common stock may decline significantly.

We rely on small numbers of projects, customers and target markets for significant portions of our net revenues, and our operating results and cash flows may decline significantly if we cannot keep or replace these projects or clients or if conditions in our target markets deteriorate.

We have derived, and believe that we will continue to derive, a significant portion of our net revenues from a limited number of clients. The completion or cancellation of a large project or a significant reduction in its scope would significantly reduce our net revenues and cash flows. Most of our contracts are terminable by the client following limited notice and without significant penalty to the client. If any of our large clients or prime contractors terminates its relationship with us, we will lose a significant portion of our net revenues and cash flows.

For the fiscal year ended September 30, 2004, our ten largest clients represented 57.6% of our total net revenues, including revenues from federal taxpayers under the Internal Revenue Service, IRS, contract which accounted for 12.2% of our total net revenues.  The existing contract with the IRS allows the IRS to terminate our services at any time for any or no reason. Even though our net revenues are not funded by the IRS, the loss of the IRS as a client, or a decrease in IRS-related transactions because of increased competition from another IRS-authorized service provider, would result in a reduction in our net revenues and cash flows.

During the fiscal year ended September 30, 2004, we performed services for three different state governments as a subcontractor to ACS, accounting for 11.1% of our total net revenues.  In June 2004, we were notified by ACS of its decision not to renew our subcontract on its Ohio child support contract effective June 30, 2004.  For the year ended September 30, 2004, the revenues from the Ohio subcontract accounted for approximately 4.3% of our total net revenues. The volume of work performed for specific clients or prime contractors is likely to vary from period to period, and a client or prime contractor in one period may elect not use our services in a subsequent period.  We cannot predict if ACSs decision will affect the other two subcontracts under our existing relationship with ACS or the future revenue associated with those subcontracts.  The remaining two subcontracts
have base contract renewal dates of June 30, 2006 and May 31, 2007.  The loss of revenues from those subcontracts could adversely affect future operating results and cash flows.

31



As a result
of our focus in specific markets, economic and other conditions that affect the
companies and government agencies in these markets could also result in a
reduction in our net revenues and cash flows. Because we derive a significant
portion of our net revenues from a limited number of clients, we have several
large accounts receivable and unbilled receivable balances of $11.3 million. At
September 30, 2004, unbilled receivables for two clients accounted for 42.3% and
29.6% of total unbilled receivables. At September 30, 2004, total accounts
receivable and unbilled receivables, for these two clients accounted for 30.9%
and 10.0%, respectively, of total net accounts receivable and unbilled
receivables of $6.9 million. Any dispute, early contract termination or other
collection issues could have a material adverse impact on our financial
condition and results of operations. The imposition of significant penalties for
our failure to meet scheduled delivery requirements could also have a material
adverse effect on us.

Our markets are highly competitive; if we do not compete effectively for any reason, we could face price reductions, reduced profitability and loss of market share.

The information technology, transaction processing and consulting services markets are highly competitive and are served by numerous international, national and local firms. We may not be able to compete effectively in these markets. Market participants include systems consulting and integration firms, including international consulting firms and related entities, the internal information systems groups of our prospective clients, professional services companies, hardware and application software vendors, and divisions of large integrated technology companies and outsourcing companies. Many of these competitors have significantly greater financial, technical and marketing resources, generate greater net revenues and have greater name recognition than we do. In addition, there are relatively low barriers to entry into the information technology and consulting services markets, and we have faced, and expect



to continue to face, additional competition from new entrants into the information technology and consulting services markets.

We believe that our ability to compete also depends in part on a number of competitive factors outside our control, including:

| |  | the ability of our clients   or competitors to hire, retain and motivate project managers and other senior   technical staff;
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                              
| |  | the ownership by   competitors of software used by potential clients;                                                        
| |   |                                                                                                                              
| |  | the price at which others   offer comparable services;                                                                       
| |   |                                                                                                                              
| |  | the ability of our clients   to perform the services themselves; and                                                         
| |   |                                                                                                                              
| |  | the extent of our   competitors responsiveness to client needs.                                                             

If we do not compete effectively on one or more of these competitive factors, our revenue growth and operating margins could decline and our ability to execute our business strategy will be impaired.

If we fail to accurately estimate the resources necessary to meet our obligations under fixed price contracts or the volume of transactions or transaction dollars processed under our transaction-based contracts, we may incur losses on these contracts.

Underestimating
the resources, costs or time required for a fixed price project or a
transaction-based contract or overestimating the expected volume of transactions
or transaction dollars processed under a transaction-based contract would cause
our costs under fixed price contracts to be greater than expected and our fees
under transaction-based contracts to be less than expected, and our related
profit, if any, to be less. Under fixed price contracts, we generally receive
our fee if we meet specified deliverables such as completing certain components
of a system installation. For transaction-based contracts, we receive our fee on
a per-transaction basis or as a percentage of dollars processed, such as the
number of child support payments processed or tax dollars processed. To earn a
profit on these contracts, we rely upon accurately estimating costs involved and
assessing the probability of meeting the specified objectives or realizing the
expected number or average dollar amounts of transactions within the contracted
time period. A failure by a client to adequately disclose in their request for
proposal their existing systems, current interfaces, complete functional
requirements and historical payment and transaction volumes could

32



result in our
underestimating the work required to complete a project.  If we fail to
estimate accurately the factors upon which we base our contract pricing, or we
are unable to successfully obtain change orders, we may incur losses on those
contracts or be unable to complete our performance obligations. During the year
ended September 30, 2004, 19.4% of our net revenues were generated from fixed
price contracts and 62.3% of our net revenues were generated from
transaction-based contracts. We believe that the percentage of net revenues
attributable to fixed price and transaction-based contracts will continue to be
significant for the foreseeable future.

We will need to hire and successfully
  integrate additional qualified personnel in our accounitng function. If we encounter
  difficulties in attracting or retaining qualified accounting staff, we may not
  be able to remedy identified weaknesses in our accounting function.

In connection with the audit of our financial statements for fiscal 2004, our independent auditors advised that we had a
material weakness in our internal control structure related to insufficient personnel resources and technical accounting
expertise within our accounting function. As a result of the recent relocation of our accounting function from
Walnut Creek, California to Reston, Virginia, we have had to restaff many of the positions in that function, and
we have not yet filled all of the open positions. As a part of our remediation of the material weakness indentified by our auditors,
we will need to hire additional qualified personnel to fill open positions within our accounting, financial planning, and compliance functions. The current employment
market for qualified individuals with accounting backgrounds is very tight, and we may encounter difficulty in identifying, attracting or retaining
such individuals. If we are unable to successfully staff up our accounting function, we might not be able to remedy the indentified material weakness.

Our Class B common stock price and trading volume have been and could continue to be volatile, which could result in substantial losses for investors in our Class B common stock.

Our Class B common stock price and trading volume have been and could continue to be volatile. These price fluctuations may be rapid and severe and may leave investors little time to react. Factors that affect the market price of our Class B common stock include:

| |  | quarterly variations in operating   results;                                                                                                                                                                        
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                     
| |  | developments with respect   to specific projects;                                                                                                                                                                   
| |   |                                                                                                                                                                                                                     
| |  | developments in our   organization, such as our restructuring in the fourth quarter of fiscal year   2003 and the consolidation of the Walnut Creek and Reston offices during the   second half of fiscal year 2004;
| |   |                                                                                                                                                                                                                     
| |  | announcements of   technological innovations or new products or services by us or our   competitors;                                                                                                                
| |   |                                                                                                                                                                                                                     
| |  | general conditions in the   information technology industry or the industries in which our clients   compete;                                                                                                       
| |   |                                                                                                                                                                                                                     
| |  | changes in earnings   estimates by securities analysts or us;                                                                                                                                                       
| |   |                                                                                                                                                                                                                     
| |  | general economic and   political conditions such as recessions and acts of war or terrorism; and                                                                                                                    
| |   |                                                                                                                                                                                                                     
| |  | integration of acquired   assets and companies.                                                                                                                                                                     

Fluctuations in the price of our Class B common stock could cause investors to lose all or part of their investment.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules, are creating uncertainty for companies such as ours. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards.  This investment may result in increased general and administrative expenses for outside services and a diversion of management time and attention from revenue-generating activities.

33



An investigation involving the child support payment processing industry could force us to incur unusual expenses and may negatively affect our business reputation.

In June 2003, we received a subpoena from a grand jury in the Southern District of New York to produce certain documents pursuant to an investigation by the Antitrust Division of the DOJ involving the child support payment processing industry. We have fully cooperated, and intend to continue to cooperate fully, with the subpoena and with the DOJs investigation. On November 20, 2003, the DOJ granted us conditional amnesty pursuant to the Antitrust Divisions Corporate Leniency Policy. Consequently, the DOJ will not bring any criminal charges against us and our officers, directors and employees, as long as we continue to comply with the Corporate Leniency Policy, which requires, among other things, our full cooperation in the investigation and restitution payments if it is determined that parties were injured as a result of impermissible anticompetitive conduct.  We anticipate that we will
incur additional expenses as we continue to cooperate with the investigation. Such expenses, any restitution payments that we are required to make and any negative publicity in connection with the investigation could compromise our financial results and damage our reputation.

Additionally, we cannot estimate what impact, if any, that our involvement in this investigation will have on our ability to compete and win new child support payment processing opportunities.

Within our EPP Segment, OPCs business model is continuing to evolve, it is difficult to evaluate OPCs business and its ability to maintain profitability.

At the end of July 2002, we acquired OPC, which had a history of losses. Although OPC has cumulatively increased revenues since the acquisition and has reduced certain operating expenses as we integrated this acquisition and is currently profitable, there can be no assurance that OPC will maintain profitability in the future.

34



The use of
credit and debit cards and electronic checks to make payments to government
agencies is still relatively new and evolving.  To date, OPCs
business has consisted primarily of providing credit and debit card payment
options for the payment of federal and state personal income taxes, real estate
and personal property taxes, business taxes and fines for traffic violations and
parking citations.  Payment by electronic check is an additional payment
option that OPC has implemented for electronic transactions.  Because OPC
has only a limited operating history under our management, it is difficult to
evaluate its business and prospects and the risks, expenses and difficulties
that we may face in implementing OPCs business model. OPCs business
model is based on consumers willingness to pay a convenience fee, in
addition to their required government or other payment, for the use of
OPCs credit or debit card and electronic check payment option.  Our
success with respect to OPC will depend on maintaining OPCs relationship
with the IRS and on maintaining existing, and developing additional
relationships with state and local government agencies, especially state taxing
authorities, and their respective constituents.  We may not be able to
develop new OPC relationships or maintain existing OPC relationships.  In
addition, if consumers are not receptive to paying a convenience fee, if card
associations change their rules and do not allow us to charge the convenience
fees, or if credit or debit card issuers eliminate or reduce the value of
rewards obtained under their respective rewards programs, demand for OPCs
services will decline or fail to grow.  OPC is charged processing fees by
its credit/debit card partners and financial institutions for processing
payments. The processing fees OPC is charged can be changed with little or no
notice. Any increase in the fees charged to OPC would raise costs and reduce
margins, which could harm our profitability.

Currently, OPC processes credit and debit card payments on behalf of VISA issuing banks for tax payments under a VISA tax pilot program that was created in March 2002.  The tax pilot program is scheduled to end in December 2004.  If VISA does not extend the tax pilot program or make it a permanent program, OPC would be limited in its ability to accept VISA cards, which would cause us to lose business and hurt our revenue and cash flow.

Demand for OPCs services would also be adversely affected by a decline in the use of the Internet.  Factors that could reduce the level of Internet usage or electronic commerce include the actual or perceived lack of security or privacy of information, traffic congestion or other Internet access delays, excessive government regulation, increases in access costs, or the unavailability of cost-effective high speed service.

Our ability to grow our business will suffer if we are unable to attract, successfully integrate and retain qualified personnel and key employees.

If we are unable to attract, retain, train, manage and motivate skilled employees, particularly project managers and other senior technical personnel, our ability to adequately manage and staff our existing projects and to bid for or obtain new projects could be impaired. There is significant competition for employees with the skills required to perform the services we offer. In particular, qualified project managers and senior technical and professional staff are in great demand worldwide. In addition, we require that many of our employees travel to client sites to perform services on our behalf, which may make a position with us less attractive to potential employees. We may not be able to identify and successfully recruit and integrate a sufficient number of skilled employees into our operations, which would compromise our ability to pursue our growth strategy. Our success also depends upon the
continued services of a number of key employees, including our chief executive officer and the leaders of our strategic business units. Any of our employees may terminate their employment at any time.

In June 2004, we completed the consolidation of our offices in Walnut Creek, California and Reston, Virginia.  Some of the employees in our Walnut Creek office did not relocate to Reston and elected to terminate their employment with us as a result.  In addition, we may face difficulties integrating employees from our Walnut Creek office and newly hired employees into our Reston office.  The loss of the services of any key employee could significantly disrupt our operations. In addition, if one or more of our key employees resigns to join a competitor or to form a competing company, the loss of such personnel and any resulting loss of existing or potential clients to any such competitor could harm our competitive position.

Because we sometimes work with third
parties and use third party software in providing products and services to
clients, any failure by these third parties to satisfactorily perform their
obligations could hurt our reputation, operating results and
competitiveness.

35



We frequently
join with other organizations to bid and perform an engagement.  In these
engagements, we may engage subcontractors or we may act as a subcontractor to
the prime contractor of the engagement. We also use third party software or technology
providers to jointly bid and perform engagements. Our ability to service some of
our clients depends to a large extent on our use of various software programs
that we license from a small number of primary software vendors. In these
situations, we depend on the software, resources and technology of these third
parties in order to perform work under the engagement. We also rely on a third
party co-location facility for our primary data center and we utilize third
party processors to complete payment transactions and third party software
providers for system, security and infrastructure facilities. Failure of third
parties to meet their contractual obligations or other actions or failures
attributable to these third parties or their products or to the prime contractor
or subcontractor could adversely impact a project, damage our reputation and
compromise our ability to attract new business. In addition, the inability to
negotiate terms of a contract with a third party, the refusal or inability of
these third parties to permit continued use of their software, services or
technology by us, our inability to gain access to software that has been placed
in escrow by third parties, or the discontinuance or termination by the client
or prime contractor of our services or the services of a key subcontractor,
would harm our operating results and the competitiveness of our products and
services and may adversely affect our ability to serve new clients.  If we
are unable to meet our contractual requirements with our clients, we could be
subjected to claims by our clients.

We have completed numerous
acquisitions and may complete others, which could increase our costs or be
disruptive to our business.

One component of our business strategy is to expand our presence in new or existing markets by acquiring additional businesses. From October 1, 2001 through September 30, 2004, we acquired four businesses using cash and Class B common stock, with some of those acquisitions also involving assumed liabilities and contingent payments. Acquisitions involve a number of special risks, including:

| |  | failure to realize the   value of the acquired assets, businesses or projects;                                                                         
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                        
| |  | diversion of managements   attention;                                                                                                                 
| |   |                                                                                                                                                        
| |  | failure to retain key   personnel;                                                                                                                     
| |   |                                                                                                                                                        
| |  | entrance into markets in   which we have limited or no prior experience;                                                                               
| |   |                                                                                                                                                        
| |  | increased general and   administrative expenses;                                                                                                       
| |   |                                                                                                                                                        
| |  | client dissatisfaction or   performance problems with acquired assets, businesses or projects;                                                         
| |   |                                                                                                                                                        
| |  | write-offs due to   impairment of goodwill and other intangible assets and other charges against   earnings;                                           
| |   |                                                                                                                                                        
| |  | assumption of unknown   liabilities;                                                                                                                   
| |   |                                                                                                                                                        
| |  | the potentially dilutive   issuance of our common stock, the use of significant amounts of cash or the   incurrence of substantial amounts of debt; and
| |   |                                                                                                                                                        
| |  | other unanticipated events   or circumstances.                                                                                                         

We may not be able to identify, acquire or profitably manage additional businesses or integrate successfully any acquired businesses without substantial expense, delay or other operational or financial problems. Without additional acquisitions, we are unlikely to maintain historical growth rates.

If our EPP business units clients or credit/debit card issuers cease to publicize our services or adversely change the manner in which our services are promoted, consumer use of its services may slow, and we may suffer a large increase in advertising costs.

Currently, our EPP business units clients and credit/debit card issuers provide a significant portion of the publicity for our services, without any charge to us.  If clients or credit/debit card issuers cease to publicize our services, or charge us for this publicity, advertising costs will increase substantially, which could hurt our margins and profitability. While the EPP business unit endeavors in its client agreements to require such clients to undertake such advertising activities, many of the clients and payment card issuers have no obligation to continue to provide this publicity, and there are no assurances that they will continue to do so.  In addition, the clients may publicize other services, including those of competitors.  For example, the IRSs tax year 2002 Form 1040 instruction booklet listed OPCs name before a competitors name in regard to providers



of electronic credit/debit card payment services, whereas for the 2003 tax year OPCs name was listed second.

36



In addition, OPC advertises in conjunction with its credit/debit card partners under co-operative advertising programs. If OPCs credit/debit card partners fail to contribute to the co-operative advertising programs, OPCs ability to advertise may be compromised.

We depend on government agencies for our net revenues and the loss or decline of existing or future government agency funding could cause our net revenues and cash flows to decline.

For the fiscal year ended September 30, 2004, approximately 31.8% of our net revenues were derived from federally mandated and primarily federally funded child support transaction processing services fees and approximately 32.5% of our net revenues were derived from convenience fees earned by our EPP business unit with respect to payments made by constituents primarily to government agencies.  The balance of our net revenues was derived from other services provided to government agencies.  Some of these net revenues, particularly our FMS and State of Missouri contracts, may be subject to state and local government agency spending fluctuations. These government agencies may be subject to budget cuts, budgetary constraints, a reduction or discontinuation of funding or changes in the political or regulatory environment that may cause government agencies to terminate projects, divert funds or delay
implementation. These government agencies may terminate most of these contracts at any time without cause.  In addition, revisions to or repeals of mandated statutes and regulations, including changes to the timing of required compliance, may cause government agencies to divert funds. A significant reduction in funds available for government agencies to purchase professional services or business solutions would significantly reduce our net revenues and cash flows. The loss of a major government client, or any significant reduction or delay in orders from such a client, would also significantly reduce our net revenues and cash flows. Additionally, government contracts are generally subject to audits and investigations by government agencies.  If the results of these audits or investigations are negative, our reputation could be damaged, contracts could be terminated or significant penalties could be assessed.  If a contract is terminated for any reason, our ability to fully recover
certain amounts may be impaired.

Our failure to deliver error-free products and services could result in reduced payments, significant financial liability or additional costs to us, as well as negative publicity.

Many of our engagements involve projects that are critical to the operations of our clients businesses and provide benefits that may be difficult to quantify. The failure by us, or by third parties on an engagement in which we are a subcontractor, to meet a clients expectations in the performance of the engagement could damage our reputation and compromise our ability to attract new business. We have undertaken, and may in the future undertake, projects in which we guarantee performance based upon defined operating specifications or guaranteed delivery dates. We also have undertaken, and may in the future undertake, projects that require us to obtain a performance bond from a licensed surety and to post the performance bond with the client. Unsatisfactory performance or unanticipated difficulties or delays in completing such projects may result in termination of the contract, client
dissatisfaction and a reduction in payment to us, payment of material penalties or material damages by us as a result of litigation or otherwise, or claims by a client against the performance bond posted by us. In addition, unanticipated delays could necessitate the use of more resources than we initially budgeted for a particular project, which could increase our costs for that project.

Our EPP business units electronic payment services and our GBPO business units child support payment processing services are designed to provide payment management functions and, in the case of some of our child support payment processing contracts, serve to limit our clients risk of fraud or loss in effecting transactions with their constituents.  As electronic services become more critical to our clients, we may be subjected to claims or fines regarding our alleged liability for the processing of fraudulent or erroneous transactions. Our services depend on hardware, software and supporting infrastructure that is internally developed, purchased and licensed from third parties.  Although we conduct extensive testing, software may contain defects or programming errors, or may not properly interface with third party systems, particularly when first introduced or when new versions



are released.  In addition, we may experience disruptions in service from third-party providers. To the extent that defects or errors are undetected by us in the future or cannot be resolved satisfactorily or in a timely manner once detected, our business could suffer.  If one or more liability claims were brought against us, even if unsuccessful, their defense would likely be time consuming, costly and potentially damaging to our reputation.

37



The software products we provide compete in markets that are rapidly changing and we must develop, acquire and introduce new products and technologies to grow our net revenues and remain competitive.

The markets for products we provide are characterized by rapid technological change, changes in client demands and evolving industry standards.  As a result, our future success will continue to depend upon our ability to develop new products or product enhancements that address the future needs of our target markets and to respond to these changing standards and practices.  We may not be successful in developing, introducing and marketing new products or product enhancements on a timely and cost effective basis, or at all, and our new products and product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance.  If we are unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or client requirements, or if new products or
new versions of existing products do not achieve market acceptance, our business would be seriously harmed.  In addition, our ability to develop new products and product enhancements is dependent upon the products of other software vendors.  If the products of such vendors have design defects or flaws, or if such products are unexpectedly delayed in their introduction, our business could be seriously harmed.  Software products as complex as those offered by us may contain undetected defects or errors particularly when first introduced or as new versions are released.  Although we have not experienced significant adverse effects resulting from software errors, we cannot be certain that, despite testing by us and our clients, defects or errors will not be found in new products or enhancements after general release, resulting in loss of or delay in market acceptance, which could seriously harm our business.

If we are unable to obtain adequate or affordable insurance coverage or sufficient performance bonds for any reason, 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 a variety of different business risks including, but not limited to, errors and omissions, directors and officers, general liability and workers compensation policies. There can be no assurance that we can maintain the same scope and amount of insurance coverage on reasonable terms or obtain such insurance at all.  Our inability to renew policies or maintain the same level of coverage would increase our risk exposure and could expose us to significant liability claims in the future.  Any claims against our policies may impact our ability to obtain such insurance on reasonable terms, if at all.  Increased premiums or a claim made against a policy could cause our financial results to suffer and impair our ability to bid for future contracts.

We have undertaken, and may in the future undertake, projects that require us to obtain a performance bond from a licensed surety and post the performance bond with the client.  There can be no assurance that such performance bonds will continue to be available on reasonable terms, if at all.  Our inability to obtain performance bonds or a reduction in our bonding capacity would compromise our capacity to obtain additional contracts. Increased premiums or a claim made against a performance bond could hurt our earnings and cash flow and limit our ability to bid for future contracts.

A decline in the economic climate could adversely affect demand for our products and services, which could cause us to lose revenue and could hurt our margins and profitability.

There are
some areas of our business that experience increasing pricing pressures from
competitors as well as from clients seeking to control costs.  Some of our
competitors are capable of operating at significant losses for extended periods
of time, increasing pricing pressure on our products and services.  If we
do not maintain competitive pricing, the demand for our products and services,
as well as our market share, may decline.  From time to time, in responding
to competitive pressures, we lower the prices of our products and
services.  If we are unable to reduce our costs or improve operating
efficiencies when we offer such lower prices, our net revenues and margins will
be adversely affected.

38



A significant
amount of our EPP business units net revenues are generated primarily
based on convenience fees charged as a percentage of dollars processed for
income taxes and other payments.  Income taxes are dependent on the amount of income earned by
taxpaying citizens and the prevailing tax rates.  A decline in economic
conditions could reduce the per capita income of citizens, and thus reduce the
amount of income tax payments consumers remit to government entities, which may
reduce our revenues from convenience fees.  A reduction in income tax rates
may also reduce the amount of income tax payments consumers remit to government
entities, which may likewise reduce our revenues from convenience fees.

We could suffer material losses if our systems or operations fail or are disrupted.

Any system failure, including network, software or hardware failure or operations disruptions, whether caused by us, a third party service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortage, capacity constraints, health epidemics or terrorist attacks, could cause interruptions, delays in our business, loss of data or damage to our reputation.  Any system failure in our EPP units business, particularly during income tax season, could significantly harm our reputation, and cause our results of operations and financial condition to suffer. In addition, if our mail, communications or utilities are disrupted or fail, our operations, including our child support transaction processing, could be suspended or interrupted, we could incur contractual penalties. Our property insurance and business interruption insurance may not be adequate to compensate us for



all losses that may occur as a result of any system or operational failure or disruption.

If we fail to adapt our business to changes in economic or business conditions, our financial results could suffer.

Personnel expenses represent a significant percentage of our operating expenses and are relatively fixed in advance of any particular quarter. We manage our personnel utilization rates by carefully monitoring our needs and anticipating personnel increases based on specific project requirements. To the extent net revenues do not increase at a rate commensurate with these additional expenses, or  we fail to align our operating expenses with prevailing economic or business conditions, our financial results would suffer.

Capacity constraints could compromise our ability to process transactions, which could harm our reputation and cause us to lose business.

A constraint in our capacity to process transactions could impair the quality and availability of service.  Capacity constraints may cause unanticipated system disruptions, impair quality and lower the level of service, which could lead to damage to our reputation and lost sales.  Although we believe that there is sufficient capacity to accommodate anticipated future growth, there are no assurances that we will not suffer capacity constraints caused by sharp increases in the use of our services.  Due to the large number of tax payments made in March and April, there is an increased risk that our OPC subsidiary will suffer a capacity constraint during that period.

We could become subject to other lawsuits that could result in material liabilities to us or cause us to incur material costs.

Any failure in a clients system or failure to meet a material deliverable could result in a claim against us for substantial damages, regardless of our responsibility for such failure. We cannot guarantee that the disclaimers, limitations of warranty, limitations of liability and other provisions set forth in our contracts will be enforceable or will otherwise protect us from liability for damages. Any claim by a shareholder or derivative action brought by a shareholder could result in a material liability to us. Our insurance, which includes coverage for errors or omissions and directors and officers liability, may not continue to be available on reasonable terms or in sufficient amounts to cover one or more claims, and the insurer may disclaim coverage as to any future claim. The successful assertion of one or more claims against us that exceed available insurance coverage or changes in insurance
policies, including premium increases or the imposition of large deductible or co-insurance requirements, would significantly harm our financial results.

39



If we are unable to protect our intellectual property and proprietary rights, demand for our products and services could be reduced.

The steps we take to protect our intellectual property rights may be inadequate to avoid the loss or misappropriation of that information, or to detect unauthorized use of such information. If we are unable to protect our intellectual property, competitors could market services or products similar to ours, which could reduce demand for our offerings.  We rely on a combination of trade secrets, nondisclosure agreements, licensing agreements and other contractual arrangements, and copyright and trademark laws to protect our intellectual property rights. We also enter into non-disclosure agreements with our employees, subcontractors and the parties we team with for contracts and generally require that our clients enter into such agreements. We also control and limit access to our proprietary information.

We have proprietary software that is licensed to clients pursuant to licensing agreements and other contractual arrangements. Issues relating to the ownership of, and rights to use, software and application frameworks can be complicated, and there can be no assurance that disputes will not arise that affect our ability to resell or reuse such software and application frameworks. A portion of our business also involves the development of software applications for specific client engagements or the customization of an existing software product for a specific client. Ownership of the developed software and the customizations to the existing software are the subject of negotiation with each particular client and is typically assigned to the client. We also develop software application frameworks and may retain ownership or marketing rights to these application frameworks, which may be adapted through further
customization for future client projects. Some of our clients have prohibited us from marketing the software and application frameworks developed specifically for them for a specified period of time or to specified third parties, and others may demand similar or other restrictions in the future.

Infringement claims may be asserted against us in the future that may not be successfully defended. The loss or misappropriation of our intellectual property or the unsuccessful defense of any claim of infringement could prevent or delay our providing our products and services, cause us to become liable for substantial damages, or force us to enter into royalty or licensing agreements.

40



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 10 percentage points from levels at September 30, 2004, the fair value of the portfolio would decline by $2.1 million. We anticipate having the ability to hold our fixed income investments until maturity, and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

Item 8.  Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements for a listing of the financial statements filed with this report.

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

On
  December 17, 2004, we filed a Current Report on Form 8-K reporting that on December
  13, 2004 PricewaterhouseCoopers LLP (PwC) informed us that PwC declined
  to stand for re-election as our independent registered public accounting firm
  following completion of its audit of our financial statements for the year ended
  September 30, 2004. We are in the process of seeking proposals for the fiscal
  year 2005 audit from other independent registered public accounting firms.

PwCs
  audit reports with respect to our financial statements for the fiscal years
  ended September 30, 2002 and 2003 did not contain an adverse opinion or disclaimer
  of opinion and were not qualified or modified as to uncertainty, audit scope
  or accounting principle.

During our fiscal years ended September 30, 2002 and 2003 and the
period commencing October 1, 2003 and ending December 13, 2004, there have been
no disagreements between PwC and us on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PwC would have caused them
to make reference thereto in their reports on the financial statements for such
years.

Except
  as noted in the following paragraph, there have been no reportable events, as
  defined by item 304(a)(1)(v) of Regulation S-K, during our fiscal years ended
  September 30, 2002 and 2003 or the period commencing October 1, 2003 and ending
  December 13, 2004.

On December 14, 2004, PwC advised management and the Audit Committee of
our Board of Directors of a material weakness related to insufficient personnel
resources and technical accounting expertise within our accounting function.

We
  provided PwC with a copy of this disclosure and, received a letter from PwC
  stating that it agrees with this disclosure. A copy of PwC's Letter was filed
  as Exhibit 16.1 to our Current Report on Form 8-K filed on December 17,2004.

Item 9A.  Controls
  and Proceedures

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, 2004. Based on this evaluation, our chief executive officer and chief financial
  officer concluded that, as of September 30, 2004, our disclosure controls and
  procedures were (1) designed to ensure that material information relating to
  the Company, including its consolidated subsidiaries, is made known to our chief
  executive officer and chief financial officer by others within those entities,
  particularly during the period in which this report was being prepared and (2)
  effective, in that they provide reasonable assurance that information

41



required to be disclosed in the reports
  that we file or submit under the Exchange Act is recorded, processed, summarized
  and reported within the time periods specified in the SEC's rules and forms.

In
  connection with the audit of our financial statements for the fiscal year ended
  September, 2004, by our independent auditors and their issuance of an unqualified
  opinion on our consolidated financial statements for the year ended September
  30, 2004, our independent auditors informed the Audit Committee and management
  that they had identified a deficiency in our internal control structure that
  was considered a material weakness, as defined under standards of
  the American Institute of Certified Public Accountants.

This
  material weakness was related to insufficient personnel resources and technical
  accounting expertise within our accounting function. We believe this situation
  is due primarily to the recent relocation of our accounting function from Walnut
  Creek, California to Reston, Virginia, and the resulting need to restaff many
  of the positions in that function. We have not yet filled all of the open positions,
  and the new staff in the positions we have filled are still becoming familiar
  with those positions. Our management and the Audit Committee are currently evaluating
  this situation with a view to formulating a plan to remediate the material weakness.
  We currently expect this remediation will require us to hire additional qualified
  presonnel to fill open positions within the accounting, financial planning,
  and compliance functions, and potentially to increase the level of accounting
  expertise of current personnel by means of training.

No
  changes in our internal control over financial reporting (as defined in Rules
  13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter
  ended September 30, 2004 that have materially affected or are reasonably likely
  to materially affect, our internal control over financial reporting.

Item 9B.  Other
  Information

None.

42



PART
  III

Item 10.  Directors
  and Executive Officers of the Registrant

| | (a) | Executive Officers. See Executive
        Officers in Part I of this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (b) | Directors.  Information concerning
        our Directors, audit committee financial expert, and compliance with Section
        16(a) of the Exchange Act is incorporated herein by reference to our definitive
        proxy statement to be filed pursuant to Regulation 14A, under the
        headings Election of Directors, Section 16(a) Beneficial
        Ownership Reporting Compliance and Executive Officers.
        We intend to file our proxy statement with the Securities and Exchange
        Commission within 120 days of our fiscal year ended September 30,
        2004.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (c) | Code of Ethics.  We adopted
        a Code of Ethics that applies to the Chief Executive Officer, Chief Financial
        Officer and Chief Accounting Officer of the Company.  A copy of our
        Code of Ethics is posted on our Internet site at http://www.tier.com. 
        In the event that we make any amendment to, or grants any waivers of,
        a provision of the Code of Ethics that requires disclosure under applicable
        SEC rules, we intend to disclose such amendment or waiver and the reasons
        therefor on our Internet site.                               

Item 11.  Executive
  Compensation

The
  information required under this item may be found under the section captioned
  Compensation of Executive Officers in our proxy statement be filed
  pursuant to Regulation 14A and is incorporated herein by reference.

Item 12.  Security
  Ownership of Certain Beneficial Owners and Management

The
  information required under this item may be found under the section captioned
  Security Ownership of Certain Beneficial Owners and Management in
  our proxy statement be filed pursuant to Regulation 14A and is incorporated
  herein by reference.

Item 13.  Certain
  Relationships and Related Transactions

The
  information required under this item may be found under the section captioned
  Certain Transactions in our proxy statement be filed pursuant to
  Regulation 14A and is incorporated herein by reference.

Item 14.  Principal
  Accounting Fees and Services

The
  information required under this item may be found under the section captioned
  Ratification of Selection of Independent Registered Public Accounting
  Firm in our proxy statement be filed pursuant to Regulation 14A and
  is incorporated herein by reference.

PART
  IV

Item 15.  Exhibits
  and Financial Statement Schedules

| | (a) | The following documents are filed
        as part of this report:
| | --- | -----------------------------------------------------------------
| |     |                                                                  
| |     | (1)                                                              
| |     |                                                                  
| |     | (2)                                                              
| |     |                                                                  
| |     |                                                                  
| |     |                                                                  
| |     |                                                                  

43



| |     | (3)                                                                                                  | Exhibits. See Exhibit Index.
| | --- | ---------------------------------------------------------------------------------------------------- | ------------------------------
| |     |                                                                                                      |                               
| | (b) | Exhibits. See Exhibit Index.                                                                      
| |     |                                                                                                      |                               
| | (c) | Financial Statement Schedules.
        See Index to Consolidated Financial Statements on page F-1.

44



INDEX TO CONSOLIDATED
  FINANCIAL STATEMENTS

TIER TECHNOLOGIES,
  INC.

|Report of Independent
        Registered Public Accounting Firm | F-2
|--------------------------------------------------------------- | ---
|                                                                |    
|Consolidated
        Balance Sheets                             | F-3
|                                                                |    
|Consolidated
        Statements of Operations                   | F-4
|                                                                |    
|Consolidated
        Statements of Shareholders Equity         | F-5
|                                                                |    
|Consolidated Statements
        of Cash Flows                   | F-6
|                                                                |    
|Notes to Consolidated
        Financial Statements              | F-7
|                                                                |    
|Schedule I                                                      | S-1

F-1



REPORT OF INDEPENDENT
  REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
  of
  Tier Technologies, Inc.

In
  our opinion, the consolidated financial statements listed in the accompanying
  index present fairly, in all material respects, the financial position of Tier
  Technologies, Inc. and its subsidiaries at September 30, 2004 and
  2003, and the results of their operations and their cash flows for each of the
  three years in the period ended September 30, 2004 in conformity with accounting
  principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

These financial statements and financial statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted our audits of these statements 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

|/s/ PRICEWATERHOUSECOOPERS
        LLP | 
|-------------------------------------- | 
|                                       | 
|PRICEWATERHOUSECOOPERS LLP             | 
|San Jose, California                   | 
|December 27, 2004                      | 

F-2



TIER TECHNOLOGIES, INC.CONSOLIDATED BALANCE SHEETS
  (in thousands)

|                                                                                                                                       |  | September 30, |        
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------
|                                                                                                                                       |  |               |        
|                                                                                                                                       |  | 2004          |        
|                                                                                                                                       |  |               |        
|Assets                                                                                                                                 |  |               |        
|Current
        assets:                                                                                                                |  |               |        
|Cash
        and cash equivalents                                                                                                      |  | $             | 42,061 
|Short-term
        investments                                                                                                         |  |               | 13,619 
|Restricted
        investments                                                                                                         |  |               | 780    
|Accounts
        receivable, net of allowance for doubtful accounts of $708 in 2004 and
        $843 in 2003                           |  |               | 17,394 
|Unbilled
        receivables                                                                                                           |  |               | 5,046  
|Prepaid
        expenses and other current assets                                                                                      |  |               | 4,617  
|Assets
        of discontinued operations                                                                                              |  |               |       
|                                                                                                                                       |  |               |        
|Total
        current assets                                                                                                           |  |               | 83,517 
|Property,
        equipment and software, net                                                                                          |  |               | 7,158  
|Notes
        and accrued interest receivable from related parties, less current portion                                               |  |               | 2,406  
|Goodwill                                                                                                                               |  |               | 37,824 
|Other
        acquired intangible assets, net                                                                                          |  |               | 30,761 
|Long-term
        investments                                                                                                          |  |               | 10,537 
|Restricted
        investments                                                                                                         |  |               | 3,329  
|Other
        assets                                                                                                                   |  |               | 1,937  
|Non-current
        assets of discontinued operations                                                                                  |  |               |       
|                                                                                                                                       |  |               |        
|Total
        assets                                                                                                                   |  | $             | 177,469
|                                                                                                                                       |  |               |        
|Liabilities
        and shareholders equity                                                                                           |  |               |        
|Current
        liabilities:                                                                                                           |  |               |        
|Accounts
        payable                                                                                                               |  | $             | 2,626  
|Accrued
        liabilities                                                                                                            |  |               | 7,501  
|Accrued
        subcontractor expenses                                                                                                 |  |               | 2,478  
|Accrued
        compensation and related liabilities                                                                                   |  |               | 4,623  
|Income
        taxes payable                                                                                                           |  |               | 7,007  
|Deferred
        income                                                                                                                |  |               | 5,269  
|Other
        current liabilities                                                                                                      |  |               | 107    
|Liabilities
        of discontinued operations                                                                                         |  |               | 121    
|                                                                                                                                       |  |               |        
|Total
        current liabilities                                                                                                      |  |               | 29,732 
|Long-term
        debt, less current portion                                                                                           |  |               | 89     
|Non-current
        liabilities of discontinued operations                                                                             |  |               |       
|Other
        liabilities                                                                                                              |  |               | 1,698  
|                                                                                                                                       |  |               |        
|Total
        liabilities                                                                                                              |  |               | 31,519 
|                                                                                                                                       |  |               |        
|Commitments
        and contingencies (Notes 6, 8, and 16)                                                                             |  |               |        
|Shareholders
        equity:                                                                                                          |  |               |        
|Preferred
        stock, no par value; authorized shares4,579; no shares issued and
        outstanding                               |  |               |       
|Common
        stock, no par value; authorized shares43,480; issued and outstanding 
        shares19,440 in 2004 and 18,658 in 2003 |  |               | 172,136
|Notes
        receivable from shareholders                                                                                             |  |               | (1,773 
|Accumulated
        other comprehensive loss                                                                                           |  |               | (258   
|Accumulated
        deficit                                                                                                            |  |               | (24,155
|                                                                                                                                       |  |               |        
|Total
        shareholders equity                                                                                                     |  |               | 145,950
|                                                                                                                                       |  |               |        
|Total
        liabilities and shareholders equity                                                                                     |  | $             | 177,469
|                                                                                                                                       |  |               |        

See accompanying notes.

F-3



TIER TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS
  (in thousands, except per share data)

|                                                                             |  | Year Ended
        September 30, |        
|---------------------------------------------------------------------------- |  | -------------------------------- | -------
|                                                                             |  |                                  |        
|                                                                             |  | 2004                             |        
|                                                                             |  |                                  |        
|Net
        revenues                                                         |  | $                                | 127,937
|Costs
        and expenses:                                                  |  |                                  |        
|Direct
        costs                                                         |  |                                  | 83,637 
|Selling
        and marketing                                                |  |                                  | 7,161  
|General
        and administrative                                           |  |                                  | 27,959 
|Restructuring
        and other charges                                      |  |                                  | 3,493  
|Depreciation
        and amortization                                        |  |                                  | 4,977  
|                                                                             |  |                                  |        
|Income
        (loss) from continuing operations                             |  |                                  | 710    
|Interest
        income                                                      |  |                                  | 1,200  
|Interest
        expense                                                     |  |                                  | 51     
|                                                                             |  |                                  |        
|Income
        (loss) from continuing operations before income taxes         |  |                                  | 1,859  
|Provision
        (benefit) for income taxes                                 |  |                                  | 105    
|                                                                             |  |                                  |        
|Income
        (loss) from continuing operations, net of income taxes        |  |                                  | 1,754  
|                                                                             |  |                                  |        
|Discontinued
        operations:                                             |  |                                  |        
|Loss
        from operations of discontinued operations, net of income taxes |  |                                  | (1,440 
|Loss
        on disposal of discontinued operations, net of income taxes     |  |                                  |       
|                                                                             |  |                                  |        
|Loss
        from discontinued operations, net of income taxes               |  |                                  | (1,440 
|                                                                             |  |                                  |        
|Net
        income                                                           |  | $                                | 314    
|                                                                             |  |                                  |        
|Income
        (loss) from continuing operations, net of income taxes:       |  |                                  |        
|Per
        basic share                                                      |  | $                                | 0.09   
|                                                                             |  |                                  |        
|Per
        diluted share                                                    |  | $                                | 0.09   
|                                                                             |  |                                  |        
|Loss
        from discontinued operation, net of income taxes:               |  |                                  |        
|Per
        basic share                                                      |  | $                                | (0.07  
|                                                                             |  |                                  |        
|Per
        diluted share                                                    |  | $                                | (0.07  
|                                                                             |  |                                  |        
|Net
        income                                                           |  |                                  |        
|Per
        basic share                                                      |  | $                                | 0.02   
|                                                                             |  |                                  |        
|Per
        diluted share                                                    |  | $                                | 0.02   
|                                                                             |  |                                  |        
|Shares
        used in computing basic income (loss) per share               |  |                                  | 18,987 
|                                                                             |  |                                  |        
|Shares
        used in computing diluted income (loss) per share             |  |                                  | 19,322 
|                                                                             |  |                                  |        

See accompanying notes.

F-4



TIER TECHNOLOGIES,
  INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
  (in thousands)

|                                                                     |  | Common Stock |      | Notes Receivable
        
        From
        Shareholders |   | Accumulated
        Other
        Comprehensive
        Income (Loss) |   | Retained
        Earnings
        (Accumulated
        Deficit) |        | Total Shareholders
        Equity |   | Comprehensive
        Income (Loss) |  
|-------------------------------------------------------------------- |  | ------------ | ---- | ----------------------------------------------------------- | - | --------------------------------------------------------------------- | - | --------------------------------------------------------------- | ------ | ---------------------------------- | - | ----------------------------------- | -
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                
|                                                                     |  | Class A      |      | Class B                                                     |   |                                                                       |   |                                                                 |        |                                   
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                   
|                                                                     |  | Shares       |      | Amount                                                      |   | Shares                                                                |   | Amount                                                          |        |                                    |   |                                     |  
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                    |   |                                     |  
|Balance
        at September 30, 2001                                |  |              | 967  |                                                             | $ | 992                                                                   |   |                                                                 | 12,151 |                                    | $ | 69,908                              |  
|Exercise
        of stock options                                    |  |              | 10   |                                                             |   | 36                                                                    |   |                                                                 | 1,575  |                                    |   | 12,400                              |  
|Issuance
        of Class B common stock                             |  |              |     |                                                             |   |                                                                      |   |                                                                 | 4,164  |                                    |   | 77,581                              |  
|Tax
        benefit of stock options exercised                       |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   | 4,349                               |  
|Conversion
        of Class A common stock into Class B common stock |  |              | (97  | )                                                           |   | (98                                                                   | ) |                                                                 | 97     |                                    |   | 98                                  |  
|Issuance
        of Class B common stock in business combinations    |  |              |     |                                                             |   |                                                                      |   |                                                                 | 141    |                                    |   | 2,604                               |  
|Option
        acceleration charge from discontinued operations      |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   | 1,902                               |  
|Net
        income                                                   |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|Unrealized
        loss on investments                               |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|Foreign
        currency translation adjustment                      |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                    |   |                                     |  
|Balance
        at September 30, 2002                                |  |              | 880  |                                                             |   | 930                                                                   |   |                                                                 | 18,128 |                                    |   | 168,842                             |  
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                    |   |                                     |  
|Exercise
        of stock options                                    |  |              |     |                                                             |   |                                                                      |   |                                                                 | 182    |                                    |   | 1,218                               |  
|Issuance
        of Class B common stock                             |  |              |     |                                                             |   |                                                                      |   |                                                                 | 36     |                                    |   | 417                                 |  
|Repurchase
        of Class B common stock                           |  |              |     |                                                             |   |                                                                      |   |                                                                 | (568   | )                                  |   | (6,665                              | )
|Net
        loss                                                     |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|Unrealized
        loss on investments                               |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|Foreign
        currency translation adjustment                      |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                    |   |                                     |  
|Balance
        at September 30, 2003                                |  |              | 880  |                                                             |   | 930                                                                   |   |                                                                 | 17,778 |                                    |   | 163,812                             |  
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                    |   |                                     |  
|Exercise
        of stock options                                    |  |              |     |                                                             |   |                                                                      |   |                                                                 | 350    |                                    |   | 2,196                               |  
|Issuance
        of Class B common stock                             |  |              |     |                                                             |   |                                                                      |   |                                                                 | 30     |                                    |   | 199                                 |  
|Conversion
        of Class A common stock into Class B common stock |  |              | (880 | )                                                           |   | (930                                                                  | ) |                                                                 | 880    |                                    |   | 930                                 |  
|Issuance
        of Class B common stock in business combinations    |  |              |     |                                                             |   |                                                                      |   |                                                                 | 402    |                                    |   | 4,447                               |  
|Stock
        option revision charge                                 |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   | 552                                 |  
|Net
        income                                                   |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|Unrealized
        loss on investments                               |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|Foreign
        currency translation adjustment                      |  |              |     |                                                             |   |                                                                      |   |                                                                 |       |                                    |   |                                    |  
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                    |   |                                     |  
|Balance
        at September 30, 2004                                |  |              |     |                                                             | $ |                                                                      |   |                                                                 | 19,440 |                                    | $ | 172,136                             |  
|                                                                     |  |              |      |                                                             |   |                                                                       |   |                                                                 |        |                                    |   |                                     |  

See accompanying notes

F-5



TIER TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
  (in thousands)

|                                                                                                                                                                                |  | Year Ended
        September 30, |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------
|                                                                                                                                                                                |  |                                  |        
|                                                                                                                                                                                |  | 2004                             |        
|                                                                                                                                                                                |  |                                  |        
|Operating
        activities                                                                                                                                                    |  |                                  |        
|Income
        (loss) from continuing operations, net of income taxes                                                                                                           |  | $                                | 1,754  
|Adjustments
        to reconcile income (loss) from continuing operations, net of income taxes
        to net cash from continuing operations provided by operating activities: |  |                                  |        
|Depreciation
        and amortization                                                                                                                                           |  |                                  | 7,274  
|Goodwill
        and other assets impairment charge                                                                                                                             |  |                                  | 571    
|Provision
        for doubtful accounts                                                                                                                                         |  |                                  | 205    
|Deferred
        income taxes                                                                                                                                                   |  |                                  | 25     
|Tax
        benefit of stock options exercised                                                                                                                                  |  |                                  |       
|Stock
        option revision charge                                                                                                                                            |  |                                  | 552    
|Forgiveness
        of notes receivable from employees                                                                                                                          |  |                                  | 8      
|Change
        in operating assets and liabilities, net of effects of business combinations:                                                                                    |  |                                  |        
|Accounts
        receivable                                                                                                                                                     |  |                                  | 6,653  
|Income
        taxes payable                                                                                                                                                    |  |                                  | 9,382  
|Prepaid
        expenses and other current assets                                                                                                                               |  |                                  | (1,401 
|Other
        assets                                                                                                                                                            |  |                                  | 257    
|Accounts
        payable and accrued liabilities                                                                                                                                |  |                                  | (3,262 
|Deferred
        income                                                                                                                                                         |  |                                  | 780    
|                                                                                                                                                                                |  |                                  |        
|Net
        cash from continuing operations provided by operating activities                                                                                                    |  |                                  | 22,798 
|                                                                                                                                                                                |  |                                  |        
|Investing
        activities                                                                                                                                                    |  |                                  |        
|Purchase
        of equipment and software                                                                                                                                      |  |                                  | (3,389 
|Notes
        and accrued interest receivable from related parties                                                                                                              |  |                                  | (262   
|Repayments
        on notes and accrued interest receivable from related parties                                                                                                |  |                                  |       
|Business
        combinations, net of cash acquired                                                                                                                             |  |                                  | (15,639
|Restricted
        investments                                                                                                                                                  |  |                                  | 3,597  
|Purchases
        of available-for-sale securities                                                                                                                              |  |                                  | (26,639
|Sales
        of available-for-sale securities                                                                                                                                  |  |                                  |       
|Maturities
        of available-for-sale securities                                                                                                                             |  |                                  | 32,712 
|Other
        assets                                                                                                                                                            |  |                                  | (244   
|                                                                                                                                                                                |  |                                  |        
|Net
        cash from continuing operations used in investing activities                                                                                                        |  |                                  | 9,864  
|                                                                                                                                                                                |  |                                  |        
|Financing
        activities                                                                                                                                                    |  |                                  |        
|Borrowings
        under bank lines of credit                                                                                                                                   |  |                                  | 2,200  
|Payments
        under bank lines of credit                                                                                                                                     |  |                                  | (2,200 
|Repurchase
        of Class B common stock                                                                                                                                      |  |                                  |       
|Net
        proceeds from issuance of Class A and Class B common stock                                                                                                          |  |                                  | 2,395  
|Payments
        on capital lease obligations, other financing arrangements and notes payable
        to shareholders                                                           |  |                                  | (149   
|                                                                                                                                                                                |  |                                  |        
|Net
        cash from continuing operations provided by (used in) financing activities                                                                                          |  |                                  | 2,246  
|Effect
        of exchange rate changes on cash                                                                                                                                 |  |                                  |       
|                                                                                                                                                                                |  |                                  |        
|Net
        cash from continuing operations                                                                                                                                     |  |                                  | 15,180 
|Net
        cash provided by (used in) discontinued operations                                                                                                                  |  |                                  | 703    
|                                                                                                                                                                                |  |                                  |        
|Net
        increase (decrease) in cash and cash equivalents                                                                                                                    |  |                                  | 15,883 
|Cash
        and cash equivalents at beginning of period                                                                                                                        |  |                                  | 26,178 
|                                                                                                                                                                                |  |                                  |        
|Cash
        and cash equivalents at end of period                                                                                                                              |  | $                                | 42,061 
|                                                                                                                                                                                |  |                                  |        
|Supplemental
        disclosures of cash flow information                                                                                                                       |  |                                  |        
|Cash
        paid during the period for:                                                                                                                                        |  |                                  |        
|Interest                                                                                                                                                                        |  | $                                | 99     
|                                                                                                                                                                                |  |                                  |        
|Income
        taxes paid (refunded), net                                                                                                                                       |  | $                                | (9,573 
|                                                                                                                                                                                |  |                                  |        
|Supplemental
        disclosure of non-cash transactions                                                                                                                        |  |                                  |        
|Equipment
        acquired under capital lease obligations and other financing arrangements                                                                                     |  | $                                |       
|                                                                                                                                                                                |  |                                  |        
|Assumed
        liabilities related to business combinations                                                                                                                    |  | $                                |       
|                                                                                                                                                                                |  |                                  |        
|Class B
        common stock issued in business combinations                                                                                                                    |  | $                                | 4,447  
|                                                                                                                                                                                |  |                                  |        
|Conversion
        of Class A common stock to Class B common stock                                                                                                              |  | $                                | 930    
|                                                                                                                                                                                |  |                                  |        
|Stock
        options acceleration charge from discontinued operation                                                                                                           |  | $                                |       
|                                                                                                                                                                                |  |                                  |        
|Write
        down of unbilled receivables                                                                                                                                      |  | $                                |       
|                                                                                                                                                                                |  |                                  |        

See accompanying notes.

F-6



TIER TECHNOLOGIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES

The Company

Tier
  Technologies, Inc. (the Company) is a provider of transaction
  processing services and software and systems integration services to federal,
  state and local government and other public sector clients.   Its
  clients outsource portions of their business processes to the Company, and rely
  on it for its industry-specific information technology expertise and solutions.
  The Company has offices located throughout the United States.

Basis of Presentation

The
  accompanying consolidated financial statements include the accounts of the Company
  and its wholly owned subsidiaries. All significant intercompany transactions
  and balances have been eliminated in consolidation. The Company translates the
  accounts of its discontinued United Kingdom subsidiary using the local foreign
  currency as the functional currency. The assets and liabilities of the subsidiary
  are translated into U.S. dollars using exchange rates in effect at the balance
  sheet date, net revenues and expenses are translated using the average exchange
  rate for the period, and gains and losses from this translation process are
  included in shareholders equity.

Use of Estimates

The
  preparation of financial statements in conformity with generally accepted accounting
  principles requires management to make certain estimates and assumptions that
  affect the reported amounts of assets and liabilities and disclosures of contingent
  assets and liabilities at the date of the financial statements and the reported
  amounts of net revenues and expenses during the reporting period. Although management
  believes that the estimates and assumptions used in preparing the accompanying
  consolidated financial statements and related notes are reasonable in light
  of known facts and circumstances, actual results could differ from those estimates.

Revenue Recognition and Credit Risk

The
  Company derives net revenues from three principal delivery offerings: 
  transaction and payment processing, systems design and integration, and maintenance
  and support services.  Net revenues include software license revenues and
  reimbursements from clients for out-of-pocket expenses.  Neither software
  license nor reimbursements revenues were greater than 10% of total net revenues
  for any period included in these consolidated financial statements.

Transaction
  and Payment Processing Transaction and payment processing revenues
  are recorded in accordance with Staff Accounting Bulletin (SAB)
  104, Revenue Recognition. Transaction processing revenues includes revenues
  recorded at the Companys child support payment processing centers and
  the revenues of the Companys Electronic Payment Processing (EPP)
  segment.  The EPP segment includes revenues from two wholly-owned subsidiaries
  of the Company:  all revenues from Official Payments Corporation (OPC)
  and the electronic processing revenues of EPOS Corporation (EPOS),
  an Alabama corporation acquired effective June 1, 2004.  These revenues
  are based upon a per-transaction fee or a percentage of the dollar amount processed
  and  are recognized each month based on the number of transactions performed
  and dollar amount processed in that month after the Company has received a signed
  contract, the price per transaction or fee percentage is fixed according to
  the contract, and collectibility is reasonably assured. The Company assesses
  the probability of collection based upon the clients financial condition
  and prior payment history.  For EPP, transaction fees are generally borne
  by the consumer utilizing our services, not the governmental or other entity. 
  EPP receives real-time authorization for credit and debit card transactions,
  which ensures availability of cardholder funds for payments.  Revenues
  for EPOS are included only from the date of acquisition.

F-7



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Systems
  Design and Integration -Systems design and integration includes software
  application license revenues and software development and systems integration
  service revenues to develop applications to enhance our clients operating
  functionality.

License
  and services revenues for contracts involving significant modification, customization
  or services which are essential to the functionality of the software are recognized
  over the period of each engagement, using the percentage-of-completion method
  of Statement of Position 81-1 Accounting for the Performance of Construction
  Type and Certain Production Type Contracts. The ratio of costs incurred
  to total estimated project costs is used as the measure of progress towards
  completion.  Due to the long-term nature of these contracts, estimates
  of total project costs are subject to changes over the contract term. A provision
  for a loss contract on an engagement is made in the period in which the loss
  becomes probable and can be reasonably estimated.  If the loss cannot be
  reasonably estimated, a zero profit methodology is applied to the contract whereby
  the amount of revenue recognized is limited to the amount of costs until such
  time, as the total loss can be estimated. 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. Revenues recognized under the percentage-of-completion
  method were $12.1 million, $10.1 million and $25.8 million for the years ended
  September 30, 2004, 2003 and 2002, respectively.

Where
  costs are incurred related to an unapproved change order, the costs are deferred
  until the change order is approved provided that the Company believes it is
  probable that the cost will be recovered through a change in the contract price.
  Included in prepaid and other assets at September 30, 2004 and 2003, respectively,
  and were $196,000 and $34,000 of deferred costs related to change orders not
  yet approved.

Revenues
  from software license fees not requiring significant modification are recognized
  in accordance with Statement of Position 97-2, Software Revenue Recognition.Revenues from license fees are recognized when persuasive evidence of an
  agreement exists, delivery of the software has occurred, no significant Company
  obligations with regard to implementation or integration exist, the fee is fixed
  or determinable and collectibility is probable. Arrangements for which the fees
  are not deemed probable for collection are recognized upon cash collection. 
  Arrangements for which the fees are not deemed fixed or determinable are recognized
  the earlier of the due date or when payment is received.  Revenues from
  software license fees not requiring significant modification were $403,000,
  $75,000 and $329,000 for the years ended September 30, 2004, 2003 and 2002,
  respectively.

For
  license arrangements with multiple obligations (for example, undelivered maintenance
  and support), the Company allocates 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 the Company.  Fair value for
  the maintenance and support obligations for software licenses is based upon
  the specific sale of renewals to customers or upon renewal rates quoted in the
  contracts.

Under
  the terms of its license agreements, the Company does not offer return rights
  or price protection.  Therefore, no provisions have been made for sales
  returns.  For its proprietary software, the Company offers routine, short-term
  warranties that its software will operate free of material defects and in conformity
  with written documentation.  Under these agreements, if the Company has
  an active maintenance agreement with the customer, the Company accounts for
  any obligation in conformity with Statement of Financial Accounting Standards
  No. 5, Accounting for Contingencies.  If the Company does not
  have a maintenance contract in place, the warranty is considered implied maintenance
  and the Company defers revenues consistent with other maintenance and support
  obligations.

F-8



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Maintenance and Support Services
  The Company provides ongoing maintenance and support services. Maintenance
  revenue is deferred and recognized on a straight-line basis as services revenue
  over the life of the related contract, which is typically one year.  Non-essential
  support services, including training and consulting, are also typically provided
  on a time and materials basis and revenue is recognized as the services are
  performed.  Revenue is recognized only after a contract is signed which
  indicates a fixed or determinable price and the Company believes, based upon
  its assessment of the customers financial condition, that collection is
  reasonably assured.

Multiple Elements Arrangements
  The Company has several engagements that provide a combination of services from
  several delivery offerings as part of the overall project.  For these multiple
  element arrangements, the Company allocates revenue to each element based on
  the fair value of the delivery offering.  In establishing fair value, the
  Company uses prices charged on similar contracts.  For multiple element
  arrangements entered into beginning July 1, 2003, the Company has followed the
  provisions of Emerging Issues Task Force Issue 00-21, Revenue Arrangements
  with Multiple Deliverables (EITF 00-21).  For these multiple element
  arrangements, the Company accounts for each unit of the contract as a separate
  unit when each unit provides value to the customer on a stand-alone basis and
  there is objective evidence of the fair value of the stand-alone unit. 
  The implementation of EITF 00-21 did not have a material effect on the Companys
  recognition of revenue.

Customer Concentration and Risk

The
  Company derives a significant portion of its net revenues from a limited number
  of customers.  For the fiscal years ended September 30, 2004 and 2003,
  revenues from one client totaled approximately $15.7 million and $17.8 million
  which represented 12.2% and 15.4% of total net revenues, respectively. For the
  fiscal year ended September 30, 2002, revenues from two clients totaled approximately
  $13.6 million and $10.9 million, which represented 16.1% and 12.9% of total
  net revenues.  Net revenues derived from sales to governmental agencies
  were approximately $126.2 million, $115.9 million and $84.7 million for the
  years ended September 30, 2004, 2003 and 2002, respectively.

The
  Companys contracts with government agencies typically include a termination
  for convenience clause.  The termination for convenience clause provides
  the agency with the right to terminate a contract, in whole or in part, for
  any reason deemed to be in the publics best interest.  The Companys
  contracts with government agencies also typically provide for termination for
  cause.

The
  Company has several large accounts receivable and unbilled receivable balances,
  and any dispute, early contract-termination or other collection issues could
  have a material adverse impact on its financial condition and results of operations. 
  Unbilled receivables were $5.0 million and $7.9 million at September 30,
  2004 and 2003, respectively, of which approximately $5.0 million and $7.6 million,
  respectively, related to contracts with government agencies. Amounts will become
  billable upon completion of project milestones or customer acceptance. 
  Unbilled receivables for two clients accounted for 42.3% and 29.6%, respectively,
  of total unbilled receivables at September 30, 2004.  Total accounts receivable
  and unbilled receivables, for these two clients accounted for 30.9% and 10.0%,
  respectively, of total net accounts receivable and unbilled receivables, at
  September 30, 2004.  Unbilled receivables for three clients accounted for
  44.2%, 25.0% and 20.3%, respectively, of total unbilled receivables at September
  30, 2003. Total accounts receivable and unbilled receivables, for these three
  clients accounted for 19.8%, 16.1% and 7.0%, respectively, of total net accounts
  receivable and unbilled receivables, at September 30, 2003.

F-9



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

As
  a result of the termination of its contract with the California Public Employees
  Retirement System (CalPERS), the Company recorded $12.8 million
  in September 2003 as a revenue reversal on this loss contract for amounts unbilled
  and uncollected as of the date of termination.  The Company also wrote-off
  $532,000 in deferred costs in September 2003 related to change orders that were
  being negotiated at June 30, 2003.  From inception through June 30, 2003,
  the Company had recorded revenue under the percentage-of-completion method of
  $20.3 million under the terms of the contract and collected $7.5 million in
  cash including $985,000 in July 2003.  No revenues were recognized in connection
  with this contract for the fiscal year ended September 30, 2004.

Included
  in other assets at September 30, 2004 was approximately $2.4 million, which
  represented balances billed but not paid by clients under retainage provisions
  in the contracts, of which approximately $2.4 million was expected to be collected
  within two years, and $12,000 was expected to be collected within four years. 
  Included in accounts receivable and other assets at September 30, 2003 was approximately
  $1.4 million of retainage of which approximately $461,000 was expected to be
  collected within one year, $430,000 was expected to be collected within two
  years and $557,000 was expected to be collected within three years.

Included
in prepaid expenses and other current assets at September 30, 2004, was approximately $1.1 million of inventory
which represented component inventory of EPOS relating to interactive voice response hardware technology,
that when assembled is sold to its customers as part of normal business operations. The inventory is assembled
into finished product to meet the specific functional project requirements of its clients.
The component inventory is carried at the lower of cost or market and all inventory deemed obsolescent is
written off in the period when that determination is made as to the specific impairment of value.

Cash and Cash Equivalents

Cash
  equivalents are highly liquid investments with original maturities of three
  months or less 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 and
  highly liquid debt securities of corporations, state governments, municipalities
  and the U.S. government.

In
  the course of operating a payment processing center for a client, the Company
  may maintain bank accounts for the deposit and disbursement of monies on behalf
  of the client. The cash balance of the accounts and the related liability of
  the same amount are netted in the accompanying consolidated balance sheets since
  the Company has the right to offset such amounts.

Fair Value of Financial Instruments

The
  carrying amounts of certain of the Companys financial instruments including
  cash and cash equivalents, restricted cash, accounts receivable, accounts payable
  and accrued liabilities approximate fair value due to their short maturities. 
  The carrying amounts of notes receivable and long-term debt approximate fair
  value as the interest rates are charged at market rates.

Investments

The
  Company has classified all short-term investments as available-for-sale. Available-for-sale
  securities are recorded at amounts that approximate fair market value based
  on quoted market prices and have included investment-grade municipal securities
  and commercial paper. Realized gains and losses and declines in value judged
  to be other than temporary on available-for-sale securities are included in
  the general and administrative expense line item.

Investments
  with maturities greater than 12 months as of the balance sheet date are classified
  as long-term investments.  These long-term investments are categorized
  by the Company as available-for-sale and are recorded at amounts that approximate
  fair value based on quoted market prices and are primarily comprised of state
  and local municipalities debt readily traded on over-the-counter markets. 
  Unrealized gains and losses on these investments were not material and there
  were no other than temporary impairments to these investments.

The
  portfolio of short-term and long-term Investments (including cash and cash equivalent)
  consisted of the following.

|                                        |  | December 31, |       
|--------------------------------------- |  | ------------ | ------
|                                        |  |              |       
|$'s in Thousands                        |  | 2004         |       
|                                        |  |              |       
|Cash & Cash Equivalent Securities       |  | $            | 28,182
|Corporate Debt Securities               |  |              | 0     
|Municipal and Tax Advantaged Securities |  |              | 28,177
|Action Rate Preferred Debt Securities   |  |              | 1,000 
|U.S. Treasury and Agency Securities     |  |              | 7,858 
|                                        |  |              |       
|Total                                   |  | $            | 66,217
|                                        |  |              |       

F-10



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

On
  a quarterly basis, the Company analyses its investment portfolio in order to
  determine whether an other than temporary impairment has occurred by reviewing
  that the rating of the investment remains at investment-grade.

Restricted
  investments were approximately $4.1 million and $7.7 million at September 30,
  2004 and 2003, respectively, and 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 be through August 2007.

Advertising Expense

The
  Company expenses the cost of advertising, net of cooperative advertising cash
  contributions received from partners, during the period the advertising takes
  place.

Equipment and Software

Equipment
  and software are stated at cost. Depreciation and amortization are computed
  using the straight-line method over the shorter of the estimated useful life
  of the asset or the lease term, which range 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.

Long-Lived Assets

Long-lived
  assets and certain identifiable intangible assets to be held and used are reviewed
  for impairment whenever events or changes in circumstances indicate that the
  carrying amount of such assets may not be recoverable. Determination of recoverability
  is based on an estimate of undiscounted future cash flows resulting from the
  use of the asset and its eventual disposition. Measurement of an impairment
  loss for long-lived assets and certain identifiable intangible assets that management
  expects to hold and use is based on the fair value of the asset. Long-lived
  assets and certain identifiable intangible assets to be disposed of are reported
  at the lower of carrying amount or fair value less costs to sell.

In
  July 2001, the Financial Accounting Standards Board (FASB) issued
  Statement of Financial Accounting Standards No. 142 (SFAS 142) Goodwill
  and Other Intangible Assets.  As of October 1, 2002, the Company
  adopted SFAS 142 and stopped amortizing goodwill.  Under SFAS 142, the
  Company evaluates goodwill for impairment annually during the fourth quarter
  of its fiscal year, or more frequently if impairment indicators arise. 
  Identifiable intangible assets that have finite lives continue to be amortized
  over their estimated useful lives.

Goodwill
  and certain intangible assets not subject to amortization are assessed for impairment
  annually (or more frequently if events or changes indicate that the asset may
  be impaired) using fair value measurement techniques which include significant
  assumptions including future revenue and expenses, future growth rate, and discount
  rates.  The impairment test of goodwill consists of a two-step process. 
  The first step of the test is used to identify potential impairment by comparing
  the fair value of a reporting unit (which the Company has determined to be consistent
  with its reportable segments) with its carrying amount, including goodwill. 
  If the fair value of a reporting unit exceeds its carrying amount, goodwill
  of the reporting unit is considered not impaired and the second step of the
  impairment test is unnecessary.  If the carrying amount of a reporting
  unit exceeds its fair value, the second step of the goodwill impairment test
  must be performed to measure the amount of impairment loss, if any.  In
  the fourth quarter of fiscal 2004, the Company performed its annual impairment
  test to determine if goodwill is impaired.  The results did not indicate
  any impairment loss. A change of 1.0% in the discount rate reduces the fair
  value calculated in the analysis by $52.8 million.

F-11



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Software Development Costs

Software
  development costs have been accounted for in accordance with Statement of Financial
  Accounting Standards No. 86 (SFAS 86), Accounting for
  the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
  Under the standard, capitalization of software development costs begins upon
  the establishment of technological feasibility. To date, software development
  costs incurred prior to technological feasibility have not been material and
  have been charged to expense. Capitalized external use software at September
  30, 2004 and 2003 was approximately $5.9 million and $4.5 million, respectively,
  and the associated accumulated amortization was $3.6 million and $2.6 million
  respectively.  These amounts have been included in Software in the table
  in Note 3.  Amortization expense related to external use software for the
  years ended September 30, 2004, 2003 and 2002 was $1.3 million, $1.5 million,
  and $923,000, respectively.  External use software included software acquired
  through business combinations of $3.9 million, internally developed software
  which has been licensed to the Companys clients of $1.2 million and third
  party software sublicensed to the Companys clients of $543,000.

Internal Use Software Costs

Internal
  use software costs have been accounted for in accordance with Statement of Position
  No. 98-1 (SOP 98-1), Accounting for the Costs of Computer
  Software Developed or Obtained for Internal Use. Under SOP 98-1, computer
  software costs related to internal use software that are incurred in the preliminary
  project stage are expensed as incurred. Once the capitalization criteria of
  SOP 98-1 have been met, external direct costs of materials and services consumed
  in developing or obtaining internal-use computer software; payroll and payroll-related
  costs for employees who are directly associated with and who devote time to
  the internal-use computer software project (to the extent of the time spent
  directly on the project); and interest costs incurred when developing computer
  software for internal use are capitalized. Internal use software costs capitalized
  for the years ended September 30, 2004 and 2003 were approximately $728,000
  and $786,000, respectively.

Stock-Based Compensation

In
  December 2002, the Financial Accounting Standards Board (FASB) issued
  Statement of Financial Accounting Standards No. 148 (SFAS 148),
  Accounting for Stock-Based Compensation Costs  Transition and Disclosure,
  which provides alternative methods of transition for an entity that voluntarily
  changes to the fair value-based method of accounting for stock-based compensation. 
  SFAS 148 also requires additional disclosures about the effects on reported
  net income of an entitys accounting policy with respect to stock-based
  compensation.  The Company accounts for employee stock options in accordance
  with Accounting Principles Board Opinion No. 25, (APB 25),
  Accounting for Stock Issued to Employees and provides the disclosure
  required in Statement of Financial Accounting Standards No. 123 (SFAS 123),
  Accounting for Stock-Based Compensation. Stock options issued to
  non-employees are accounted for in accordance with Emerging Issues Task Force
  Issue No. 96-18, Accounting for Equity Instruments That Are Issued
  to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
  or Services.  The Company adopted the disclosure provisions of SFAS
  148 in January 2003.

F-12



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

The
  following table illustrates the effect on net loss and net loss per share if
  the Company would have applied the fair value recognition provisions of SFAS
  123 to stock-based compensation:

|                                                                                                                                           |  | Year Ended
        September 30,              |       
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------- | ------
|                                                                                                                                           |  |                                               |       
|                                                                                                                                           |  | 2004                                          |       
|                                                                                                                                           |  |                                               |       
|                                                                                                                                           |  | (in thousands,
        except per share data) |       
|Net
        income as reported                                                                                                             |  | $                                             | 314   
|Add:
        Stock-based compensation expense included in reported net loss, net of
        related tax effects                            |  |                                               |      
|Deduct:
        Total stock-based compensation expense determined under fair value-based
        method for all awards, net of tax effects |  |                                               | 2,601 
|                                                                                                                                           |  |                                               |       
|Net
        loss, pro forma                                                                                                                |  | $                                             | (2,287
|                                                                                                                                           |  |                                               |       
|Basic
        net income per share, as reported                                                                                            |  | $                                             | 0.02  
|                                                                                                                                           |  |                                               |       
|Basic
        net loss per share, pro forma                                                                                                |  | $                                             | (0.12 
|                                                                                                                                           |  |                                               |       
|Diluted
        net income per share, as reported                                                                                          |  | $                                             | 0.02  
|                                                                                                                                           |  |                                               |       
|Diluted
        net loss per share, pro forma                                                                                              |  | $                                             | (0.12 
|                                                                                                                                           |  |                                               |       

| | The fair value for stock-based
        compensation was estimated at the date of grant using a Black-Scholes
        option pricing model with the following weighted-average assumptions:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    |  | Year Ended
        September 30, | 
|----------------------------------- |  | -------------------------------- | 
|                                    |  |                                  | 
|                                    |  | 2004                             | 
|                                    |  |                                  | 
|Expected
        dividend yield     |  | 0%                               | 
|Expected
        volatility         |  | 62.3% - 70.8%                    | 
|Risk-free
        interest rate     |  | 2.46% - 4.05%                    | 
|Expected
        life of the option |  | 3.0 to 6 years                   | 

Income Taxes

The
  Company accounts for income taxes in accordance with Statement of Financial
  Accounting Standards No. 109 (SFAS 109), Accounting
  for Income Taxes which requires the use of the liability method in accounting
  for income taxes. Under this method, deferred income tax assets and liabilities
  are determined based on differences between financial reporting and tax bases
  of assets and liabilities and are measured using enacted tax rules and laws
  that are expected to be in effect when the differences are expected to reverse.
  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 asset will
  not be realized.

Income (Loss) Per Share

Basic
  income (loss) per share is computed by dividing the income (loss) for the period
  by the weighted average number of common shares outstanding during the period.
  Diluted income (loss) per share is computed by dividing the income (loss) for
  the period by the weighted average number of common and common equivalent shares
  outstanding during the period. Common equivalent shares, composed of incremental
  common shares issuable upon the exercise of stock options, unvested restricted
  common stock and contingently issuable shares that are probable of being issued,
  are included in diluted income (loss) per share to the extent such shares are
  dilutive.  In accordance with SFAS 128, Earnings Per Share,
  the Company uses income from continuing operations, net of income taxes as the
  control number in determining whether common equivalent shares are
  dilutive or anti-dilutive in periods where discontinued operations are reported.

F-13



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Comprehensive Income (Loss)

Effective
  October 1, 1998, the Company accounts for comprehensive income (loss) items
  in accordance with Statement of Financial Accounting Standards No. 130
  (SFAS 130), Reporting Comprehensive Income. SFAS 130
  establishes standards for reporting comprehensive income (loss) and its components,
  including presentation in an annual financial statement that is displayed with
  the same prominence as other annual financial statements. Various components
  of comprehensive income (loss) may, for example, consist of foreign currency
  items and unrealized gains and losses on certain investments classified as available-for-sale.

Segment Reporting

Through
  September 30, 2003, the Company was managed through four reportable segments:
  U.S. Commercial Services, U.S. Government Services, OPC and United Kingdom Operations.
  The U.S. Commercial Services segment provided business process reengineering
  (BPR), systems design and integration (Systems) and
  business process outsourcing (BPO) services to Fortune 1000 clients
  in the United States. The U.S. Government Services segment provided BPR, Systems,
  transaction processing and BPO services to federal, state and local government
  entities in the United States. The OPC segment provided transaction processing
  services to clients primarily in the public sector. The United Kingdom Operations
  segment provided BPR, Systems and BPO services to clients in the public and
  private sectors in Europe.

Following
  the restructuring in the fourth quarter of fiscal year 2003, the Company has
  been managed through three reportable segments: Government Business Process
  Outsourcing (GBPO), Government Systems Integration (Government
  SI) and OPC.  Accordingly, the prior year amounts have been reclassified
  to conform to the current year presentation.  In connection with the acquisition
  of EPOS, the Company renamed two of its segments; consequently, the three reportable
  segments are now as follows:  GBPO, Packaged Software and Systems Integration
  (PSSI), formerly known as Government SI, and Electronic Payment
  Processing (EPP), formerly known as OPC.  The GBPO segment
  provides transaction processing services. The PSSI segment provides systems
  integration, licensing and maintenance services.  The EPP segment provides
  transaction and payment processing services.

Reclassifications

Certain
  reclassifications related to our discontinued operations, as disclosed in Note
  14, have been made to the prior years consolidated financial statements
  and related notes to conform to the current year presentation.

Guarantees

The
  Company has various agreements pursuant to which it may be obligated to indemnify
  the other party with respect to certain matters.  Generally, these indemnification
  clauses are included in contracts arising in the normal course of business under
  which the Company customarily agrees to hold the other party harmless against
  losses arising from a breach of representations related to such matters as title
  to assets sold and licensed or certain intellectual property rights.  Payment
  by the Company under such indemnification clauses is generally conditioned on
  the other party making a claim that is subject to challenge by the Company and
  dispute resolution procedures specified in the particular contract.  Further,
  the Companys obligations under these agreements may be limited in terms
  of time and/or amount, and in some instances, the Company may have recourse
  against third parties for certain payments made by the Company.  In addition,
  the Company has indemnification agreements with executive officers and directors. 
  It is not possible to predict the maximum potential amount of future payments
  under these indemnification agreements due to the conditional nature of the
  Companys obligations and the unique facts of each particular agreement. 
  For the year ended September 30, 2004 and 2003, the Company recorded costs of
  approximately $211,000 and $305,000, respectively, under indemnification agreements
  with certain executive officers related to the DOJ investigation (See Note 15).

F-14



TIER TECHNOLOGIES, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

As
  disclosed in Note 5, one of the standby letters of credit outstanding under
  the credit facility was issued in April 2004 in the amount of $935,000, and
  was used to guarantee the performance bond of CPAS Systems, Inc., CPAS,
  required by a project contract that is anticipated to be completed in August
  2005.  On October 1, 2004, the Company acquired 45% of the common stock
  of CPAS (See Note 16).  In conjunction with this guarantee, the Company
  entered into an indemnification agreement with the third party which pledges
  to hold harmless, indemnify and make the Company whole from and against any
  and all amounts actually claimed or withdrawn as well as other business consideration. 
  The Company recorded a liability for the fair value of $935,000 in accrued liabilities
  and an equal receivable in prepaid expenses and other current assets. 
  The recorded amounts will be eliminated if the Company is released from the
  risk upon expiration or settlement of the obligation.

As
  disclosed in Note 8, the Company may be required to make contingent payments
  related to the achievement of future performance targets by certain acquisitions. 
  As of September 30, 2004, contingent payments of approximately $2.7 million
  may be made over the next eight months upon the achievement of certain performance
  targets.  Given that the contingent liability is not probable, these amounts
  are not included in liabilities at September 30, 2004.  If it is determined
  that these contingent payments are earned in the future, the Company will record
  the liability at that time.

Impact of Recently Issued Accounting
  Standards

In
  March 2003, the Emerging Issues Task Force, EITF, reached a consensus
  on recognition and measurement guidance discussed under EITF Issue No. 
  03-01.  The consensus clarified the meaning of other-than-temporary impairment
  and its application to debt and equity investments accounted for under SFAS
  No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
  other investments accounted for under the cost method.  The recognition
  and measurement guidance for which the consensus was reached in March 2004 is
  to applied to other-than-temporary impairment evaluations in reporting periods
  beginning after June 15, 2004.  The Company will evaluate the effect of
  adopting the recognition and measurement guidance when the final consensus is
  reached.  The consensus reached in March 2004, also provided for certain
  disclosure requirements for fiscal years ending after June 15, 2004.  In
  September 2004, the FASB issued a final FASB Staff Position that delays the
  effective date for the measurement and recognition guidance for all investments
  within the scope of EITF Issue No. 03-1.

In
  October 2004, the EITF reached a consensus on determining whether to aggregate
  operating segments that do not meet the quantitative thresholds discussed under
  EITF No. 04-10.  The consensus provided guidance on aggregating operating
  segments if an operating segment does not meet one quantitative threshold. 
  It allows an entity to combine information segments to produce a reportable
  segment if the segments have similar economic characteristics and share a majority
  of aggregation criteria.  The consensus is effective for fiscal year ending
  after October 13, 2004.

The
  American Job Creation Act of 2004 (AJCA), which has been approved by Congress
  and is expected to be signed by the President, replaces an export incentive
  with a deduction from domestic manufacturing income. If signed, this change
  should have no material impact on the Company's income tax provision.

F-15



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

2.  INCOME (LOSS) PER SHARE

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

|                                                                                                                                |  | Year Ended
        September 30,              |       
|------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------
|                                                                                                                                |  |                                               |       
|                                                                                                                                |  | 2004                                          |       
|                                                                                                                                |  |                                               |       
|                                                                                                                                |  | (in thousands,
        except per share data) |       
|Numerator:                                                                                                                      |  |                                               |       
|Income
        (loss) from continuing operations, net of income taxes                                                           |  | $                                             | 1,754 
|                                                                                                                                |  |                                               |       
|Loss
        from discontinued operation, net of income taxes                                                                   |  | $                                             | (1,440
|                                                                                                                                |  |                                               |       
|Net
        income                                                                                                              |  | $                                             | 314   
|                                                                                                                                |  |                                               |       
|Denominator
        for basic income (loss) per share-weighted average common shares outstanding                                |  |                                               | 18,987
|Effects
        of dilutive securities:                                                                                         |  |                                               |       
|Common
        stock options                                                                                                    |  |                                               | 335   
|Contingently
        issuable shares                                                                                            |  |                                               |      
|                                                                                                                                |  |                                               |       
|Denominator
        for diluted income (loss) per share-adjusted weighted average common shares
        and assumed conversions |  |                                               | 19,322
|                                                                                                                                |  |                                               |       
|Income
        (loss) from continuing operations, net of income taxes:                                                          |  |                                               |       
|Per
        basic share                                                                                                         |  | $                                             | 0.09  
|                                                                                                                                |  |                                               |       
|Per
        diluted share                                                                                                       |  | $                                             | 0.09  
|                                                                                                                                |  |                                               |       
|Loss
        from discontinued operation, net of income taxes:                                                                  |  |                                               |       
|Per
        basic share                                                                                                         |  | $                                             | (0.07 
|                                                                                                                                |  |                                               |       
|Per
        diluted share                                                                                                       |  | $                                             | (0.07 
|                                                                                                                                |  |                                               |       
|Net
        income:                                                                                                             |  |                                               |       
|Per
        basic share                                                                                                         |  | $                                             | 0.02  
|                                                                                                                                |  |                                               |       
|Per
        diluted share                                                                                                       |  | $                                             | 0.02  
|                                                                                                                                |  |                                               |       

Options
  to purchase approximately 1.2 million shares of Class B common stock
  at a price ranging from $9.97 to $20.70 per share were outstanding at September 30,
  2004, but were not included in the computation of diluted loss per share because
  the options exercise prices were greater than the average market price
  of the shares. Options to purchase approximately 1.5 million shares of
  Class B common stock at a price ranging from $12.04 to $20.70 per share
  were outstanding at September 30, 2003, but were not included in the computation
  of diluted loss per share because the options exercise prices were greater
  than the average market price of the shares. In addition, common stock equivalents
  of 458,000 shares were excluded from the calculation of diluted loss per share
  at September 30, 2003, since their effect would have been anti-dilutive. Options
  to purchase approximately 255,000 shares of Class B common stock at a price
  ranging from $17.75 to $20.70 per share were outstanding at September 30,
  2002, but were not included in the computation of diluted income (loss) per
  share because the options exercise prices were greater than the average
  market price of the shares.

F-16



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

3.  BALANCE SHEET COMPONENTS

The
  components of property, equipment and software are as follows:

|                                                        |  | September 30,  |        
|------------------------------------------------------- |  | -------------- | -------
|                                                        |  |                |        
|                                                        |  | 2004           |        
|                                                        |  |                |        
|                                                        |  | (in thousands) |        
|Land
        and building                               |  | $              | 2,452  
|Computer
        equipment                              |  |                | 8,717  
|Software                                                |  |                | 14,558 
|Furniture,
        equipment and leasehold improvements |  |                | 4,372  
|                                                        |  |                |        
|                                                        |  |                | 30,099 
|Less:
        Accumulated depreciation and amortization |  |                | (22,941
|                                                        |  |                |        
|                                                        |  | $              | 7,158  
|                                                        |  |                |        

Depreciation
  expense for the years ended September 30, 2004, 2003 and 2002 was approximately
  $1.2 million, $1.3 million and $1.5 million, respectively.  Amortization
  expense related to software for the years ended September 30, 2004, 2003 and
  2002 was approximately $2.4 million, $3.0 million and $2.5 million, respectively. 
  Of the total depreciation and amortization expense, approximately $2.3 million,
  $2.2 million and $2.1 million was included in direct costs for the years ended
  September 30, 2004, 2003 and 2002, respectively.

Software
  includes both internal use and external use software.  See Note 1. Internal
  use software includes third party software acquired for use on client projects
  and back office operations, software acquired through business combinations
  and internally developed software primarily for use in our child support payment
  processing operations.

At
  September 30, 2004 and 2003, the cost of assets acquired under capital leases
  was $963,000 and $1.1 million, respectively, and the related accumulated depreciation
  and amortization was $864,000 and $903,000, respectively.

4.  GOODWILL AND OTHER ACQUIRED
  INTANGIBLE ASSETS

As
  of October 1, 2002, the Company adopted SFAS 142 and stopped amortizing goodwill.
  The Company completed initial impairment tests in accordance with SFAS 142 in
  the first quarter of fiscal year 2003.  Results of the initial impairment
  tests did not indicate any impairment loss.  Impairment tests involve the
  use of estimates related to the fair market values of the business operations
  with which goodwill is associated.  Losses, if any, resulting from the
  annual impairment tests will be reflected in operating income in the statement
  of operations. During the fourth quarter of fiscal year 2003, the Company decided
  to shut down the U.S. Commercial Services segment and the United Kingdom Operations
  segment and accordingly recorded a restructuring charge of $17.6 million to
  write-off substantially all of the associated goodwill.  As of September
  30, 2003, the remaining goodwill associated with these segments totaled $457,000,
  representing its fair market value. During the quarter ended December 31, 2003,
  the remaining balance was written off.  The fair market value was determined
  by estimating the expected cash flows on the remaining contracts in these segments.
  In the fourth quarter of fiscal year 2004, the Company performed its annual
  impairment test to determine if the remaining goodwill associated with its segments
  is impaired.  The results did not indicate any impairment loss.

F-17



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Other acquired intangible assets, net,
  consisted of the following at September 30, 2004 and 2003:

|                                              |  |                             |           |       | September 30,
        2004 |                                  | September 30,
        2003 |    
|--------------------------------------------- |  | --------------------------- | --------- | ----- | -------------------------- | -------------------------------- | -------------------------- | ---
|                                              |  |                             |           |       |                            |                                  |                            |    
|                                              |  | Amortization
        Period |           | Gross |                            | Accumulated
        Amortization |                            | Net
|                                              |  |                             |           |       |                            |                                  |                            |    
|                                              |  |                             |           |       | (in thousands)             |                                  | (in thousands)             |    
|Client
        relationships                  |  |                             | 10 years  |       | $                          | 28,640                           |                            | $  
|Trademarks                                    |  |                             | 3 years   |       |                            | 3,200                            |                            |    
|Technology                                    |  |                             | 10 years  |       |                            | 740                              |                            |    
|Acquired
        contracts                    |  |                             | 12 months |       |                            | 500                              |                            |    
|Backlog
        and acquired contracts        |  |                             | 1 year    |       |                            | 675                              |                            |    
|Technology                                    |  |                             | 5 years   |       |                            | 4,150                            |                            |    
|Technology
        & research and development |  |                             | 7 years   |       |                            | 30                               |                            |    
|Non-compete
        agreements                |  |                             | 3 years   |       |                            | 560                              |                            |    
|                                              |  |                             |           |       |                            |                                  |                            |    
|Other
        acquired intangible assets, net |  |                             |           |       | $                          | 38,495                           |                            | $  
|                                              |  |                             |           |       |                            |                                  |                            |    

Amortization
  expense of other acquired intangible assets was approximately $3.7 million,
  $3.3 million, and $777,000 for fiscal years ended September 30, 2004, 2003 and
  2002, respectively.

Estimated
  amortization expense for other acquired intangible assets on the Companys
  September 30, 2004 balance sheet for the next five years is as follows (in thousands):

|Year Ending September
        30, | 
|--------------------------------- | 
|                                  | 
|2005                              | 
|2006                              | 
|2007                              | 
|2008                              | 
|2009                              | 
|                                  | 
|                                  | 
|                                  | 

The
  changes in the carrying amount of goodwill for the fiscal year ended September
  30, 2004 are as follows (in thousands):

|                                         |  | Business
        Processing
        Outsourcing |       | Packaged
        Software
        and Systems
        Integration |   | Electronic
        Payment
        Processing |  | Total |       
|---------------------------------------- |  | ----------------------------------------------- | ----- | ----------------------------------------------------------------- | - | --------------------------------------------- |  | ----- | ------
|                                         |  |                                                 |       |                                                                   |   |                                               |  |       |       
|Balance
        as of September 30, 2003 |  | $                                               | 5,298 |                                                                   | $ | 9,721                                         |  | $     | 14,606
|Acquisition
        of EPOS Corporation  |  |                                                 |      |                                                                   |   | 8,199                                         |  |       |      
|                                         |  |                                                 |       |                                                                   |   |                                               |  |       |       
|Balance
        as of September 30, 2004 |  | $                                               | 5,298 |                                                                   | $ | 17,920                                        |  | $     | 14,606
|                                         |  |                                                 |       |                                                                   |   |                                               |  |       |       

F-18



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Had
  the Company been accounting for goodwill under SFAS 142 for the fiscal year
  ended September 30, 2002, the Companys net income (loss) and net income
  (loss) per share would have been as follows:

|                                                     |  | Year Ended
        September 30,
        2002         |        
|---------------------------------------------------- |  | ----------------------------------------------------- | -------
|                                                     |  |                                                       |        
|                                                     |  | (in thousands,
        except per share
        date) |        
|Reported
        net loss                            |  | $                                                     | (15,040
|Add
        back:  Goodwill amortization, net of tax |  |                                                       | 2,324  
|                                                     |  |                                                       |        
|Adjusted
        net loss                            |  | $                                                     | (12,716
|                                                     |  |                                                       |        
|Net
        loss per basic share:                    |  |                                                       |        
|As
        reported                                  |  | $                                                     | (0.87  
|Goodwill
        amortization, net of tax            |  |                                                       | 0.13   
|                                                     |  |                                                       |        
|Adjusted
        net loss per basic share            |  | $                                                     | (0.74  
|                                                     |  |                                                       |        
|Net
        loss per diluted share:                  |  |                                                       |        
|As
        reported                                  |  | $                                                     | (0.82  
|Goodwill
        amortization, net of tax            |  |                                                       | 0.13   
|                                                     |  |                                                       |        
|Adjusted
        net loss per diluted share          |  | $                                                     | (0.69  
|                                                     |  |                                                       |        

5.  BANK LINES OF CREDIT

At
  September 30, 2004, the Company had a $15.0 million revolving credit facility,
  all of which may be used for letters of credit.  The credit facility has
  a maturity date of January 31, 2005.  The credit facility is collateralized
  by first priority liens and security interests in the Companys assets.
  Interest is based on either the adjusted LIBOR (as of September 30, 2004 was
  3.65%) rate plus 2.25% or the lenders announced prime rate (as of September
  30, 2004 was 4.75%) at the Companys option, and is payable monthly. 
  As of September 30, 2004, there was approximately $1,735,000 of standby letters
  of credit outstanding under this facility.  Among other provisions, the
  credit facility requires the Company to maintain certain minimum financial ratios.
  As of September 30, 2004, the Company was in compliance with all of the financial
  ratios of the credit facility.

One
  of the standby letters of credit outstanding under the credit facility was issued
  in April 2004 in the amount of $935,000, and was used to guarantee the performance
  bond of CPAS Systems, Inc. (CPAS) required by a project contract
  that is anticipated to be completed in August 2005.  On October 1, 2004,
  the Company acquired 45% of the common stock of CPAS.  In conjunction with
  this guarantee, the Company entered into an indemnification agreement with the
  third party which pledges to hold harmless, indemnify and make the Company whole
  from and against any and all amounts actually claimed or withdrawn as well as
  other business consideration.  In accordance with Financial Accounting
  Standards Board (FASB) Interpretation No. 45 (FIN 45),
  Guarantors Accounting and Disclosure Requirements for Guarantees,
  Including Indirect Guarantees of Indebtedness of Others, the Company recorded
  a liability for the fair value of $935,000 in accrued liabilities and an equal
  receivable in prepaid expenses and other current assets.  The recorded
  amounts will be eliminated if the Company is released from the risk upon expiration
  or settlement of the obligation.

F-19



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

In
  addition to the letters of credit issued under the credit facility, the Company
  had letters of credit totaling approximately $3.2 million, which were collateralized
  by certain securities in the Companys long-term investment portfolio at
  September 30, 2004.  Also, the Companys subsidiary, OPC, had a letter
  of credit outstanding in the amount of approximately $138,000 collateralized
  by a certificate of deposit.  The majority of these letters of credit were
  issued to secure performance bonds and to meet various facility lease requirements.

6.  COMMITMENTS AND CONTINGENCIES

The
  Company leases its principal facilities and certain equipment under noncancellable
  operating and capital leases which expire at various dates through fiscal 2010.
  Future minimum lease payments for noncancellable leases with terms of one year
  or more are as follows:

|                                                   |  | Operating
        Leases |        | Capital
        Leases |  
|-------------------------------------------------- |  | ------------------------ | ------ | ---------------------- | -
|                                                   |  |                          |        |                        |  
|                                                   |  | (in thousands)           |       
|Year
        ending September 30,                  |  |                          |        |                        |  
|2005                                               |  | $                        | 3,943  |                        | $
|2006                                               |  |                          | 2,252  |                        |  
|2007                                               |  |                          | 1,966  |                        |  
|2008                                               |  |                          | 1,552  |                        |  
|2009                                               |  |                          | 1,119  |                        |  
|Thereafter                                         |  |                          | 518    |                        |  
|                                                   |  |                          |        |                        |  
|Total
        minimum lease payments               |  | $                        | 11,350 |                        |  
|                                                   |  |                          |        |                        |  
|Less
        amounts representing interest         |  |                          |        |                        |  
|                                                   |  |                          |        |                        |  
|Present
        value of capital lease obligations |  |                          |        |                        |  
|Less
        amounts due within one year           |  |                          |        |                        |  
|                                                   |  |                          |        |                        |  
|                                                   |  |                          |        |                        | $
|                                                   |  |                          |        |                        |  

The
  amounts due within one year of $107,000 is included in other current liabilities.

Rent
  expense for the years ended September 30, 2004, 2003, and 2002 was approximately
  $2.7 million, $3.6 million and $2.5 million, respectively.

Under
  certain contracts, the Company is required to obtain performance bonds from
  a licensed surety and to post the performance bond with the client. At September 30,
  2004, the Company had aggregate bonds totaling $27.1 million posted with clients. 
  Certain of these bonds are secured by letters of credit and pledged investments
  totaling $3.0 million.  Fees for obtaining the bonds are expensed over
  the life of the bond and are included in direct costs.

7.  SHAREHOLDERS EQUITY

Common Stock

In
  February 1997, the Companys Board of Directors authorized two classes
  of common stock, Class A common stock and Class B common stock. Each
  then outstanding share of common stock was converted into 40 shares of Class A
  common stock and 60 shares of Class B common stock. In October 1997,
  the Board of Directors increased the authorized shares of Class B common
  stock to 42.6 million.

F-20



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

The
  holders of Class A common stock and Class B common stock have ten
  votes per share and one vote per share, respectively. Each share of Class A
  common stock will automatically convert into one share of Class B common
  stock upon transfer of the share, except in limited circumstances, or at the
  election of the holder of such shares of Class A common stock.

Upon
  conversion of shares of Class A common stock into shares of Class B
  common stock, such Class A common stock shares are retired from the authorized
  shares and are not reissuable by the Company. During the years ended September 30,
  2004 and 2002, approximately 880,000 and 97,000 shares, respectively, of Class A
  common stock were converted to Class B common stock.  As of September
  30, 2004, all Class A common stock have been converted to Class B common stock
  and, accordingly, no shares were authorized or outstanding.

In
  December 2001, the Company completed a follow-on public offering of 4.0 million
  shares of its Class B common stock at $20.00 per share.  Of those shares,
  3.6 million shares were sold by the Company and 400,000 shares were sold by
  certain selling shareholders.  Net proceeds to the Company were approximately
  $68.6 million after deducting the underwriters discount, commissions and related
  issuance costs.

In
  January 2002, the underwriters for the Companys follow-on public offering
  exercised the over-allotment option for an additional 600,000 shares of the
  Companys Class B common stock at $20.00 per share.  Of those shares,
  540,000 shares were sold by the Company and 60,000 shares were sold by certain
  selling shareholders.  Net proceeds to the Company were approximately $10.4
  million.

Common Stock Repurchase Program

In
  October 1998, the Board of Directors authorized the repurchase of up to
  one million shares of Class B common stock. The purchases were to be made
  in the open market or in privately negotiated transactions at the discretion
  of the Companys 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, the Board increased the number of
  shares authorized for repurchase to a total of two million shares.  Eight
  Hundred Eighty-Four Thousand and Four Hundred shares have been repurchased for
  a total cost of approximately $8.7 million as of September 30, 2004. 
  Under the Companys current bank facility, stock repurchases are prohibited.

1996 Equity Incentive Plan

In
  February 1997, the Company adopted the 1996 Equity Incentive Plan (the
  Plan), under which the Board of Directors may issue incentive stock
  options for Class B common stock to employees and nonstatutory stock options,
  stock bonuses or the right to purchase restricted stock to employees, consultants
  and outside directors. The Board of Directors or a committee designated by the
  Board determines who shall receive awards, the number of shares and the exercise
  price (which cannot be less than the fair market value at date of grant for
  incentive stock options and other awards). Options granted under the Plan expire
  no more than ten years from the date of grant and must vest at a rate of
  at least 20% per year over five years from date of grant. Incentive stock options
  granted to employees deemed to own more than 10% of the combined voting power
  of all classes of stock of the Company must have an exercise price of at least
  110% of the market price of the stock at the date of grant, and the options
  may not be exercisable after the expiration of five years from the date of grant.
  In September 2002, in connection with the sale of the Companys Australian
  operation, the Company recorded compensation expense of approximately $1.9 million
  related to the acceleration of vesting upon a change in control of options previously
  granted to Australian employees. At September 30, 2004 and 2003, the number
  of shares authorized for issuance under the Plan was approximately 6,989,000.

F-21



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

A summary of activity under the Plan
  is as follows:

|                                                  |  | Number of Shares |                | Weighted Average
        Exercise Price |  
|------------------------------------------------- |  | ---------------- | -------------- | --------------------------------------- | -
|                                                  |  |                  |                |                                         |  
|                                                  |  |                  | (in thousands) |                                         |  
|Options
        outstanding at September 30, 2001 |  |                  | 3,674          |                                         | $
|Options
        granted                           |  |                  | 712            |                                         | $
|Options
        cancelled                         |  |                  | (270           | )                                       | $
|Options
        exercised                         |  |                  | (1,575         | )                                       | $
|                                                  |  |                  |                |                                         |  
|Options
        outstanding at September 30, 2002 |  |                  | 2,541          |                                         | $
|Options
        granted                           |  |                  | 664            |                                         | $
|Options
        cancelled                         |  |                  | (306           | )                                       | $
|Options
        exercised                         |  |                  | (182           | )                                       | $
|                                                  |  |                  |                |                                         |  
|Options
        outstanding at September 30, 2003 |  |                  | 2,717          |                                         | $
|Options
        granted                           |  |                  | 782            |                                         | $
|Options
        cancelled                         |  |                  | (693           | )                                       | $
|Options
        exercised                         |  |                  | (350           | )                                       | $
|                                                  |  |                  |                |                                         |  
|Options
        outstanding at September 30, 2004 |  |                  | 2,456          |                                         | $
|                                                  |  |                  |                |                                         |  

The
  weighted average fair value of options granted to employees under the Plan during
  the years ended September 30, 2004, 2003 and 2002 was $8.29, $8.79, and
  $10.16 per share, respectively. At September 30, 2004, 2003 and 2002, there
  were outstanding options to purchase 1.5 million, 1.7 million and 1.2 million
  shares of Class B common stock exercisable at weighted average exercise
  prices of $11.37, $10.64, and $10.33, respectively. At September 30, 2004,
  options to purchase approximately 1.0 million shares of Class B common
  stock were available for grant. The weighted average remaining life of outstanding
  options under the Plan at September 30, 2004 was 6.98 years.

The
  following table summarizes information about stock options outstanding at September 30,
  2004:

|Options Outstanding              |  | Options Exercisable        |      
|-------------------------------- |  | -------------------------- | -----
|                                 |  |                            |      
|Range of
        Exercise Prices |  | Number
        Outstanding |      
|                                 |  |                            |      
|                                 |  | (in thousands)             |      
|$3.25
        - $6.50            |  |                            | 342  
|$6.81
        - $7.78            |  |                            | 197  
|$7.81
        - $7.81            |  |                            | 467  
|$7.86
        - $9.10            |  |                            | 385  
|$9.19
        - $14.25           |  |                            | 250  
|$14.82
        - $16.12          |  |                            | 330  
|$16.38
        - $17.75          |  |                            | 405  
|$17.81
        - $17.81          |  |                            | 5    
|$19.56
        - $19.56          |  |                            | 40   
|$20.70
        - $20.70          |  |                            | 35   
|                                 |  |                            |      
|$3.25
        - $20.70           |  |                            | 2,456
|                                 |  |                            |      

F-22



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Employee Stock Purchase Plan

In
  October 1997, the Company adopted the Employee Stock Purchase Plan. The
  Company initially reserved a total of 100,000 shares of Class B common
  stock for issuance under the plan. On January 11, 2000, the Companys
  shareholders authorized an increase in the number of shares of Class B
  common stock reserved for issuance under the plan to 300,000. The plan has consecutive
  six-month purchase periods and eligible employees may purchase Class B
  common stock at 85% of the lesser of the fair market value of the Companys
  Class B common stock on the first day or the last day of the applicable
  purchase period. Total shares purchased under the plan for the fiscal years
  ended September 30, 2004, 2003 and 2002 were approximately 30,000, 36,000
  and 24,000, respectively,  resulting in proceeds of approximately $199,000,
  $342,000 and $257,000, respectively.

8.  ACQUISITIONS

All
  acquisitions have been accounted for using the purchase method of accounting. 
  The initial purchase price for each acquisition described below includes cash
  paid and stock issued at the date of acquisition, estimated acquisition costs
  and any guaranteed future consideration. Beginning October 1, 2002, the Company
  adopted SFAS 142 and no longer amortizes goodwill and indefinite lived intangible
  assets. Under SFAS 142, goodwill and indefinite lived intangible assets are
  reviewed at least annually for impairment.  Separable intangible assets
  that have finite useful lives continue to be amortized over their useful lives.

Effective
  March 1, 2002, the Company acquired certain assets of Chayet Communications
  Group, Inc. (Chayet) for approximately $737,000 in cash and shares
  of Class B common stock, including approximately $28,000 in estimated acquisition
  costs.  This acquisition enhanced the Companys industry expertise
  in the healthcare and government markets as Chayet specialized in providing
  consulting services to these markets. Total tangible assets acquired were approximately
  $4,000. Goodwill was approximately $732,000, of which approximately $488,000
  was assigned to the U.S. Commercial Services segment and was written off with
  the corporate restructuring of 2003.  Approximately $244,000 was assigned
  to the U.S. Government Services segment and, subsequently, allocated to our
  Government Business Processing Outsourcing and Packaged Software and Systems
  Integration segments with the corporate restructuring of 2003.  The full
  amount of goodwill is expected to be deductible for income tax purposes. 
  Contingent payments of $333,000 were accrued during the year ended September
  30, 2002 of which $167,000 was paid during the year ended September 30, 2002
  and $166,000 was paid during the year ended September 30, 2003.  Contingent
  payments of approximately $250,000 were accrued during the year ended September
  30, 2003, of which $167,000 was paid as of September 30, 2003 and the remaining
  $83,000 was paid during the year ended September 30, 2004.

Effective
  March 16, 2002, the Company acquired certain assets and assumed certain liabilities
  of the Government Solutions Center (GSC) of KPMG Consulting Inc.
  (now BearingPoint, Inc.) for approximately $8.4 million in cash, including approximately
  $665,000 in estimated acquisition costs.  GSC focuses on providing financial
  management and procurement system solutions to state, county and city governments
  and agencies. This acquisition increased our portfolio of local government clients
  and added additional proprietary technology solutions to the Companys
  delivery offerings.  Total tangible assets acquired were approximately
  $395,000 and liabilities assumed were approximately $2.9 million.  Intangible
  assets acquired were approximately $10.9 million and included software, acquired
  contracts and goodwill, which are being amortized over their estimated useful
  lives of one to three years.  Goodwill of approximately $8.4 million was
  assigned to the U.S. Government Services segment and, subsequently, allocated
  to our Government Business Processing Outsourcing and Packaged Software and
  Systems Integration segments with the corporate restructuring of 2003. 
  The full amount of goodwill is deductible for income tax purposes.  In
  accordance with SFAS 142, the Company is not amortizing goodwill for this acquisition. 
  Additional contingent payments of approximately $2.7 million in cash may be
  paid to BearingPoint, Inc. upon the achievement of certain revenue performance
  targets over the period ending March 31, 2005. Contingent payments will be accrued
  when earned and recorded as additional purchase price. At September 30, 3004,
  no contingent payments were accrued.

F-23



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

Effective
  at the end of July 2002, the Company acquired all the issued and outstanding
  capital stock of OPC for approximately $70.7 million in cash, including approximately
  $1.8 million in estimated acquisition costs. OPCs principal business is
  enabling the collection of credit card payments on behalf of government entities. 
  This acquisition increased the Companys portfolio of state and local government
  clients and added to its transaction and online payment processing delivery
  offering.  Total tangible assets acquired were approximately $44.3 million,
  including approximately $39.4 million of cash and investments, and liabilities
  assumed were approximately $16.9 million.  Intangible assets acquired were
  approximately $43.2 million and include software, acquired contracts, trademarks
  and goodwill, which are being amortized over their estimated useful lives of
  20 months to ten years. Goodwill was assigned to the Electronic Payment Processing
  segment and totals $14.6 million at September 30, 2004.  Goodwill is not
  expected to be deductible for income tax purposes.

Effective
  June 1, 2004, the Company purchased all of the outstanding stock of EPOS Corporation
  (EPOS), a Alabama corporation that supplies interactive voice response
  communication and electronic transaction processing technologies.  The
  total purchase price was approximately $20.1 million and was comprised of approximately
  $15.6 million in cash and 402,422 shares of Class B common stock valued at approximately
  $4.5 million, based on the closing price of Class B common stock on June 1,
  2004.  The cash payment of $15.6 million includes payments directly to
  EPOS lenders of approximately $7.5 million and estimated acquisition costs of
  approximately $811,000.  The identifiable intangible assets comprised the
  following (in thousands):

|Description                                   |  | Amount |       | Estimated Useful
        Life | 
|--------------------------------------------- |  | ------ | ----- | ----------------------------- | 
|                                              |  |        |       |                               | 
|Client
        relationships                  |  | $      | 4,240 |                               | 
|Backlog
        and acquired contracts        |  |        | 600   |                               | 
|Technology                                    |  |        | 4,150 |                               | 
|Technology
        & research and development |  |        | 30    |                               | 
|Non-compete
        agreement                 |  |        | 560   |                               | 
|                                              |  |        |       |                               | 
|Total                                         |  | $      | 9,580 |                               | 
|                                              |  |        |       |                               | 

Total
  goodwill of $8.2 million was allocated to the Packaged Software and Systems
  Integration (PSSI) segment.  The value of the identifiable
  intangible assets is based on an independent appraisal.  The full amount
  of goodwill is not deductible for income tax purposes.

Many
  requests for proposals issued in the child support payment processing and unemployment
  insurance practices require interactive voice response communication capabilities,
  such as those provided by EPOS.  Additionally, EPOS has established electronic
  payment processing capabilities and clients in the secondary education and utilities
  vertical industries that broaden the Companys overall capabilities and
  client base.  The Company has established strategic, operational business,
  financial, and valuation criteria that it uses to evaluate potential acquisitions
  and believes that these criteria, including valuation, are in line with market
  conditions.

F-24



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

The
  total purchase price paid was preliminarily allocated to the assets acquired
  and liabilities assumed as follows (in thousands):

|Accounts
        receivable                       |  | $ | 1,514  |  
|------------------------------------------------- |  | - | ------ | -
|Prepaid
        expenses and other current assets |  |   | 989    |  
|Property,
        equipment and software          |  |   | 2,413  |  
|Other
        assets                              |  |   | 37     |  
|Deferred
        income tax asset                 |  |   | 25     |  
|Accounts
        payable and accrued expenses     |  |   | (1,473 | )
|Deferred
        revenue                          |  |   | (1,190 | )
|Other
        long-term liability                 |  |   | (9     | )
|Other
        acquired intangible assets          |  |   | 9,580  |  
|Goodwill                                          |  |   | 8,199  |  
|                                                  |  |   |        |  
|Total
        consideration                       |  | $ | 20,085 |  
|                                                  |  |   |        |  

The
  following unaudited pro forma summary presents consolidated information as if
  the acquisition of EPOS had occurred as of October 1, 2001.  This pro forma
  summary is provided for information purposes only and is based on historical
  information after including the impact of certain adjustments such as increased
  estimated amortization expense due to the preliminary recording of intangible
  assets.  These pro forma results do not necessarily reflect actual results
  that would have occurred nor is it necessarily indicative of future results
  of operations of the combined entities (in thousands, except per share data):

|                                                            |  | Year Ended
        September 30, |        
|----------------------------------------------------------- |  | -------------------------------- | -------
|                                                            |  |                                  |        
|                                                            |  | 2004                             |        
|                                                            |  |                                  |        
|Net
        revenues                                        |  | $                                | 143,565
|                                                            |  |                                  |        
|Net
        income (loss)                                   |  | $                                | 336    
|                                                            |  |                                  |        
|Basic
        net income (loss) per share                   |  | $                                | 0.02   
|                                                            |  |                                  |        
|Diluted
        net income (loss) per share                 |  | $                                | 0.02   
|                                                            |  |                                  |        
|Shares
        used in computing basic net loss per share   |  |                                  | 18,987 
|                                                            |  |                                  |        
|Shares
        used in computing diluted net loss per share |  |                                  | 19,322 
|                                                            |  |                                  |        

In
  April 2004, the Company acquired from PublicBuy.net LLC an e-procurement software
  solution and related assets that streamline the purchasing process for public
  procurement officials for approximately $1,259,000 in cash, including $66,000
  in estimated transaction costs.  The total purchase price was allocated
  to intangible assets for $75,000, which are being amortized over 12 months,
  and software for $1,184,000.  The Company intends to license this software
  as part of its suite of financial management software offerings.

The
  accompanying consolidated financial statements include the results of operations
  of these acquired businesses and assets for periods subsequent to the respective
  acquisition dates.

F-25



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

9.  RELATED PARTY TRANSACTIONS

Notes Receivable and Accrued Interest
  Receivable

The
  Company had outstanding notes receivable and accrued interest receivable from
  certain officers and employees of the Company as of September 30, 2004
  and 2003, which total approximately $2.5 million and $2.2 million, respectively.
  These notes bear interest at rates ranging from 3.55% to 7.18% and have original
  maturities from one to ten years. Certain of these notes having a remaining
  aggregate balance of approximately $75,000 at  September 30, 2004 are being
  forgiven in accordance with the terms of the officers and employees
  agreements.

The
  Company also has outstanding notes receivable included in shareholders
  equity from the former Chairman of the Board and former Chief Executive Officer
  that were issued in connection with the exercise of options to purchase shares
  of Class B common stock. These notes are due in February 2007, bear
  interest at 6.99% per annum, are collateralized and full recourse, and have
  a balance of approximately $1.8 million as of September 30, 2004. The Chairman
  has pledged a total of approximately 387,000 shares of Class B common stock
  as collateral for these notes and other notes with a combined balance as of
  September 30, 2004 of approximately $2.8 million. As of September 30,
  2004, the pledged stock had a market value of approximately $3.7 million.

Included
  in the amounts above are $4.2 million and $3.9 million in notes receivable and
  accrued interest receivable from directors and executive officers of the Company
  at September 30, 2004 and 2003, respectively.

As
  mentioned above, approximately 387,000 shares of Class B common stock have been
  pledged as collateral for certain of these notes.

EPOS
  Corporation, a wholly owned subsidiary of the Company, has purchased certain
  software licenses and maintenance and related services from Nuance Communications,
  Inc. for voice recognition software which EPOS incorporates into its products.
  Mr. Berger, a Tier director, has been Chief Executive Officer and a director
  of Nuance since April 2003. Since the beginning of fiscal year, EPOS has paid
  or has been invoiced by Nuance for approximately $577,081.

10.  SEGMENT INFORMATION

Following
  the restructuring in the fourth quarter of fiscal year 2003, the Company has
  been managed through three reportable segments: Government Business Process
  Outsourcing (GBPO), Government Systems Integration (Government
  SI) and OPC.  Accordingly, the prior year amounts have been reclassified
  to conform to the current year presentation.  In connection with the acquisition
  of EPOS, the Company renamed two of its segments; consequently, the three reportable
  segments are now as follows:  GBPO, Packaged Software and Systems Integration
  (PSSI), formerly known as Government SI, and Electronic Payment
  Processing (EPP), formerly known as OPC.  The GBPO segment
  provides transaction processing services. The PSSI segment provides systems
  integration, licensing and maintenance services.  The EPP segment provides
  transaction and payment processing services.  The Company evaluates the
  performance of its operating segments based on net revenues and direct costs,
  while other operating costs are evaluated on a geographical basis.  Accordingly,
  the Company does not include selling and marketing expenses, general and administrative
  expenses, depreciation and amortization expense not attributable to state child
  support payment processing centers, interest income (expense), other income
  (expense) and income tax expense in segment profitability.  The table below
  presents financial information for the three reportable segments:

F-26



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

|                                                     |  | GBPO           |        | PSSI |   | EPP    |  | Total |       
|---------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | ----- | ------
|                                                     |  |                |        |      |   |        |  |       |       
|                                                     |  | (in thousands) |       
|For
        the Fiscal Year Ended September 30, 2004 |  |                |        |      |   |        |  |       |       
|Net
        revenues                                 |  | $              | 44,715 |      | $ | 42,553 |  | $     | 40,669
|Direct
        costs                                 |  |                | 28,772 |      |   | 26,417 |  |       | 28,448
|For
        the Fiscal Year Ended September 30, 2003 |  |                |        |      |   |        |  |       |       
|Net
        revenues                                 |  |                | 48,715 |      |   | 30,197 |  |       | 37,005
|Direct
        costs                                 |  |                | 29,939 |      |   | 33,033 |  |       | 26,685
|For
        the Fiscal Year Ended September 30, 2002 |  |                |        |      |   |        |  |       |       
|Net
        revenues                                 |  |                | 40,582 |      |   | 40,374 |  |       | 3,700 
|Direct
        costs                                 |  |                | 22,854 |      |   | 27,308 |  |       | 2,685 

11.  INCOME TAXES

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

|                                              |  | September 30,  |        
|--------------------------------------------- |  | -------------- | -------
|                                              |  |                |        
|                                              |  | 2004           |        
|                                              |  |                |        
|                                              |  | (in thousands) |        
|Deferred
        tax liabilities:             |  |                |        
|Intangibles                                   |  | $              | 6,246  
|Internally
        developed software         |  |                | 552    
|Other
        deferred tax liabilities        |  |                | 341    
|                                              |  |                |        
|Total
        deferred tax liabilities        |  |                | 7,139  
|                                              |  |                |        
|Deferred
        tax assets:                  |  |                |        
|Accrued
        expenses                      |  |                | 2,453  
|Deferred
        income                       |  |                | 41     
|Depreciation                                  |  |                | 233    
|Accounts
        receivable allowance         |  |                | 456    
|Net
        operating loss carryforward       |  |                | 24,803 
|Foreign
        tax credit carryforward       |  |                | 584    
|Valuation
        allowance                   |  |                | (21,431
|                                              |  |                |        
|Total
        deferred tax assets             |  |                | 7,139  
|                                              |  |                |        
|Net
        deferred tax assets (liabilities) |  | $              |       
|                                              |  |                |        

At
  September 30, 2004, the Company had approximately $584,000 of excess foreign
  tax carryforwards for the purpose of offsetting future U.S. federal income tax.
  Such foreign tax carryforwards will begin to expire in 2010. The benefit from
  the foreign tax carryforwards may be limited in certain circumstances. The Company
  believes sufficient uncertainty exists regarding the realizability of the foreign
  tax carryforwards such that a full valuation allowance is required.

At
  September, 30, 2004, the Company had federal net operating loss carryforwards
  of approximately $64.0 million, which expire beginning in fiscal 2018. 
  At September 30, 2004, the Company had state net operating loss carryforwards
  of approximately $52.1 million, which expire beginning in fiscal 2007. Of these
  amounts, $48.6 million of federal net operating loss carryforwards and $31.3
  million of state net operating loss carryforwards were acquired in the acquisition
  of OPC.  The Companys ability to utilize the acquired federal net
  operating loss carryforward is limited to $3,350,000 per year pursuant to Internal
  Revenue Code Sections 382, which imposes an annual limitation on the utilization
  of net operating loss carryforwards following ownership changes.

F-27



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

As
  of September 30, 2004, the Company established a full valuation allowance against
  the net deferred tax assets due to the uncertainty regarding their utilization. 
  At September 30, 2004, $2.1 million and $4.0 million of the Companys valuation
  allowance relates to deferred tax assets for which any subsequently recognized
  tax benefits will reduce goodwill or increase common stock, respectively.

The
  Companys fiscal 2002 tax returns include a loss on disposal of Australian
  operations totaling approximately $22.5 million for which no tax benefit has
  been recorded.  Any tax benefit recorded relating to this will be recorded
  in discontinued operations.

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

|                                                   |  | Year Ended September 30, |     
|-------------------------------------------------- |  | ------------------------ | ----
|                                                   |  |                          |     
|                                                   |  |                          | 2004
|                                                   |  |                          |     
|                                                   |  | (in thousands)           |     
|Current
        (benefit):                         |  |                          |     
|Federal                                            |  | $                        |    
|State                                              |  |                          | 105 
|Foreign                                            |  |                          |    
|                                                   |  |                          |     
|                                                   |  |                          | 105 
|                                                   |  |                          |     
|Deferred
        (benefit):                        |  |                          |     
|Federal                                            |  |                          |    
|State                                              |  |                          |    
|                                                   |  |                          |     
|                                                   |  |                          |    
|                                                   |  |                          |     
|Total
        provision (benefit) for income taxes |  | $                        | 105 
|                                                   |  |                          |     

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

|                                                |  | Year Ended September 30, |      
|----------------------------------------------- |  | ------------------------ | -----
|                                                |  |                          |      
|                                                |  |                          | 2004 
|                                                |  |                          |      
|U.S
        statutory federal tax rate          |  |                          | 34.0 
|State
        taxes, net of federal tax benefit |  |                          | 7.5  
|Tax
        exempt interest income              |  |                          | (11.2
|Tax
        effect of United Kingdom operations |  |                          |     
|Meals
        and entertainment                 |  |                          | 4.9  
|Valuation
        allowance                     |  |                          | (30.8
|Other                                           |  |                          | 1.3  
|                                                |  |                          |      
|Effective
        tax rate                      |  |                          | 5.7  
|                                                |  |                          |      

F-28



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

12.  RETIREMENT PLAN

The
  Company maintains a savings plan under Section 401(k) of the Internal Revenue
  Code (the 401(k) Plan). Under the 401(k) Plan, participating employees
  may defer a portion of their pretax earnings up to the Internal Revenue Service
  annual contribution limit. The Companys contributions to the 401(k) Plan
  are discretionary. The Company has not contributed any amounts to the 401(k)
  Plan to date.

13.  RESTRUCTURING

During
  the fourth quarter of fiscal year 2003, the Company initiated a strategic review
  of its business units.  This review was completed in the fourth quarter
  of fiscal year 2003 and the Company decided to renew its focus on its core Government
  Services businesses while exiting unprofitable or marginal business operations. 
  As a result of this review, the Company recorded a charge of approximately $19.8
  million during the three months ended September 30, 2003.  This charge
  was comprised of $18.2 million of goodwill, intangible and tangible asset impairment
  charges, $882,000 related to the closure of several offices (net of estimated
  sublease income of $115,000) and $707,000 of severance related to the termination
  of employees in the exited businesses. The restructuring plan included the termination
  of approximately 50 employees, of which approximately 20 employees were terminated
  during the three months ended September 30, 2003 and the remaining employees
  were terminated during the three months ended December 31, 2003.  Goodwill
  and asset impairment charges of approximately $1.3 million were incurred for
  the fiscal year ended September 30, 2004, of which approximately $571,000 was
  included in restructuring charges and approximately $752,000 was included in
  loss from discontinued operations.  Severance of approximately $2.3 million
  was incurred for the fiscal year ended September 30, 2004, of which approximately
  $1.5 million primarily resulted from the signing of a termination agreement
  with the Companys former chief executive officer and was included in restructuring
  charges and approximately $830,000 was included in loss from discontinued operations. 
  Also included in restructuring charges for the fiscal year ended September 30,
  2004 was an additional $1.1 million comprised of $222,000 related to estimated
  facility closure costs for one additional office and $854,000 for the closure
  of our Walnut Creek, California office (net of estimated sublease income of
  $1.5 million).

As
  a result of the acquisition of OPC in July 2002, the Company assumed certain
  liabilities for restructuring costs that OPC had previously recognized in connection
  with the involuntary termination of employees and the consolidation of facilities
  (net of estimated sublease income of $295,000). The assumed severance liability
  included severance for 27 individuals and the closing of certain office space.

In
  June 2004, the Company completed the consolidation of its Walnut Creek, California
  and Reston, Virginia offices.  As part of the office consolidation, the
  Company relocated the accounting, financial planning, information technology,
  legal, human resources and facilities corporate functions to the Reston office
  and closed the Walnut Creek office.  The Company believes that the office
  consolidation will improve the efficiency of its workforce, reduce its cost
  structure, assist in developing a consistent corporate culture and streamline
  the overall back office operations.  As anticipated, some members of the
  staff formerly resident in Walnut Creek have relocated to the Reston office
  as part of the office consolidation, and the Company has hired new staff for
  the Reston office to perform functions formerly carried out in Walnut Creek. 
  The Company incurred restructuring and other related pre-tax charges totaling
  approximately $2.9 million in connection with the office consolidation in the
  fiscal year ended September 30, 2004.  The charges are comprised of approximately
  $385,000 in severance payments for employees who did not relocate to the Reston
  office, $1.3 million in asset impairment charges and facility closure costs,
  net of estimated sublease income of $1.5 million, and approximately $1.3 million
  in other charges, such as relocation and temporary labor cost, related to the
  office consolidation.

F-29



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

At
  September 30, 2003, the Company had restructuring liabilities totaling $2.3
  million, of which $656,000 was recorded in accrued liabilities, and $668,000
  was recorded in other long-term liabilities and $1.0 million was recorded in
  liabilities of discontinued operations.  The following is a summary of
  the restructuring liabilities from September 30, 2002 through September 30,
  2003 (in thousands):

|                                                     |  | Liability as
        of
        September 30,
        2002 |       | Additions/
        (Reductions) |   | Cash
        Payments |   | Liability as
        of
        September 30,
        2003 |       
|---------------------------------------------------- |  | ---------------------------------------------------------- | ----- | ------------------------------- | - | --------------------- | - | ---------------------------------------------------------- | ------
|                                                     |  |                                                            |       |                                 |   |                       |   |                                                            |       
|Severance
         OPC                              |  | $                                                          | 2,254 |                                 | $ | (38                   | ) | $                                                          | (1,083
|Facilities
        closure  OPC                     |  |                                                            | 513   |                                 |   | (15                   | ) |                                                            | (361  
|Severance
         continuing operations            |  |                                                            |      |                                 |   | 280                   |   |                                                            | (280  
|Facilities
        closure  continuing operations   |  |                                                            |      |                                 |   | 53                    |   |                                                            |      
|Severance
         discontinued operations          |  |                                                            |      |                                 |   | 427                   |   |                                                            | (249  
|Facilities
        closure  discontinued operations |  |                                                            |      |                                 |   | 829                   |   |                                                            |      
|                                                     |  |                                                            |       |                                 |   |                       |   |                                                            |       
|                                                     |  | $                                                          | 2,767 |                                 | $ | 1,536                 |   | $                                                          | (1,973
|                                                     |  |                                                            |       |                                 |   |                       |   |                                                            |       

At
  September 30, 2004, the Company had restructuring liabilities totaling $2.0
  million, of which $1.0 million was recorded in accrued liabilities, $908,000
  was recorded in non-current other liabilities, and $114,000 was included in
  current liabilities of discontinued operations. Approximately $506,000 of the
  non current restructuring liability is expected to be paid in fiscal year 2006,
  approximately $222,000 in fiscal year 2007, and the balance is expected to be
  paid in fiscal year 2008. The following is a summary of the restructuring liabilities
  from September 30, 2004 (in thousands):

|                                                     |  | Liability as
        of
        September 30,
        2003 |       | Additions/
        (Reductions) |   | Cash
        Payments |   | Liability as
        of
        September 30,
        2004 |       
|---------------------------------------------------- |  | ---------------------------------------------------------- | ----- | ------------------------------- | - | --------------------- | - | ---------------------------------------------------------- | ------
|                                                     |  |                                                            |       |                                 |   |                       |   |                                                            |       
|Severance  OPC                                      |  | $                                                          | 1,133 |                                 | $ |                      |   | $                                                          | (501  
|Facilities closure  OPC                             |  |                                                            | 137   |                                 |   |                      |   |                                                            | (91   
|Severance  continuing operations                    |  |                                                            |      |                                 |   | 986                   |   |                                                            | (515  
|Facilities closure  continuing
        operations   |  |                                                            | 53    |                                 |   | 1,357                 |   |                                                            | (640  
|Severance  discontinued operations                  |  |                                                            | 178   |                                 |   | 787                   |   |                                                            | (965  
|Facilities closure  discontinued
        operations |  |                                                            | 829   |                                 |   | (385                  | ) |                                                            | (330  
|                                                     |  |                                                            |       |                                 |   |                       |   |                                                            |       
|                                                     |  | $                                                          | 2,330 |                                 | $ | 2,745                 |   | $                                                          | (3,042
|                                                     |  |                                                            |       |                                 |   |                       |   |                                                            |       

14.  DISCONTINUED OPERATIONS

During
  the quarter ended September 30, 2003, the Company completed a strategic review
  of all business units and began a restructuring plan which included exiting
  the U.S. Commercial Services segment, which includes the Systems and Technology
  Training division, and the United Kingdom Operations segment. During the quarter
  ended December 31, 2003, the Company completed the restructuring and abandoned
  those businesses.  Accordingly, the financial position, results of operations
  and cash flows of the U.S. Commercial Services and United Kingdom Operations
  segments have been reported as discontinued operations for each period presented. 
  The discontinued operations activity for the fiscal year ended September 30,
  2004 included a reduction in the estimated facility closure charges as a result
  of renegotiating more favorable lease-buyout terms for one of the facilities. 
  The discontinued operations activity for the fiscal year ended September 30,
  2003 represented the historical results of operations of these discontinued
  businesses.

F-30



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

During
  the quarter ended March 31, 2002, the Company adopted a plan to sell its Australian
  operation and completed this sale in September 2002.  In accordance with
  Accounting Principles Board Opinion No. 30, Reporting the Results of Operations
   Reporting the Effects of Disposal of Segment of a Business, and Extraordinary,
  Unusual and Infrequently Occurring Events and Transactions, the Australian
  operations are reported as a discontinued operation for the years ended September
  30, 2002 and 2001.  Gross proceeds from the sale of the Australian operations,
  including funds in escrow, amounted to approximately $3.4 million (converted
  to U.S. dollars as of the date of sale) and selling and exit costs amounted
  to approximately $2.0 million.

At
  September 30, 2004, the Company had liabilities of discontinued operations of
  approximately $121,000 comprised of restructuring liabilities, and accounts
  payable and other accrued liabilities.

The operating results of the discontinued
  operations were as follows (in thousands):

|                                                                                                                                                                                                                                 |  | Year Ended September 30, |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------
|                                                                                                                                                                                                                                 |  |                          |       
|                                                                                                                                                                                                                                 |  | 2004                     |       
|                                                                                                                                                                                                                                 |  |                          |       
|Net
        revenues                                                                                                                                                                                                             |  | $                        | 1,780 
|                                                                                                                                                                                                                                 |  |                          |       
|Loss
        from operations of discontinued operation, adjusted for applicable provision
        (benefit) for income taxes of $0, ($538), and $592 for the years ended
        September 30, 2004, 2003 and 2002, respectively |  |                          | (1,440
|Loss
        on disposal of discontinued operation, including income taxes of 
        $356 for the year ended September 30, 2002                                                                                                |  |                          |      
|                                                                                                                                                                                                                                 |  |                          |       
|Loss
        from discontinued operation, net of income taxes                                                                                                                                                                    |  | $                        | (1,440
|                                                                                                                                                                                                                                 |  |                          |       

15.  LEGAL PROCEEDINGS

In
  June 2003, the Company announced that it had received a subpoena from a grand
  jury in the Southern District of New York to produce certain documents pursuant
  to an investigation involving the child support payment processing industry
  by the United States Department of Justice (DOJ), Antitrust Division. 
  The Company has fully cooperated, and intends to continue to cooperate fully,
  with the subpoena and with the DOJs investigation.  On November 20,
  2003, the DOJ granted conditional amnesty to the Company pursuant to the Antitrust
  Divisions Corporate Leniency Policy.  Consequently, the DOJ will
  not bring any criminal charges against the Company, its officers, directors
  and employees, as long as the Company continues to comply with the Corporate
  Leniency Policy, which requires, among other things, the Companys full
  cooperation in the investigation and restitution payments if it is determined
  that parties were injured as a result of impermissible anti-competitive conduct. 
  During the fiscal year 2003, the Company incurred approximately $1.3 million
  of legal costs to comply with the investigation, which includes approximately
  $305,000 paid under officers and directors indemnification agreements. 
  During the fiscal year 2004, the Company incurred approximately $770,000 of
  legal costs to comply with the subpoena which included costs of approximately
  $211,000 incurred under indemnification agreements partially offset by a claim
  payment received from its insurance carrier for approximately $227,000.

F-31



TIER TECHNOLOGIES,
  INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

16.  SUBSEQUENT EVENTS

On
  October 1, 2004, the Company made a strategic investment in CPAS Systems, Inc.,
  a global supplier of pension administration software systems.  The Company
  acquired 45% of the common stock of CPAS for approximately $3.6 million. 
  CPAS will be consolidated into the Companys financial results with minority
  interest for the non-Company owned portion.

F-32



TIER TECHNOLOGIES,
  INC.  SCHEDULE I
  (in thousands)

|                                                                          |  | Balance at
        Beginning of
        Period |        | Additions/
        (Reductions) |   | Write-offs |   | Balance at
        End of
        Period |     
|------------------------------------------------------------------------- |  | ---------------------------------------------- | ------ | ------------------------------- | - | ---------- | - | ---------------------------------------- | ----
|                                                                          |  |                                                |        |                                 |   |            |   |                                          |     
|Year Ended September 30, 2004:
        Allowance for doubtful receivables |  | $                                              | 843    |                                 | $ | 150        |   | $                                        | (285
|Allowance
        for NSF and mispost receivables                         |  |                                                | 974    |                                 |   | 468        |   |                                          |    
|Deferred
        tax asset valuation allowance                            |  |                                                | 23,209 |                                 |   | (1,778     | ) |                                          |    
|Year Ended September 30, 2003:
        Allowance for doubtful receivables |  |                                                | 650    |                                 |   | 1,074      |   |                                          | (881
|Allowance
        for NSF and mispost receivables                         |  |                                                | 549    |                                 |   | 437        |   |                                          | (12 
|Deferred
        tax asset valuation allowance                            |  |                                                | 14,127 |                                 |   | 9,082      |   |                                          |    
|Year Ended September 30, 2002:
        Allowance for doubtful receivables |  |                                                | 209    |                                 |   | 470        |   |                                          | (29 
|Allowance
        for NSF and mispost receivables                         |  |                                                | 810    |                                 |   | (261       | ) |                                          |    
|Deferred
        tax asset valuation allowance                            |  |                                                | 215    |                                 |   | 13,912     |   |                                          |    

S-1



SIGNATURES

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

|                         | TIER TECHNOLOGIES, INC.
|------------------------ | -----------------------
|Dated: December 28, 2004 |                        
|                         |                        
|                         | By:                    
|                         |                        
|                         |                        

POWER OF ATTORNEY

KNOW
  ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
  constitutes and appoints James R. Weaver and Jeffrey A. McCandless, and each
  of them, their attorneys-in-fact and agents, each with the power of substitution,
  for them in any and all capacities, to sign any and all amendments to this Report
  on Form 10-K, and to file the same, with exhibits thereto and other documents
  in connection therewith, with the Securities and Exchange Commission, hereby
  ratifying and confirming all that said attorneys-in-fact, or substitutes, may
  do or cause to be done by virtue hereof.

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/ JAMES
        R. WEAVER       |  | Chief Executive Officer and Chairman
        of the          |  |                  
|                                  |  | Board (principal executive officer)                          |  | December 28, 2004
|James R. Weaver                   |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|/s/ JEFFREY
        A. MCCANDLESS |  | Chief Financial Officer (principal
        financial officer |  |                  
|                                  |  | and principal accounting officer)                            |  | December 28, 2004
|Jeffrey A. McCandless             |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|/s/ CHARLES
        W. BERGER     |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|Charles W. Berger                 |  | Director                                                     |  | December 28, 2004
|                                  |  |                                                              |  |                  
|/s/ JAMES
        L. BILDNER      |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|James L. Bildner                  |  | Director                                                     |  | December 28, 2004
|                                  |  |                                                              |  |                  
|/s/ SAMUEL
        CABOT III      |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|Samuel Cabot III                  |  | Director                                                     |  | December 28, 2004
|                                  |  |                                                              |  |                  
|/s/ MORGAN
        P. GUENTHER    |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|Morgan P. Guenther                |  | Director                                                     |  | December 28, 2004
|                                  |  |                                                              |  |                  
|/s/ RONALD
        L. ROSSETTI    |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|Ronald L. Rossetti                |  | Director                                                     |  | December 28, 2004
|                                  |  |                                                              |  |                  
|/s/ T. MICHAEL
        SCOTT      |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|T. Michael Scott                  |  | Director                                                     |  | December 28, 2004
|                                  |  |                                                              |  |                  
|/s/ BRUCE
        R. SPECTOR      |  |                                                              |  |                  
|                                  |  |                                                              |  |                  
|Bruce R. Spector                  |  | Director                                                     |  | December 28, 2004



EXHIBIT INDEX

|Exhibit Number |  | Exhibit Description                                                                                                                                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                                                                                                                                       
|3.1            |  | Amended and Restated Articles
        of Incorporation (5)                                                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                       
|3.2            |  | Amended and Restated Bylaws (1)                                                                                                                                                                                                                                       
|               |  |                                                                                                                                                                                                                                                                       
|4.1            |  | Form of Class B common stock
        Certificate (2)                                                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                                                                                       
|4.2            |  | See Exhibits 3.1 and 3.2 for provisions
        of the Amended and Restated Articles of Incorporation and Amended and
        Restated Bylaws of the Registrant defining rights of the holders of Class B
        common stock of the Registrant                      
|               |  |                                                                                                                                                                                                                                                                       
|10.1           |  | Amended and Restated 1996 Equity
        Incentive Plan, dated January 28, 1999 (9)*                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                                                                                       
|10.2           |  | Third Amended and Restated Employment
        Agreement by and between the Registrant and James L. Bildner, dated as
        of October 1, 2000 (9)*                                                                                                                  
|               |  |                                                                                                                                                                                                                                                                       
|10.3           |  | Full Recourse Promissory Note
        by and between the Registrant and James L. Bildner, dated as of January 2,
        1997 (2)                                                                                                                                     
|               |  |                                                                                                                                                                                                                                                                       
|10.4           |  | Full Recourse Promissory Note
        by and between the Registrant and James L. Bildner, dated as of May 31,
        1997 (2)                                                                                                                                        
|               |  |                                                                                                                                                                                                                                                                       
|10.5           |  | Full Recourse Promissory Note
        by and between the Registrant and James L. Bildner, dated as of July 15,
        1997 (2)                                                                                                                                       
|               |  |                                                                                                                                                                                                                                                                       
|10.6           |  | Amended and Restated Full Recourse
        Secured Promissory Note, dated as of April 1, 1998, and Amended and
        Restated Pledge Agreement dated April 1, 1998, by and between the
        Registrant and James L. Bildner (3)                                  
|               |  |                                                                                                                                                                                                                                                                       
|10.7           |  | Amended and Restated Full Recourse
        Secured Promissory Note, dated as of April 1, 1998, and Amended and
        Restated Pledge Agreement dated April 1, 1998, by and between the
        Registrant and James L. Bildner (3)                                  
|               |  |                                                                                                                                                                                                                                                                       
|10.8           |  | Form of Indemnification Agreement
        (2)                                                                                                                                                                                                                         
|               |  |                                                                                                                                                                                                                                                                       
|10.9           |  | Tier Corporation 401(k) Plan,
        Summary Plan Description (2)                                                                                                                                                                                                    
|               |  |                                                                                                                                                                                                                                                                       
|10.10          |  | Employee Stock Purchase Plan (7)*                                                                                                                                                                                                                                     
|               |  |                                                                                                                                                                                                                                                                       
|10.11          |  | Amended and Restated Pledge Agreement,
        dated as of June 30, 1999, by and between the Registrant and James
        L. Bildner. (4)                                                                                                                             
|               |  |                                                                                                                                                                                                                                                                       
|10.12          |  | Second Amended and Restated Pledge
        Agreement, dated as of June 30, 1999, by and between the Registrant
        and James L. Bildner. (4)                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                       
|10.13          |  | Third Amended and Restated Pledge
        Agreement, dated as of June 30, 1999, by and between the Registrant
        and James L. Bildner. (4)                                                                                                                       
|               |  |                                                                                                                                                                                                                                                                       
|10.14          |  | Full Recourse Promissory Note
        by and between the Registrant and James L. Bildner, dated as of March 27,
        2000. (Assignment of the Note by and between the Registrant and William
        G. Barton, previously filed as Exhibit 10.17 to Form S-1). (6)



|Exhibit Number |  | Exhibit Description                                                                                                                                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                                                                                                                                       
|10.15          |  | Full Recourse Promissory Note
        by and between the Registrant and James L. Bildner, dated as of March 27,
        2000. (Assignment of the Note by and between the Registrant and William
        G. Barton, previously filed as Exhibit 10.18 to Form S-1). (6)
|               |  |                                                                                                                                                                                                                                                                       
|10.16          |  | Full Recourse Promissory Note
        by and between the Registrant and James L. Bildner, dated as of March 27,
        2000. (Assignment of the Note by and between the Registrant and William
        G. Barton, previously filed as Exhibit 10.19 to Form S-1). (6)
|               |  |                                                                                                                                                                                                                                                                       
|10.17          |  | Pledge Agreement by and between
        the Registrant and James L. Bildner, dated as of March 27, 2000.
        (6)                                                                                                                                                  
|               |  |                                                                                                                                                                                                                                                                       
|10.18          |  | Full Recourse Promissory Note
        by and between the Registrant and James L. Bildner, dated as of July 26,
        2000 (8)                                                                                                                                       
|               |  |                                                                                                                                                                                                                                                                       
|10.19          |  | Full Recourse Promissory Note
        by and between the Registrant and James Weaver, dated as of September 18,
        2000 (8)                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                       
|10.20          |  | Incentive Compensation Plan (9)*                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                       
|10.21          |  | Severance and Change in Control
        Benefits Agreement by and between the Registrant and James Weaver* (10)                                                                                                                                                       
|               |  |                                                                                                                                                                                                                                                                       
|10.22          |  | Full Recourse Unsecured Promissory
        note by and between the Registrant and Harry Wiggins, dated as of October
        22, 2001 (11)                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                       
|10.23          |  | First Amendment to the Third Amended
        and Restated Employment Agreement by and between the Registrant and James
        L. Bildner, dated August 8, 2002 (12).*                                                                                                
|               |  |                                                                                                                                                                                                                                                                       
|10.24          |  | Severance and Change in Control
        Benefits Agreement by and between the Registrant and Laura B. DePole,
        dated August 22, 2002 (12) *                                                                                                                    
|               |  |                                                                                                                                                                                                                                                                       
|10.25          |  | Amended Employment Agreement by
        and between the Registrant and Harry Wiggins, dated September 29, 2002
        (12) *                                                                                                                                         
|               |  |                                                                                                                                                                                                                                                                       
|10.26          |  | Credit and Security Agreement
        as of January 29, 2003 by and between the Registrant and City National
        Bank (13)                                                                                                                                        
|               |  |                                                                                                                                                                                                                                                                       
|10.27          |  | Termination Agreement dated October
        14, 2003 by and between the Company and James L. Bildner (14)*                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                       
|10.28          |  | Separation Agreement dated December
        12, 2003 by and between the Company and Harry Wiggins (14)*                                                                                                                                                               
|               |  |                                                                                                                                                                                                                                                                       
|10.29          |  | Employment Agreement dated July
        2, 2003 by and between the Company and Mr. Jeffrey A. McCandless (15)*                                                                                                                                                        
|               |  |                                                                                                                                                                                                                                                                       
|10.30          |  | Pledge Agreement between the Company
        and James L. Bildner, dated April 1, 2004 (16)                                                                                                                                                                           
|               |  |                                                                                                                                                                                                                                                                       
|10.31          |  | First Amendment to the Pledge
        Agreement between the Company and James L. Bildner, dated June 14, 2004
        (16)                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                       
|10.32          |  | First Amendment to the Second
        Amended and Restated Pledge Agreement between the Company and James L.
        Bildner, dated June 14, 2004 (16)                                                                                                                
|               |  |                                                                                                                                                                                                                                                                       
|10.33          |  | First Amendment to the Third Amended
        and Restated Pledge Agreement between the Company and James L. Bildner,
        dated June 14, 2004 (16)                                                                                                                 



|Exhibit Number |  | Exhibit Description                                                                                                                                                                                                                 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                                                                                                     
|10.34          |  | Agreement and Plan of Merger among
        the Company, Baker Acquisition Corporation, EPOS Corporation, the individuals
        named herein, and Michael A. Lawler, as Shareholder Representative, dated
        June 1, 2004 (16)
|               |  |                                                                                                                                                                                                                                     
|10.35          |  | Executive Employment Agreement,
        dated November 9, 2004, by and between Registrant and James Weaver (17)*                                                                                                                    
|               |  |                                                                                                                                                                                                                                     
|10.36          |  | Form of Incentive Stock Option
        Agreement under the Registrants Amended and Restated 1996 Equity
        Incentive Plan (17)                                                                                                
|               |  |                                                                                                                                                                                                                                     
|10.37          |  | Form of Nonstatutory Stock Option
        Agreement under the Registrants Amended and Restated 1996 Equity
        Incentive Plan (17)                                                                                             
|               |  |                                                                                                                                                                                                                                     
|10.38          |  | Employment Agreement dated May
        28, 2004, by and between EPOS Corporation and Michael A. Lawler*                                                                                                                             
|               |  |                                                                                                                                                                                                                                     
|10.39          |  | Supplemental Indemnity Agreement
        by and between Registrant and Bruce R. Spector, dated September 2, 2004*                                                                                                                   
|               |  |                                                                                                                                                                                                                                     
|10.40          |  | Cross-collaterialization Agreement
        dated December 13, 2004, by and between Registrant and James L. Bildner
        (18)                                                                                                     
|               |  |                                                                                                                                                                                                                                     
|16.1           |  | Letter from PriceWaterhouseCoopers
        LLP, dated December 17, 2004 (19)                                                                                                                                                        
|               |  |                                                                                                                                                                                                                                     
|21.1           |  | Subsidiaries of the Registrant                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                     
|23.1           |  | Consent of PricewaterhouseCoopers
        LLP, Independent Registered Public Accounting Firm                                                                                                                                        
|               |  |                                                                                                                                                                                                                                     
|31.1           |  | Certification of Chief Executive
        Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
        Securities Exchange Act of 1934, as amended.                                                               
|               |  |                                                                                                                                                                                                                                     
|31.2           |  | Certification of Chief Financial
        Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
        Securities Exchange Act of 1934, as amended.                                                               
|               |  |                                                                                                                                                                                                                                     
|32.1           |  | Certification of Chief Executive
        Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
        906 of the Sarbanes-Oxley Act of 2002.                                                                  
|               |  |                                                                                                                                                                                                                                     
|32.2           |  | Certification of Chief Financial
        Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
        906 of the Sarbanes-Oxley Act of 2002                                                                   
|               |  |                                                                                                                                                                                                                                     
|              
|*              |  | Management contract or compensatory
        plan required to be filed as an exhibit to this report.                                                                                                                                 
|               |  |                                                                                                                                                                                                                                     
|(1)            |  | Filed as an exhibit to Form S-1/A
        (No. 333-37661), filed on November 17, 1997, and incorporated
        herein by reference.                                                                                                
|               |  |                                                                                                                                                                                                                                     
|(2)            |  | Filed as an exhibit to Form S-1
        (No. 333-37661), filed on October 10, 1997, and incorporated
        herein by reference.                                                                                                   
|               |  |                                                                                                                                                                                                                                     
|(3)            |  | Filed as an exhibit to Form S-1/A
        (No. 333-52065), filed on May 7, 1998, and incorporated herein
        by reference.                                                                                                      
|               |  |                                                                                                                                                                                                                                     
|(4)            |  | Filed as an exhibit to Form 10-Q,
        filed August 16, 1999, and incorporated herein by reference.                                                                                                                              
|               |  |                                                                                                                                                                                                                                     
|(5)            |  | Filed as an exhibit to Form 10-K,
        filed December 21, 1998, and incorporated herein by reference.                                                                                                                            



|(6)  |  | Filed as an exhibit to Form 10-Q,
        filed May 15, 2000, and incorporated herein by reference.                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                               
|(7)  |  | Filed as an exhibit to Form S-8
        (No. 333-42082), filed on July 24, 2000, and incorporated herein
        by reference.
|     |  |                                                                                                                               
|(8)  |  | Filed as an exhibit to Form 10-K,
        filed December 6, 2000, and incorporated herein by reference.                       
|     |  |                                                                                                                               
|(9)  |  | Filed as an exhibit to Form 10-Q,
        filed May 11, 2001, and incorporated herein by reference.                           
|     |  |                                                                                                                               
|(10) |  | Filed as an exhibit to Form 10-K,
        filed November 29, 2001, and incorporated herein by reference.                      
|     |  |                                                                                                                               
|(11) |  | Filed as an exhibit to Form 10-Q,
        filed February 13, 2002, and incorporated herein by reference.                      
|     |  |                                                                                                                               
|(12) |  | Filed as an exhibit to Form 10-K,
        filed December 11, 2002, and incorporated herein by reference.                      
|     |  |                                                                                                                               
|(13) |  | Filed as an exhibit to Form 10-Q,
        filed May 12, 2003, and incorporated herein by reference.                           
|     |  |                                                                                                                               
|(14) |  | Filed as an exhibit to Form 10-Q,
        filed February 13, 2004, and incorporated herein by reference.                      
|     |  |                                                                                                                               
|(15) |  | Filed as an exhibit to Form 10-Q,
        filed May 11, 2004, and incorporated herein by reference.                           
|     |  |                                                                                                                               
|(16) |  | Filed as an exhibit to Form 10-Q,
        filed August 15, 2004, and incorporated herein by reference.                        
|     |  |                                                                                                                               
|(17) |  | Filed as an exhibit to Form 8-K
        filed November 12, 2004, and incorporated herein by reference.                        
|     |  |                                                                                                                               
|(18) |  | Filed as an exhibit to Form 8-K
        filed December 15, 2004, and incorporated herein by reference.                        
|     |  |                                                                                                                               
|(17) |  | Filed as an exhibit to Form 8-K
        filed December 17, 2004, and incorporated herein by reference.