**United StatesSecurities and Exchange Commission**

**Washington,D.C.  20549**

 

# **FORM10-Q**

 

| **ý** | **Quarterly Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**Forthe Quarterly Period Ended April 30, 2003.**

 

| **o** | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

** **

**Forthe Transition Period from                 to                 .**

 

**Commissionfile number  0-24201**

 

**Carreker Corporation**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     |   | **75-1622836**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |                               |
| **4055  Valley View Lane, #1000  Dallas, Texas**                 |   | **75244**                          |
| (Address of  principal executive office)                         |   | (Zip Code)                         |

 

**(972)458-1981**

(Registrant’stelephone number, including area code)

 

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter periods that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý    No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes  ý    No  o

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practical date.

 

Common Stock, $.01 parvalue — 23,547,326 shares as of May 30, 2003.

 

 

----

 

**CARREKERCORPORATION**

 

**Index**

 
| **PART 1:**        | **FINANCIAL INFORMATION**                                                                                      |
|--------------------|----------------------------------------------------------------------------------------------------------------|
|               |                                                                                                           |
| **Item 1.**        | **Financial Statements  (unaudited)**                                                                          |
|               |                                                                                                           |
|               | **Condensed  Consolidated Balance Sheets at April 30, 2003 and January 31, 2003**                              |
|               |                                                                                                           |
|               | **Condensed  Consolidated Statements of Operations for the three months endedApril 30, 2003  and 2002**        |
|               |                                                                                                           |
|               | **Condensed  Consolidated Statements of Stockholders’ Equity for the three months ended  April 30, 2003** |
|               |                                                                                                           |
|               | **Condensed  Consolidated Statements of Cash Flows for the three months endedApril 30, 2003  and 2002**        |
|               |                                                                                                           |
|               | **Notes to Condensed  Consolidated Unaudited Financial Statements**                                            |
|               |                                                                                                           |
| **Item 2.**        | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations**                |
|               |                                                                                                           |
| **Item 3.**        | **Quantitative  and Qualitative Disclosures about Market Risk**                                                |
|               |                                                                                                           |
| **Item 4.**        | **Controls and  Procedures**                                                                                   |
|               |                                                                                                           |
| **PART II:**       | **OTHER INFORMATION**                                                                                          |
|               |                                                                                                           |
| **Item 1.**        | **Legal  Proceedings**                                                                                         |
|               |                                                                                                           |
| **Item 2.**        | **Changes in Securities and  Use of Proceeds**                                                                 |
|               |                                                                                                           |
| **Item 3.**        | **Defaults Upon Senior  Securities**                                                                           |
|               |                                                                                                           |
| **Item 4.**        | **Submission of Matters to a  Vote of Security Holders**                                                       |
|               |                                                                                                           |
| **Item 5.**        | **Other  Information**                                                                                         |
|               |                                                                                                           |
| **Item 6.**        | **Exhibits and Reports on Form  8-K**                                                                          |
|               |
| **SIGNATURES**     |
|               |
| **CERTIFICATIONS** |
|               |
| **EXHIBITS**       |

 

2

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**PARTI:  FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**CARREKER CORPORATION**

**CondensedConsolidated Balance Sheets**

**(Unaudited)**

**(In thousands, except per share amounts)**

** **

**ASSETS**

 
|                                                                                                                                            |       | **April 30,  2003** |       | **January 31,  2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
|                                                                                                                                            |       |                | ** ** |                  | ** ** |
| Current  assets                                                                                                                                 |       |                |       |                  |       |
| Cash  and cash equivalents                                                                                                                      |       | $                   | 28,887     |                  | $          | 26,986 |   |
| Accounts  receivable, net of allowance of $1,630 and $1,761 at April 30, 2003 and  January 31, 2003, respectively                               |       | 16,089              |       | 22,759                |       |
| Prepaid  software royalties                                                                                                                     |       | 645                 |       | 763                   |       |
| Prepaid  expenses and other current assets                                                                                                      |       | 3,273               |       | 3,073                 |       |
| Total  current assets                                                                                                                           |       | 48,894              |       | 53,581                |       |
|                                                                                                                                            |       |                |       |                  |       |
| Property  and equipment, net of accumulated depreciation of $15,578 and $14,704 at  April 30, 2003 and January 31, 2003, respectively      |       | 8,412               |       | 8,975                 |       |
| Capitalized  software costs, net of accumulated amortization of $10,332 and $10,025 at  April 30, 2003 and January 31, 2003, respectively  |       | 1,704               |       | 2,010                 |       |
| Acquired  developed technology, net of accumulated amortization of $7,897 and $6,867 at  April 30, 2003 and January 31, 2003, respectively |       | 16,303              |       | 17,333                |       |
| Goodwill,  net of accumulated amortization of $3,405 at April 30, 2003 and  January 31, 2003                                               |       | 21,193              |       | 21,193                |       |
| Customer  relationships, net of accumulated amortization of $2,683 and $2,333 at  April 30, 2003 and January 31, 2003, respectively        |       | 5,717               |       | 6,067                 |       |
| Deferred  loan costs, net of accumulated amortization of $784 and $676 at  April 30, 2003 and January 31, 2003, respectively               |       | 468                 |       | 576                   |       |
| Other  assets                                                                                                                                   |       | 432                 |       | 373                   |       |
| Total  assets                                                                                                                                   |       | $                   | 103,123    |                  | $          | 110,108 |   |
|                                                                                                                                            |       |                | ** ** |                  | ** ** |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                  | ** ** |
| Current  liabilities                                                                                                                            |       |                |       |                  |       |
| Accounts  payable                                                                                                                               |       | $                   | 2,907      |                  | $          | 2,273 |   |
| Accrued  compensation and benefits                                                                                                              |       | 7,774               |       | 7,603                 |       |
| Other  accrued expenses                                                                                                                         |       | 3,433               |       | 4,482                 |       |
| Deferred  revenue                                                                                                                               |       | 25,694              |       | 17,600                |       |
| Accrued  merger and restructuring costs                                                                                                         |       | 2,277               |       | 3,735                 |       |
| Total  current liabilities                                                                                                                      |       | 42,085              |       | 35,693                |       |
| Long-term  debt                                                                                                                                 |       | 15,000              |       | 25,000                |       |
| Deferred  revenue                                                                                                                               |       | 407                 |       | 817                   |       |
| Total  liabilities                                                                                                                              |       | 57,492              |       | 61,510                |       |
|                                                                                                                                            |       |                |       |                  |       |
| Contingencies                                                                                                                                   |       |                |       |                  |       |
|                                                                                                                                            |       |                |       |                  |       |
| Stockholders’  equity                                                                                                                      |       |                |       |                  |       |
| Preferred  stock, $.01 par value:  2,000 shares authorized; no shares issued or outstanding                                                     |       | —              |       | —                |       |
| Common  stock, $.01 par value:  100,000 shares authorized; 23,574 shares issued at April 30, 2003 and  January 31, 2003                    |       | 236                 |       | 236                   |       |
| Additional  paid-in capital                                                                                                                     |       | 105,263             |       | 105,263               |       |
| Accumulated  deficit                                                                                                                            |       | (59,353             | )          | (56,386               | )          |
| Less  treasury stock, at cost:  27 common  shares at April 30, 2003 and January 31, 2003                                              |       | (515                | )          | (515                  | )          |
| Total  stockholders’ equity                                                                                                                |       | 45,631              |       | 48,598                |       |
| Total  liabilities and stockholders’ equity                                                                                                |       | $                   | 103,123    |                  | $          | 110,108 |   |

 

See accompanyingnotes.

 

3

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**CARREKERCORPORATION**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

**(In thousands, except per shareamounts)**

 
|                                                        |   | **Three Months Ended****April 30,** |   |
|-------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                        |   | **2003**                            |   | **2002** |   |
|                                                        |   |                                |   |   |   |
| **Revenues:**                                               |   |                                |   |   |   |
| Consulting  fees                                            |   | $                                   | 6,751  |   | $ | 9,595 |   |
| Software  license fees                                      |   | 6,578                               |   | 14,042 |   |
| Software  maintenance fees                                  |   | 8,710                               |   | 10,667 |   |
| Software  implementation fees                               |   | 4,894                               |   | 7,197 |   |
| Out-of-pocket  expense reimbursements                       |   | 1,323                               |   | 2,188 |   |
| Total  revenues                                             |   | 28,256                              |   | 43,689 |   |
|                                                        |   |                                |   |   |   |
| **Cost of revenues:**                                       |   |                                |   |   |   |
| Consulting  fees                                            |   | 4,969                               |   | 6,854 |   |
| Software  license fees                                      |   | 1,721                               |   | 1,693 |   |
| Software  maintenance fees                                  |   | 3,115                               |   | 2,769 |   |
| Software  implementation fees                               |   | 4,824                               |   | 5,138 |   |
| Out-of-pocket  expenses                                     |   | 1,253                               |   | 2,337 |   |
| Total  cost of revenues                                     |   | 15,882                              |   | 18,791 |   |
| Gross  profit                                               |   | 12,374                              |   | 24,898 |   |
|                                                        |   |                                |   |   |   |
| **Operating costs and expenses:**                           |   |                                |   |   |   |
| Selling,  general and administrative                        |   | 12,086                              |   | 12,846 |   |
| Research  and development                                   |   | 1,805                               |   | 2,986 |   |
| Amortization  of intangible assets                          |   | 350                                 |   | 350 |   |
| Restructuring  and other charges                            |   | 684                                 |   | — |   |
| Total  operating costs and expenses                         |   | 14,925                              |   | 16,182 |   |
| Income  (loss) from operations                              |   | (2,551                              | )      | 8,716 |   |
|                                                        |   |                                |   |   |   |
| **Other income (expense):**                                 |   |                                |   |   |   |
| Interest  income                                            |   | 80                                  |   | 68 |   |
| Interest  expense                                           |   | (418                                | )      | (785 | ) |
| Other  income (expense)                                     |   | 16                                  |   | 87 |   |
| Total  other income (expense)                               |   | (322                                | )      | (630 | ) |
| Income  (loss) before provision (benefit) for income taxes  |   | (2,873                              | )      | 8,086 |   |
| Provision  (benefit) for income taxes                       |   | 94                                  |   | (1,605 | ) |
| Net  income (loss)                                          |   | $                                   | (2,967 | ) | $ | 9,691 |   |
| Basic  earnings (loss) per share                            |   | $                                   | (0.13  | ) | $ | 0.43 |   |
| Diluted  earnings (loss) per share                          |   | $                                   | (0.13  | ) | $ | 0.43 |   |
| Shares  used in computing basic earnings (loss) per share   |   | 23,547                              |   | 22,302 |   |
| Shares  used in computing diluted earnings (loss) per share |   | 23,547                              |   | 22,697 |   |

 

See accompanyingnotes.

 

4

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**CARREKER CORPORATION**

**CondensedConsolidated Statements of Stockholders’ Equity**

**(Unaudited)**

**(Inthousands)**

 
|                         |       | **Common Stock** |       | **Additional  Paid-In  Capital** |   | **Accumulated  Deficit** |       | **Treasury Stock** |       | **Total  Stockholders’  Equity** |    |
|------------------------------|------------|------------------|------------|----------------------------------|--------|--------------------------|------------|--------------------|------------|---------------------------------------|---------|
|                         |       |             |       |                             |   |
|                         | **Shares** |             | **Amount** |                             |   |                     | **Shares** |               | **Amount** |                                  |    |
| Balance  at January 31, 2003 |       | 23,574           |       | $                                | 236    |                     | $          | 105,263            |       | $                                     | (56,386 | ) | 27 |   | $ | (515 | ) | $ | 48,598 |   |
|                         |       |             |       |                             |   |                     |       |               |       |                                  |    |   |   |   |   |
| Net  loss                    |       | —           |       | —                           |   | —                   |       | (2,967             | )          | —                                |    | — |   | (2,967 | ) |
| Balance  at April 30, 2003   |       | 23,574           |       | $                                | 236    |                     | $          | 105,263            |       | $                                     | (59,353 | ) | 27 |   | $ | (515 | ) | $ | 45,631 |   |

 

See accompanyingnotes.

 

5

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**CARREKER CORPORATION**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

**(In thousands)**

 
|                                                                                                 |   | **Three Months Ended****April 30,** |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                 |   | **2003**                            |   | **2002** |   |
| **Operating Activities:**                                                                            |   |                                |   |   |   |
| Net  income (loss)                                                                                   |   | $                                   | (2,967 | ) | $ | 9,691 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                                |   |   |   |
| Depreciation  and amortization of property and equipment                                             |   | 874                                 |   | 1,208 |   |
| Amortization  of capitalized software costs and acquired developed technology                        |   | 1,336                               |   | 1,366 |   |
| Amortization  of intangible assets                                                                   |   | 350                                 |   | 350 |   |
| Provision  for doubtful accounts                                                                     |   | (52                                 | )      | 140 |   |
| Amortization  of deferred loan costs                                                                 |   | 108                                 |   | 108 |   |
| Changes  in operating assets and liabilities, net of effects of acquisitions:                        |   |                                |   |   |   |
| Accounts  receivable                                                                                 |   | 6,722                               |   | 561 |   |
| Prepaid  expenses and other assets                                                                   |   | (141                                | )      | 22 |   |
| Accounts  payable and accrued expenses                                                               |   | (1,702                              | )      | (16,775 | ) |
| Income  taxes payable/receivable                                                                     |   | —                              |   | (1,843 | ) |
| Deferred  revenue                                                                                    |   | 7,684                               |   | 1,366 |   |
| Net  cash provided by (used in) operating activities                                                 |   | 12,212                              |   | (3,806 | ) |
| **Investing Activities:**                                                                            |   |                                |   |   |   |
| Purchases  of property and equipment                                                                 |   | (311                                | )      | (1,016 | ) |
| Computer  software costs capitalized                                                                 |   | —                              |   | (103 | ) |
| Net  cash used in investing activities                                                               |   | (311                                | )      | (1,119 | ) |
| **Financing Activities:**                                                                            |   |                                |   |   |   |
| Purchases  of treasury stock                                                                         |   | —                              |   | (4 | ) |
| Payments  on long-term debt                                                                          |   | (10,000                             | )      | (2,500 | ) |
| Proceeds  from exercises of stock options                                                            |   | —                              |   | 654 |   |
| Proceeds  from sale of common stock                                                                  |   | —                              |   | 9,323 |   |
| Net  cash provided by (used in) financing activities                                                 |   | (10,000                             | )      | 7,473 |   |
| Net  increase in cash and cash equivalents                                                           |   | 1,901                               |   | 2,548 |   |
| Cash  and cash equivalents at beginning of period                                                    |   | 26,986                              |   | 25,674 |   |
| Cash  and cash equivalents at end of period                                                          |   | $                                   | 28,887 |   | $ | 28,222 |   |
|                                                                                                 |   |                                |   |   |   |   |   |
| Supplemental  disclosures of cash flow information:                                                  |   |                                |   |   |   |
| Cash  paid for interest                                                                              |   | $                                   | 347    |   | $ | 618 |   |
| Cash  paid for income taxes, net                                                                     |   | $                                   | 94     |   | $ | 238 |   |

 

See accompanyingnotes.

 

6

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**Carreker CorporationNotes to Condensed Consolidated UnauditedFinancial StatementsFor the Three Months Ended April 30, 2003 and 2002**

 

**1.****              Descriptionof Business**

 

Carreker Corporation (“the Company,” “Carreker,”“our,” “we”) provides payments-related software and consulting solutions tofinancial institutions and financial service providers.  These solutions help the Company’s customersimprove operational efficiency in how payments are processed; enhance revenueand profitability from payments-oriented products and services; reduce lossesassociated with fraudulent payment transactions; and evolve towardnext-generation payment practices and technologies.

 

**2.****              Summaryof Significant Accounting Procedures**

 

**Principles of Consolidation andPresentation**

 

The condensedconsolidated unaudited financial statements include the accounts of the Companyand its wholly owned subsidiaries. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

The accompanyingcondensed consolidated unaudited financial statements and notes have beenprepared in accordance with the rules and regulations of the Securities andExchange Commission for Form 10-Q and include all of the information anddisclosures required by generally accepted accounting principles for interimfinancial reporting.  The results ofoperations, for the three months ended April 30, 2003, are not necessarilyindicative of full-year results.

 

These financialstatements should be read in conjunction with the financial statements,accounting policies and financial notes included in the Company’s Annual Reporton Form 10-K for the fiscal year ended January 31, 2003, filed with theSecurities and Exchange Commission.  Inthe opinion of management, the accompanying condensed consolidated unauditedfinancial statements reflect all adjustments (consisting only of normalrecurring adjustments) that are necessary for a fair representation offinancial results for the interim periods presented.

 

We restated ouraudited financial statements for the years ended January 31, 2002, 2001, 2000and 1999, and our unaudited financial statements for each of the quarters inthe year ended January 31, 2002 and for the quarters ended April 30, 2002 andJuly 31, 2002.  Refer to the Company’sForm 10-K for the year ended January 31, 2003 for details of the restatement aswell as the impact of the restatement on the years and quarters previouslyreported.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires the use of estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes.  As discussed below, the Companymakes significant estimates and assumptions in the areas of accountsreceivable, impairment of intangibles, and revenue recognition.  Although the Company believes that the estimatesand assumptions are reasonable, actual results may differ, and such differencescould be significant to the Company’s financial results.

 

**Cash and Cash Equivalents**

 

The Companyconsiders all highly liquid investments with maturities of three months or lesswhen purchased to be cash equivalents. Cash and cash equivalents primarilyconsist of demand deposit accounts and shares in a demand money market accountcomprised of domestic and foreign commercial paper, certificates of deposit andU.S. government obligations that are maintained with nationally recognizedfinancial institutions.

 

7

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**Accounts Receivable****and Concentration of Credit Risk**

 

Financialinstruments, which potentially subject the Company to concentration of creditrisk consist principally of temporary cash investments and accountsreceivable.  The Company placestemporary cash investments with financial institutions and limits its exposurewith any one financial institution.

 

A significant portionof the Company’s business consists of providing consulting services andlicensing software to major domestic and international banks, which gives riseto a concentration of credit risk in receivables. The Company performs on-goingcredit evaluations of its customers’ financial condition and generally requiresno collateral. Because the Company’s accounts receivable are typicallyunsecured, the Company periodically evaluates the collectibility of itsaccounts based on a combination of factors, including a particular customer’sability to pay as well as the age of receivables.  To evaluate a specific customer’s ability to pay, the Companyanalyzes financial statements, payment history, and various information ordisclosures by the customer or other publicly available information.  In cases where the evidence suggests acustomer may not be able to satisfy its obligation to the Company or if thecollection of the receivable becomes doubtful due to a dispute that arisessubsequent to the delivery of the Company’s products and services, the Companysets up a reserve in an amount determined appropriate for the perceivedrisk.  Most of the Company’s contractsinclude multiple payment milestones, some of which occur in advance of revenuerecognition, which mitigates the risk both in terms of collectibility andadjustments to recorded revenue.

 

The fair value ofaccounts receivable approximates the carrying amount of accounts receivable.

 

Accountsreceivable, net of allowances, consist of the following (in thousands):

 
|                                  |   | **April 30,  2003** |   | **January 31,  2003** |   |
|---------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                  |   |                |   |                  |   |
| Gross  accounts receivable            |   | $                   | 62,001 |                  | $      | 74,918 |   |
| Less  deferred revenue                |   | (44,282             | )      | (50,398               | )      |
| Less  allowance for doubtful accounts |   | (1,630              | )      | (1,761                | )      |
| Net  accounts receivable              |   | $                   | 16,089 |                  | $      | 22,759 |   |

 

**Property and Equipment**

 

Property andequipment are stated at cost. Depreciation is calculated using thestraight-line method over the estimated useful lives of the respective assets,generally from three to five years. Leasehold improvements are amortized usingthe straight-line method over the shorter of the terms of the related leases orthe respective useful lives of the assets.  The components of property and equipment are as follows (in thousands):

 
|                                            |   | **April 30,****2003** |   | **January 31,  2003** |   |
|-------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
| Furniture                                       |   | $                     | 5,071  |                  | $      | 5,071 |   |
| Equipment  and software                         |   | 17,709                |   | 17,406                |   |
| Leasehold  improvements                         |   | 1,210                 |   | 1,202                 |   |
| Total  cost                                     |   | 23,990                |   | 23,679                |   |
|                                            |   |                  |   |                  |   |
| Less  accumulated depreciation and amortization |   | (15,578               | )      | (14,704               | )      |
| Net  property and equipment                     |   | $                     | 8,412  |                  | $      | 8,975 |   |

 

The Companyaccounts for the costs of computer software developed or obtained for internaluse in accordance with Statement of Position No. 98-1, “*Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use,”* (“SOP 98-1”)*.* The Company capitalizes costs of consultants, as well as payroll andpayroll-related costs for employees incurred in developing internal-usecomputer software.  These costs areincluded in “Equipment and Software”. Costs incurred during preliminary project and post-implementation stagesare charged to expense.

 

8

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**LongLived Assets**

 

The Companyaccounts for goodwill and other intangible assets in accordance with Statementof Financial Accounting Standards No. 142, *“Goodwilland Other Intangible Assets,”* (SFAS 142).  Under the provisions of SFAS 142, an annual assessment ofgoodwill impairment is performed.  Thisassessment involves the use of estimates related to fair market values of theCompany’s reporting units with which the goodwill is associated.  The assessment of goodwill impairment in thefuture will be impacted if future operating cash flows of the Company’sreporting units decline, which would result in decreases in the relatedestimate of fair market value.  TheCompany performs its annual impairment analysis on November 1st ofeach year and whenever facts and circumstances indicate an impairment mayexist.  Intangible assets not subject toamortization are tested annually for impairment, and are tested for impairmentmore frequently if events and circumstances indicate that an asset might beimpaired.  An impairment loss isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.

 

The Companyaccounts for long lived assets in accordance with Statement of FinancialAccounting Standards No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets,”* (SFAS144).  Under the provisions of SFAS 144,long-lived assets, such as property, plant and equipment and purchased intangiblessubject to amortization, are tested for recoverability whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to estimated undiscounted future cash flows expected to begenerated by the asset.  If the carryingamount of an asset exceeds its estimated future cash flows, an impairmentcharge is recognized by the amount by which the carrying amount of the assetsexceeds the fair value of the asset.

 

**DeferredLoan Costs**

 

Deferred loancosts consist of loan closing costs and other administrative expensesassociated with the Revolving Credit Agreement.  The costs are being amortized to interest expense over the 36month life of the credit agreement.

 

**Software Costs Capitalized**

 

The Companycapitalizes the development costs of software, other than internal-usesoftware, in accordance with Statement of Financial Accounting Standards No.86, “*Accounting for Costs of ComputerSoftware to be Sold, Leased or Otherwise Marketed,”* (“SFAS86”).  The Company’s policy is tocapitalize software development costs incurred in developing a product oncetechnological feasibility of the product has been established. Softwaredevelopment costs capitalized also include amounts paid for purchased softwareon products that have reached technological feasibility. Technologicalfeasibility of the product is determined after completion of a detailed programdesign and a determination has been made that any uncertainties related tohigh-risk development issues have been resolved. If the process of developingthe product does not include a detail program design, technological feasibilityis determined only after completion of a working model which has been betatested. All software development costs capitalized are amortized using anamount determined as the greater of: (1) the ratio that current gross revenuesfor a capitalized software project bears to the total of current and futuregross revenues for that project or (2) the straight-line method over theremaining economic life of the product (generally three to six years). TheCompany did not capitalize any software costs for the three months ended April30, 2003.  The Company capitalized$103,000 of software costs during the three months ended April 30, 2002.  The Company recorded amortization related tocapitalized software costs of $307,000 and $335,000 for the three months endedApril 30, 2003 and 2002, respectively.  Amortizationexpense is recorded as a component of cost of software license fees in theaccompanying condensed consolidated unaudited statements of operations.

 

9

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**Revenue Recognition**

 

The Company’srevenue recognition policies are in accordance with Statement of Position(“SOP”) 97-2, *“Software Revenue Recognition,”* as amended by SOP 98-9, “*Modificationof SOP 97-2,**Software Revenue Recognition with Respect to CertainTransactions,”* and Staff Accounting Bulletin (“SAB”) No. 101, *“RevenueRecognition in Financial Statements.”*  In the case of software arrangements that require significantproduction, modification, or customization of software, or the licenseagreement requires the Company to provide implementation services that aredetermined to be essential to other elements of the arrangement, the Companyfollows the guidance in SOP 81-1, *“Accounting for Performance of Construction – Typeand Certain Production – Type Contracts.”*

 

*Consulting Fees.*  The Company employs three primary pricing methods inconnection with its delivery of consulting services. First, the Company may price its delivery of consulting services onthe basis of time and materials, in which case the customer is chargedagreed-upon daily rates for services performed and out-of-pocket expenses. Inthis case, the Company is generallypaid fees and related amounts on a monthly basis, and the Company recognizes revenues as the services are performed.Second, the Company may deliverconsulting services on a fixed-price basis. In this case, the Company is paid on a monthly basis or pursuant to an agreedupon payment schedule, and the Company recognizesrevenues paid on a percentage-of-completion basis.  The Company believesthat this method is appropriate because of its ability to determine performancemilestones and determine dependable estimates of its costs applicable to eachphase of a contract.  Because financialreporting of these contracts depends on estimates, which are assessedcontinually during the term of the contract, costs are subject to revisions asthe contract progresses.  Anticipatedlosses on fixed-price contracts are recognized when estimable.  Third, the Company may deliver consulting services pursuant to avalue-priced contract with the customer. In this case, the Company is paid, onan agreed upon basis with the customer, either a specified percentage of(1) the projected increased revenues and/or decreased costs that areexpected to be derived by the customer generally over a period of up to twelvemonths following implementation of its solution or (2) the actual increasedrevenues and/or decreased costs experienced by the customer generally over aperiod of up to twelve months following implementation of its solution, subjectin either case to a maximum, if any is agreed to, on the total amount ofpayments to be made to the Company.  TheCompany must first commit time and resources to develop projections associatedwith value-pricing contracts before a bank will commit to purchase itssolutions, and the Company therefore assumes the risk of making thesecommitments with no assurance that the bank will purchase the solution.  Costs associated with these value-pricingcontracts are expensed as incurred. These contracts typically provide for the Company to receive a percentage of the projected oractual increased revenues and/or decreased costs, with payments to be made tothe Company pursuant to an agreed upon schedule ranging from one to twelvemonths in length.  The Company recognizes revenues generated from consultingservices in connection with value-priced contracts based upon projected resultsonly upon completion of all services and agreement upon the actual fee to bepaid (even though billings for these services may be delayed by mutualagreement for periods not to exceed twelve months). In an effort to allowcustomers to more closely match expected benefits from services with paymentsto the Company, during the thirdquarter of fiscal 2001, the Company beganto offer payment terms which extend beyond 12 months.  When the Company enters into an agreement which has a significantcomponent of the total amount payable under the agreement due beyond 12 monthsand it is determined payments are not fixed and determinable at the date theagreement was entered into, revenue under the arrangement will be recognized aspayments become due and payable.  Whenfees are to be paid based on a percentage of actual revenues and/or savings tocustomers, the Company recognizesrevenues only upon completion of all services and as the amounts of actualrevenues or savings are confirmed by the customer with a fixed payment date.

 

Costs associated with time and materials, fixed-pricedand value-priced consulting fee arrangements are expensed as incurred and areincluded as a component of the cost of consulting fees.

 

The Company expectsthat value-pricing contracts will continue to account for a large percentage ofits revenues in the future. As a consequence of the use of value-pricingcontracts and due to the revenue recognition policy associated with thosecontracts, the Company’s results ofoperations will likely fluctuate significantly from period to period.

 

Regardlessof the pricing method employed by the Company in a given contract, the Companyis typically reimbursed on a monthly basis for out-of-pocket expenses incurredon behalf of its customers.

 

10

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*Software License Fees.*  In theevent that a software license is sold either together with implementationservices or on a stand-alone basis, the Company is usually paid software license fees in one or more installments, asprovided in the customer’s contract but not to exceed twelve months.  Under SOP 97-2, the Company recognizessoftware license revenue upon execution of a contract and delivery of thesoftware, provided that the license fee is fixed and determinable, nosignificant production, modification or customization of the software isrequired and collection is considered probable by management.  When the software license arrangementrequires the Company to provide implementation services that are essential tothe functionality of the software or significant production, customization ormodification of the software, both the product license revenue andimplementation fees are recognized as services are performed.

 

Software licenses are often soldas part of a multiple element arrangement that may include maintenance,implementation or consulting.  TheCompany determines whether there is vendor specific objective evidence of fairvalue (“VSOEFV”) for each element identified in the arrangement to determinewhether the total arrangement fees can be allocated to each element.  If VSOEFV exists for each element, the totalarrangement fee is allocated based on the relative fair value of eachelement.  In cases where there is notVSOEFV for each element, or if it is determined services are essential to thefunctionality of the software being delivered, or if significant production,modification or customization of the software is required, the Company defersrevenue recognition of the software license fees.  However, if VSOEFV is determinable for all of the undeliveredelements, and assuming the undelivered elements are not essential to thedelivered elements, the Company will defer recognition of the full fair valuerelated to the undelivered elements and recognize the remaining portion of thearrangement value through application of the residual method as set forth inSOP 98-9.  Where VSOEFV has not been establishedfor certain undelivered elements, revenue for all elements is deferred untilthose elements have been delivered or their fair values have beendetermined.  Evidence of VSOEFV isdetermined for software products based on actual sales prices for the productsold to a similar class of customer and based on pricing strategies set forthin the Company’s price book.  Evidenceof VSOEFV for services (implementation and consulting) is based upon standardbilling rates and the estimated level of effort for individuals expected toperform the related services.  TheCompany establishes VSOEFV for maintenance agreements using the percentagemethod such that VSOEFV for maintenance is a percentage of the license fee chargedannually for a specific software product, which in most instances is 20% of theportion of arrangement fees allocated to the software license element.

 

Although substantially all of the Company’s currentsoftware licenses provide for a fixed price license fee, some licenses insteadprovide for the customer to pay a monthly license fee based on actual use ofthe software product.  The level oflicense fees earned by the Company under these arrangements will vary based onthe actual amount of use by the customer. Revenue under these arrangements is recognized on a monthly basis.

 

*Software Maintenance Fees.*  Inconnection with the sale of a software license, a customer may elect topurchase software maintenance services. Most of the customers that purchasesoftware licenses from the Company alsopurchase software maintenance services, which typically are renewedannually.  The Company charges an annual maintenance fee, which istypically a percentage of the initial software license fee. The annualmaintenance fee generally is paid to the Company at the beginning of the maintenance period, and the Company recognizes these revenues ratably over the term ofthe related contract.  If the annualmaintenance fee is not paid at the beginning of the maintenance period, theCompany defers revenue recognition until the time the maintenance fee is paidby the customer.

 

*Software Implementation Fees.*  Inconnection with the sale of a software license, a customer may elect topurchase software implementation services, including software enhancements,patches and other software support services. Most of the customers thatpurchase software licenses from the Company also purchase software implementation services.  The Company prices its implementation services on a time-and-materials or on afixed-price basis, and the Company recognizesthe related revenues as services are performed.  Costs associated with these engagements are expensed as incurred.

 

The Company’s contractstypically do not include right of return clauses, and as a result, the Companydoes not record a provision for returns.

 

**Royalties**

 

In connection withsoftware license and maintenance agreements entered into with certain banks andpurchase agreements with vendors under which the Company acquired softwaretechnology used in products sold to its customers, the Company is required topay royalties on sales of certain software products, including four Back Officeproducts and the Branch Truncation Management product.  Under these arrangements, the Company accruesroyalty expense when the associated revenue is recognized.  The royalty percentages generally range from20% to 30% of the associated revenues. Approximately $435,000 and $128,000 of royalty expense was recorded underthese agreements for the three months ended April 30, 2003 and 2002, respectively.  Royalty expense is included as a componentof the cost of software license fees and cost of software maintenance fees andin the accompanying condensed consolidated statements of operations.

 

11

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**Deferred Revenue**

 

Deferred revenuerepresents amounts paid by customers under terms specified in consulting,software licensing, and maintenance contracts for which completion ofcontractual terms or delivery of the software has not occurred.  Non-current deferred revenue representsamounts for maintenance to be provided beginning in periods on or after May 1,2004.

 

Deferred revenueand advance payments from customers consist of the following (in thousands)

 
|                                              |   | **April 30,  2003** |   | **January  31,  2003** |   |
|---------------------------------------------------|--------|---------------------|--------|------------------------|--------|
| Current:                                          |   |                |   |                   |   |
| Deferred software maintenance fees                |   | $                   | 38,144 |                   | $      | 38,764 |   |
| Deferred software implementation and license fees |   | 31,832              |   | 29,234                 |   |
|                                              |   | 69,976              |   | 67,998                 |   |
| Less amount in accounts receivable                |   | (44,282             | )      | (50,398                | )      |
|                                              |   | $                   | 25,694 |                   | $      | 17,600 |   |
|                                              |   |                |   |                   |   |
| Non-current:                                      |   |                |   |                   |   |
| Deferred software maintenance fees                |   | $                   | 407    |                   | $      | 817 |   |
|                                              |   |                |   |                   |   |
| Less amount in accounts receivable                |   | —              |   | —                 |   |
|                                              |   | $                   | 407    |                   | $      | 817 |   |

 

**Research and Development Costs**

 

Research anddevelopment costs, that are not subject to capitalization under Statement of FinancialAccounting Standards No. 86, “*Accounting forthe Cost of Computer Software to be Sold, Leased, or Otherwise Marketed,”*(“SFAS 86”) are expensed as incurred and relate mainly to the development ofnew products, new applications, new features or enhancements for existingproducts or applications and sustaining maintenance activities.

 

**IncomeTaxes**

 

The Companyaccounts for income taxes using the liability method, whereby deferred taxassets and liabilities are determined based on differences between financialreporting and tax basis of assets and liabilities measured using enacted taxrates and laws that will be in effect when the differences are expected toreverse.  The measurement of deferredtax assets is adjusted by a valuation allowance, if necessary, to recognize theextent to which based on available evidence, it is more likely than not thatthe future tax benefits will not be realized.

 

**Earnings Per Share**

 

Basic earnings pershare is computed using the weighted average number of shares of common stockoutstanding during each period. Diluted earnings per share is computed usingthe weighted average number of shares of common stock outstanding during eachperiod and common equivalent shares consisting of stock options (using thetreasury stock method).

 

**Stock-Based Compensation**

 

The Company haselected to follow Accounting Principles Board (“APB”), Opinion No. 25, “*Accounting for Stock Issued to Employees*,”in accounting for its employees and director stock options.  Under APB 25, if the exercise price of astock option equals or exceeds the market price of the underlying stock on thedate of grant, no compensation expense is recognized.  The Company accounts for stock-based compensation fornon-employees under the fair value method prescribed by SFAS 123, “*Accounting for Stock-Based Compensation”*(“SFAS 123”).  Through April 30, 2003,there have been no significant grants to non-employees. The Company had nounearned stock compensation at April 30, 2003.

 

Although SFAS 123allows APB 25 guidelines to be applied in accounting for stock options, theCompany is required to disclose pro forma net income (loss) and net income(loss) per share as if they had adopted SFAS 123.  The following table sets forth the pro forma information as ifthe provisions of SFAS 123 had been applied to account for stock basedcompensation (in thousands, except per share data):

 

12

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|                                                                                             |   | **Three Months Ended****April 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                             |   | **2003**                            |   | **2002** |   |
|                                                                                             |   |                                |   |   |   |
| Net  income (loss), as reported                                                                  |   | $                                   | (2,967 | ) | $ | 9,691 |   |
| Pro  forma stock compensation expense computed under the fair value method, net of  income taxes |   | (1,068                              | )      | (683 | ) |
| Pro  forma net income (loss)                                                                     |   | $                                   | (4,035 | ) | $ | 9,008 |   |
|                                                                                             |   |                                |   |   |   |
| Basic  earnings (loss) per common share, as reported                                             |   | $                                   | (0.13  | ) | $ | 0.43 |   |
| Diluted  earnings (loss) per common share, as reported                                           |   | $                                   | (0.13  | ) | $ | 0.43 |   |
| Pro  forma basic earnings (loss) per common share                                                |   | $                                   | (0.17  | ) | $ | 0.40 |   |
| Pro  forma diluted earnings (loss) per common share                                              |   | $                                   | (0.17  | ) | $ | 0.40 |   |

 

**Risks and Uncertainties**

 

The Company’sfuture results of operations and financial condition could be impacted by thefollowing factors, among others: dependence on the banking industry, decline incheck volumes, fluctuations in operating results, use of fixed-price orvalue-priced arrangements, lack of long-term agreements, ability to managegrowth, dependence on key personnel, product liability, rapid technologicalchange and dependence on new products, dependence on third-party providers andthe Internet, new focus on providing business process outsourcing withsignificant offshore component, ability to attract and retain qualifiedpersonnel, customer concentration, indebtedness, competition, potentialstrategic alliances and acquisitions, proprietary rights, infringement claimsand legal proceedings, dependence on third parties for technology licenses,liability claims, class action lawsuits, stock price fluctuations, continuedNASDAQ listing, international operations, use of independent contractors,changing government and tax regulations, anti-takeover provisions in theCompany’s charter and impairment of goodwill or intangible assets.  Negative trends in the Company’s operatingresults could result in noncompliance of financial covenants related to itsrevolving credit agreement, which could impair the Company’s liquidity.  See description of the Company’s revolvingcredit agreement and related financial covenants in Note 5.

 

**Recently Issued Accounting Standards**

 

In November 2002,the EITF reached a consensus on Issue 00-21, *“MultipleDeliverable Revenue Arrangements.”* EITF 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which it will perform multiple revenue-generatingactivities.  It also addresses when andhow an arrangement involving multiple deliverables should be divided intoseparate units of accounting.  Theguidance in EITF 00-21 is effective for revenue arrangements entered into infiscal periods beginning after June 15, 2003, with early application permitted.  Companies may elect to report the change inaccounting as a cumulative effect of a change in accounting principle inaccordance with APB Opinion 20, *“AccountingChanges” and SFAS 3, “Reporting Accounting Changes in Interim FinancialStatements (an amendment of APB Opinion No. 28).”*  We do not currently believe adoption willhave a significant impact on our accounting for multiple element arrangements.

 

**3.****              BusinessCombinations**

 

On June 6, 2001,the Company completed the acquisition of Check Solutions Company, a New Yorkgeneral partnership (“Check Solutions”), for $110.2 million in cash, plus anadditional $2.0 million of direct acquisition costs.  Check Solutions is a check and image processing software andinstallation business that services the payment-processing sector of thefinancial industry.  The operatingresults of Check Solutions are reported in the Business Segment and RevenueConcentration footnote in the Global Payments Technologies segment.  The Company funded the acquisition with$65.2 million in cash and funded the remaining $45.0 million from proceedsunder the revolving credit agreement as described in Note 5.

 

The acquisitionwas accounted for by the purchase method of accounting, and accordingly, thestatements of operations include the results of Check Solutions beginning June6, 2001.  The assets acquired andliabilities assumed were recorded at estimated fair values determined by theCompany’s management, based on information currently available and on currentassumptions about future operations. The Company has obtained an independent appraisal of the fair values ofthe identified intangible assets, which are being amortized on a straight-linebasis.

 

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A summary of theassets acquired and liabilities assumed in the acquisition follows (inthousands):

 
| Net  assets of Check Solutions                                          |   | $      | 6,702   |   |
|-------------------------------------------------------------------------|--------|--------|---------|--------|
| Current  technology and software products (estimated life of 5-6 years) |   | 24,200 |    |
| Customer  relationships (estimated life of 6 years)                     |   | 8,400  |    |
| Assembled  workforce                                                    |   | 5,600  |    |
| Goodwill                                                                |   | 64,998 |    |
| In-process  research and development                                    |   | 2,300  |    |
| Total  purchase price                                                   |   | $      | 112,200 |   |

 

In connection withthe acquisition of Check Solutions, a portion of the purchase price wasallocated to acquired in-process research and development (“IPR&D”).  The $2.3 million attributed to IPR&D wasexpensed on the date of the acquisition as the IPR&D projects had notreached technological feasibility nor had any alternative future use.  The charge is included in merger,restructuring and other charges in the statement of operations.

 

**4.****              Goodwilland Intangible Assets**

 

The Companyadopted SFAS No. 142, *“Goodwill and OtherIntangible Assets,”* effective February 1, 2002.  Under SFAS 142, goodwill and intangibleassets deemed to have indefinite lives are no longer amortized but are subjectto annual impairment tests in accordance with this statement.  Other intangible assets, which includeacquired developed technology and customer relationships, will continue to beamortized over their useful lives.

 

Upon adoption ofSFAS 142, assembled work force intangible with a remaining net book value of$5.0 million at February 1, 2002 was reclassified to goodwill and is nolonger amortized.  The Company performedan initial assessment of impairment on February 1, 2002, the date SFAS 142 wasadopted.  No impairment resulted fromthis initial assessment.

 

The Companyperformed an evaluation of its existing goodwill and intangible assetseffective November 1, 2002, utilizing various assumptions and factors toestimate future cash flows to determine the fair value of the business.  Due to a decline in the estimated fair valueof the reporting unit to which goodwill has been assigned subsequent to theannual assessment date, the Company determined goodwill was impaired during thequarterly period ended January 31, 2003 and the Company recorded a charge of$46.0 million during that period to reflect the impairment of goodwill andintangible assets based on declines in the estimated fair value of the GlobalPayments Technologies segment to which goodwill is allocated.  Fair value was determined considering anumber of fair value estimation techniques, including a discounted cash flowanalysis and consideration of the market price of the Company’s stock.

 

Intangible assetswith definite useful lives are amortized on a straight-lined basis, resultingin amortization expense of $350,000 for each of the three month periods endedApril 30, 2003 and 2002.

 

The followingtable sets forth the estimated amortization expense of intangible assets forthe indicated fiscal years ending January 31 (in thousands):

 
| **Year** |   | **Amount** |   |
|----------|--------|------------|--------|
| 2004     |   | 1,400      |   |
| 2005     |   | 1,400      |   |
| 2006     |   | 1,400      |   |
| 2007     |   | 1,400      |   |
| 2008     |   | 467        |   |

 

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**5.****              RevolvingCredit Agreement**

 

On June 6, 2001,the Company entered into a three-year revolving credit agreement with a groupof banks in an amount not to exceed $60.0 million to fund the acquisition ofCheck Solutions.  All outstandingborrowings are due June 5, 2004. Borrowings under the credit agreement currently bear interest equal toeither the greater of prime or federal funds rate plus a margin ranging from0.50% to 1.25% depending on the Company’s ratio of funded debt to Earningsbefore Interest, Taxes, Depreciation and Amortization (“EBITDA”), or LIBOR plusa margin equal to 2.00% to 2.75% depending on the Company’s ratio of fundeddebt to EBITDA.  Interest payments aredue quarterly.  The Company is requiredto pay a commitment fee equal to 0.375% to 0.50% depending on the Company’sratio of funded debt to EBITDA on the unused amount of the revolving creditagreement.  The revolving creditagreement contains customary affirmative and negative covenants, some of whichhave been amended, including financial covenants requiring the maintenance ofspecified interest coverage, ratio of EBITDA to funded debt, and ratio ofaccounts receivable, cash and short-term investments to funded debt.  Additionally, the payment of dividends isprecluded subject to the approval of the banks.  Substantially all of the Company’s assets collateralize therevolving credit agreement.  As of April30, 2003, the Company is in compliance with the covenants of the revolvingcredit agreement, as amended.

 

At April 30, 2003,the Company had $15.0 million outstanding under the credit agreement.  At April 30, 2003, the interest rate on thedebt was 4.8125%.  Because the intereston the debt is variable, the carrying value approximates the fair value.  Interest expense, exclusive of theamortization of deferred loan costs, on the credit agreement was $310,000 and$609,000 for the three months ended April 30, 2003 and 2002, respectively.

 

**6.****              CommonStock Offering**

 

On April 5, 2002,the Company sold 1,282,214 shares to a group of institutional investors in aprivate transaction.  In connection withthis transaction, the Company filed a registration statement on Form S-3following the filing of its annual report on Form 10-K for the year endedJanuary 31, 2002, to register the resale of such shares.  The Form S-3 was deemed effective on May 15,2002.  On April 5, 2002, the Companyutilized the net proceeds of approximately $9.3 million received from the saleto satisfy remaining obligations due certain employees of Check Solutionsdescribed in Note 15 below, with the remainder used for working capital.

 

**7.****              Provision(Benefit) for Income Taxes**

 

The Company hasestablished a valuation allowance to reserve its net deferred tax assets atApril 30, 2003 because the more likely than not criteria for future realizationof the Company’s net deferred tax assets specified in Statements of FinancialAccounting Standards No. 109, “*Accountingfor Income Taxes,”* (“SFAS No. 109”) were not met.

 

The net taxprovision of $94,000 for the three months ended April 30, 2003 consists of aprovision for state taxes.  No taxbenefit has been recorded due to the uncertainty regarding the Company’sability to generate taxable income and resulting uncertainty relative to therecoverability of deferred tax assets. The net tax benefit of $1.6 million for the three months ended April 30,2002 consists of a $1.9 million tax benefit generated by additional tax losscarrybacks available to the Company as a result of the Job Creation and WorkersAssistance Act of 2002, offset by a $300,000 provision for taxes based on anestimated annual effective tax rate of 3.6% for the year ending January 31,2003.  The estimated annual effectivetax rate is lower than the statutory federal and state rates as a result of thecarryforward of the net operating losses that were expected to be utilizedduring the year ended January 31, 2003.

 

15

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**8.****              IncentiveCompensation Plans**

 

In 2002, theCompany introduced two new incentive programs to employees.  The variable compensation plan awards employeesbased on quarterly Company operating results. At April 30, 2003, approximately 334 employees are eligible to receivecash awards under the variable compensation plan.  The Company did not record expense under this plan in the threemonths ended April 30, 2003 and recorded expense under this plan of $920,000 inthe three months ended April 30, 2002.

 

The incentivebonus plan awards employees based on the Company’s and the applicable businessunit’s operating results. Substantially, all employees are eligible to receive cash awards underthe incentive bonus plan.  Awards fromthis plan are paid to employees subsequent to the end of the fiscal year.  The Company did not record expense underthis plan in the three months ended April 30, 2003 and recorded expense underthis plan of $958,000 in the three months ended April 30, 2002.

 

**9.****              EarningsPer Share**

 

The followingtable sets forth the computation of basic and diluted earnings per share (inthousands, except per share amounts):

 
|                                                   |   | **Three Months Ended****April 30,** |   |
|--------------------------------------------------------|--------|-------------------------------------|--------|
|                                                   |   | **2003**                            |   | **2002** |   |
|                                                   |   |                                |   |   |   |
| Basic  earnings (loss) per share:                      |   |                                |   |   |   |
| Net  income (loss)                                     |   | $                                   | (2,967 | ) | $ | 9,691 |   |
|                                                   |   |                                |   |   |   |
| Weighted  average shares outstanding                   |   | 23,547                              |   | 22,302 |   |
|                                                   |   |                                |   |   |   |
| Basic  earnings (loss) per share                       |   | $                                   | (0.13  | ) | $ | 0.43 |   |
|                                                   |   |                                |   |   |   |
| Diluted  earnings per share:                           |   |                                |   |   |   |
| Net  income (loss)                                     |   | $                                   | (2,967 | ) | $ | 9,691 |   |
|                                                   |   |                                |   |   |   |
| Weighted  average shares outstanding                   |   | 23,547                              |   | 22,302 |   |
| Assumed  conversion of employee stock options          |   | —                              |   | 395 |   |
| Shares  used in diluted earnings per share calculation |   | 23,547                              |   | 22,697 |   |
|                                                   |   |                                |   |   |   |
| Diluted  earnings (loss) per share                     |   | $                                   | (0.13  | ) | $ | 0.43 |   |

 

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**10.****       Contingencies**

 

On June 2, 2003,in the District Court, Dallas County, Texas, Walter Evans brought ashareholders’ derivative action, for the benefit of Nominal Defendant CarrekerCorporation against James D. Carreker, John D. Carreker, Jr., James R. Erwin,James L. Fischer, Michael D. Hansen, Donald L. House, Richard R. Lee, Jr.,David K. Sias, Ronald J. Steinhart, and Ernst & Young, LLP and CarrekerCorporation, Nominal Defendant (Cause No. 0305505). The complaint alleges thatthe director defendants breached their fiduciary duty to the company. Inaddition the complaint makes certain allegations against the company’s independentauditors Ernst & Young, LLP. The complaint seeks unspecified amounts ofcompensatory damages, as well as interest and costs, including legal fees fromthe director defendants.

 

On May 29, 2003,in the United States District Court for the Northern District of Texas, DallasDivision, Barbara I. Smith brought a shareholders’ derivative action pursuantto Rule 23.1, Fed.R.Civ.P, for the benefit of Nominal Defendant CarrekerCorporation against certain of its current officers and directors, i.e., John D.Carreker, Jr., James D. Carreker, Richard R. Lee, Jr., James L. Fischer, DonaldL. House, David K. Sias and Terry L. Gage (Civil Action No. 303CV1211-D),seeking to remedy their individual breaches of fiduciary duty, including theirknowing violations of Generally Accepted Accounting Principles (“GAAP”),knowing violations of federal and state securities laws, acts of bad faith andother breaches of fiduciary duty.  Theplaintiff seeks redress (in the form of, among others, unspecified amounts ofcompensatory damages, interests and costs, including legal fees) for injuriesto the Company and its shareholders caused by Defendants’ misfeasance and/ormalfeasance during the period from May 20, 1998 through December 10, 2002.

 

On April 16, 2003the United States District Court for the Northern District of Texas, DallasDivision, issued an order consolidating a number of purported class actionlawsuits against the Company, John D. Carreker Jr. and Terry L. Gage into aConsolidated Action styled In re Carreker Corporation Securities Litigation,Civil Action No. 303CV0250-M.  Also, onMarch 3, 2003, Claude Alton Coulter filed a purported class action lawsuit (Civil Action No.503-CV-5-Q) against the Company, John D. Carreker Jr. and Terry L. Gage in theUnited States District Court for the Eastern District of Texas, TexarkanaDivision.  These complaints, filed onbehalf of purchasers of the Company’s common stock between May 20, 1998 andDecember 10, 2002, inclusive, allege violations of Section 10(b) of theSecurities Exchange Act of 1934 and Rule 10b-5 against all defendants andviolations of Section 20(a) of the Exchange Act against the individualdefendants.  These complaints alsoallege, among other things, that defendants artificially inflated the value ofthe Company’s stock by knowingly or recklessly misrepresenting the Company’sfinancial results during the purported class period.  The plaintiffs are seeking unspecified amounts of compensatorydamages, interests and costs, including legal fees.

 

Earnings PerformanceGroup (“EPG”) filed a complaint on or about September 16, 1998 in the SuperiorCourt of New Jersey, Law Division, Essex County seeking to enjoin and restrainthe Company from using any EPG confidential or proprietary information or tradesecrets and from employing any former EPG employee in such a manner thatdisclosure or use of an EPG confidential or proprietary information or tradesecret would be likely.  EPG also seeks(a) an accounting of any profits realized from or attributable to the use of anyEPG confidential or proprietary information or trade secret, (b) compensatoryand exemplary damages, plus interest and (c) attorneys’ fees and costs ofsuit.  On October 14, 1998, the Companyremoved the case to the United States District Court for the District of NewJersey.  The Company answered thecomplaint on November 4, 1998, essentially denying the allegations and settingforth various affirmative defenses.  OnNovember 20, 1998, the Company filed an Amended Answer, Separate Defenses andCounterclaim.  In the Counterclaim theCompany asserts claims for (a) restraint of trade, (b) tortuous interferencewith contractual relationships, (c) unfair competition and (d) interferencewith prospective economic advantage.

 

The Company andindividual defendants deny the allegations in these complaints and intend todefend themselves vigorously.  It is notpossible at this time to predict whether the Company will incur any liabilityor to estimate the damages, or the range of damages, if any, that the Company mightincur in connection with these lawsuits.

 

The Company isperiodically involved in various other legal actions and claims which arise inthe normal course of business.  In theopinion of management, the final disposition of these matters are not expectedto have a material adverse effect on the Company’s financial position orresults of operations.

 

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**11.****       BusinessSegments and Revenue Concentration**

 

The tables belowshow revenues and income (loss) from operations for the periods indicated forthe Company’s three reportable business segments: Revenue Enhancement, GlobalPayments Technologies and Global Payments Consulting.  Customer projects are sold on a solution basis, so it isnecessary to break them down by segment and allocate accordingly.  Included in “Corporate Unallocated” arecosts related to selling and marketing, unallocated corporate overhead expenseand general software management. Business segment results including costs for research and development,as well as product royalty expense, the amortization of intangible assets, thewrite-off of capitalized software costs and restructuring and other chargeswere as follows (in thousands):

 
|                                                                          |   | **Three Months ended April 30, 2003** |   |
|-------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                          |   | **Revenue  Enhancement**              |   | **Global  Payments  Technologies** |   | **Global  Payments  Consulting** |   | **Corporate  Unallocated** |   | **Total** |   |
| Revenues:                                                                     |   |                                  |   |   |   |   |   |   |   |   |   |
| Consulting  fees                                                              |   | $                                     | 6,078  |   | $ | 115 |   | $ | 558 |   | $ | — |   | $ | 6,751 |   |
| Software  license fees                                                        |   | 907                                   |   | 5,671 |   | — |   | — |   | 6,578 |   |
| Software  maintenance fees                                                    |   | 234                                   |   | 8,476 |   | — |   | — |   | 8,710 |   |
| Software  implementation fees                                                 |   | 230                                   |   | 4,531 |   | 133 |   | — |   | 4,894 |   |
| Out-of-pocket  expense reimbursements                                         |   | 609                                   |   | 577 |   | 137 |   | — |   | 1,323 |   |
| Intercompany  revenue                                                         |   | —                                |   | (20 | ) | 20 |   | — |   | — |   |
| Total  revenues                                                               |   | $                                     | 8,058  |   | $ | 19,350 |   | $ | 848 |   | $ | — |   | $ | 28,256 |   |
|                                                                          |   |                                  |   |   |   |   |   |   |   |   |   |
| Income  (loss) from operations before merger, restructuring and other charges |   | $                                     | 3,363  |   | $ | 3,730 |   | $ | (961 | ) | $ | (7,999 | ) | $ | (1,867 | ) |
|                                                                          |   |                                  |   |   |   |   |   |   |   |   |   |
| Restructuring  and other charges                                              |   | —                                |   | 21 |   | 147 |   | 516 |   | 684 |   |
| Income  (loss) from operations                                                |   | $                                     | 3,363  |   | $ | 3,709 |   | $ | (1,108 | ) | $ | (8,515 | ) | $ | (2,551 | ) |

 
|                                  |   | **Three Months ended April 30, 2002** |   |
|---------------------------------------|--------|---------------------------------------|--------|
|                                  |   | **Revenue  Enhancement**              |   | **Global  Payments  Technologies** |   | **Global  Payments  Consulting** |   | **Corporate  Unallocated** |   | **Total** |   |
| Revenues:                             |   |                                  |   |   |   |   |   |   |   |   |   |
| Consulting  fees                      |   | $                                     | 7,423  |   | $ | 35 |   | $ | 2,137 |   | $ | — |   | $ | 9,595 |   |
| Software  license fees                |   | 168                                   |   | 13,874 |   | — |   | — |   | 14,042 |   |
| Software  maintenance fees            |   | —                                |   | 10,667 |   | — |   | — |   | 10,667 |   |
| Software  implementation fees         |   | 849                                   |   | 6,332 |   | 16 |   | — |   | 7,197 |   |
| Out-of-pocket  expense reimbursements |   | 721                                   |   | 902 |   | 565 |   | — |   | 2,188 |   |
| Intercompany  revenue                 |   | —                                |   | (119 | ) | 119 |   | — |   | — |   |
| Total  revenues                       |   | $                                     | 9,161  |   | $ | 31,691 |   | $ | 2,837 |   | $ | — |   | $ | 43,689 |   |
|                                  |   |                                  |   |   |   |   |   |   |   |   |   |
| Income  (loss) from operations        |   | $                                     | 3,775  |   | $ | 11,961 |   | $ | (449 | ) | $ | (6,571 | ) | $ | 8,716 |   |

 

18

----

 

The followingtable summarizes revenues, exclusive of out-of-pocket expense reimbursements,derived from the Company’s largest customer and top five customers during theperiods indicated.

 
|                |   | **Three Months Ended****April 30,** |   |
|---------------------|--------|-------------------------------------|--------|
|                |   | **2003**                            |   | **2002** |   |
|                |   |                                |   |   |   |
| Single  customer    |   | 12%                                 |   | 10% |   |
| Top  five customers |   | 38%                                 |   | 35% |   |

 

The Company markets its solutions in several foreign countries.  Revenues, exclusive of out-of-pocketexpense reimbursements, attributed tocountries based on the location of the customer were as follows (inthousands):

 
|           |   | **Three  Months Ended  April 30,  2003** |   | **Three  Months Ended  April 30,  2002** |   |
|----------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|           |   | **Amount**                               |   | **Percent  of total  revenues**          |   | **Amount** |   | **Percent  of total  revenues** |   |
| United States  |   | $                                        | 21,494 |                                     | 80     | % | $ | 33,625 |   | 81 | % |
| Europe         |   | 1,867                                    |   | 7                                        |   | 2,491 |   | 6 |   |
| Australia      |   | 1,154                                    |   | 4                                        |   | 1,372 |   | 3 |   |
| Canada         |   | 1,996                                    |   | 7                                        |   | 1,787 |   | 4 |   |
| South Africa   |   | 276                                      |   | 1                                        |   | 2,226 |   | 6 |   |
| Other          |   | 146                                      |   | 1                                        |   | — |   | — |   |
| Total revenues |   | $                                        | 26,933 |                                     | 100    | % | $ | 41,501 |   | 100 | % |

 

**12.****       Restructuringand Other Charges**

 

The Companyrecorded $545,000 in restructuring and other charges during the three monthperiod ended April 30, 2003, principally associated with the separation of17 employees, within both the Corporate and GPC business segments.

 

The activityrelated to the accrued merger and restructuring costs reserve during thequarterly period ended April 30, 2003 is as follows (in thousands):

 
|                              |   | **Workforce  Reductions** |   | **Charges  Relating to  CheckFlow  Suite** |   | **Facility  Closures** |   | **Total** |   |
|-----------------------------------|--------|---------------------------|--------|--------------------------------------------|--------|------------------------|--------|-----------|--------|
|                              |   |                      |   |                                       |   |                   |   |      |   |
| January  31, 2003 reserve balance |   | $                         | 953    |                                       | $      | 1,273                  |   | $         | 124    |   | $ | 2,350 |   |
|                              |   |                      |   |                                       |   |                   |   |      |   |
| Additions  to reserve balance:    |   |                      |   |                                       |   |                   |   |      |   |
| Severance  charges                |   | 545                       |   | —                                     |   | —                 |   | 545       |   |
| Reduction  to reserve balance:    |   |                      |   |                                       |   |                   |   |      |   |
| Cash  paid                        |   | (550                      | )      | (68                                        | )      | —                 |   | (618      | )      |
| April  30, 2003 reserve balance   |   | $                         | 948    |                                       | $      | 1,205                  |   | $         | 124    |   | $ | 2,277 |   |

 

During thequarterly period ended April 30, 2003, the Company recorded a charge of$139,000 relating to legal and professional fees relating to the Company’srestatement efforts and the legal actions described in Note 10.

 

19

----

 

**13.****       RelatedParty Transactions**

 

In March 2001, theCompany loaned $500,000 to a former officer of the Company pursuant to aLimited Recourse Promissory Note (“Note”) collateralized solely by shares ofExchange Applications, Inc. common stock. The principal was due in full on March 30, 2004.  In January 2002, the Note was adjusted toits estimated fair value of $125,000, resulting in a charge to earnings of$375,000.  During the quarterly periodended April 30, 2002, the Note was adjusted to its estimated fair value of$25,000 resulting in an additional charge to earnings of $100,000.  During the quarterly period ended July 31,2002, the Note was deemed worthless resulting in a charge to earnings of$25,000.

 

In connection withthe completion of the Check Solutions acquisition, the Company assumed a $10.0million obligation to certain employees of Check Solutions, including a currentofficer of the Company.  During the quarterlyperiod ended January 31, 2002, $3.3 million of this obligation was paid andduring the quarterly period ended April 30, 2002 the remaining $6.7 million waspaid.

 

**Item 2. Management’s Discus****sion and Analysis of Financial Condition and Resultsof Operations**

 

All statementsother than statements of historical fact contained in this report, includingstatements in this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” concerning our financial position and liquidity,results of operations, prospects for future growth, and other matters, areforward-looking statements.  Although webelieve that the expectations reflected in such forward-looking statements arereasonable, no assurance can be given that such expectations will prove correct.  Factors that could cause our results todiffer materially from the results discussed in, or contemplated by, suchforward-looking statements include the risks described under “Business –Forward Looking Statements and Risk Factors” contained in our Form 10-K for theyear ended January 31, 2003, as filed with the Securities and ExchangeCommission (SEC).  Such risks include,without limitation, dependence on the banking industry, decline in checkvolumes, fluctuations in operating results, use of fixed-price or value-pricedarrangements, lack of long-term agreements, ability to manage growth,dependence on key personnel, product liability, rapid technological change anddependence on new products, dependence on third-party providers and theInternet, new focus on providing business process outsourcing with significantoffshore component, ability to attract and retain qualified personnel, customerconcentration, indebtedness, competition, potential strategic alliances andacquisitions, proprietary rights, infringement claims and legal proceedings,dependence on third parties for technology licenses, liability claims, classaction lawsuits, stock price fluctuations, continued NASDAQ listing,international operations, use of independent contractors, changing governmentand tax regulations, anti-takeover provisions in our charter and impairment ofgoodwill or intangible assets.  Allforward-looking statements in this report are expressly qualified in theirentirety by the cautionary statements in this paragraph, in the “risk factors”included in our SEC filings and elsewhere in this report.

 

**Overview**

 

We providepayments-related software and consulting solutions to financial institutionsand financial service providers.  Thesesolutions help our customers improve operational efficiency in how payments areprocessed; enhance revenue and profitability from payments-oriented productsand services; reduce losses associated with fraudulent payment transactions;and evolve toward next-generation payment practices and technologies.

 

We are organized into three primary operating divisions:  Global Payments Technologies (GPT), RevenueEnhancement (RevE) and GlobalPayments Consulting (GPC).  Thesedivisions represent our three reportable business segments.

See Note 11 of our Notes to Condensed ConsolidatedUnaudited Financial Statements.

 

We derive our revenues from consulting fees, software license fees,software maintenance fees, and software implementation fees. While manycustomer contracts provide for both the performance of consulting services andthe license of related software, some customer contracts require only theperformance of consulting services or only a software license (and, at theelection of the customer, related implementation services and/or annual softwaremaintenance services). We enter into these contracts with our customers on aproject-by-project basis.

 

We seek to establish long-term relationships with our customers thatwill lead to on-going projects utilizing our solutions. We are typically retainedto perform one or more discrete projects for a customer, and we use theseopportunities to extend our solutions into additional areas of the customer’soperations. To this end, a significant portion of our current revenues isderived from customers who were customers in prior years, and we are thereforedependent to a significant degree on our ability to maintain our existingrelationships with these customers.

 

20

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**Restatement**

 

We restated our audited financialstatements for the years ended January 31, 2002, 2001, 2000 and 1999, and ourunaudited financial statements for each of the quarters in the year endedJanuary 31, 2002 and for the quarters ended April 30, 2002 and July 31, 2002.  Refer to our Form 10-K for the year endedJanuary 31, 2003 for details of the restatement, as well as the impact of therestatement on the years and quarters previously reported.

 

**Products and Services**

 

*Global Payments Technologies Solutions.*  Carreker’s technology solutions helpfinancial institutions address the needs of some critical payment services anddelivery functions that impact overall operating costs and riskmanagement.  These functions includepresentment of checks in paper and electronic form, determination of theavailability of funds, identification and mitigation of fraudulent payments,handling irregular items such as checks returned unpaid (exceptions),maintaining a record of past transactions (archiving), responding to relatedcustomer inquiries (research), and correcting any errors that are discovered(adjustments).  The Global PaymentsTechnologies solutions suite addresses these key functions in the context ofimproving operational efficiency and a gradual transition from paper toelectronic-based payment systems.  Inaddition, we offer technology solutions that optimize the inventory managementof a bank’s cash stock levels, including managing how much is needed, when itis needed and where it is needed.  Oursolutions reduce the amount of cash banks need to hold in reserve accounts andas cash-on-hand, while ensuring a high level of customer service through timelyreplenishment of ATM cash supplies.

 

Specific solutions in theGlobal Payments Technologies group include:

 
| **Solution**                    |   | **Description**                                                                                                                                                                                                                                                                       |   | **Products  Offered**                                                                                                                                                                                                                     |
|---------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   |                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                      |
| Fraud  Mitigation               |   | Automated fraud  detection and prevention solutions that reduce incidents of check fraud,  deposit fraud, check kiting, and electronic fraud. Scalable solutions are  offered for community banks.                                                                                    |   | FraudLink On-Us,  FraudLink Deposit, FraudLink Kite, FraudLink Positive Pay, FraudLink  eTracker, FraudLink PC, CORE, FraudLink ACHeCK, eFraudLink.com, Fraud  Solutions Consulting                                                       |
|                            |   |                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                      |
| Back  Office Processing         |   | Products that bring new  efficiencies to back-office operations through leading-edge image, workflow,  and RECO (character recognition) technologies.                                                                                                                                 |   | Adjustments/Express,  Exceptions/Express, Input/Express, Inbound Returns/Express, Image Bulk-File,  All Transactions File and Fine Sort                                                                                                   |
|                            |   |                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                      |
| Remittance  Processing          |   | Both host- and client/server-based  platforms for improved productivity in processing retail and wholesale  remittance transactions.                                                                                                                                                  |   | NeXGen Remittance                                                                                                                                                                                                                         |
|                            |   |                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                      |
| Conventional  Check Capture     |   | An extensive array of  enhancement products that add flexibility and usability to IBM’s Check  Processing Control System (CPCS) and the IBM 3890/XP series of Document  Processors.                                                                                              |   | Conventional Capture  Products, CPCS Enhancements Products, XP/Productivity Tools, Platform  Emulation, NeXGen Settlement, NeXGen Balancing, LTA (Large Table Access)                                                                     |
|                            |   |                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                      |
| Check  Image Capture            |   | Products and services  related to the capture, storage and delivery of check images.                                                                                                                                                                                                  |   | ALS & CIMS  Products, NeXGen Image Processor, Image Enhancement Products, Reject Repair,  RECO Technology, Image POD, Image Delivery Products, Delivery Express                                                                       |
|                            |   |                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                      |
| Check  Image Archive Management |   | Comprehensive array of  check image archive management products that may be tailored to a bank’s  unique requirements based on their operational environments and volumes.  Carreker offers archive technology for  both in-house solutions and shared outsource providers. |   | Check Image  Archive-AIX, Check Image Archive-MVS, Check Image Archive Load                                                                                                                                                               |
|                            |   |                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                      |
| Image  Applications             |   | Applications providing  new solutions that address revenue enhancement and expense reduction issues  through the application of image, workflow and RECO technologies.                                                                                                                |   | Image Statements,  NeXGen Remittance, + CDRom Delivery, Exceptions/Express, Inbound  Returns/Express, Adjustments/Express, Input/Express, Express Capture, Payee  Name Verification, Amount Encoding Verification, Image Quality Analysis |

 

21

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| **Solution**                  |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **Products  Offered**                                                        |
|-------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|
|                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                         |
| Global  Tracking              |   | A complete bar code  tracking system eliminates manual log sheets, automates data gathering and  maximizes workflow by tracking accountable mail, branch bags, item volumes,  currency bags, incoming domestic and international deposits, outgoing cash  letters, exceptions and much more.                                                                                                                                                                         |   | Receive Sentry                                                               |
|                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                         |
| eMetrics                      |   | Performance-measurement  software suite that uses historical data to generate key performance  indicators, item processing volume data, productivity statistics and quality  control benchmarks.                                                                                                                                                                                                                                                                     |   | Lumen, ProModel,  eiMICR, eiStats, eiQuality, eiPerform                      |
|                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                         |
| Electronic  Check Presentment |   | Enables banks to  transition from paper-based to electronic payment systems by automating key  elements of the processing stream, as well as improving a bank’s yield from  float management. These solutions are designed to reduce and eventually  eliminate the movement of paper payments through the system, improving  productivity, reducing errors, increasing customer satisfaction and reducing  fraud.                                               |   | CheckLink, CheckLink  PC, Deposit Manager, Branch Truncation Manager, Cnotes |
|                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                         |
| Float  Management             |   | Solutions that manage a  bank’s float through float analysis, pricing and a comprehensive consulting  practice to improve profitability, reporting, workflow and check clearing  operations.  These products also  provide critical activity summaries, aid in creating multiple availability  and pricing schedules, and pinpoint the cost/profitability of any transaction  or relationship.                                                             |   | Float Analysis System,  Float Pricing System                                 |
|                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                         |
| ATM  Solutions                |   | Advanced ATM monitoring  and management improving ATM availability and ensuring service levels are  met. These solutions include an automated ATM monitoring and dispatching  system for maximizing network availability; an Internet-based cash  forecasting and inventory management desktop system for reducing cash needs  by 20-40% across the enterprise; and a real-time Internet-based system for  efficient handling of ATM service requests and responses. |   | eiManager, eiGateway,  iCom                                                  |
|                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                         |
| Cash  Solutions               |   | A product suite, now  optimized through Web-based software solutions, that dramatically reduces the  amount of cash banks, financial institutions and companies need to hold as  cash-on-hand throughout vault, branch and ATM networks. These solutions also  automate and standardize the cash ordering process.  Consulting solutions can drive further efficiency and  automation in vault, branch and ATM operations.                                      |   | iCom, ReserveLink,  ReserveLink Plus, Cash Supply Chain Consulting           |
|                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                         |
| Logistics                     |   | Improves margins  related to the cash product by reducing operational infrastructure and cash  movement (armored transportation) expense; optimizes the cash delivery  channel and associated workflows; assesses the cash strategic direction,  pricing components, customer approach and existing service levels.                                                                                                                                                  |   | Cash Supply Chain  Consulting                                                |

 

22

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*Revenue Enhancement Solutions.*  The Revenue Enhancement division includestwo business units:  RevE and EnAct.RevE is a highly specialized division that provides consulting services focusedon tactical methods of increasing banks’ fee income. The scope and depth ofthis practice has expanded throughout its 12 year history and now includesretail, small business, and commercial deposits, treasury management, consumerand commercial lending, credit card lending and trust and investment services.Our solutions involve developing strategies that enable our clients to takeadvantage of electronification trends, often gaining first mover advantages forour clients. In addition to developing strategies, our business model ensuresthat we continue to translate those strategies into tactical implementationswith measurable revenue streams. Our client base has continued to expand withvery high penetration rates in the markets in which we operate. Thus, we haveexperienced a trend of becoming longer term strategic partners with ourclients.

 

Another component of ourRevenue Enhancement Division is our business providing EnAct software andproprietary sales management methodology. Our Customer Value Management andEnAct solutions assist financial institutions in leveraging centralintelligence with local insight. This enables our clients to recognize thosecustomers and prospects representing the greatest value or potential. Ourapproach is unique and complimentary to many CRM investments that banks have madein recent years and is designed to focus their activities such that they canactually attain the returns that have been promised.

 

*Global Payments Consulting.*  Carreker helps financial institutionspro-actively plan, prepare and optimize for the regulatory, competitive andtechnological impacts affecting the financial payments environment.

 

Our Global PaymentsConsulting (GPC) division provides strategic planning and implementationadvisory services for financial institutions with large enterprise paymentinfrastructure environments.  We providepayment research services, predictive financial and operational modeling,organizational design, and business planning services focused on assistingfinancial institutions in preparing and positioning their organization for therapidly changing payment landscape of financial services.

 

GPC has specializedadvisory services focused on operational and infrastructure planning,implementation and measurements associated with the changing payment technologyand delivery landscape.  Specific areasof focus and expertise are business infrastructure planning in imageprocessing, float/available fund optimization, operational migration planningand fraud and risk management across all types of payments.

 

23

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**Results of Operations**

 

For the periodsindicated, the following table sets forth the percentage that selected items inthe unaudited condensed consolidated statements of operations bear to totalrevenues.  The period-to-periodcomparisons of financial results are not necessarily indicative of futureresults.

 
|                                                       |   | **Three Months Ended  April 30,** |       |
|------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                       |   | **2003**                          |       | **2002** |   |
|                                                       |   |                              | ** ** |   | ** ** |
| Revenues:                                                  |   |                              |       |   |   |
| Consulting  fees                                           |   | 23.9                              | %          | 22.0 | % |
| Software  license fees                                     |   | 23.3                              |       | 32.1 |   |
| Software  maintenance fees                                 |   | 30.8                              |       | 24.4 |   |
| Software  implementation fees                              |   | 17.3                              |       | 16.5 |   |
| Out-of-pocket  expense reimbursements                      |   | 4.7                               |       | 5.0 |   |
| Total  revenues                                            |   | 100.0                             |       | 100.0 |   |
|                                                       |   |                              |       |   |   |
| Cost  of revenues:                                         |   |                              |       |   |   |
| Consulting  fees                                           |   | 17.6                              |       | 15.7 |   |
| Software  license fees                                     |   | 6.1                               |       | 3.9 |   |
| Software  maintenance fees                                 |   | 11.0                              |       | 6.3 |   |
| Software  implementation fees                              |   | 17.1                              |       | 11.8 |   |
| Out-of-pocket  expenses                                    |   | 4.4                               |       | 5.3 |   |
| Total  cost of revenues                                    |   | 56.2                              |       | 43.0 |   |
|                                                       |   |                              |       |   |   |
| Gross  profit                                              |   | 43.8                              |       | 57.0 |   |
|                                                       |   |                              |       |   |   |
| Operating  costs and expenses:                             |   |                              |       |   |   |
| Selling,  general and administrative                       |   | 42.8                              |       | 29.4 |   |
| Research  and development                                  |   | 6.4                               |       | 6.8 |   |
| Amortization  of intangible assets                         |   | 1.2                               |       | 0.8 |   |
| Restructuring  and other charges                           |   | 2.4                               |       | — |   |
| Total  operating costs and expenses                        |   | 52.8                              |       | 37.0 |   |
|                                                       |   |                              |       |   |   |
| Income  (loss) from operations                             |   | (9.0                              | )          | 20.0 |   |
| Other  income (expense), net                               |   | (1.2                              | )          | (1.5 | ) |
|                                                       |   |                              |       |   |   |
| Income  (loss) before provision (benefit) for income taxes |   | (10.2                             | )          | 18.5 |   |
| Provision  (benefit) for income taxes                      |   | 0.3                               |       | (3.7 | ) |
|                                                       |   |                              |       |   |   |
| Net  income (loss)                                         |   | (10.5                             | )%         | 22.2 | % |

 

For the periodsindicated, the following table sets forth the selected items comprising cost ofrevenues as a percentage of the revenues generated by that category of ouroperations.  The period-to-periodcomparisons of financial results are not necessarily indicative of futureresults.

 
|                          |   | **Three Months Ended  April 30,** |       |
|-------------------------------|--------|-----------------------------------|------------|
|                          |   | **2003**                          |       | **2002** |   |
|                          |   |                              | ** ** |   | ** ** |
| Cost  of revenues:            |   |                              |       |   |   |
| Consulting  fees              |   | 73.6                              | %          | 71.4 | % |
| Software  license fees        |   | 26.2                              |       | 12.1 |   |
| Software  maintenance fees    |   | 35.8                              |       | 26.0 |   |
| Software  implementation fees |   | 98.6                              |       | 71.4 |   |
| Out-of-pocket  expenses       |   | 94.7                              |       | 106.8 |   |

 

24

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*Revenues:*  Our total revenues decreased by $15.4million, or 35.3%, to $28.3 million for the three months ended April 30, 2003,from $43.7 million for the three months ended April 30, 2002.  The decrease in total revenue was the resultof a decline in all four core revenue categories, and each decline is describedin more detail below.

 

*ConsultingFees:*  Revenues fromconsulting fees decreased by $2.8 million, or 29.6%, to $6.8 million for thethree months ended April 30, 2003, from $9.6 million for the three months endedApril 30, 2002.  Consulting fees areprimarily derived from Revenue Enhancement’s value-priced engagements and fromGlobal Payments Consulting business segments consulting solutions.  Consulting revenue from Revenue Enhancementdecreased $1.3 million, or 18.1% quarter-over-quarter.  We have been successful in generatingrevenue from our existing customer base and have increased our penetration intosmaller financial institutions with the introduction of our Celerityoffering.  However, we have seen adecline in our Revenue Enhancement consulting fees derived from ourinternational customer base of approximately $2.6 million for the quarterly periodended April 30, 2003 as compared to the quarterly period ended April 30,2002.  Global Payments Consultingrevenue continues to decrease.  On aquarter-over-quarter basis Global Payments Consulting revenue decreased $1.6million, or 74%.  Traditionally, theGlobal Payments Consulting business segment generated IT consulting revenuesparticularly when a financial institution customer was merging orconsolidating.  We are transitioningthis business segment to address enterprise-wide payment strategies and imageenabling planning and integration.  Wecontinue to be cautious about the prospects for this business segment as thetransition takes place.

 

*SoftwareLicense Fees:* Revenues from software license fees decreased $7.4 million, or 53.2%, to$6.6 million for the three months ended April 30, 2003 from $14.0 million forthe three months ended April 30, 2002. The majority of our software license arrangements are sold withimplementation services that are essential to the functionality of the softwareand therefore the software license fees are recognized as the essentialservices are performed.  We havecontinued to experience delayed customer purchasing decisions as customertechnology budgets remain tight.  Inaddition, our customers are in a period of transition as the form of paymentstransfer from traditional paper checks to electronic forms of payments.  The predictability of the timing, form andsequence of this transition is causing our customers to delay buyingdecisions.  This general market weaknessbecame particularly visible beginning in the latter half of fiscal 2002.  These conditions, intense competition andcustomer anxiety over the possible outcome of our special investigation,contributed to the lower software revenue in the quarterly period ended April30, 2003.

 

*SoftwareMaintenance Fees:* Revenues from software maintenance fees decreased $2.0 million, or18.3%, to $8.7 million for the three months ended April 30, 2003, from $10.7million for the three months ended April 30, 2002.  Software maintenance fees represent annually renewable productand telephone support for our software customers.  The annual maintenance fee generally is paid to us at thebeginning of the maintenance period, and we recognize these revenues ratablyover the term of the related contract. We defer revenue recognition on maintenance fees until cash iscollected, which can cause quarter-to-quarter fluctuations.  In the three month period ended April 30,2003, approximately $2.6 million of revenue that was due was not recognizedsince payment was not received.  Weanticipate that these payments will be received in future quarters.

 

*SoftwareImplementation Fees:* Revenues from software implementation fees decreased $2.3 million, or32.0%, to $4.9 million for the three months ended April 30, 2003, from $7.2million for the three months ended April 30, 2002.  On a quarter-over-quarter basis, the decline in softwareimplementation fee revenue can be primarily attributed to declines in softwareimplementation fees within our Global Payments Technologies businesssegment.  Based on lower license sales,we expect software implementation fee revenue to remain flat for the balance offiscal 2003.

 

*Out-of-PocketExpense Reimbursements:* Revenues from out-of-pocket expense reimbursements decreased $865,000 or39.5% to $1.3 million for the three months ended April 30, 2003, from $2.2million for the three months ended April 30, 2002.  Decreases in these reimbursements are primarily the result of ageneral decline in our Global Payments Consulting business segment.  Engagements in this segment usually requireour employees to be at the customer location for extended periods of time.

 

*Costof Revenues:*  Ourtotal cost of revenues was $15.9 million, or 56.2%, of total revenue for the threemonths ended April 30, 2003, and was $18.8 million, or 43.0% of total revenuefor the three months ended April 30, 2002. In absolute dollars, the decrease in the cost of revenues is the directresult of lower costs of consulting and lower out-of-pocket expenses within ourGlobal Payments Consulting business segment. The lower cost of consulting was the result of lower personnel costs,which includes travel expenses.  Theincrease in these costs as a percentage of total revenue is a result of the 35.3%decline in total revenues, compounded by a 53.2% decline in software licensefees during the quarterly period ended April 30, 2003, as compared to thequarterly period ended April 30, 2002.

 

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*Costof Consulting:*  Ourcost of consulting was $5.0 million, or 73.6% of consulting fees for the threemonths ended April 30, 2003, and was $6.9 million, or 71.4% of consulting feesfor the three months ended April 30, 2002. Cost of consulting decreased in absolute dollars due primarily toreduced personnel-related and contract labor costs through cost reduction andrestructuring efforts completed in the last half of fiscal 2001 and duringfiscal 2002, particularly within the Global Payments Consulting business segment.  The majority of our consulting fee revenueis driven by value-priced engagements within our Revenue Enhancement businesssegment that fluctuate significantly from period-to-period; as a result, ourconsulting costs as a percentage of revenue will also fluctuate based on theamount of value-priced revenue recognized.

 

*Costof Software Licenses:* Our cost of software licenses was $1.7 million, or 26.2%, of softwarelicense fees for the three months ended April 30, 2003, and $1.7 million, or12.1%, of software license fees for the three months ended April 30, 2002.  Cost of software licenses consistprincipally of amortization of capitalized software costs, amortization ofacquired developed technology and royalties payable to third parties.  Despite the fixed nature of approximately$1.3 million per quarter of amortization of capitalized software costs, costsof acquired developed technology and costs of software licenses as a percentageof software license fees will fluctuate based on the level of software licensefee revenue recognized.  Additionally,in connection with software license agreements entered into with certain banksand purchase agreements with vendors under which our acquired softwaretechnology is used in products sold to our customers, we are required to payroyalties on sales of certain software products, including, but not limited to,four Back Office products and the Branch Truncation Management product.  Under these arrangements, we record royaltyexpense when the associated revenue is recognized.  The royalty percentages generally range from 20% to 30% of theassociated revenue.  Approximately$435,000 and $128,000 of royalty expense was recorded under these agreementsfor the three months ended April 30, 2003 and 2002, respectively.

 

*Costof Software Maintenance:* Our cost of software maintenance was $3.1 million, or 35.8%, of softwaremaintenance fees for the three months ended April 30, 2003, and $2.8 million,or 26.0%, of software maintenance fees for the three months ended April 30,2002.  Because our maintenance revenueis not recognized until the cash is collected, maintenance revenue canfluctuate from period-to-period and as a result our cost of softwaremaintenance as a percentage of related maintenance revenue will also fluctuate.

 

*Costof Software Implementation:* Our cost of software implementation was $4.8 million, or 98.6%, ofsoftware implementation fees for the three months ended April 30, 2003 and $5.1million, or 71.4%, of software implementation fees for the three months endedApril 30, 2002.  The decrease in ourgross margins related to software implementation revenue is the result ofdecreased software implementation revenue and lower utilization of personnel.  

 

*Costof Out-of-Pocket Expense Reimbursements:*  Our cost of out-of-pocket expensereimbursements was $1.3 million, or 94.7% of related revenues for the threemonths ended April 30, 2003, and was $2.3 million, or 106.8% of relatedrevenues for the three months ended April 30, 2002.  Cost of out-of-pocket expense reimbursements have generallydeclined along with reduced engagements in our Global Payments Consultingbusiness segment.  This segment hashistorically had engagements which required extended stays at customer locations.  Gross margins will fluctuate due tocontractual terms, such as the timing of billing for the out-of-pocket expensesand limitations or caps in the amount of expense that can be billed to thecustomer.

 

*Selling, General and Administrative:*  Our selling, general and administrative expenses were $12.1million, or 42.8%, of total revenue for the three months ended April 30, 2003,and $12.8 million, or 29.4%, of total revenue for the three months ended April30, 2002.  Selling, general andadministrative expenses generally consist of personnel costs such as salaries,commissions and other incentive compensation along with travel associated withselling, marketing, general management and software management.  Additionally, the provision for doubtful accounts,as well as fees for professional services and other related costs areclassified within selling, general and administrative expense.  The decrease in quarter-over-quarterselling, general and administrative expenses is principally the result of a reductionin salary and benefit expense due to personnel reductions.  The increase in these costs as a percent oftotal revenue is the result of the 35.3% decline in total revenue.

 

*Research and Development:***** Research and development costs were $1.8million, or 6.4%, of total revenue for the three months ended April 30, 2003,and $3.0 million, or 6.8%, of total revenue for the three months ended April30, 2002.  Research and developmentcosts decreased on a quarter-over-quarter basis due to heightened research anddevelopment activity in the three months ended April 30, 2002 related todevelopment and testing of four Fraud Mitigation products along with iCom, anoffering within Cash Solutions.  We havecontinued to invest in our solutions, in support of revenue growth and qualityenhancements, and we expect Research and Development activities to increase infuture quarters as we invest in technologies to meet our customers' needs forshifting from paper-based payments to electronic payments.

 

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*Amortizationof Intangible Assets:* Our amortization of intangibles was $350,000, or 1.2%, of total revenuefor the three months ended April 30, 2003, and $350,000, or 0.8%, of totalrevenue for the three months ended April 30, 2002.  The amortization for the three months ended April 30, 2003 and2002 is a result of the recognition of amortization expense for a customerrelationship intangible asset acquired in the Check Solutions acquisition.

 

*Restructuringand other charges:* Werecorded $545,000 of restructuring and other charges during the three monthperiod ended April 30, 2003, consisting principally of severance for 17employees terminated.

 

The activity related tothe accrued merger and restructuring costs reserve during the Company’squarterly period ended April 30, 2003 is as follows (in thousands):

 
|                                 |   | **Workforce  Reductions** |   | **Charges  Relating to  CheckFlow  Suite** |   | **Facility  Closures** |   | **Total** |   |
|--------------------------------------|--------|---------------------------|--------|--------------------------------------------|--------|------------------------|--------|-----------|--------|
|                                 |   |                      |   |                                       |   |                   |   |      |   |
| Reserve  balance at January 31, 2003 |   | $                         | 953    |                                       | $      | 1,273                  |   | $         | 124    |   | $ | 2,350 |   |
|                                 |   |                      |   |                                       |   |                   |   |      |   |
| Additions  to reserve balance:       |   |                      |   |                                       |   |                   |   |      |   |
| Severance  charges                   |   | 545                       |   | —                                     |   | —                 |   | 545       |   |
| Reductions  to reserve balance:      |   |                      |   |                                       |   |                   |   |      |   |
| Cash  paid                           |   | (550                      | )      | (68                                        | )      | —                 |   | (618      | )      |
| Reserve  balance at April 30, 2003   |   | $                         | 948    |                                       | $      | 1,205                  |   | $         | 124    |   | $ | 2,277 |   |

 

During the quarterlyperiod ended April 30, 2003, the Company recorded a charge of $139,000 relatingto legal and professional fees relating to the Company’s restatement effortsand the legal actions.

 

*InterestIncome:*  Interestincome increased $12,000 to $80,000 for the three months ended April 30, 2003,from $68,000 for the three months ended April 30, 2002.  We expect interest income to beinsignificant during fiscal 2003.

 

*InterestExpense:*  Interestexpense decreased $367,000 to $418,000 for the three months ended April 30,2003, from $785,000 for the three months ended April 30, 2002.  Interest expense decreased on aquarter-over-quarter basis due to a decreased amount of borrowings outstandingunder the revolving credit agreement and a decreased interest rate.

 

*Provision(Benefit) for Income Taxes:* The net tax expense of $94,000 for the three months ended April 30, 2003is a result of the provision for state taxes. The net tax benefit of $1.6 million for the three months ended April 30,2002 consists of a tax benefit generated by additional tax loss carrybacksavailable to us as a result of the Job Creation and Workers Assistance Act of2002, offset by a $300,000 provision for taxes based on an estimated annualeffective tax rate of 3.6% for the year ending January 31, 2003.  The estimated annual effective tax rate islower than the statutory federal and state rates as a result of thecarryforward of net operating losses utilized or expected to be utilized duringthe year ended January 31, 2003.

 

**Liquidity and Capital Resources**

 

At April 30, 2003, we hadworking capital of $6.8 million compared with $17.9 million at January 31,2003.  We had $28.9 million in cash andcash equivalents at April 30, 2003, an increase of $1.9 from $27.0 million in cashand cash equivalents at January 31, 2003. At April 30, 2003, we had $15.0 million of long-term debt compared to$25.0 million at January 31, 2003. The decrease in working capital is a direct result of the payments madeon the long-term debt during the quarterly period ended April 30, 2003.

 

During the three monthsended April 30, 2003, we generated $12.2 million of cash from operatingactivities, as compared to using $3.8 million during the three months endedApril 30, 2002.  The increase in cashgenerated from operating activities during the quarterly period endedApril 30, 2003, is primarily the result of increased accounts receivablecollection activity, specifically for software license and implementationarrangements.

 

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The timing of cashcollections can cause fluctuations from quarter-to-quarter in our cashgenerated from operating activities. Average days’ sales outstanding fluctuate for a variety of reasons,including the timing of billings specified by contractual agreement and receivablesfor expense reimbursements.  Thefollowing table contains the quarterly days sales outstanding (DSO):

 
| **Quarter ended** |   | **DSO** |   |
|-------------------|--------|---------|--------|
| April  30, 2003   |   | 51      |   |
| January  31, 2003 |   | 72      |   |
| October  31, 2002 |   | 97      |   |
| July  31, 2002    |   | 73      |   |
| April  30, 2002   |   | 76      |   |

 

From an investingperspective, we used $311,000 and $1.1 million during the three months endedApril 30, 2003 and 2002, respectively. These uses of cash are comprised of purchases of property and equipmentand capitalized software development.

 

From a financing perspective,we used $10.0 million during the three months ended April 30, 2003, as comparedto generating $7.5 million during the period ended April 30, 2002.  The uses of cash during the quarterly periodended April 30, 2003, is the result of the repayment of borrowings under therevolving credit agreement.  The cashgenerated from financing activities during the quarterly period ended April 30,2002, was the result of the sale of 1,282,214 shares of common stock to a groupof institutional investors in a private transaction in which $9.3 million ofnet proceeds were received.

 

On June 6, 2001, weentered into a three-year revolving credit agreement with a group of banks inan amount not to exceed $60.0 million to fund the acquisition of CheckSolutions.  At April 30, 2003, we had$15.0 million outstanding.  Alloutstanding borrowings are due June 5, 2004. Borrowings under the credit agreement bear interest equal to either thegreater of prime or federal funds rate plus a margin ranging from 0.50% to1.25% depending on our ratio of funded debt to Earnings before Interest, TaxesDepreciation and Amortization (“EBITDA”) or London Interbank Offered Rate(“LIBOR”) plus a margin equal to 2.00% to 2.75% depending on our ratio offunded debt to EBITDA.  Interest paymentsare due quarterly.  We are required topay a commitment fee equal to 0.375% to 0.50% depending on our ratio of fundeddebt to EBITDA on the unused amount of the revolving credit agreement.  The revolving credit agreement containscustomary affirmative and negative covenants, some of which have been amended,including financial covenants requiring the maintenance of specified interestcoverage, ratio of EBITDA to funded debt, and ratio of accounts receivable,cash and short-term investments to funded debt.  Additionally, the payment of dividends is precluded subject tothe approval of the banks. Substantially all of our assets collateralize this revolving creditagreement.  As of April 30, 2003, wewere in compliance with the covenants of the revolving credit agreement, asamended.  While there can be noassurance, we believe we will continue to meet these covenants during the yearended January 31, 2004.  Negative trendsin our operating results or any instances of non-compliance could negativelyimpact our liquidity.

 

We expect that existingcash and cash generated from operating activities will be sufficient to meetour anticipated cash needs for working capital, capital expenditures and otheractivities during fiscal 2003.  However,if current sources are not sufficient to meet our needs, we may seek additionalequity or debt financing.  There can beno assurance that additional financing would be available on acceptable terms,if at all.  We are presently involved ina number of lawsuits, the outcome of which could affect our liquidity.  Further, in the future we may pursueacquisitions of businesses, products or technologies that could complement orexpand our business and product offerings, which could change our financingneeds.  Our forecast of the period oftime through which our financial resources will be adequate to support ouroperations is a forward-looking statement that involves risks anduncertainties, and actual results could vary. The failure to secure additional financing when needed could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

The following summarizesour contractual obligations at April 30, 2003 and the effect these contractualobligations are expected to have on our liquidity and cash flows in futureperiods (in thousands):

 
|                        |   |      |   | **Payments Due by Period** |   |
|-----------------------------|--------|-----------|--------|----------------------------|--------|
|                        |   | **Total** |   | **1 Year or  Less**        |   | **Years  2-3** |   | **After  3 Years** |   |
| Revolving  credit agreement |   | $         | 15,000 |                       | $      | — |   | $ | 15,000 |   | $ | — |   |
| Operating  leases           |   | 20,125    |   | 3,788                      |   | 7,047 |   | 9,290 |   |
|                        |   | $         | 35,125 |                       | $      | 3,788 |   | $ | 22,047 |   | $ | 9,290 |   |

 

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**Critical Accounting Policies**

 

In preparing ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States, we use certain estimates andassumptions that affect the reported amounts and related disclosures and ourestimates may vary from actual results. We consider the following four accounting policies the most important tothe portrayal of our financial condition and those that require the mostsubjective judgment.  Although webelieve that our estimates and assumptions are reasonable, actual results maydiffer, and such differences could be significant to our financial results.

 

Revenue Recognition

 

Our revenue recognitionpolicies are in accordance with Statement of Position (“SOP”) 97-2, *“SoftwareRevenue Recognition,”* as amended by SOP 98-9, “*Modification of SOP 97-2, SoftwareRevenue Recognition with Respect to Certain Transactions,”* and StaffAccounting Bulletin (“SAB”) No. 101, *“Revenue Recognition in Financial Statements.”*  In the case of software arrangements thatrequire significant production, modification, or customization of software, orthe license agreement requires the Company to provide implementation servicesthat are determined to be essential to other elements of the arrangement, theCompany follows the guidance in SOP 81-1, *“Accounting for Performance of Construction – Typeand Certain Production – Type Contracts.”*

 

*Consulting Fees.*  We employ three primary pricing methods inconnection with our delivery of consulting services. First, we may price ourdelivery of consulting services on the basis of time and materials, in whichcase the customer is charged agreed-upon daily rates for services performed andout-of-pocket expenses. In this case, we are generally paid fees and relatedamounts on a monthly basis, and we recognize revenues as the services areperformed. Second, we may deliver consulting services on a fixed-price basis.In this case, we are generally paid on a monthly basis or pursuant to an agreedupon payment schedule, and we recognize revenues paid on apercentage-of-completion basis. We believe that this method is appropriatebecause of our ability to determine performance milestones and determinedependable estimates of our costs applicable to each phase of a contract.  Because financial reporting of thesecontracts depends on estimates, which are assessed continually during the termof the contract, costs are subject to revisions as the contractprogresses.  Anticipated losses onfixed-priced contracts are recognized when estimable.  Third, we may deliver consulting services pursuant to avalue-priced contract with the customer. In this case, we are paid, on anagreed upon basis with the customer, either a specified percentage of(1) the projected increased revenues and/or decreased costs that areexpected to be derived by the customer generally over a period of up to twelvemonths following implementation of our solution or (2) the actual increasedrevenues and/or decreased costs experienced by the customer generally over aperiod of up to twelve months following implementation of our solution, subjectin either case to a maximum, if any is agreed to, on the total amount ofpayments to be made to us.  We mustfirst commit time and resources to develop projections associated withvalue-pricing contracts before a bank will commit to purchase our solutions,and we therefore assume the risk of making these commitments with no assurancethat the bank will purchase the solution. Costs associated with these value-pricing contracts are expensed asincurred**.**  These contracts typically provide for us toreceive a percentage of the projected or actual increased revenues and/ordecreased costs, with payments to be made to us pursuant to an agreed uponschedule ranging from one to twelve months in length. We recognize revenuesgenerated from consulting services in connection with value-priced contractsbased upon projected results only upon completion of all services and agreementupon the actual fee to be paid (even though billings for these services may bedelayed by mutual agreement for periods not to exceed twelve months). In aneffort to allow customers to more closely match expected benefits from ourservices with payments to us, we may offer payment terms which extend beyond 12months.  When we enter into an agreementthat has a significant component of the total amount payable under theagreement due beyond 12 months and it is determined payments are not fixed anddeterminable at the date the agreement is entered into, revenue under thearrangement will be recognized as payments become due and payable.  When fees are to be paid based on apercentage of actual revenues and/or savings to our customers, we recognizerevenues only upon completion of all services and as the amounts of actualrevenues or savings are confirmed by the customer with a fixed payment date.

 

Costs associated withtime and materials, fixed-priced and value-priced consulting fee arrangementsare expensed as incurred and are included as a component of the cost ofconsulting fees.

 

We expect thatvalue-priced contracts will continue to account for a large percentage of ourrevenues in the future. As a consequence of the use of value-priced contractsand due to the revenue recognition policy associated with those contracts, ourresults of operations will likely fluctuate significantly from period toperiod.

 

Regardless of the pricingmethod employed by us in a given contract, we are typically reimbursed on amonthly basis for out-of-pocket expenses incurred on behalf of our customers.

 

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*Software License Fees.*  In the event that a software license is soldeither together with consulting services or on a stand-alone basis, we areusually paid software license fees in one or more installments, as provided inthe customer’s contract but not to exceed 12 months.  Under SOP 97-2, we recognize software license revenue uponexecution of a contract and delivery of the software, provided that the licensefee is fixed and determinable, no significant production, modification orcustomization of the software is required and collection is considered probableby management.  When the softwarelicense arrangement requires us to provide implementation services that areessential to the functionality of the software or significant production,customization or modification of the software, both the product license revenueand implementation fees are recognized as services are performed.

 

Software licenses areoften sold as part of a multiple element arrangement that may includemaintenance, implementation or consulting. We determine whether there is vendor specific objective evidence of fairvalue (“VSOEFV”) for each element identified in the arrangement to determinewhether the total arrangement fees can be allocated to each element.  If VSOEFV exists for each element, the totalarrangement fee is allocated based on the relative fair value of each element.  In cases where there is not VSOEFV for eachelement, or if it is determined services are essential to the functionality ofthe software being delivered, or if significant production, modification orcustomization of the software is required, we defer revenue recognition of thesoftware license fees.  However, ifVSOEFV is determinable for all of the undelivered elements, and assuming theundelivered elements are not essential to the delivered elements, we will deferrecognition of the full fair value related to the undelivered elements andrecognize the remaining portion of the arrangement value through application ofthe residual method as set forth in SOP 98-9. Where VSOEFV has not been established for certain undelivered elements,revenue for all elements is deferred until those elements have been deliveredor their fair values have been determined. Evidence of VSOEFV is determined for software products based on actualsales prices for the product sold to a similar class of customer and based onpricing strategies set forth in our price book.  Evidence of VSOEFV for services (installation, implementation andconsulting) is based upon standard billing rates and the estimated level ofeffort for individuals expected to perform the related services.  We establish VSOEFV for maintenanceagreements using the percentage method such that VSOEFV for maintenance is apercentage of the license fee charged annually for specific software product,which in most instances is 20% of the portion of arrangement fees allocated tothe software license element.

 

Although substantiallyall of our current software licenses provide for a fixed-price license fee,some licenses provide for the customer to pay a monthly license fee based onthe actual use of the software product.  The level of license fees earned by us under this arrangement willvary based on the actual amount of use by the customer.  Revenue under these arrangements isrecognized on a monthly basis.

 

*Software Maintenance Fees.*  In connection with our sale of a softwarelicense, a customer may elect to purchase software maintenance services. Mostof the customers that purchase software licenses from us also purchase softwaremaintenance services, which typically are renewed annually. We charge an annualmaintenance fee, which is typically a percentage of the initial softwarelicense fee. The annual maintenance fee generally is paid to us at thebeginning of the maintenance period, and we recognize these revenues ratablyover the term of the related contract. If the annual maintenance fee is not paid at the beginning of themaintenance period, we defer revenue recognition until the time the maintenancefee is paid by the customer.

 

*SoftwareImplementation Fees.* In connection with the sale of a software license, a customer may electto purchase software implementation services, including software enhancements,patches and other software support services. Most of the customers that purchase software licenses from us alsopurchase software implementation services. We price our implementation services on a time-and-material or on afixed-price basis, and we recognize the related revenues as services areperformed.  Costs associated with theseengagements are expensed as incurred.

 

Royalties

 

In connection withsoftware license and maintenance agreements entered into with certain banks andpurchase agreements with vendors under which we acquired software technologyused in products sold to its customers, we are required to pay royalties onsales of certain software products, including four Back Office products andBranch Truncation Management product. Under these arrangements, we accrue royalty expense when the associatedrevenue is recognized.  The royaltypercentages generally range from 20%-30% of the associated revenues.  Royalty expense is included as a componentof the cost of software license fees and cost of software maintenance fees inthe accompanying consolidated statement of operations.

 

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Allowancefor Doubtful Accounts

 

A large proportion of ourrevenues and receivables are attributable to our customers in the bankingindustry.  Our trade accounts receivablebalance is recorded net of allowances for amounts not expected to be collectedfrom our customers.  Because ouraccounts receivable are typically unsecured, we periodically evaluate thecollectibility of our accounts based on a combination of factors, including aparticular customer’s ability to pay as well as the age of receivables.  In cases where the evidence suggests acustomer may not be able to satisfy its obligation to us or if the collectionof the receivable becomes doubtful due to a dispute that arises subsequent tothe delivery of our products and services, we set up a specific reserve in anamount we determine appropriate for the perceived risk.  If circumstances change, such as higher thanexpected defaults or an unexpected material adverse change in a customer’sability to meet their financial obligations to us, our estimates ofrecoverability of amounts due us could be reduced by a material amount.

 

Software CostsCapitalized, Goodwill, Other Intangible Assets and Other Long-Lived Assets

 

Software costscapitalized include developed technology acquired in acquisitions and costsincurred by us in developing our products that qualify for capitalization.  We capitalize our software developmentcosts, other than costs for internal-use software, in accordance with Statementof Financial Accounting Standards No. 86, “*Accountingfor Costs of Computer Software to be Sold, Leased or Otherwise Marketed”*(“SFAS 86”).  Our policy is tocapitalize software development costs incurred in developing a product oncetechnological feasibility of the product has been established.  Software development costs capitalized alsoinclude amounts paid for purchased software on products that have reachedtechnological feasibility. Technological feasibility of the product isdetermined after completion of a detailed program design and a determinationhas been made that any uncertainties related to high-risk development issueshave been resolved. If the process of developing the product does not include adetailed program design, technological feasibility is determined only aftercompletion of a working model that has been beta tested. All capitalizedsoftware development costs are amortized using an amount determined as thegreater of: (1) the ratio that current gross revenues for a capitalizedsoftware project bears to the total of current and future projected grossrevenues for that project or (2) the straight-line method over the remainingeconomic life of the product (generally three to six years).

 

Goodwill and intangibleswith indefinite lives are assessed on an annual basis for impairment at thereporting unit level by applying a fair value based test.  We performed the initial impairment test ofgoodwill and intangibles with indefinite lives assets at February 1, 2002 and afollow up test at November 1, 2002 to determine if an impairment charge shouldbe recognized under SFAS 142.  Theinitial impairment analysis did not result in any write-down of capitalizedcosts.  We perform an annual impairmentassessment on November 1st of each year or when factors indicatethat other long-lived assets should be evaluated for possible impairment, weuse an estimate of undiscounted future net cash flows over the remaining lifeof the asset to determine if impairment has occurred.  Assets are grouped at the lowest level for which there areidentifiable cash flows that are largely independent from other assetgroups.  An impairment in the carryingvalue of an asset is assessed when the undiscounted, expected future operatingcash flows derived from the asset are less than its carrying value.  Management believes that assumptions used todetermine cash flows are reasonable, but actual future cash flows may differfrom those estimated.  If we determinean asset has been impaired, the impairment is recorded based on the estimatedfair value of the impaired asset. During the period ended January 31, 2003, events and circumstancescaused us to revaluate goodwill resulting in an impairment charge of $46.0million.  Goodwill at April 30, 2003totaled $21.2 million.  Furtherdeterioration in market conditions, increases in interest rates and changes inour projections with respect to the Global Payments Technologies reporting unitto which goodwill is allocated would result in additional impairment charges inthe future.

 

Merger, Restructuring and Other Charges

 

During fiscal year 2001,we recorded significant reserves in connection with our acquisition of CheckSolutions and subsequent operational restructurings.  Additional reserves were recorded during the three months endedApril 30, 2003 and 2002.  These reservescontain significant estimates pertaining to work force reductions, and thesettlement of contractual obligations resulting from our actions.  Although we do not anticipate significantchanges, the actual costs may differ from these estimates.

 

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Contingencies

 

We are subject toproceedings, lawsuits and other claims. We are required to assess the likelihood of any adverse judgments ofoutcomes to these matters as well as potential ranges of probable losses.  A determination of the amount or reservesrequired, if any, for these contingencies is made after careful analysis ofeach individual issue.  The requiredreserves may change in the future due to new developments in each matter orchanges in insurance coverage or approach such as change in settlementstrategy.

 

Income Taxes

 

We recognize deferred taxassets or liabilities for the expected future tax consequences of temporarydifferences between the book and tax bases of assets and liabilities.  We review our deferred tax assets for recoverabilityand establish a valuation allowance based on historical taxable income,projected future taxable income and the expected timing of the reversals ofexisting temporary differences.  As aresult of our cumulative net losses we have provided a full valuation allowanceagainst our net deferred tax assets.  Inaddition, we expect to provide a full valuation allowance of any future taxbenefits until we can sustain a level of profitability that demonstrates ourability to utilize these assets.

 

**Recently Issued Accounting Standards**

 

In November 2002, theEITF reached a consensus on Issue 00-21, *“MultipleDeliverable Revenue Arrangements.”* EITF 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which it will perform multiple revenue-generatingactivities.  It also addresses when andhow an arrangement involving multiple deliverables should be divided intoseparate units of accounting.  The guidancein EITF 00-21 is effective for revenue arrangements entered into in fiscalperiods beginning after June 15, 2003, with early application permitted.  Companies may elect to report the change inaccounting as a cumulative effect of a change in accounting principle inaccordance with APB Opinion 20, *“AccountingChanges” and SFAS 3, “Reporting Accounting Changes in Interim FinancialStatements (an amendment of APB Opinion No. 28).”*  We do not currently believe adoption willhave a significant impact on our accounting for multiple element arrangements.

 

**Item 3.  Quantitative and****Qualitative Disclosures About Market Risk**

 

**InterestRate Risk**

 

We invest our cash in avariety of financial instruments.  Theseinvestments are denominated in U.S. dollars and maintained with nationallyrecognized financial institutions and mutual fund companies.

 

We account for ourinvestment instruments in accordance with Statement of Financial AccountingStandards No. 115, “*Accounting for CertainInvestments in Debt and Equity Securities”* (“SFAS 115”).  We treat all of our cash equivalents andshort-term investments as available-for-sale under SFAS 115.

 

Investments in bothfixed-rate and floating-rate interest-earning instruments carry a degree ofinterest rate risk.  Fixed-ratesecurities may have their fair market value adversely impacted due to a rise ininterest rates, while floating rate securities may produce less income thanexpected if interest rates fall.  Due inpart to these factors, our future investment income may fall short ofexpectations due to changes in interest rates, or we may suffer losses inprincipal if forced to sell securities that have seen a decline in market valuedue to changes in interest rates.  Ourinvestment securities are held for purposes other than trading.  At April 30, 2003, we did not hold anyfixed-rate investments.

 

We currently have $15.0million outstanding under our revolving credit agreement at April 30,2003.  As described in Note 5 of ourNotes to Condensed Consolidated Unaudited Financial Statements, the interestrate is variable.  At April 30, 2003,the interest rate on the debt was 4.8125%.

 

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**ForeignCurrency Risk**

 

We currently haveoperations in several international locations including Canada, United Kingdom,South Africa and Australia.  As aresult, we have assets and liabilities outside the United States that aresubject to fluctuations in foreign currency exchange rates.  Due to the nature of these operations, wecurrently utilize the U.S. Dollar as the functional currency for allinternational operations.

 

An insignificant portionof our accounts receivable balance at April 30, 2003 was denominated in aforeign currency.  Our exposure toadverse movements to foreign exchange rates is not significant.  Therefore, we do not currently hedge ourforeign currency exposure; however, we do try to limit our foreign currencyexposure by negotiating foreign currency exchange rates within our customercontracts.  Historically, foreigncurrency gains and losses have not had a significant impact on our results ofoperations or financial position.  Wewill continue to evaluate the need to adopt a hedge strategy in the future andmay implement a formal strategy if our business transacted in foreigncurrencies increases.

 

**Item 4.  Controls and Procedures**

 

*DisclosureControls*

 

We maintain disclosurecontrols and procedures designed to ensure that we are able to collect theinformation we are required to disclose in the reports we file with the SEC,and to process, summarize and disclose this information within the time periodsspecified in the rules of the SEC.

 

Our Chief Executive andChief Financial Officers are responsible for evaluating the effectiveness ofour disclosure controls and procedures. ** **Based on their evaluation of ourdisclosure controls and procedures which took place as of a date within 90 daysof the filing date of this report, and except as noted below, the ChiefExecutive and Chief Financial Officers believe that these procedures areeffective to ensure that we are able to collect, process and disclose the informationwe are required to disclose in the reports we file with the SEC within therequired time periods.

 

In designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

*InternalControls*

 

Since the date of themost recent evaluation of our internal controls by the Chief Executive andChief Financial Officers, there have been no significant changes in suchcontrols or in other factors that could have significantly affected those controls,including any corrective actions with regard to significant deficiencies andmaterial weaknesses, except as described below.

 

Inconnection with the restatement process recently completed, during the firstquarter of fiscal 2003 we began utilizing an off-line restatement workbook, inaddition to our corporate accounting system, to report quarterly revenues.  We believe that this process needs furtherimprovement and have implemented appropriate changes.  These changes include (i) the completion by July 31, 2003 ofa pre-existing project to move all items from the restatement workbook to ourcorporate accounting system, thus eliminating any off-line entries that requireconsolidation, and (ii) enhancing the analytical procedure of comparing forecastedrevenue to actual revenue on a project basis.

 

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**PART II:   OTHER INFORMATION**

 

**ITEM 1.****                             LEGALPROCEEDINGS**

 

On June 2, 2003, in theDistrict Court, Dallas County, Texas, Walter Evans brought a shareholders’ derivativeaction, for the benefit of Nominal Defendant Carreker Corporation against JamesD. Carreker, John D. Carreker, Jr., James R. Erwin, James L. Fischer, MichaelD. Hansen, Donald L. House, Richard R. Lee, Jr., David K. Sias, Ronald J.Steinhart, and Ernst & Young, LLP and Carreker Corporation, NominalDefendant (Cause No. 0305505). The complaint alleges that the directordefendants breached their fiduciary duty to the company. In addition thecomplaint makes certain allegations against the company’s independent auditorsErnst & Young, LLP. The complaint seeks unspecified amounts of compensatorydamages, as well as interest and costs, including legal fees from the directordefendants.

 

On May 29, 2003, in theUnited States District Court for the Northern District of Texas, DallasDivision, Barbara I. Smith brought a shareholders’ derivative action pursuantto Rule 23.1, Fed.R.Civ.P, for the benefit of Nominal Defendant CarrekerCorporation against certain of its current officers and directors, i.e., JohnD. Carreker, Jr., James D. Carreker, Richard R. Lee, Jr., James L. Fischer,Donald L. House, David K. Sias and Terry L. Gage (Civil Action No.303CV1211-D), seeking to remedy their individual breaches of fiduciary duty,including their knowing violations of Generally Accepted Accounting Principles(“GAAP”), knowing violations of federal and state securities laws, acts of badfaith and other breaches of fiduciary duty. The plaintiff seeks redress (in the form of, among others, unspecifiedamounts of compensatory damages, interests and costs, including legal fees) forinjuries to the Company and its shareholders caused by Defendants’ misfeasanceand/or malfeasance during the period from May 20, 1998 throughDecember 10, 2002.

 

On April 16, 2003 theUnited States District Court for the Northern District of Texas, DallasDivision, issued an order consolidating a number of purported class actionlawsuits against the Company, John D. Carreker Jr. and Terry L. Gage into aConsolidated Action styled In re Carreker Corporation Securities Litigation,Civil Action No. 303CV0250-M.  Also, onMarch 3, 2003, Claude Alton Coulter filed a purported class action lawsuit (Civil Action No.503-CV-5-Q) against the Company, John D. Carreker Jr. and Terry L. Gage in theUnited States District Court for the Eastern District of Texas, TexarkanaDivision.  These complaints, filed onbehalf of purchasers of the Company’s common stock between May 20, 1998 andDecember 10, 2002, inclusive, allege violations of Section 10(b) of the SecuritiesExchange Act of 1934 and Rule 10b-5 against all defendants and violations ofSection 20(a) of the Exchange Act against the individual defendants.  These complaints also allege, among otherthings, that defendants artificially inflated the value of the Company’s stockby knowingly or recklessly misrepresenting the Company’s financial resultsduring the purported class period.  Theplaintiffs are seeking unspecified amounts of compensatory damages, interestsand costs, including legal fees.

 

Earnings PerformanceGroup (“EPG”) filed a complaint on or about September 16, 1998 in the SuperiorCourt of New Jersey, Law Division, Essex County seeking to enjoin and restrainthe Company from using any EPG confidential or proprietary information or tradesecrets and from employing any former EPG employee in such a manner thatdisclosure or use of an EPG confidential or proprietary information or tradesecret would be likely.  EPG also seeks(a) an accounting of any profits realized from or attributable to the use ofany EPG confidential or proprietary information or trade secret, (b)compensatory and exemplary damages, plus interest and (c) attorneys’ fees andcosts of suit.  On October 14, 1998, theCompany removed the case to the United States District Court for the Districtof New Jersey.  The Company answered thecomplaint on November 4, 1998, essentially denying the allegations and settingforth various affirmative defenses.  OnNovember 20, 1998, the Company filed an Amended Answer, Separate Defenses andCounterclaim.  In the Counterclaim theCompany asserts claims for (a) restraint of trade, (b) tortuous interferencewith contractual relationships, (c) unfair competition and (d) interferencewith prospective economic advantage.

 

The Company andindividual defendants deny the allegations in these complaints and intend todefend themselves vigorously.  It is notpossible at this time to predict whether the Company will incur any liabilityor to estimate the damages, or the range of damages, if any, that the Companymight incur in connection with these lawsuits.

 

The Company isperiodically involved in various other legal actions and claims which arise inthe normal course of business.  In theopinion of management, the final disposition of these matters are not expectedto have a material adverse effect on the Company’s financial position orresults of operations.

 

**ITEM 2.****                             CHANGESIN SECURIT****IES AND USE OF PROCEEDS**

 

None.

 

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**ITEM 3.****                             DEFAULTSUPON SENI****OR SECURITIES**

 

None.

 

**ITEM 4.****                             SUBMISSIONOF MATT****ERS TO A VOTE OF SECURITYHOLDERS**

 

None

 

**ITEM5.****                             OTHERINFORMATION**

 

None.

 

**ITEM 6.****                             EXHIBITSAND REPOR****TS ON FORM 8-K**

 

(a)          Exhibits

 
| **Number** |   | **Exhibit Description**                                                                                                  |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                     |
| 99.1       |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| 99.2       |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

(b)         Reports on Form 8-K

 

We filed the followingCurrent Reports on Form 8-K with the Securities and Exchange Commission duringthe quarterly period ended April 30, 2003:

 

(i)                                     Acurrent report on Form 8-K dated February 7, 2003 was filed with Securities andExchange Commission February 10, 2003.

(ii)                                  Acurrent report on Form 8-K dated February 24, 2003 was filed with Securitiesand Exchange Commission February 24, 2003.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| CARREKER  CORPORATION |
|-----------------------|
|                  |   |   |
|                  |   |   |
| By:                   | /s/ John D. Carreker,  Jr. |   | Date: |   June 12,  2003 |   |
|                  | John D. Carreker, Jr. |   |
|                  | Chairman of the Board  and  Chief Executive Officer |   |
|                  |   |   |
|                  |   |   |
| By:                   | /s/ Terry L. Gage |   | Date: |   June 12,  2003 |   |
|                  | Terry L. Gage |   |
|                  | Executive Vice  President and  Chief Financial Officer |   |

 

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**CERTIFICATIONS**

 

I, John D. Carreker, Jr., principal executive officer, certifythat:

 

1.                                       I have reviewed this quarterlyreport on Form 10-Q of Carreker Corporation;

 

2.                                       Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

(a)          Designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         Evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”); and

 

(c)          Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.                                       The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board of directors(or persons performing the equivalent function):

 

(a)          All significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

(b)         Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6.                                       The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | June 12, 2003                                       |   |
|--------|-----------------------------------------------------|--------|
|   |                                                |
|   |                                                |
| By:    | /s/  John D. Carreker, Jr.                          |   |
|   | John D. Carreker, Jr.                               |
|   | Chairman of the Board  and  Chief Executive Officer |
|        |                                                     |        |  |  |

 

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**CERTIFICATIONS**

 

I, Terry L. Gage, principal financial officer, certify that:

 

1.                                       I have reviewed this quarterlyreport on Form 10-Q of Carreker Corporation;

 

2.                                       Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

(a)          Designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         Evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”); and

 

(c)          Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.                                       The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)          All significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

(b)         Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6.                                       The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | June 12, 2003                                          |   |
|--------|--------------------------------------------------------|--------|
|   |                                                   |
|   |                                                   |
| By:    | /s/ Terry L. Gage                                      |   |
|   | Terry L. Gage                                          |
|   | Executive Vice  President and  Chief Financial Officer |
|        |                                                        |        |  |  |

 

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