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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Period Ended July 31, 2002.  
|- | -----------------------------------------------------------------------------------------------------------------------------
|o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from
 to
.

Commission file number 0-24201

LOGO

Carreker Corporation(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

75-1622836(IRS Employer Identification No.)4055 Valley View Lane, #1000
Dallas, Texas(Address of principal executive office)

75244(Zip Code)


(972) 458-1981(Registrant's telephone number, including area code)

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

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

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common
Stock, $.01 par value23,541,076 shares as of August 31, 2002.

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CARREKER CORPORATION

Index



|                                 |         | 
|-------------------------------- | ------- | 
|PART I:    FINANCIAL INFORMATION
|                                 | Item 1. | 
|                                 |         | 
|                                 |         | 
|                                 |         | 
|                                 |         | 
|                                 |         | 
|                                 | Item 2. | 
|                                 | Item 3. | 
|                                 | Item 4. | 
|PART II:    OTHER INFORMATION   
|                                 | Item 1. | 
|                                 | Item 2. | 
|                                 | Item 3. | 
|                                 | Item 4. | 
|                                 | Item 5. | 
|                                 | Item 6. | 
|SIGNATURES                      
|CERTIFICATIONS                  

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

CARREKER CORPORATION        Condensed Consolidated Balance Sheets  (Unaudited)  (In thousands, except per share amounts)    ASSETS

|                                                                                                                                        |                                                                                                                                              | July 31,
2002 |         | January 31,
2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ------- | ---------------- | -
|Current assets                                                                                                                          |                                                                                                                                              |               |         |                  |  
|                                                                                                                                        | Cash and cash equivalents                                                                                                                    |               | $       | 33,990           |  
|                                                                                                                                        | Accounts receivable, net of allowance of $1,708 and $2,367 at July 31, 2002 and January 31, 2002, respectively                               |               |         | 50,320           |  
|                                                                                                                                        | Federal income tax receivable                                                                                                                |               |         | 6,950            |  
|                                                                                                                                        | Prepaid software royalties                                                                                                                   |               |         | 368              |  
|                                                                                                                                        | Prepaid expenses and other current assets                                                                                                    |               |         | 3,630            |  
|                                                                                                                                        | Deferred income taxes                                                                                                                        |               |         | 867              |  
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|Total current assets                                                                                                                    |                                                                                                                                              |               | 96,125  |                  |  
|Property and equipment, net of accumulated depreciation of $12,773 and $10,682 at July 31, 2002 and January 31, 2002, respectively      |                                                                                                                                              |               | 9,269   |                  |  
|Capitalized software costs, net of accumulated amortization of $8,495 and $7,676 at July 31, 2002 and January 31, 2002, respectively    |                                                                                                                                              |               | 3,540   |                  |  
|Acquired developed technology, net of accumulated amortization of $4,807 and $2,746 at July 31, 2002 and January 31, 2002, respectively |                                                                                                                                              |               | 19,393  |                  |  
|Goodwill, net of accumulated amortization of $3,641 at July 31, 2002 and January 31, 2002                                               |                                                                                                                                              |               | 69,996  |                  |  
|Customer relationships, net of accumulated amortization of $1,633 and $933 at July 31, 2002 and January 31, 2002, respectively          |                                                                                                                                              |               | 6,767   |                  |  
|Deferred loan costs, net of accumulated amortization of $460 and $244 at July 31, 2002 and January 31, 2002, respectively               |                                                                                                                                              |               | 792     |                  |  
|Other assets                                                                                                                            |                                                                                                                                              |               | 294     |                  |  
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|Total assets                                                                                                                            |                                                                                                                                              | $             | 206,176 |                  | $
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                    |                                                                                                                                             
|Current liabilities                                                                                                                     |                                                                                                                                              |               |         |                  |  
|                                                                                                                                        | Accounts payable                                                                                                                             |               | $       | 2,738            |  
|                                                                                                                                        | Accrued compensation and benefits                                                                                                            |               |         | 8,399            |  
|                                                                                                                                        | Other accrued expenses                                                                                                                       |               |         | 3,226            |  
|                                                                                                                                        | Deferred revenue                                                                                                                             |               |         | 36,824           |  
|                                                                                                                                        | Accrued merger and restructuring costs                                                                                                       |               |         | 6,018            |  
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|Total current liabilities                                                                                                               |                                                                                                                                              |               | 57,205  |                  |  
|Long-term debt                                                                                                                          |                                                                                                                                              |               | 35,000  |                  |  
|Deferred income taxes                                                                                                                   |                                                                                                                                              |               | 867     |                  |  
|Deferred revenue                                                                                                                        |                                                                                                                                              |               | 1,392   |                  |  
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|Total liabilities                                                                                                                       |                                                                                                                                              |               | 94,464  |                  |  
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|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; 23,568 and 21,924 shares issued at July 31, 2002 and January 31, 2002, respectively |               |         | 236              |  
|                                                                                                                                        | Additional paid-in capital                                                                                                                   |               |         | 105,445          |  
|                                                                                                                                        | Retained earnings (deficit)                                                                                                                  |               |         | 6,546            |  
|                                                                                                                                        | Less treasury stock, at cost: 27 common shares at July 31, 2002 and January 31, 2002, respectively                                           |               |         | (515             | )
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|Total stockholders' equity                                                                                                              |                                                                                                                                              |               | 111,712 |                  |  
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|Total liabilities and stockholders' equity                                                                                              |                                                                                                                                              | $             | 206,176 |                  | $
|                                                                                                                                        |                                                                                                                                              |               |         |                  |  
|See accompanying notes.                                                                                                                 |                                                                                                                                              |               |         |                 

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CARREKER CORPORATION  Condensed Consolidated Statements of Operations  (Unaudited)  (In thousands, except per share amounts)

|                                                          |                                         | Three Months Ended
July 31,        |        | Six Months Ended
July 31, |       
|--------------------------------------------------------- | --------------------------------------- | ---------------------------------- | ------ | ------------------------- | ------
|
|Revenues:                                                 |                                         |                                    |        |                           |       
|                                                          | Consulting fees                         |                                    | $      | 12,946                    |       
|                                                          | Software license fees                   |                                    |        | 7,864                     |       
|                                                          | Software maintenance fees               |                                    |        | 11,047                    |       
|                                                          | Software implementation fees            |                                    |        | 5,526                     |       
|                                                          | Out-of-pocket expense reimbursements    |                                    |        | 1,670                     |       
|                                                          |                                         |                                    |        |                           |       
|                                                          |                                         | Total revenues                     |        |                           | 39,053
|Cost of revenues:                                         |                                         |                                    |        |                           |       
|                                                          | Consulting fees                         |                                    |        | 7,397                     |       
|                                                          | Software license fees                   |                                    |        | 1,661                     |       
|                                                          | Write-off of capitalized software costs |                                    |        |                          |       
|                                                          | Software maintenance fees               |                                    |        | 2,072                     |       
|                                                          | Software implementation fees            |                                    |        | 3,901                     |       
|                                                          | Out-of-pocket expense reimbursements    |                                    |        | 1,939                     |       
|                                                          |                                         |                                    |        |                           |       
|                                                          |                                         | Total cost of revenues             |        |                           | 16,970
|                                                          |                                         |                                    |        |                           |       
|Gross profit                                              |                                         |                                    | 22,083 |                           |       
|Operating costs and expenses:                             |                                         |                                    |        |                           |       
|                                                          | Selling, general and administrative     |                                    |        | 14,195                    |       
|                                                          | Research and development                |                                    |        | 2,447                     |       
|                                                          | Amortization of intangible assets       |                                    |        | 350                       |       
|                                                          | Merger-related costs                    |                                    |        |                          |       
|                                                          |                                         |                                    |        |                           |       
|                                                          |                                         | Total operating costs and expenses |        |                           | 16,992
|                                                          |                                         |                                    |        |                           |       
|Income (loss) from operations                             |                                         |                                    | 5,091  |                           |       
|Other income (expense):                                   |                                         |                                    |        |                           |       
|                                                          | Interest income                         |                                    |        | 125                       |       
|                                                          | Interest (expense)                      |                                    |        | (696                      | )     
|                                                          | Other income (expense):                 |                                    |        | (49                       | )     
|                                                          |                                         |                                    |        |                           |       
|                                                          |                                         | Total other income (expense)       |        |                           | (620  
|Income (loss) before provision (benefit) for income taxes |                                         |                                    | 4,471  |                           |       
|Provision (benefit) for income taxes                      |                                         |                                    | 447    |                           |       
|                                                          |                                         |                                    |        |                           |       
|Net income (loss)                                         |                                         | $                                  | 4,024  |                           | $     
|                                                          |                                         |                                    |        |                           |       
|Basic earnings (loss) per share                           |                                         | $                                  | 0.17   |                           | $     
|                                                          |                                         |                                    |        |                           |       
|Diluted earnings (loss) per share                         |                                         | $                                  | 0.17   |                           | $     
|                                                          |                                         |                                    |        |                           |       
|Shares used in computing basic earnings per share         |                                         |                                    | 23,397 |                           |       
|Shares used in computing diluted earnings per share       |                                         |                                    | 24,005 |                           |       

See accompanying notes.

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CARREKER CORPORATION  Condensed Consolidated Statements of Stockholders' Equity  (Unaudited)  (In thousands)

|                                                                   |                           | Common Stock |        |   |     |     |   | Treasury Stock |         |   |       
|------------------------------------------------------------------ | ------------------------- | ------------ | ------ | - | --- | --- | - | -------------- | ------- | - | ------
|
|
|Balance at January 31, 2002                                        |                           | 21,924       |        | $ | 219 |     | $ | 93,680         |         | $ | (1,165
|Other                                                              |                           |             |        |   |    |     |   |               |         |   |      
|Issuance of shares of common stock upon exercises of stock options |                           | 99           |        |   | 1   |     |   | 653            |         |   |      
|Tax benefit from exercises of stock options                        |                           |             |        |   |    |     |   | 218            |         |   |      
|Sale of common stock                                               |                           | 1,282        |        |   | 13  |     |   | 9,310          |         |   |      
|Net income                                                         |                           |             |        |   |    |     |   |               |         |   | 3,687 
|                                                                   |                           |              |        |   |     |     |   |                |         |   |       
|                                                                   | Balance at April 30, 2002 |              | 23,305 |   |     | 233 |   |                | 103,861 |   |       
|Other                                                              |                           |             |        |   |    |     |   |               |         |   |      
|Issuance of shares of common stock upon exercises of stock options |                           | 263          |        |   | 3   |     |   | 1,584          |         |   |      
|Net income                                                         |                           |             |        |   |    |     |   |               |         |   | 4,024 
|                                                                   |                           |              |        |   |     |     |   |                |         |   |       
|                                                                   | Balance at July 31, 2002  |              | 23,568 |   | $   | 236 |   | $              | 105,445 |   | $     
|                                                                   |                           |              |        |   |     |     |   |                |         |   |       

See accompanying notes.

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CARREKER CORPORATION  Condensed Consolidated Statements of Cash Flows  (Unaudited)  (In thousands)

|                                                     |                                                                                             | Three Months Ended
July 31,                                                  |                                       | Six Months Ended
July 31, |      
|---------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------- | ------------------------- | -----
|
|Operating Activities:                                |                                                                                             |                                                                              |                                       |                           |      
|                                                     | Net income (loss)                                                                           |                                                                              | $                                     | 4,024                     |      
|                                                     | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                                              |                                       |                           |      
|                                                     |                                                                                             | Depreciation and amortization of property and equipment                      |                                       |                           | 1,133
|                                                     |                                                                                             | Amortization of capitalized software costs and acquired developed technology |                                       |                           | 1,514
|                                                     |                                                                                             | Amortization of goodwill and customer relationships                          |                                       |                           | 350  
|                                                     |                                                                                             | Compensation earned under employee/director stock option plan                |                                       |                           |     
|                                                     |                                                                                             | Tax benefit from exercises of stock options                                  |                                       |                           |     
|                                                     |                                                                                             | Deferred income taxes                                                        |                                       |                           |     
|                                                     |                                                                                             | Non-cash portion of merger-related costs                                     |                                       |                           |     
|                                                     |                                                                                             | Write-off capitalized software costs                                         |                                       |                           |     
|                                                     |                                                                                             | Provision for doubtful accounts                                              |                                       |                           | 376  
|                                                     |                                                                                             | Amortization of software royalties                                           |                                       |                           |     
|                                                     |                                                                                             | Amortization of deferred loan costs                                          |                                       |                           | 108  
|                                                     |                                                                                             | Loss on sale of asset                                                        |                                       |                           | 1    
|                                                     |                                                                                             | Changes in operating assets and liabilities, net of effects of acquisitions: |                                       |                           |      
|                                                     |                                                                                             |                                                                              | Accounts receivable                   |                           |      
|                                                     |                                                                                             |                                                                              | Prepaid expenses and other assets     |                           |      
|                                                     |                                                                                             |                                                                              | Prepayment of software royalties      |                           |      
|                                                     |                                                                                             |                                                                              | Accounts payable and accrued expenses |                           |      
|                                                     |                                                                                             |                                                                              | Income taxes payable/receivable       |                           |      
|                                                     |                                                                                             |                                                                              | Deferred revenue                      |                           |      
|                                                     |                                                                                             |                                                                              |                                       |                           |      
|Net cash provided by (used in) operating activities  |                                                                                             |                                                                              | 11,459                                |                           |      
|Investing Activities:                                |                                                                                             |                                                                              |                                       |                           |      
|                                                     | Sales and maturities of short-term investments                                              |                                                                              |                                       |                          |      
|                                                     | Acquisitions, net of cash acquired                                                          |                                                                              |                                       |                          |      
|                                                     | Purchases of property and equipment                                                         |                                                                              |                                       | (782                      | )    
|                                                     | Computer software costs capitalized                                                         |                                                                              |                                       |                          |      
|                                                     | Proceeds from disposition of assets                                                         |                                                                              |                                       |                          |      
|                                                     |                                                                                             |                                                                              |                                       |                           |      
|Net cash used in investing activities                |                                                                                             |                                                                              | (782                                  | )                         |      
|Financing Activities:                                |                                                                                             |                                                                              |                                       |                           |      
|                                                     | Purchases of treasury stock                                                                 |                                                                              |                                       | 4                         |      
|                                                     | Proceeds from issuance of long-term debt                                                    |                                                                              |                                       |                          |      
|                                                     | Payments on long-term debt                                                                  |                                                                              |                                       | (6,500                    | )    
|                                                     | Payment of deferred loan costs                                                              |                                                                              |                                       |                          |      
|                                                     | Proceeds from exercises of stock options                                                    |                                                                              |                                       | 1,587                     |      
|                                                     | Proceeds from sale of common stock                                                          |                                                                              |                                       |                          |      
|                                                     | Payments on notes payable                                                                   |                                                                              |                                       |                          |      
|                                                     |                                                                                             |                                                                              |                                       |                           |      
|Net cash provided by (used in) financing activities  |                                                                                             |                                                                              | (4,909                                | )                         |      
|                                                     |                                                                                             |                                                                              |                                       |                           |      
|Net increase (decrease) in cash and cash equivalents |                                                                                             |                                                                              | 5,768                                 |                           |      
|Cash and cash equivalents at beginning of period     |                                                                                             |                                                                              | 28,222                                |                           |      
|                                                     |                                                                                             |                                                                              |                                       |                           |      
|Cash and cash equivalents at end of period           |                                                                                             | $                                                                            | 33,990                                |                           | $    
|                                                     |                                                                                             |                                                                              |                                       |                           |      
|Supplemental disclosures of cash flow information:   |                                                                                             |                                                                              |                                       |                           |      
|                                                     | Cash paid for interest                                                                      |                                                                              | $                                     | 611                       |      
|                                                     |                                                                                             |                                                                              |                                       |                           |      
|                                                     | Cash paid for income taxes, net                                                             |                                                                              | $                                     | 418                       |      
|                                                     |                                                                                             |                                                                              |                                       |                           |      

See accompanying notes.

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CARREKER CORPORATION        Notes to Condensed Consolidated Unaudited Financial Statements  for the three and six months ended July 31, 2002 and 2001

1. Description of Business

Carreker Corporation ("the Company") is a leading provider of consulting and software solutions to the banking industry. The Company's solutions include
comprehensive service offerings coupled with a broad array of proprietary software products, which have been designed to address the unique requirements of the banking industry. These solutions are
designed to improve the competitiveness of a bank's financial performance and operations.

2. Summary of Significant Accounting Procedures



The accompanying condensed consolidated unaudited financial statements and notes have been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim financial reporting. The
results of operations, for the three and six months ended July 31, 2002, are not necessarily indicative of full-year results.

These
financial statements should be read in conjunction with the financial statements, accounting policies and financial notes included in the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 2002, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated
unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair representation of financial results for the interim periods
presented.

The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated
in consolidation.

Upon
adoption of Statements of Financial Accounting Standards No. 141,Business Combinations, and No. 142, Goodwill and Other Intangible Assetson
February 1, 2002, the Company reclassified a $5.0 million (net) assembled workforce intangible to
goodwill and ceased amortization, see "Recently Issued Accounting Standards" below. The Company reclassified the January 31, 2002 balance sheet to conform with this presentation.

Upon
adoption of the FASB announcement,Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurredon February 1, 2002, the Company characterized reimbursements received for out-of-pocket expenses incurred as revenue in the statement
of operations. Prior to February 1, 2002, the Company netted reimbursements received for out-of-pocket expenses against the related expenses in the statement of
operations. See "Recently Issued Accounting Standards" below. The Company reclassified the statement of operations for the three and six months ended July 31, 2001, to conform with this
presentation.

Historically,
uncollected invoices for maintenance services within our Check Solutions subsidiary were eliminated from both the accounts receivable and deferred revenue accounts. To be
consistent with current industry practice and trends, these invoices which totaled $3.2 million and $10.9 million, were included in the accounts receivable and deferred revenue accounts
at July 31, 2002 and January 31, 2002, respectively.

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The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. As discussed below, the Company makes significant estimates and assumptions in the areas of accounts receivable and revenue
recognition. Although the Company believes that the estimates and assumptions are reasonable, actual results may differ, and such differences could be significant to the Company's financial results.



The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents
primarily consist of demand deposit accounts and shares in a demand money market account comprised of domestic and foreign commercial paper, certificates of deposit and U.S. government obligations
that are maintained with nationally recognized financial institutions.



A significant portion of the Company's business consists of providing consulting services and licensing software to major domestic banks, which gives rise to a
concentration of credit risk in receivables. Because the Company's accounts receivable typically are unsecured, the Company periodically evaluates the collectibility of its accounts based on a
combination of factors, including a particular customer's ability to pay, as well as the age of receivables. In cases where the evidence suggests a customer may not be able to satisfy its obligation
to the Company or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of the Company's products and services, the Company sets up a specific
reserve in an amount determined appropriate for the perceived risk. Most of the Company's contracts include multiple-payment milestones, which may extend up to one year from the contract date. The
provision for doubtful accounts during the three months ended July 31, 2002 and 2001 were $376,000 and $639,000, respectively. The provision for doubtful accounts during the six months ended
July 31, 2002 and 2001 were $516,000 and $826,000, respectively.

Accounts
receivable include unbilled amounts that generally represent receivables for work performed and are billed after the end of the period, or contracts which contain future,
multiple-payment milestones and have not been presented to the customers upon mutual agreement. These receivables are generally billed and collected within one year of completion of the service.
Accounts receivable include $23.6 million and $21.0 million of unbilled receivables at July 31, 2002 and January 31, 2002, respectively.

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

---



The Company's investment in affiliate consists of a 25% interest in Cash Services Australia Pty, Ltd. ("CSA"), an Australian provider of cash
transportation services. Under terms established with the formation of CSA in May 2002, the Company transferred a 75% interest in CSA to three Australian banks. Prior to May 2002, CSA
was a 100% owned consolidated subsidiary. This transaction did not have an effect on the consolidated statement of operations for the three months ended July 31, 2002. Subsequent to this
transaction, the Company began to account for this investment using the equity method.

During
the three months ended July 31, 2002, the Company recognized $179,000 of consulting services and $291,000 of maintenance services provided by CSA to the three Australian
banks that had previously been deferred, as payment terms were not deemed fixed and determinable.

The
Company's equity investment of approximately $112,000 in CSA is contained in "Other assets" and an unsecured advance of approximately $338,000 is carried in "Prepaid expenses and
other current assets" in the accompanying condensed consolidated balance sheet.



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

July 31,
2002

January 31,
2002Furniture

$
5,046

$
5,035Equipment and software


15,986


15,038Leasehold improvements


1,010


993Total cost


22,042


21,066Less accumulated depreciation and amortization


(12,773
)

(10,682
)Net property and equipment

$
9,269

$
10,384


The
Company accounts for the costs of computer software developed or obtained for internal use in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use("SOP
98-1").The Company capitalizes costs of consultants, as well as payroll and payroll-related costs for employees incurred in developing
internal-use computer software. These costs are included in "Equipment and Software". Costs incurred during preliminary project and post-implementation stages are charged to
expense.

---



Intangible assets, which consist of acquired developed technology, capitalized software costs and customer relationships, have been recorded as the result of
business acquisitions (See Note 3) and are being amortized on the straight-line basis over six years.

Goodwill
is the result of differences, if any, between the aggregate consideration paid for the acquisition and the fair value of the net tangible and intangible assets acquired. Through
January 31, 2002, goodwill was amortized on a straight-line basis over an estimated life of 15 years. Beginning February 1, 2002, goodwill and an intangible asset
representing the assembled workforce will no longer be amortized, but will be subject to an annual impairment test. See "Recently Issued Accounting Standards" below.



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



The Company reviews long-lived assets, including goodwill and intangible assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to projected future discounted
cash flows expected to be generated by the asset or business unit. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount
exceeds the estimated fair value of the assets. The assessment of recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved. See
"Recently Issued Accounting Standards" below.

---



Software costs capitalized include developed technology acquired in acquisitions and costs incurred by the Company in developing its products which qualify for
capitalization. The Company capitalizes the development costs of software, other than internal-use software, in accordance with Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed("SFAS 86"). The Company's policy is to capitalize software
development costs incurred in developing a product once technological feasibility of the product has been established. Software development costs capitalized also include amounts paid for purchased
software on products that have reached technological feasibility. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made
that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detail program design, technological
feasibility is determined only after completion of a working model which has been beta tested. All software development costs capitalized are amortized using an amount determined as the greater of:
(1) the ratio that current gross revenues for a capitalized software project bears to the total of current and future gross revenues for that project or (2) the straight-line
method over the remaining economic life of the product (generally three to six years). The Company did not capitalize any software costs or acquired developed technology for the three months ended
July 31, 2002. The Company capitalized $25.7 million of software costs and acquired developed technology during the three months ended July 31, 2001. The Company capitalized
$103,000 of software costs and acquired developed technology during the six months ended July 31, 2002. The Company capitalized $27.4 million of software costs and acquired developed
technology during the six months ended July 31, 2001. The Company recorded amortization related to capitalized software costs and acquired developed technology of $1.5 million and
$1.4 million for the three months ended July 31, 2002 and 2001, respectively. The Company recorded amortization related to capitalized software costs and acquired developed technology of
$2.9 million and $2.5 million during the six months ended July 31, 2002 and 2001, respectively.

---



Consulting Fees.The Company employs three primary pricing methods in connection with the delivery of consulting services.
First, the Company may price our delivery of consulting services on the basis of time and materials, in which case the customer is charged agreed-upon daily rates for services performed
and out-of-pocket expenses. In this case, the Company is generally paid fees and related amounts on a monthly basis, and the Company recognizes revenues as the services are
performed. Second, the Company may deliver consulting services on a fixed-price basis. In this case, the Company is paid on a monthly basis or pursuant to an agreed upon payment schedule, and the
Company recognizes revenues paid on a percentage-of-completion basis. The Company believes that this method is appropriate because of our ability to determine performance
milestones and determine dependable estimates of our costs applicable to each phase of a contract. Because financial reporting of these contracts depends on estimates, which are assessed continually
during the term of the contract, costs are subject to revisions as the contract progresses. Anticipated losses on fixed-price contracts are recognized when estimable. Third, the Company may deliver
consulting services pursuant to a value-priced contract with the customer. In this case, we are paid, on an agreed upon basis with the customer, either a specified percentage of (1) the
projected increased revenues and/or decreased costs that are expected to be derived by the customer generally over a period of up to twelve months following implementation of the solution or
(2) the actual increased revenues and/or decreased costs experienced by the customer generally over a period of up to twelve months following implementation of the solution, subject in either
case to a maximum, if any is agreed to, on the total amount of payments to be made to us. These contracts typically provide for the Company to receive a percentage of the projected or actual increased
revenues and/or decreased costs, with payments to be made to us pursuant to an agreed upon schedule ranging from one to twelve months in length. The Company recognizes revenues generated from
consulting services in connection with value-priced contracts based upon projected results only upon completion of all services and agreement upon the actual fee to be paid (even though billings for
these services may be delayed by mutual agreement for periods not to exceed twelve months). In an effort to allow customers to more closely match expected benefits from our services with payments to
the Company, during the third quarter of fiscal 2001, the Company began to offer payment terms which extend beyond 12 months. When the Company enters into an agreement which has a significant
component of the total amount payable under the agreement due beyond 12 months and it is determined payments are not fixed and determinable at the date the agreement was entered into, revenue
under the arrangement will be recognized as payments become due and payable. Under this approach, upon contract signing, a completed backlog of revenue is established which is incrementally recognized
as revenue over future quarters as amounts become due and payable under the agreement. When fees are to be paid based on a percentage of actual revenues and/or savings to customers, the Company
recognizes revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer.

---

The
Company typically must first commit time and resources to develop projections associated with value-pricing contracts before a bank will commit to purchase our solutions, and the
Company therefore assumes the risk of making these commitments with no assurance that the bank will purchase the solutions. The Company expects that value-priced contracts will continue to account for
a large percentage of our revenues in the future. As a consequence of the use of value-priced contracts and due to the revenue recognition policy associated with those contracts, the Company's results
of operations will likely fluctuate significantly from period to period.

Regardless
of the pricing method employed by the Company in a given contract, the Company is typically reimbursed on a monthly basis for out-of-pocket expenses
incurred on behalf of our customers. Historically, expenses have been netted against reimbursements for consolidated financial statement reporting purposes. Beginning February 1, 2002, the
Company began to characterize reimbursements received for out-of-pocket expenses incurred as revenue in the consolidated statement of operations in accordance with a recent
FASB announcement, see "Recently Issued Accounting Standards" below. All comparative prior periods have been adjusted to reflect this change.

Software License Fees.In the event that a software license is sold either together with consulting services or on a
stand-alone basis, the Company is usually paid software license fees in one or more installments, as provided in the customer's contract but not to exceed twelve months. The Company recognizes
software license revenues in accordance with the American Institute of Certified Public Accountants' Statement of Position No. 97-2,Software Revenue
Recognition(SOP 97-2). Under SOP 97-2, the Company recognizes software license revenues upon execution of a contract and delivery of software, provided
that the license fee is fixed and determinable, no significant production, modification or customization of the software is required, and collection is considered probable by management.

Although
substantially all of the Company's current software licenses provide for a fixed-price license fee, some licenses provide for the customer to pay a monthly license fee based on
actual use of the software product. The license fees earned by the Company under these arrangements will vary based on the actual amount of use by the customer. Revenue under these arrangements is
recognized on a monthly basis as earned.

Software Maintenance Fees.In connection with the sale of a software license, a customer may elect to purchase software
maintenance services. Most of the customers that purchase software licenses from the Company also purchase software maintenance services, which typically are renewed annually. The Company charges an
annual maintenance fee, which is usually a percentage of the initial software license fee. The annual maintenance fee generally is paid to the Company at the beginning of the maintenance period, and
the Company recognizes these revenues ratably over the term of the related contract.

Software Implementation Fees.In connection with the sale of a software license, a customer may elect to purchase software
implementation services, including software enhancements and other software support services. Most of the customers that purchase software licenses from the Company also purchase software
implementation services. The Company prices our implementation services on a time-and-materials or on a fixed-price basis, and the Company recognizes the related revenues as
services are performed.

---

Revenues
for agreements that include one or more elements to be delivered at a future date are recognized based on the relative fair value of those elements determined using
vendor-specific objective evidence. If fair values have not been established for certain undelivered elements, revenue is deferred until those elements have been delivered or their fair values have
been determined.

During
the three months ended July 31, 2002, the Company adjusted revenue, on a percentage-of-completion basis, for a long-term fixed price
implementation project that favorably impacted current quarter revenues in the amount of $375,000.



In connection with software license and maintenance agreements entered into with certain banks and purchase agreements with vendors under which the Company
acquired software technology used in products sold to its customers, the Company is required to pay royalties on sales of certain software products, including four Back Office products and the Branch
Truncation Management product. Under these arrangements, the Company accrues royalty expense when the associated revenue is recognized. The royalty percentages generally range from 20% to 30%.
Approximately $188,000 and $311,000 of royalty expense was recorded under these agreements for the three months ended July 31, 2002 and 2001, respectively, and $846,000 and $429,000 for the six
months ended July 31, 2002 and 2001, respectively. Royalty expense is included as a component of the cost of software licenses in the accompanying consolidated statements of operations.



Deferred revenue principally represents amounts prepaid by customers under annual maintenance contracts and also represents prepayments for consulting and
software licensing for which completion of contractual terms or delivery of the software has not occurred. Long-term deferred revenue represents amounts received for maintenance to be
provided beginning in periods on or after August 1, 2003.



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



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

---



The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees("APB Opinion No. 25"), and the Financial Accounting Standards Board Statement ("FASB") Interpretation
No. 44,Accounting for Certain Transactions Involving Stock Compensation("FIN 44")(an Interpretation of APB Opinion
No. 25).



The Company's future results of operations and financial condition could be impacted by several factors, including: dependence on the banking industry, customer
concentration, indebtedness, fluctuations in operating results, eligibility of shares for sale in the market, use of fixed-price or value-priced arrangements, lack of long-term agreements,
ability to gain market acceptance, ability to manage growth, dependence on key personnel, product liability, rapid technological change and dependence on new products, dependence on third-party
providers and the Internet, ability to attract and retain qualified personnel, competition, potential strategic alliances and acquisitions, proprietary rights, claims and legal proceedings,
international operations, use of independent contractors, changing government and tax regulations, anti-takeover provisions in our charter and impairment of goodwill or intangible assets.
Negative trends in the Company's operating results could result in noncompliance of financial covenants related to its revolving credit agreement, which could impair the Company's liquidity. See
description of the Company's revolving credit agreement and related financial covenants in Note 5.



In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,Business
Combinations("SFAS No. 141"), andGoodwill and Other Intangible Assets("SFAS No. 142"), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other
intangible assets beginning February 1, 2002. Upon adoption, the Company reclassified a $5.0 million (net) assembled workforce intangible to goodwill and ceased amortization. Application
of the nonamortization provisions of the Statement is expected to result in an increase in net income of $5.5 million ($0.23 per share using the dilutive number of shares at July 31,
2002) per year. During the three months ended July 31, 2002, the Company performed the initial impairment test of goodwill and indefinite lived intangible assets as of February 1, 2002,
to determine if a transition impairment charge should be recognized under SFAS 142. The initial impairment analysis did not result in any write-down of the intangible assets and
goodwill.

The
assessment of goodwill impairment in the future will be impacted if projected future operating cash flows of the reporting unit are not achieved, resulting in decreases in the
related estimated fair market values. All goodwill and intangible assets with indefinite lives relate to the Company's acquisition of Check Solutions Company (see Note 3), which closed on
June 6, 2001. All goodwill and intangible assets with indefinite lives are included as a component of the Global Technology Solutions business segment.

---

In
October 2001, the FASB issued Statements of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of
Long-Lived Assets("SFAS No. 144"). SFAS No. 144, which replaces SFAS No. 121,Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, requires long-lived assets to be measured at the lower of carrying amount or
fair value less the cost to sell. SFAS No. 144 also broadens disposal transaction reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. There was no effect on the earnings and financial position of the Company related to the adoption of SFAS No. 144.

In
November 2001, the FASB issued an announcement on the topic ofIncome Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred(the "Announcement"). The Announcement requires companies to characterize reimbursements received for
out-of-pocket expenses incurred as revenue in the statement of operations. Prior to February 1, 2002, the Company netted reimbursements received for
out-of-pocket expenses against the related expenses in the accompanying consolidated statements of operations. The Announcement has been applied in financial reporting periods
beginning after December 15, 2001, and comparative financial statements for prior periods are to be reclassified to comply with the guidance in this announcement. The Company adopted the
Announcement beginning February 1, 2002, and reclassified prior comparative financial statements.

The
Announcement will have no effect on net income, but the revised revenues, cost of revenues, and gross margin percentage for the affected quarters are (in thousands):

|                  |                                                              | April 30,
2001         |        | July 31,
2001 |        | October 31,
2001 |        | January 31,
2002 |     | Total  |       
|----------------- | ------------------------------------------------------------ | ---------------------- | ------ | ------------- | ------ | ---------------- | ------ | ---------------- | --- | ------ | ------
|Revenues:         |                                                              |                        |        |               |        |                  |        |                  |     |        |       
|                  | Consulting fees                                              |                        | $      | 14,845        |        | $                | 10,655 |                  | $   | 7,066  |       
|                  | Software license fees                                        |                        |        | 5,235         |        |                  | 12,057 |                  |     | 7,169  |       
|                  | Software maintenance fees                                    |                        |        | 3,197         |        |                  | 6,437  |                  |     | 9,257  |       
|                  | Software implementation fees                                 |                        |        | 2,127         |        |                  | 4,703  |                  |     | 6,192  |       
|                  | Out-of-pocket expense reimbursements                         |                        |        | 3,061         |        |                  | 2,231  |                  |     | 2,612  |       
|                  |                                                              |                        |        |               |        |                  |        |                  |     |        |       
|                  |                                                              | Total revenues         |        |               | 28,465 |                  |        | 36,083           |     |        | 32,296
|Cost of revenues: |                                                              |                        |        |               |        |                  |        |                  |     |        |       
|                  | Consulting fees                                              |                        |        | 10,095        |        |                  | 8,974  |                  |     | 8,090  |       
|                  | Software license fees                                        |                        |        | 1,139         |        |                  | 1,737  |                  |     | 2,001  |       
|                  | Write-off of capitalized software costs and prepaid software |                        |        |              |        |                  | 2,819  |                  |     | 12,089 |       
|                  | Software maintenance fees                                    |                        |        | 1,196         |        |                  | 1,745  |                  |     | 2,004  |       
|                  | Software implementation fees                                 |                        |        | 1,725         |        |                  | 3,412  |                  |     | 4,903  |       
|                  | Out-of-pocket expense reimbursements                         |                        |        | 3,110         |        |                  | 2,999  |                  |     | 3,027  |       
|                  |                                                              |                        |        |               |        |                  |        |                  |     |        |       
|                  |                                                              | Total cost of revenues |        |               | 17,265 |                  |        | 21,686           |     |        | 32,114
|                  |                                                              |                        |        |               |        |                  |        |                  |     |        |       
|Gross profit      |                                                              | $                      | 11,200 |               | $      | 14,397           |        | $                | 182 |        | $     
|                  |                                                              |                        |        |               |        |                  |        |                  |     |        |       
|Gross profit %    |                                                              |                        | 39.3   | %             |        | 39.9             | %      |                  | 0.6 | %      |       
|                  |                                                              |                        |        |               |        |                  |        |                  |     |        |       

---

3. Business Combinations

On June 6, 2001, the Company completed the acquisition of Check Solutions Company, a New York general partnership ("Check Solutions"), for
$110.2 million in cash, plus an additional $2.0 million of direct acquisition costs. Check Solutions is a check and image processing software and installation business that services the
payment-processing sector of the financial industry. Check Solutions expands our suite of software products and strengthens our software development management capabilities. The operating results of
Check Solutions are reported in the Business Segment and Revenue Concentration footnote in the Global Technology Solutions segment. The Company funded the acquisition with $65.2 million in cash
and funded the remaining $45.0 million from proceeds under the revolving credit agreement as described in Note 5.

The
acquisition was accounted for by the purchase method of accounting, and accordingly, the statements of operations include the results of Check Solutions beginning June 6,
2001. The assets acquired and liabilities assumed were recorded at estimated fair values determined by the Company's management, based on information currently available and on current assumptions
about future operations.

The
Company has obtained an independent appraisal of the fair values of the identified intangible assets, which are being amortized on a straight-line basis.

A
summary of the assets acquired and liabilities assumed in the acquisition follows (in thousands):

Net assets of Check Solutions

$
3,663Current technology and software products (estimated life of 5-6 years)


24,200Customer relationships (estimated life of 6 years)


8,400Assembled workforce


5,600Goodwill


68,037In-process research and development


2,300Total purchase price

$
112,200


Effective
February 1, 2002, the Goodwill and the Assembled workforce intangible are no longer being amortized but are subject to annual impairment testing. See "Recently Issued
Accounting Standards".

In
connection with the acquisition of Check Solutions, a portion of the purchase price was allocated to acquired in-process research and development ("IPR&D"). The
$2.3 million attributed to IPR&D was expensed on the date of the acquisition as the IPR&D projects had not reached technological feasibility nor had any alternative future use.

---

The
following unaudited pro forma financial information for the three and six months ended July 31, 2001, assumes the Check Solutions acquisition occurred at the beginning of the
respective periods (in thousands, except per share data).

Three Months Ended
July 31, 2001

Six Months Ended
July 31, 2001Revenue

$  39,246

$ 79,750Net income (loss)

(12,784)

(13,407)Basic earnings (loss) per share

(0.59)

(0.62)Diluted earnings (loss) per share

(0.59)

(0.62)


The
unaudited pro forma financial information for the three months ended July 31, 2001, combines the Company's historical statement of operations for the three months ended
July 31, 2001, which includes Check Solutions since the acquisition date of June 6, 2001, with Check Solutions' historical statement of operations for the month ended May 31,
2001. The unaudited pro forma financial information for the six months ended July 31, 2001, combines the Company's historical statement of operations for the six months ended July 31,
2001, which includes Check Solutions since the acquisition date of June 6, 2001, with Check Solutions' historical statement of operations for the four months ended May 31, 2001.

The
pro-forma information reflects adjustments for amortization of acquired software costs, customer relationship intangible asset, goodwill, the assembled workforce
intangible, additional interest expense and amortization of deferred loan costs related to the new credit agreement, a reduction in interest income, and the income tax impact of these adjustments.

The
unaudited pro forma financial information has been prepared for only comparative purposes and is not necessarily indicative of the results of operations that may occur in the future
or what would have occurred had the acquisition of Check Solutions been effected on the dates indicated.

4. Goodwill and Intangible Assets

Amortization expense on intangible assets was $350,000 and $1.1 million for the three months ended July 31, 2002 and 2001, respectively, and
$700,000 and $1.1 million for the six months ended July 31, 2002 and 2001, respectively.

---

The
Company has applied the new rules on accounting for goodwill and other intangible assets beginning February 1, 2002. With the application of the nonamortization provisions of
SFAS No. 142, the Company ceased amortization of goodwill and the assembled workforce intangible as of February 1, 2002. The following table presents the quarterly results of the Company
on a comparative basis assuming the nonamortization provisions of SFAS No. 142 were effective February 1, 2001 (in thousands, except per share data):

|                                                        |  | Three Months Ended
July 31, |       | Six Months Ended
July 31, |  
|------------------------------------------------------- |  | --------------------------- | ----- | ------------------------- | -
|
|Net income (loss)                                       |  | $                           | 4,024 |                           | $
|Goodwill and assembled workforce amortization           |  |                             |      |                           |  
|                                                        |  |                             |       |                           |  
|Adjusted net income (loss)                              |  | $                           | 4,024 |                           | $
|                                                        |  |                             |       |                           |  
|Basic earnings (loss) per share                         |  | $                           | 0.17  |                           | $
|Goodwill and assembled workforce amortization per share |  |                             |      |                           |  
|                                                        |  |                             |       |                           |  
|Adjusted basic earnings (loss) per share                |  | $                           | 0.17  |                           | $
|                                                        |  |                             |       |                           |  
|Diluted earnings (loss) per share                       |  | $                           | 0.17  |                           | $
|Goodwill and assembled workforce amortization per share |  |                             |      |                           |  
|                                                        |  |                             |       |                           |  
|Adjusted diluted earnings (loss) per share              |  | $                           | 0.17  |                           | $
|                                                        |  |                             |       |                           |  

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

Year

Amount2003

$1,4002004

1,4002005

1,4002006

1,4002007 and thereafter

1,867


---

5. Revolving Credit Agreement

On June 6, 2001, the Company entered into a three-year revolving credit agreement with a group of banks in an amount not to exceed
$60.0 million. All outstanding borrowings are due June 5, 2004. Borrowings under the credit agreement bear interest equal to either the greater of prime or federal funds rate plus a
margin ranging from 0.00% to 0.75% depending on the Company's ratio of funded debt to Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"), or LIBOR plus a margin equal to 1.50%
to 2.25% depending on the Company's ratio of funded debt to EBITDA. Interest payments are due quarterly. The Company is required to pay a commitment fee equal to 0.25% to 0.50% depending on the
Company's ratio of funded debt to EBITDA on the unused amount of the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including
financial covenants requiring the maintenance of specified interest coverage, 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 to the approval of the banks. Effective October 31, 2001, the Company entered into an amendment to the credit agreement to
reflect the impact of the decline in recent operating results. Under the amendment, margin rates were increased on prime or federal-funds based loans to 2.00% and on LIBOR-based loans to 3.50%.
Effective August 1, 2002, margins decreased to a range of 0.50% to 1.25% on prime or federal funds-based loans and to a range of 2.00% to 2.75% on LIBOR-based loans. Substantially all of the
Company's assets collateralize the revolving credit agreement. Also under the amendment, certain covenants were eliminated for the period ended October 31, 2001, and future covenants were
adjusted to levels the Company expects to achieve. As of July 31, 2002, the Company is in compliance with the covenants of the revolving credit agreement, as amended. The Company's ability to
make additional borrowings under this revolving credit agreement through October 31, 2002, is determined by a formula based on the Company's outstanding accounts receivable. Additionally, if
the Company's accounts receivable balance decreases below certain levels as defined in the revolving credit agreement, mandatory prepayments of the debt may be required. At July 31, 2002,
$7.0 million of additional borrowing capacity was available to the Company.

At
July 31, 2002, the Company had $35.0 million outstanding under the agreement in connection with the acquisition of Check Solutions. At July 31, 2002, the interest
rate on $25.0 million of the debt was 5.56%, the interest rate on $5.0 million of the debt was 5.38%, and the interest rate on $5.0 million of debt was 5.44%. Because the interest
on the debt is variable, the carrying value approximates the fair value. Interest expense on the Revolving Credit Agreement was $583,000 and $421,000 for the three months ended July 31, 2002
and 2001, respectively and $1.2 million and $421,000 for the six months ended July 31, 2002 and 2001, respectively.

6. Common Stock Offering

On April 5, 2002, the Company sold 1,282,214 shares to a group of institutional investors in a private transaction. In connection with this transaction,
the Company filed a registration statement on Form S-3 following the filing of its annual report on Form 10-K for the year ended January 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 Company utilized the net proceeds of approximately
$9.3 million received from the sale to satisfy remaining obligations due certain employees of Check Solutions described in Note 12 below, with the remainder used for working capital.

---

7. Provision (Benefit) for Income Taxes

The Company has established a valuation allowance to reserve its net deferred tax assets at July 31, 2002 because the more likely than not criteria for
future realization of the Company's net deferred tax assets specified in Statements of Financial Accounting Standards No. 109,Accounting for Income
Taxes("SFAS No. 109"), were not met.

The
net tax benefit of $1.3 million for the six months ended July 31, 2002 is a result of a $1.9 million tax benefit generated by additional tax loss carrybacks
available to the Company as a result of the recently passed Job Creation and Workers Assistance Act of 2002, offset by a $647,000 provision for taxes based on an estimated annual effective tax rate of
10% for the year ending January 31, 2003. The estimated annual effective tax rate is lower than the statutory federal and state rates as a result of the carryforward of the net operating losses
expected to be utilized during the year ending January 31, 2003.

8. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

Three Months Ended
July 31,

Six Months Ended
July 31,2002

2001

2002

2001Basic earnings (loss) per share:Net income (loss)

$
4,024

$
(11,641
)
$
7,711

$
(10,329
)Weighted average shares outstanding


23,397


21,863


22,850


21,813Basic earnings (loss) per share

$
0.17

$
(0.53
)
$
0.34

$
(0.47
)Diluted earnings per share:Net income (loss)

$
4,024

$
(11,641
)
$
7,711

$
(10,329
)Weighted average shares outstanding


23,397


21,863


22,850


21,813Assumed conversion of employee stock options


608





501


Shares used in diluted earnings per share calculation


24,005


21,863


23,351


21,813Diluted earnings (loss) per share

$
0.17

$
(0.53
)
$
0.33

$
(0.47
)


9. Contingencies

The Company is periodically involved in various legal actions and claims that arise in the normal course of business. In the opinion of management, the final
disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations.

---

10. Business Segments and Revenue Concentration

The tables below show revenues and income (loss) from operations for the periods indicated for our three reportable business segments: Revenue Enhancement, Global
Technology Solutions and Enterprise Solutions. Our customer projects are sold on a solution basis, so it is necessary to break them down by segment and allocate accordingly. Included in "Corporate
Unallocated" are costs related to selling and marketing, unallocated corporate overhead expense and general software management. Business segment results include costs for research and development, as
well as product royalty expense, the amortization of goodwill and intangible assets, the write-off of capitalized software costs, and merger-related costs (in thousands):

|                                                                       |                                      | Three Months ended July 31, 2002 |      
|---------------------------------------------------------------------- | ------------------------------------ | -------------------------------- | -----
|
|Revenues:                                                              |                                      |                                  |      
|                                                                       | Consulting fees                      |                                  | $    
|                                                                       | Software license fees                |                                  |      
|                                                                       | Software maintenance fees            |                                  |      
|                                                                       | Software implementation fees         |                                  |      
|                                                                       | Out-of-pocket expense reimbursements |                                  |      
|                                                                       | Intercompany revenue                 |                                  |      
|                                                                       |                                      |                                  |      
|                                                                       |                                      | Total revenues                   |      
|                                                                       |                                      |                                  |      
|Income (loss) from operations before amortization of intangible assets |                                      | $                                | 6,106
|                                                                       | Amortization of intangible assets    |                                  |      
|                                                                       |                                      |                                  |      
|Income (loss) from operations                                          |                                      | $                                | 6,106
|                                                                       |                                      |                                  |      



|                                                                                           |                                                | Three Months ended July 31, 2001 |      
|------------------------------------------------------------------------------------------ | ---------------------------------------------- | -------------------------------- | -----
|
|Revenues:                                                                                  |                                                |                                  |      
|                                                                                           | Consulting fees                                |                                  | $    
|                                                                                           | Software license fees                          |                                  |      
|                                                                                           | Software maintenance fees                      |                                  |      
|                                                                                           | Software implementation fees                   |                                  |      
|                                                                                           | Out-of-pocket expense reimbursements           |                                  |      
|                                                                                           | Intercompany revenue                           |                                  |      
|                                                                                           |                                                |                                  |      
|                                                                                           |                                                | Total revenues                   |      
|                                                                                           |                                                |                                  |      
|Income (loss) from operations before amortization of intangible assets and unusual charges |                                                | $                                | 1,401
|                                                                                           | Amortization of goodwill and intangible assets |                                  |      
|                                                                                           | Write-off of capitalized software costs        |                                  |      
|                                                                                           | Merger-related costs                           |                                  |      
|                                                                                           |                                                |                                  |      
|Income (loss) from operations                                                              |                                                | $                                | 1,401
|                                                                                           |                                                |                                  |      

---

|                                                                       |                                      | Six Months ended July 31, 2002 |       
|---------------------------------------------------------------------- | ------------------------------------ | ------------------------------ | ------
|
|Revenues:                                                              |                                      |                                |       
|                                                                       | Consulting fees                      |                                | $     
|                                                                       | Software license fees                |                                |       
|                                                                       | Software maintenance fees            |                                |       
|                                                                       | Software implementation fees         |                                |       
|                                                                       | Out-of-pocket expense reimbursements |                                |       
|                                                                       | Intercompany revenue                 |                                |       
|                                                                       |                                      |                                |       
|                                                                       |                                      | Total revenues                 |       
|                                                                       |                                      |                                |       
|Income (loss) from operations before amortization of intangible assets |                                      | $                              | 10,327
|                                                                       | Amortization of intangible assets    |                                |       
|                                                                       |                                      |                                |       
|Income (loss) from operations                                          |                                      | $                              | 10,327
|                                                                       |                                      |                                |       



|                                                                                           |                                                | Six Months ended July 31, 2001 |      
|------------------------------------------------------------------------------------------ | ---------------------------------------------- | ------------------------------ | -----
|
|Revenues:                                                                                  |                                                |                                |      
|                                                                                           | Consulting fees                                |                                | $    
|                                                                                           | Software license fees                          |                                |      
|                                                                                           | Software maintenance fees                      |                                |      
|                                                                                           | Software implementation fees                   |                                |      
|                                                                                           | Out-of-pocket expense reimbursements           |                                |      
|                                                                                           | Intercompany revenue                           |                                |      
|                                                                                           |                                                |                                |      
|                                                                                           |                                                | Total revenues                 |      
|                                                                                           |                                                |                                |      
|Income (loss) from operations before amortization of intangible assets and unusual charges |                                                | $                              | 5,912
|                                                                                           | Amortization of goodwill and intangible assets |                                |      
|                                                                                           | Write-off of capitalized software costs        |                                |      
|                                                                                           | Merger-related costs                           |                                |      
|                                                                                           |                                                |                                |      
|Income (loss) from operations                                                              |                                                | $                              | 5,912
|                                                                                           |                                                |                                |      

---

The
following table summarizes revenues, exclusive of out-of-pocket expense reimbursements, derived from our largest customer and top five customers during the
periods indicated.

|                   |  | Three Months Ended
July 31, |   | Six Months Ended
July 31, |  
|------------------ |  | --------------------------- | - | ------------------------- | -
|
|Single customer    |  | 12                          | % | 20                        | %
|Top five customers |  | 39                          | % | 41                        | %

The
Company markets solutions in several foreign countries. Revenues, exclusive of out-of-pocket expense reimbursements, attributed to countries based on the
location of the customer was as follows (in thousands):

|              |                | Three Months Ended
|------------- | -------------- | ------------------
|
|
|United States |                | $                 
|Europe        |                |                   
|Australia     |                |                   
|Canada        |                |                   
|South Africa  |                |                   
|Other         |                |                   
|              |                |                   
|              | Total revenues |                   
|              |                |                   



|              |                | Six Months Ended |       
|------------- | -------------- | ---------------- | ------
|
|
|United States |                | $                | 59,618
|Europe        |                |                  | 4,770 
|Australia     |                |                  | 2,076 
|Canada        |                |                  | 2,991 
|South Africa  |                |                  | 3,021 
|Other         |                |                  | 120   
|              |                |                  |       
|              | Total revenues |                  | $     
|              |                |                  |       

---

11. Merger and Restructuring Charges

In July 31, 2001, with the acquisition of Check Solutions, the Company recorded $15.6 million in merger-related costs (consisting of
$11.3 million attributable to cost of revenues, $2.3 million attributable to research and development, and $2.0 million attributable to selling, general and administrative costs).
Additionally, during the three months ended July 31, 2001 the Company wrote-off $2.8 million of capitalized software costs. These costs are summarized below (In thousands):

|                                          |  | Merger-related Costs |        | Write-off of
Capitalized
Software Costs
|----------------------------------------- |  | -------------------- | ------ | ---------------------------------------
|Workforce reductions                      |  | $                    | 1,925  |                                        
|Charges relating to CheckFlow Suite       |  |                      | 10,833 |                                        
|In-process research and development costs |  |                      | 2,300  |                                        
|Facility closures                         |  |                      | 240    |                                        
|Other                                     |  |                      | 298    |                                        
|Capitalized X-Port Vault product costs    |  |                      |       |                                        
|                                          |  |                      |        |                                        
|Total                                     |  | $                    | 15,596 |                                        
|                                          |  |                      |        |                                        

Included
in merger-related costs was $1.9 million of cash termination benefits associated with the separation of approximately 50 employees. Most of the affected employees left
their positions by October 31, 2001.

The
Company developed the CheckFlow Suite with PegaSystems, Inc. ("Pega") under a Product Development, Distribution and Sublicensing Agreement effective May 5, 1999 (the
"Agreement"). Pega filed suit to restrain the Company from developing, marketing, licensing, advertising, leasing or selling any products, including certain Back Office products acquired during the
Check Solutions business combination, that allegedly compete with products jointly developed under the Agreement. On August 27, 2001, the Company sent Pega notice of termination of the
Agreement. That same day, the Company initiated an arbitration proceeding seeking damages for Pega's prior and material breaches of the Agreement. On November 5, 2001, all matters relating to
various legal and administrative actions surrounding this dispute were settled. Under the settlement agreement, the Company agreed to pay settlement and legal costs totaling $5.4 million (of
which $1.1 million was accrued at July 31, 2001) which includes royalties on prior period sales of four Back Office products. Consistent with the prior Agreement, the Company continues
to pay Pega royalties based on future sales of the four Back Office products through October 31, 2006.

The
charges related to CheckFlow Suite included a write-off of capitalized software costs, accounts receivable net of deferred revenue, settlements and estimated
implementation costs for existing CheckFlow customers, write-off of prepaid royalties previously paid to Pega, and payments under existing work orders and other product
wind-down costs.

As
described in Note 3, a $2.3 million in-process research and development charge was recorded reflecting the estimated fair value of acquired research and development
projects at Check Solutions, which have not yet reached technological feasibility or that have no alternative future use.

The
facility closure charge includes $240,000 for office space, which will no longer be utilized as a result of the acquisition.

---

There
were no additional merger and restructuring charges during the three or six months ended July 31, 2002.

The
activity related to the merger and restructuring costs reserve balance during the three and six months ended July 31, 2002 is as follows (in thousands):

|                                 |  | Workforce
Reductions |       | Charges Relating to CheckFlow Suite |   | Facility
Closures |   | Total |    
|-------------------------------- |  | -------------------- | ----- | ----------------------------------- | - | ----------------- | - | ----- | ---
|January 31, 2002 reserve balance |  | $                    | 3,542 |                                     | $ | 7,341             |   | $     | 367
|Cash paid                        |  |                      | (958  | )                                   |   | (1,655            | ) |       | (61
|                                 |  |                      |       |                                     |   |                   |   |       |    
|April 30, 2002 reserve balance   |  |                      | 2,584 |                                     |   | 5,686             |   |       | 306
|Cash paid                        |  |                      | (833  | )                                   |   | (1,664            | ) |       | (61
|                                 |  |                      |       |                                     |   |                   |   |       |    
|July 31, 2002 reserve balance    |  | $                    | 1,751 |                                     | $ | 4,022             |   | $     | 245
|                                 |  |                      |       |                                     |   |                   |   |       |    

During
the three months ended July 31, 2001, in connection with the Company's periodic impairment review of its portfolio of software products, the Vault software acquired in the
X-Port business combination in May 2000 was deemed to be impaired. Based on the Company's calculation of the expected cash flows of the product, a $2.8 million
non-cash charge was recorded. The charge resulted from the loss of two key transactions and the projected changes in the approach to selling and delivering the software and related
services under a time or usage model.

12. Related Party Transactions

In March 2001, the Company loaned $500,000 to a former officer of the Company pursuant to a Limited Recourse Promissory Note ("Note"). The principal is due
in full on March 30, 2004. In January 2002, the Note was adjusted to its estimated fair value of $125,000, resulting in a charge to earnings of $375,000. During the three months ended
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 three months ended July 31, 2002, the
Note was deemed worthless resulting in a charge to earnings of $25,000.

In
connection with the completion of the Check Solutions acquisition, the Company assumed a $10.0 million obligation to certain employees of Check Solutions, including a current
officer of the Company. During the three months ended January 31, 2002, $3.3 million of this obligation was paid and during the three months ended April 30, 2002 the remaining
$6.7 million was paid.

---



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

All statements other than statements of historical fact contained in this report, including statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" concerning our financial position and liquidity, results of operations, prospects for future growth, and other matters, are forward-looking statements. Although we
believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause our results to
differ materially from the results discussed in, or contemplated by, such forward-looking statements include the risks described under "Risk Factors" in our Form 10-K for the fiscal
year ended January 31, 2002, on file with the Securities and Exchange Commission. Such risks include, without limitation, dependence on the banking industry, customer concentration,
indebtedness, fluctuations in our operating results, eligibility of shares for sale in the market, use of fixed-price or value-priced arrangements, lack of long-term agreements, ability to
gain market acceptance, ability to manage growth, dependence on key personnel, product liability, rapid technological change and dependence on new products, dependence on third-party providers and the
Internet, ability to attract and retain qualified personnel, competition, potential strategic alliances and acquisitions, proprietary rights, claims and legal proceedings, international operations,
use of independent contractors, changing government and tax regulations, and anti-takeover provisions in our charter and impairment of goodwill or intangible assets. All forward-looking
statements in this report are expressly qualified in their entirety by the cautionary statements in this paragraph, in "Risk Factors" (as set forth in the aforementioned Form 10-K)
and elsewhere in this report. Negative trends in our operating results could result in noncompliance of financial covenants related to its revolving credit agreement, which could impair our liquidity.
See description of our revolving credit agreement and related financial covenants in our Notes to Condensed Consolidated Unaudited Financial Statements.

Overview

We are a leading provider of integrated consulting and software solutions that enable banks to identify and implement e-finance solutions, increase
their revenues, reduce their costs and enhance their delivery of customer services. We were founded in 1978 to provide consulting services to banks, and we subsequently integrated software products
into our banking solutions. With our acquisition of Check Solutions in June 2001, we were able to significantly enhance our portfolio of software products. The acquisition of Check Solutions
was accounted for as a purchase.

We
separate our business operations into three reportable business segments: Revenue Enhancement, Global Technology Solutions and Enterprise Solutions. See Note 10 of our Notes to
Condensed Consolidated Unaudited Financial Statements.

We
derive our revenues from consulting fees, software license fees, software maintenance fees, software implementation fees and out-of-pocket expense reimbursements. While many customer
contracts provide for both the performance of consulting services and the license of related software, some customer contracts require only the performance of consulting services or only a software
license (and, at the election of the customer, related implementation services and/or annual software maintenance services). We enter into these contracts with our customers on a
project-by-project basis.

We
seek to establish long-term relationships with our customers that will lead to ongoing projects utilizing our solutions. We are typically retained to perform one or more
discrete projects for a customer, and we use these opportunities to extend our solutions into additional areas of the customer's operations. To this end, a significant portion of our current revenues
is derived from customers who were customers in prior years, and we are, therefore, dependent to a significant degree on our ability to maintain our existing relationships with these customers.

---



Products and Services

We offer a wide range of solutions that enable banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and
enhance their delivery of customer services. By combining our consulting services with our proprietary technology applications, we help banks improve their current operations and provide access to the
benefits of the Internet economy. Our offerings, uniquely tailored to the needs of the banking industry, fall into three complementary groups. Through these groups, Revenue Enhancement, Global
Technology Solutions and Enterprise Solutions, we believe we offer products and services that, when combined, deliver optimal benefits to our customers. During the three months ended July 31,
2001, we combined the Cash Solutions group, the Payment Solutions group and Check Solutions, to form the Global Technology Solutions group reflecting the common thread of technology between these
activities.

Revenue Enhancement.Revenue Enhancement consulting services enable banks to improve workflows, internal operational
processes and customer pricing structures.

|Solution            |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Products Offered                                        
|------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------
|Revenue Enhancement |  | Provides consulting services that assess the existing policies and procedures of banks to increase their revenue streams and reduce interest and operating expenses. These assessments generally focus on a variety of a
bank's operations, including deposits, treasury management, commercial lending, credit cards, automobile finance, mortgage and other consumer lending operations. Revenue Enhancement engagements typically take two to seven months to complete and we
believe are relatively nonintrusive to the client. |  | Revenue Enhancement Consulting and Methodology, Celerity
|CVM/EnAct           |  | CVM/EnAct is a customer relationship management software methodology. CVM/EnAct enables companies to focus their resources on customers who represent the highest potential value, and then drive customer interactions consistently across every customer
channel to increase profitability of a customer base.                                                                                                                                                                                                                    |  | CVM/EnAct Methodology, Consulting and Technology        

---

Global Technology Solutions.Global Technology Solutions addresses the needs of critical functions of banks. These functions
include presentment of checks in paper and electronic form, determination of the availability 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 related customer inquiries (research) and correcting any errors that are discovered (adjustments).
Global Technology Solutions approaches these key functions in the context of improving operational efficiency and a gradual transition from paper to electronic-based payment systems. Another specific
area that Global Technology Solutions specializes in is optimizing the inventory management of a bank's cash-on-hand, including managing how much is needed, when it is needed
and where it is needed. We believe our solutions reduce the amount of cash banks need to hold in reserve accounts and as cash-on-hand, while ensuring a high level of customer
service through timely replenishment of cash in ATMs. Specific solutions within this group include:

|Solution         |  | Description                                                                                                                                                                                                                                                                        |  | Products Offered                                                                                                 
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------
|Fraud Mitigation |  | Provides effective fraud detection and management software featuring automated approaches to solving the growing problem of fraudulent financial transactions, including bad checks drawn on banks for payment, fraudulent
items deposited with banks for credit and check kiting. |  | FraudLink On-us, FraudLink Deposit, FraudLink Kite, FraudLink PositivePay, FraudLink eTracker, FraudLink PC, CORE
|Back Office      |  | Brings new efficiencies to back-office operations through the use of state-of-the-art image and workflow technologies.                                                                                                                                                             |  | Adjustments/Express, Exceptions/Express, Input/Express, Inbound Returns/Express, Image Bulk-File and Fine Sort   
|Remittance       |  | Provides both a host-based and client/server-based platform for processing Retail and Wholesale remittance transactions.                                                                                                                                                           |  | NeXGen Remittance                                                                                                
|Check Capture    |  | Offers an extensive array of enhancement products that add flexibility and usability to IBM's Check Processing Control System (CPCS) and the 3890/XP series of reader/sorters.                                                                                                     |  | Image Processor 2, Conventional Capture, CPCS Enhancements, XP/Productivity Tools, Platform Emulation            
|Image Capture    |  | Provides products and services related to check image capture, storage, delivery and their related applications.                                                                                                                                                                   |  | ALS, Image Statements, Net Deliver/Reject Repair, RECO, Image POD, Image Delivery, Image Enhancements            

---

|Solution                     |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Products Offered                                                              
|---------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------
|Archive Management           |  | Provides 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.                                                                                                                                                                                                                                                                                |  | Check Image Archive AIX, Check Image Archive MVS, Check Image Archive Load    
|Global Tracking              |  | Offers an automated track and trace system designed to monitor items from the time they enter a bank's processing stream to final disposition, enabling a bank to improve labor productivity by channeling resources.                                                                                                                                                                                                                                            |  | Receive Sentry                                                                
|eMetrics                     |  | Focuses on performance-measurement by using historical data to generate key performance indicators, item processing volume data, productivity statistics and quality control benchmarks.                                                                                                                                                                                                                                                                         |  | eiLumen, eiPerform, eiStats, eiMicr, eiQuality                                
|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. The aim of this product and service is to reduce and eventually
eliminate the movement of paper payment instruments through the system, automate error-prone payment processing functions, consolidate payment information and provide a measure of fraud prevention. |  | CheckLink, CheckLink PC, Deposit Manager, Branch Truncation Management, Cnotes
|Float Management             |  | Focuses on funding requirements and overall profitability by properly managing a bank's float through float analysis, pricing and a comprehensive consulting practice to improve profitability, reporting, workflow and check-clearing operations. It
provides critical activity summaries, aids in creating multiple availability and pricing schedules, as well as pinpointing the cost/profitability of any transaction or relationship.                      |  | Float Analysis System, Float Pricing System, Consulting                       

---

|Solution       |  | Description                                                                                                                                                                                                                                                                                                                                                                                                    |  | Products Offered                    
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------
|ATM Solutions  |  | Advances ATM monitoring and management through the use of Internet connectivity to provide electronic notification of cash and/or servicing needs. Scalable to the largest ATM networks, it forecasts cash and servicing
needs, dispatches vendors for cash replenishment and maintenance services, records completed work and reconciles vendor invoices, all via an electronic communication infrastructure. |  | eiManager, eiGateway                
|Cash Solutions |  | Reduces the amount of nonearning assets required in reserve accounts and as cash-on-hand to meet operating needs. Using both technology and process reengineering, it provides management tools for forecasting, tracking and optimizing a bank's
inventory of currency. This group of solutions frees underutilized money for more productive uses.                                                           |  | iCom, Reserve Link, Reserve LinkPlus
|Logistics      |  | Reduces banks' armored car transportation costs to move cash between locations and replenish ATMs. It optimizes armored car utilization based on ATM locations and usage, route structures and delivery frequency, as well as ATM deposit processing
requirements.                                                                                                                                             |  | Consulting Services                 

---

Enterprise Solutions.Enterprise Solutions provides conversion, consolidation and integration consulting services and
products on a bank-wide basis. These services and products are particularly in demand in the context of continuing consolidation activity in the banking industry and the pressure by
customers on banks to define and implement their e-finance strategies. Key elements of this group include:

|Solution             |  | Description                                                                                                                                                                                                                 |  | Products Offered                                                                              
|-------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|Enterprise Solutions |  | Offers customized, bank-wide conversions, consolidation and integration consulting solutions in areas beyond payments systems, including consulting and project management services and IT consulting for various
projects. |  | Project Management, eSolutions, Integration, Process Optimization, Line of Business Consulting
|                     |  | Expense reduction processes are optimization strategies to help banks reduce operation expenses.                                                                                                                            |  |                                                                                               
|Strategic Services   |  | Assists customers in planning and implementing a total e-finance and payment strategy.                                                                                                                                      |  | e-Vision Consulting, Strategy Consulting, Shared Services Consulting                          

---



Results of Operations

For the periods indicated, the following table sets forth the percentage that selected items in the unaudited condensed consolidated statements of operations bear
to total revenues. The period-to-period comparisons of financial results are not necessarily indicative of future results.

Three Months Ended
July 31,

Six Months Ended
July 31,2002

2001

2002

2001Revenues:Consulting fees

33.1
%
29.5
%
28.6
%
39.5
%Software license fees

20.1

33.4

22.4

26.8Software maintenance fees

28.3

17.9

27.4

14.9Software implementation fees

14.2

13.0

16.0

10.6Out-of-pocket expense reimbursements

4.3

6.2

5.6

8.2Total revenues

100.0

100.0

100.0

100.0Cost of revenues:Consulting fees

18.9

24.9

19.1

29.4Software license fees

4.3

4.8

4.7

4.4Write-off capitalized software costs



7.8



4.4Software maintenance fees

5.3

4.8

5.7

4.6Software implementation fees

10.0

9.5

10.7

8.0Out-of-pocket expense reimbursements

5.0

8.3

5.6

9.5Total cost of revenues

43.5

60.1

45.8

60.3Gross profit

56.5

39.9

54.2

39.7Operating costs and expenses:Selling, general and administrative

36.3

39.1

37.2

35.7Research and development

6.3

5.6

6.1

4.5Amortization of intangible assets

0.9

3.2

0.9

1.8Merger-related costs



43.1



24.2Total operating costs and expenses

43.5

91.0

44.2

66.1Income (loss) from operations

13.0

(51.1
)
10.0

(26.4
)Other income (expense)

(1.5
)
(0.1
)
(1.6
)
1.0Income (loss) before provision (benefit) for income taxes

11.5

(50.2
)
8.4

(25.4
)Provision (benefit) for income taxes

1.2

(18.9
)
(1.6
)
(9.4
)Net income (loss)

10.3
%
(32.3
)%
10.0
%
(16.0
)%


---

For
the periods indicated, the following table sets forth the selected items comprising cost of revenues as a percentage of the revenues generated by that category of our operations. The
period-to-period comparisons of financial results are not necessarily indicative of future results.

Three Months Ended
July 31,

Six Months Ended
July 31,2002

2001

2002

2001Cost of revenues:Consulting fees

57.1
%
84.2
%
66.5
%
74.8
%Software license fees

21.1

14.4

21.2

16.6Software maintenance fees

18.8

27.1

20.7

30.5Software implementation fees

70.6

72.5

67.3

75.2Out-of-pocket expense reimbursements

116.1

134.4

98.5

115.4


---

Revenues:Our total revenues increased by $3.0 million, or 8%, to $39.1 million for the
three months ended
July 31, 2002, from $36.1 million for the three months ended July 31, 2001 and by $12.4 million, or 19%, to $76.9 million for the six months ended July 31,
2002, from $64.5 million for the six months ended July 31, 2001. Quarter-over-quarter revenue growth was driven by a 73% increase in our Revenue Enhancement
business segment, offset by a 49% decrease within our Enterprise Solutions business segment. The Global Technology Solutions business segment reflected modest growth of 2%. On a
year-to-date basis, revenue growth has been driven by a 42% increase within Revenue Enhancement and a 39% increase within Global Technology Solutions, offset by a 62% decrease
within Enterprise Solutions over prior year levels. Revenue Enhancement growth has been driven by an increased number of engagements, especially follow-on engagements with past Revenue
Enhancement customers. The increases within Global Technology Solutions is a primary result of the acquisition of Check Solutions on June 6, 2001 and the increased maintenance revenue in the
2002 reporting periods. The decline in our Enterprise Solutions business segment is a result of a recessionary economy in calendar 2001 and 2002, which slowed the demand for IT consulting services and
lowered the number of financial institutions that are merging or consolidating.

Consulting Fees:Revenues from consulting fees increased by $2.2 million, or 22%, to $12.9 million for the
three months ended July 31, 2002, from $10.7 million for the three months ended July 31, 2001. Consulting fees have decreased by $3.5 million, or 14% to
$22.0 million for the six months ended July 31, 2002, from $25.5 million for the six months ended July 31, 2001. Consulting fees are primarily derived from Revenue
Enhancement's value-priced engagements and from Enterprise Solutions' consolidation and integration consulting solutions. The acquisition of Check Solutions on June 6, 2001 had minimal impact
on consulting fee revenue. Consulting revenue derived from our Revenue Enhancement business segment has increased due to improved focus on the pipeline of engagements since October 31, 2001.
Consulting revenue from Revenue Enhancement had increased $4.9 million, or 85% quarter-over-quarter, and $4.5 million or 33% on a
year-to-date basis. We have been successful in generating revenue from our existing customer base and have increased our penetration into smaller financial institutions with
the introduction of our Celerity offering. Enterprise Solutions consulting revenue continues to decrease. On a quarter-over-quarter basis Enterprise Solutions consulting
revenue has decreased $2.4 million, or 55%, and $7.2 million, or 66%, on a year-to-date basis. This decline reflects lower demand for IT consulting services; in
addition, fewer financial institutions are merging and consolidating.

Software License Fees:Revenues from software license fees decreased $4.2 million, or 35%, to $7.9 million for
the three months ended July 31, 2002 from $12.1 million for the three months ended July 31, 2001. Revenues from software licenses decreased $100,000, or 1%, to
$17.2 million for the six months ended July 31, 2002 from $17.3 million for the six months ended July 31, 2001. The decrease in software license fees for the three months
ended July 31, 2002 resulted from strong sales in the prior year period due to an unusually large, multi-product transaction recorded in the three months ended July 31, 2001. Software
license fees have continued to experience delayed customer purchasing decisions, both within
the United States and abroad. Approximately 50% of the software license fees in both the three and six months ended July 31, 2002 were derived from our Check Image Archive software licensed to
a provider of image archive services to financial institutions.

---

Software Maintenance Fees:Revenues from software maintenance fees increased $4.6 million, or 72%, to
$11.0 million for the three months ended July 31, 2002, from $6.4 million for the three months ended July 31, 2001. Software maintenance fees have increased by
$11.5 million, or 119%, to $21.1 million for the six months ended July 31, 2002 from $9.6 million for the six months ended July 31, 2001. Software maintenance fees
represent annually renewable product and telephone support for our software customers. The growth in maintenance is primarily the result of the Check Solutions acquisition completed June 6,
2001 resulting in only two months of maintenance from Check Solutions customers for the three and six month periods ended July 31, 2001, and net increases in software maintenance fees due to
additional new software licensed since July 31, 2001. The underlying growth in maintenance, exclusive of Check Solutions, was approximately $600,000, or 17%,
quarter-over-quarter and $600,000, or 9%, on a year-to-date basis. The underlying increases are due to $300,000 of maintenance revenue recognized from
Cash Services Australia Pty, Ltd. that had been previously deferred, and approximately $200,000 of increased maintenance revenue from our EnAct software product.

Software Implementation Fees:Revenues from software implementation fees increased $800,000, or 17%, to $5.5 million
for the three months ended July 31, 2002, from $4.7 million for the three months ended July 31, 2001. Revenues from software implementation fees increased $5.5 million, or
80%, to $12.3 million for the six months ended July 31, 2002, from $6.8 million for the six months ended July 31, 2001. The primary reason for the growth in software
implementation fees is due to the acquisition of Check Solutions on June 6, 2001. During the three months ended July 31, 2002, we adjusted revenue accounted for on the
percentage-of-completion method for a long-term fixed price implementation project that favorably impacted current quarter revenues in the amount of $375,000. The
underlying software implementation fees, exclusive of Check Solutions, decreased $500,000, or 19%, on a quarter-over-quarter basis but have increased $900,000, or 18%, on a
year-to-date basis. This fluctuation was a result of an increase of approximately $1.3 million of CVM/EnAct implementation revenues for the six months ended
July 31, 2002. This solution was introduced in April 2001. This increase in CVM/EnAct implementation revenues was offset by decreases in our other product offerings concentrated in the
three months ended July 31, 2002. Future revenues generated from software implementation fees will likely be tied to new software license fees.

Cost of Revenues:Our total cost of revenues was $17.0 million, or 43.5%, of total revenue for the three months ended
July 31, 2002, and was $21.7 million, or 60.1% of total revenue for the three months ended July 31, 2001. Our total cost of revenues was $35.2 million, or 45.7%, of total
revenue for the six months ended July 31, 2002 and was $39.0 million, or 60.3%, of total revenue for the six months ended July 31, 2001. The primary reason for the declining cost
of revenues, both in absolute dollars and as a percentage of revenues, is a direct result of the cost reduction and restructuring efforts carried out in the last half of fiscal 2001. The cost
reduction efforts resulted in lower personnel related costs, such as salaries and travel, along with a reduction in third-party contractors used within the Enterprise Solutions and Revenue Enhancement
business segments.

Cost of Consulting:Our cost of consulting was $7.4 million, or 57.1%, of consulting fees for the three months ended
July 31, 2002, and was $9.0 million, or 84.2% of consulting fees for the three months ended July 31, 2001. Our cost of consulting was $14.7 million, or 66.5% of consulting
fees for the six months ended July 31, 2002 and was $19.1 million, or 74.8%, of consulting fees for the six months ended July 31, 2001. The decrease in the cost of consulting in
absolute dollars for both the quarter-over-quarter and year-to-date periods is due to reduced personnel-related and contract labor costs through cost
reduction and restructuring efforts completed in the last half of fiscal 2001. In absolute dollars, there has been little change in the costs of consulting for the three months ended July 31,
2002, as compared to the three months ended April 30, 2002. The primary reason for the decrease in cost of the consulting revenue as a percent of consulting fees is the increase in consulting
fees, principally in the Revenue Enhancement business segment.

---

Cost of Software Licenses:Our cost of software licenses was $1.7 million, or 21.1%, of software license fees for the
three months ended July 31, 2002, and $1.7 million, or 14.4%, of software license fees for the three months ended July 31, 2001. Our cost of software licenses was
$3.6 million, or 21.2%, of software license fees for the six months ended July 31, 2002 and $2.9 million, or 16.6%, of software license fees for the six months ended
July 31, 2001. Cost of software licenses consist principally of amortization of capitalized software costs, amortization of acquired developed technology and royalties payable to third parties.
In absolute dollars, the increase during the year-to-date periods is primarily due to the additional amortization of the acquired technology resulting from the Check Solutions
acquisition on June 6, 2001. Despite the fixed nature of approximately $1.5 million per quarter of amortization, expense costs of software licenses as a percentage of software license
fees will fluctuate based on the level of software license fee revenue recognized. Additionally, in connection with software license and maintenance agreements entered into with certain banks and
purchase agreements with vendors under which our acquired software technology used in products sold to our customers, we are required to pay royalties on sales of certain software products, including
four Back Office products and the Branch Truncation Management product. Under these arrangements, we accrue royalty expense when the associated revenue is recognized. The royalty percentages generally
range from 20% to 30%. Approximately $188,000 and $311,000 of royalty expense was recorded under these agreements for the three months ended July 31, 2002 and 2001, respectively, and $846,000
and $429,000 for the six months ended July 31, 2002 and 2001, respectively. Royalty expense is included as a component of the cost of software licenses in the accompanying consolidated
statements of operations.

Write-off of Capitalized Software Costs:During the three months ended July 31, 2002, there were no
write-off's of capitalized software costs. During the three months ended July 31, 2001, in connection with our periodic impairment review of our portfolio of software products, the
Vault software acquired in the X-Port business combination in May 2000 was deemed to be impaired. Based on our calculation of the expected cash flows of the product, a
$2.8 million non-cash charge was recorded. The charge resulted from the loss of two key transactions and the projected changes in the approach to selling and delivering the software
and related services under a time or usage model.

Cost of Software Maintenance:Our cost of software maintenance was $2.1 million, or 18.8%, of software maintenance
fees for the three months ended July 31, 2002, and $1.7 million, or 27.1%, of software maintenance fees for the three months ended July 31, 2001. Our cost of software maintenance
was $4.4 million, or 20.7%, of software maintenance fees for the six months ended July 31, 2002 and $2.9 million, or 30.5%, of software maintenance fees for the six months ended
July 31, 2001. The growth in the cost of software maintenance in absolute dollar terms, and the decrease of the cost of software maintenance as a percentage of software maintenance fees, is
principally due to the addition of higher margin maintenance fee business from the Check Solutions acquisition in June 2001.

Cost of Software Implementation:Our cost of software implementation was $3.9 million, or 70.6%, of software
implementation fees for the three months ended July 31, 2002 and $3.4 million, or 72.5%, of software implementation fees for the three months ended July 31, 2001. Our cost of
software implementation was $8.3 million, or 67.3%, of software implementation fees for the six months ended July 31, 2002, and $5.1 million, or 75.2%, of software implementation
fees for the six months ended July 31, 2001. The growth in the cost of software implementation in absolute dollar terms and the decrease in the cost of software implementation as a percentage
of software implementation fees is principally due to the acquisition of Check Solutions in June 2001, and cost reduction and restructure efforts completed in the last half of fiscal 2001 to
increase gross margins. The gross margins for software implementation have remained steady for the first two quarters of fiscal 2002.

---

Selling, General and Administrative:Our selling, general and administrative expenses were $14.2 million, or 36.3%, of
total revenue for the three months ended July 31, 2002, and $14.1 million, or 39.1%, of total revenue for the three months ended July 31, 2001. Our selling, general and
administrative expenses were $28.6 million, or 37.2%, of total revenue for the six months ended July 31, 2002, and $23.0 million, or 35.7%, of total revenue for the six months
ended July 31, 2001. Selling, general and administrative expenses generally consist of personnel costs such as salaries, commissions and travel associated with selling, marketing, general
management and software management. Additionally, the provision for doubtful accounts, as well as fees for professional services and other related costs, are classified within selling, general and
administrative expense. The increase in selling, general and administrative expense reflects the addition of Check Solutions in June 2001, offset by decreases in the underlying selling, general
and administrative costs through restructuring and cost reduction efforts carried out during the last half of fiscal 2001. Selling, general and administrative expenses have remained relatively flat in
the three months ended July 31, 2002, as compared to the three months ended April 30, 2002.

Research and Development:Research and development costs were $2.4 million, or 6.3%, of total revenue for the three
months ended July 31, 2002, and $2.0 million, or 5.6%, of total revenue for the three months ended July 31, 2001. Research and development costs were $4.7 million, or 6.1%,
of total revenue for the six months ended July 31, 2002, and $2.9 million, or 4.5%, of total revenue for the six months ended July 31, 2001. As previously mentioned, the increase
in the research and development costs on an absolute dollar basis is principally due to the addition of Check Solutions research and development costs in June 2001. We have continued to invest
in our solutions, in support of revenue growth and quality enhancements.

Amortization of Intangible Assets:Our amortization of intangibles was $350,000, or 1%, of total revenue for the three months
ended July 31, 2002, and $1.1 million, or 3.2%, of total revenue for the three months ended July 31, 2001. Our amortization of intangibles was $700,000, or 1%, of total revenue
for the six months ended July 31, 2002, and $1.1 million, or 1.8%, of total revenue for the six months ended July 31, 2001. The amortization is a result of the recognition of
amortization expense for a customer relationship intangible asset acquired in the Check Solutions acquisition. Goodwill and other intangibles with indefinite lives ceased to be amortized effective
February 1, 2002, when we adopted Statement of Financial Accounting Standards No. 141 and No. 142 ("SFAS 141" and "SFAS 142"). See further discussion in
Note 2 to our Condensed Consolidated Unaudited Financial Statements regarding the adoption of SFAS No. 141 and No. 142.

Merger-related costs:There were no additional merger-related charges during the three or six months ended July 31,
2002.

In
July 31, 2001, with the acquisition of Check Solutions, the Company recorded $15.6 million in merger-related costs (consisting of $11.3 million attributable to
cost of revenues, $2.3 million attributable to research and development, and $2.0 million attributable to selling, general and administrative costs). These costs are summarized below (In
thousands):

Merger-related CostsWorkforce reductions

$
1,925Charges relating to CheckFlow Suite


10,833In-process research and development costs


2,300Facility closures


240Other


298Total

$
15,596


Included
in merger-related costs was $1.9 million of cash termination benefits associated with the separation of approximately 50 employees. Most of the affected employees left
their positions by October 31, 2001.

---

We
developed the CheckFlow Suite with PegaSystems, Inc. ("Pega") under a Product Development, Distribution and Sublicensing Agreement effective May 5, 1999 (the
"Agreement"). Pega filed suit to restrain us from developing, marketing, licensing, advertising, leasing or selling any products, including certain Back Office products acquired during the Check
Solutions business combination, that allegedly compete with products jointly developed under the Agreement. On August 27, 2001, we sent Pega notice of termination of the Agreement. That same
day, we initiated an arbitration proceeding seeking damages for Pega's prior and material breaches of the Agreement. On November 5, 2001, all matters relating to various legal and
administrative actions surrounding this dispute were settled. Under the settlement agreement, we agreed to pay settlement and legal costs totaling $5.4 million (of which $1.1 million was
accrued at July 31, 2001) which includes royalties on prior period sales of four Back Office products. Consistent with the prior Agreement, we continue to pay Pega royalties based on future
sales of the four Back Office products through October 31, 2006.

The
charges related to CheckFlow Suite included a write-off of capitalized software costs, accounts receivable net of deferred revenue, settlements and estimated
implementation costs for existing CheckFlow customers, write-off of prepaid royalties previously paid to Pega, and payments under existing work orders and other product
wind-down costs.

As
described in Note 3 to our condensed consolidated unaudited financial statements, a $2.3 million in-process research and development charge was recorded
reflecting the estimated fair value of acquired research and development projects at Check Solutions, which have not yet reached technological feasibility or that have no alternative future use.

The
facility closure charge includes $240,000 for office space, which will no longer be utilized as a result of the acquisition.

The
activity related to the merger and restructuring costs reserve balance during the three and six months ended July 31, 2002 is as follows (in thousands):

|                                 |  | Workforce
Reductions |       | Charges Relating to CheckFlow Suite |   | Facility
Closures |   | Total |    
|-------------------------------- |  | -------------------- | ----- | ----------------------------------- | - | ----------------- | - | ----- | ---
|January 31, 2002 reserve balance |  | $                    | 3,542 |                                     | $ | 7,341             |   | $     | 367
|Cash paid                        |  |                      | (958  | )                                   |   | (1,655            | ) |       | (61
|                                 |  |                      |       |                                     |   |                   |   |       |    
|April 30, 2002 reserve balance   |  |                      | 2,584 |                                     |   | 5,686             |   |       | 306
|Cash paid                        |  |                      | (833  | )                                   |   | (1,664            | ) |       | (61
|                                 |  |                      |       |                                     |   |                   |   |       |    
|July 31, 2002 reserve balance    |  | $                    | 1,751 |                                     | $ | 4,022             |   | $     | 245
|                                 |  |                      |       |                                     |   |                   |   |       |    

Interest Income:Interest income decreased $443,000 to $125,000 for the three months ended July 31, 2002, from
$568,000 for the three months ended July 31, 2001. Interest income decreased $1.1 million to $192,000 for the six months ended July 31, 2002 from $1.3 million for the six
months ended July 31, 2001. Interest income declined on both a quarter-over-quarter and year-to-date basis due to the use of cash to fund
approximately $65.2 million for the Check Solutions acquisition in June 2001. We expect interest income to be insignificant during fiscal 2002.

Interest Expense:Interest expense increased $176,000 to $696,000 for the three months ended July 31, 2002, from
$520,000 for the three months ended July 31, 2001. Interest expense increased $854,000 to $1.5 million for the six months ended July 31, 2002, from $626,000 for the six months
ended July 31, 2001. Interest expense increased on a quarter-over-quarter and year-to-date basis due to the borrowings under the
three-year revolving credit agreement used to fund a portion of the Check Solutions acquisition in June 2001.

---



Provision (Benefit) for Income Taxes:The net tax benefit of $1.3 million for the six months ended July 31,
2002 is a result of a $1.9 million tax benefit generated by additional tax loss carrybacks available to us as a result of the recently passed Job Creation and Workers Assistance Act of 2002,
offset by a $647,000 provision for taxes based on an estimated annual effective tax rate of 10% for the year ending January 31, 2003. The estimated annual effective tax rate is lower than the
statutory federal and state rates as a result of the carryforward of additional net operating losses expected to be utilized during the year ending January 31, 2003.

Liquidity and Capital Resources

At July 31, 2002, we had working capital of $38.9 million compared with $23.7 million at January 31, 2002. We had $34.0 million
in cash and cash equivalents at July 31, 2002, an increase of $8.3 million from $25.7 million in cash and cash equivalents at January 31, 2002. At July 31, 2002, we
had $35.0 million of long-term debt.

Cash
provided by operating activities was $7.7 million for the six months ended July 31, 2002, compared with cash used in operating activities of $5.7 million for
the six months ended July 31, 2001. During the three months ended April 30, 2002, we made payments on obligations assumed in the Check Solutions acquisition. These payments were
partially offset by strong collections of outstanding accounts receivable balances. During the three and six months ended July 31, 2001, we made guaranteed royalty payments to Exchange
Applications, Inc of $3.0 million and $9.0 million, respectively, that negatively impacted cash flows during these periods.

Average
days' sales outstanding fluctuate for a variety of reasons, including the timing of billings specified by contractual agreement and receivables for expense reimbursements. The
following table contains the quarterly days sales outstanding (DSO) with a comparative column that shows DSO excluding uncollected maintenance invoices from accounts receivable.

Quarter ended

DSO

DSO excluding uncollected
maintenance invoicesJuly 31, 2002

116

97April 30, 2002

144

121January 31, 2002

140

107October 31, 2001

159

133July 31, 2001

146

131


DSO
levels are expected to increase by approximately 15-20 days during the three months ended October 31, 2002 as the effects of accelerated payments during the
three months ended July 31, 2002 diminish.

Cash
used in investing activities was $1.9 million and $67.7 million during the six months ended July 31, 2002 and 2001, respectively. This use of cash during the
six months ended July 31, 2002 was primarily related to purchases of property and equipment. The use of cash in investing activities for the six months ended July 31, 2001 was due to the
acquisition of Check Solutions in June 2001.

Financing
activities provided cash of $2.6 million in the six months ended July 31, 2002, and $44.7 million in the six months ended July 31, 2001. The cash
provided by financing activities in the six months ended July 31, 2002, related to our common stock offering of 1,282,214 shares to a group of institutional investors in a private transaction
on April 5, 2002. The net proceeds of approximately $9.3 million were used to satisfy obligations due certain employees of Check Solutions, with the remainder used for working capital.
Additionally, we paid $9.0 million on our revolving credit agreement during the six months ended July 31, 2002. During the six months ended July 31, 2001, we borrowed
$45.0 million related to the acquisition of Check Solutions in June 2001.

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On
June 6, 2001, we entered into a three-year revolving credit agreement with a group of banks in an amount not to exceed $60.0 million to partially fund the
acquisition of Check Solutions. At July 31, 2002, we had $35.0 million outstanding. All outstanding borrowings are due June 5, 2004. Borrowings under the credit agreement bear
interest equal to either the greater of prime or federal funds rate plus a margin ranging from 0.00% to 0.75% depending on our ratio of funded debt to Earnings before Interest, Taxes Depreciation and
Amortization ("EBITDA") or London Interbank Offered Rate ("LIBOR") plus a margin equal to 1.50% to 2.25% depending on our ratio of funded debt to EBITDA. Interest payments are due quarterly. We are
required to pay a commitment fee equal to 0.25% to 0.50% depending on our ratio of funded debt to EBITDA on the unused amount of the revolving credit agreement. The revolving credit agreement contains
customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified interest coverage, 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 to the approval of the banks. Effective October 31, 2001, we entered into
an amendment to the credit agreement to reflect the impact of the decline in our operating results. Under the amendment, margin rates were increased on prime or federal funds-based loans to 2.00% and
on LIBOR-based loans to 3.50%. Effective August 1, 2002, margins decreased to a range of 0.50% to 1.25% on prime or federal funds-based loans and to a range of 2.00% to 2.75% on LIBOR based
loans. Substantially all of our assets collateralize this revolving credit agreement. Also under the amendment, certain covenants were adjusted to levels we expect to achieve. As of July 31,
2002, we were in compliance with the covenants of the revolving credit agreement, as amended. While there can be no assurance, we believe we will continue to meet these covenants during the year ended
January 31, 2003. Any instances of non-compliance could negatively impact our liquidity.

Our
ability to make additional borrowings under this revolving credit agreement, through October 31, 2002, is limited by a formula based on our outstanding accounts receivable.
Additionally, if our accounts receivable decreases below a certain level as defined in the revolving credit agreement, mandatory prepayments of the debt may be required. At July 31, 2002,
$7.0 million of additional borrowing capacity was available to us under the formula.

In
the future we may pursue acquisitions of businesses, products or technologies that could complement or expand our business and product offerings. Any material acquisition or joint
venture could decrease our working capital depending on the amount, timing and nature of the consideration to be paid.

We
believe that current cash balances and expected future cash flows will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities
during fiscal 2002. However, if current sources are not sufficient to meet our needs, we may seek additional equity or debt financing. There can be no assurance that additional financing would be
available on acceptable terms, if at all. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. The failure to secure additional financing when needed could have a material adverse effect on our business, financial condition and
results of operations.



In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use certain estimates and
assumptions that affect the reported amounts and related disclosures and our estimates may vary from actual results. We consider the following four accounting policies the most important to the
portrayal of our financial condition and those that require the most subjective judgment. Although we believe that our estimates and assumptions are reasonable, actual results may differ, and such
differences could be significant to our financial results.

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Consulting Fees.We employ three primary pricing methods in connection with our delivery of consulting services. First, we
may price our delivery of consulting services on the basis of time and materials, in which case the customer is charged agreed-upon daily rates for services performed and
out-of-pocket expenses. In this case, we are paid fees and related amounts on a monthly basis, and we recognize revenues as the services are performed. Second, we may deliver
consulting services on a fixed-price basis. In this case, we are paid on a monthly basis or pursuant to an agreed upon payment schedule, and we recognize revenues paid on a
percentage-of-completion basis. We believe that this method is appropriate because of our ability to determine performance milestones and determine dependable estimates of our
costs applicable to each phase of a contract. Because financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, costs are subject to
revisions as the contract progresses. Anticipated losses on fixed-priced contracts are recognized when estimable. Third, we may deliver consulting services pursuant to a value-priced contract with the
customer. In this case, we are paid, on an agreed upon basis with the customer, either a specified percentage of (1) the projected increased revenues and/or decreased costs that are expected to
be derived by the customer generally over a period of up to twelve months following implementation of our solution or (2) the actual increased revenues and/or decreased costs experienced by the
customer generally over a period of up to twelve months following implementation of our solution, subject in either case to a maximum, if any is agreed to, on the total amount of payments to be made
to us. These contracts typically provide for us to receive a percentage of the projected or actual increased revenues and/or decreased costs, with payments to be made to us pursuant to an agreed upon
schedule ranging from one to twelve months in length. We recognize revenues generated from consulting services in connection with value-priced contracts based upon projected results only upon
completion of all services and agreement upon the actual fee to be paid (even though billings for these services may be delayed by mutual agreement for periods not to exceed twelve months). In an
effort to allow customers to more closely match expected benefits from our services with payments to us, during the third quarter of fiscal 2001, we began to offer payment terms which extend beyond
12 months. When we enter into an agreement that has a significant component of the total amount payable under the agreement due beyond 12 months and it is determined payments are not
fixed and determinable at the date the agreement was entered into, revenue under the arrangement is recognized as payments become due and payable. Under this approach, upon contract signing a
completed backlog of revenue is established that is incrementally recognized as revenue over future quarters as amounts become due and payable under the agreement. When fees are to be paid based on a
percentage of actual revenues and/or savings to our customers, we recognize revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the
customer.

We
typically must first commit time and resources to develop projections associated with value-priced contracts before a bank will commit to purchase our solutions, and we therefore
assume the risk of making these commitments with no assurance that the bank will purchase the solutions. We expect that value-priced contracts will continue to account for a large percentage of our
revenues in the future. As a consequence of the use of value-priced contracts and due to the revenue recognition policy associated with those contracts, our results of operations will likely fluctuate
significantly from period to period.

Regardless
of the pricing method employed by us in a given contract, we are typically reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf
of our customers. Historically, expenses were netted against reimbursements for consolidated financial statement reporting purposes for fiscal 2001, 2000 and 1999. Beginning February 1, 2002,
we began to characterize reimbursements received for out-of-pocket expenses incurred as revenue in the statement of operations and all comparative statements of operations have
been restated to reflect this change in accordance with the recent FASB announcement. See "Recently Issued Accounting Standards".

---

Software License Fees.In the event that a software license is sold either together with consulting services or on a
stand-alone basis, we are usually paid software license fees in one or more installments, as provided in the customer's contract but not to exceed 12 months. We recognize software license
revenues in accordance with the American Institute of Certified Public Accountants' No. 97-2,Software Revenue Recognition("SOP
97-2"). Under SOP 97-2, we recognize software license revenues upon execution of a contract and delivery of software, provided that the license fee is fixed and determinable,
no significant production, modification or customization of the software is required, and collection is considered probable by management.

Although
substantially all of our current software licenses provide for a fixed-price license fee, some licenses instead provide for the customer to pay a monthly license fee based on
the actual use of the software product. The level of license fees earned by us under this arrangement will vary based on the actual amount of use by the customer. Revenue under these arrangements is
recognized on a monthly basis.

In
connection with software license and maintenance agreements entered into with certain banks and purchase agreements with vendors under which we acquired software technology used in
products sold to its customers, we are required to pay royalties on sales of certain software products, including four Back Office products and Branch Truncation Management product. Under these
arrangements, we accrue royalty expense when the associated revenue is recognized. The royalty percentages generally range from 20%-30%. Royalty expense is included as a component of the
cost of software licenses in the accompanying consolidated statement of operations.

Software Maintenance Fees.In connection with our sale of a software license, a customer may elect to purchase software
maintenance services. Most of the customers that purchase software licenses from us also purchase software maintenance services, which typically are renewed annually. We charge an annual maintenance
fee, which is typically a percentage of the initial software license fee. The annual maintenance fee generally is paid to us at the beginning of the maintenance period, and we recognize these revenues
ratably over the term of the related contract.

Software Implementation Fees.In connection with our sale of a software license, a customer may elect to purchase software
implementation services, including software enhancements, and other software support services. Most of the customers that purchase software licenses from us also purchase software implementation
services. We price our implementation services on a time-and-materials or a fixed-price basis, and we recognize the related revenues as services are performed.

Revenues
for agreements that include one or more elements to be delivered at a future date are recognized based on the relative fair value of those elements determined using
vendor-specific objective evidence. If fair values have not been established for certain undelivered elements, revenue is deferred until those elements have been delivered or their fair values have
been determined.

Our
contracts do not include right-of-return clauses and, as a result, we do not record a provision for returns.



A substantial proportion of our revenues and receivables is attributable to our customers in the banking industry. Our trade accounts receivable balance is
recorded net of allowances for amounts not expected to be collected from our customers. Because our accounts receivable are typically unsecured, we periodically evaluate the collectibility of our
accounts based on a combination of factors, including a particular customer's ability to pay as well as the age of receivables. In cases where the evidence suggests a customer may not be able to
satisfy its obligation to us or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of our products and services, we set up a specific reserve
in an amount we determine appropriate for the perceived risk.

---



Software costs capitalized include developed technology acquired in acquisitions and costs incurred by us in developing our products that qualify for
capitalization. We capitalize our software development costs, other than costs for internal-use software, in accordance with Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to
be Sold, Leased or Otherwise Marketed("SFAS 86"). Our policy is to capitalize software development costs
incurred in developing a product once technological feasibility of the product has been established. Capitalized software development costs also include amounts paid for purchased software on products
that have reached technological feasibility. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any
uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detailed program design, technological feasibility is
determined only after completion of a working model that has been beta tested. All capitalized software development costs are amortized using an amount determined as the greater of: (1) the
ratio that current gross revenues for a capitalized software project bears to the total of current and future projected gross revenues for that project or (2) the straight-line
method over the remaining economic life of the product (generally three to six years).

Through
January 31, 2002, goodwill and other intangible assets were amortized using the straight-line method over lives of 6 to 15 years. Effective
February 1, 2002, goodwill and the indefinite lived intangibles were no longer amortized. See "Recently Issued Accounting Standards" below. The goodwill and intangibles with indefinite lives
will be assessed on an annual basis for impairment at the reporting unit level by applying a fair value based test. We performed the initial impairment test of goodwill and intangibles with indefinite
lives assets at February 1, 2002 to determine if a transition impairment charge should be recognized under SFAS 142. The initial impairment analysis did not result in any
write-down of capitalized costs.

We
periodically evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of other long-lived assets warrant revision or that
the remaining balance may not be recoverable. When factors indicate that other long-lived assets should be evaluated for possible impairment, we use an estimate of undiscounted future net
cash flows over the remaining life of the asset to determine if impairment has occurred. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent
from other asset groups. An impairment in the carrying value of an asset is assessed when the undiscounted, expected future operating cash flows derived from the asset are less than its carrying
value. Management believes that assumptions used to determine cash flows are reasonable, but actual future cash flows may differ from those estimated. If we determine an asset has been impaired, the
impairment is recorded based on the estimated fair value of the impaired asset.



During fiscal year 2001, we recorded significant reserves in connection with our acquisition of Check Solutions and subsequent operational restructurings. No
additional reserves were recorded during the three or six months ended July 31, 2002. These reserves contain significant estimates pertaining to work force reductions, and the settlement of
contractual obligations resulting from our actions. Although we do not anticipate significant changes, the actual costs may differ from these estimates.

---



In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,Business
Combinations, and No. 142,Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over their useful lives. We applied the new rules on accounting for goodwill and other intangible assets beginning
February 1, 2002. Upon adoption, we reclassified a $5.0 million (net) assembled workforce intangible to goodwill and ceased amortization. Application of the nonamortization provisions of
the Statement is expected to result in an increase in net income of $5.5 million ($0.23 per share using the dilutive number of shares at July 31, 2002) per year. We performed along with
an outside valuation firm, the initial test of goodwill and indefinite lived intangible assets as of February 1, 2002, to determine if a transition impairment charge should be recognized under
SFAS 142. The initial impairment analysis did not result in any write-down of capitalized costs.

The
assessment of goodwill impairment in the future will be impacted if projected future operating cash flows of the reporting unit are not achieved, resulting in decreases in the
related estimated fair market values. All goodwill and intangibles with indefinite lives relates to our acquisition of Check Solutions Company (see Note 3), which closed on June 6, 2001.
All goodwill and indefinite lived intangibles are included as a component of the Global Technology Solutions business segment.

In
October 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets("SFAS No. 144"), which replaces SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of("SFAS No. 121),requires long-lived assets to be measured at the lower of carrying amount or fair value
less the cost to sell. SFAS No. 144 also broadens disposal transaction reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. There was no effect on our earnings and financial position related to the adoption of SFAS No. 144.

In
November 2001, the FASB issued an announcement on the topic ofIncome Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred(the "Announcement"). The Announcement requires companies to characterize reimbursements received for
out-of-pocket expenses incurred as revenue in the statement of operations. Prior to February 1, 2002, we netted reimbursements received for
out-of-pocket expenses against the related expenses in the accompanying consolidated statements of operations. The Announcement has been applied in financial reporting periods
beginning after December 15, 2001, and comparative financial statements for prior periods are to be reclassified to comply with the guidance in this announcement. We adopted the Announcement
beginning February 1, 2002, and prior periods have been adjusted to reflect the change (see Note 2 in our Notes to Condensed Consolidated Unaudited Financial Statements).

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We invest our cash in a variety of financial instruments. These investments are denominated in U.S. dollars and maintained with nationally recognized financial
institutions and mutual fund companies.

We
account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115,Accounting for Certain Investments in
Debt and Equity Securities("SFAS 115"). We treat all of our cash equivalents and short-term investments as available-for-sale under
SFAS 115.

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Investments
in both fixed-rate and floating-rate interest-earning instruments carry a degree of interest rate risk. Fixed-rate securities may have
their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors,
our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have seen a decline in market value
due to changes in interest rates. Our investment securities are held for purposes other than trading. At July 31, 2002, we did not hold any fixed-rate investments.



We currently have $35.0 million outstanding under our revolving credit agreement at July 31, 2002. As described in Note 5 of our Notes to
Condensed Consolidated Unaudited Financial Statements, the interest rate is variable. At July 31, 2002, the interest rate on $25.0 million of the debt was 5.56%, the interest rate on
$5.0 million of the debt was 5.38%, and the interest rate on $5.0 million of debt was 5.44%.

At
July 31, 2002, we did not hold any fixed-rate short-term investments.



An insignificant portion of our accounts receivable balance at July 31, 2002 was denominated in a foreign currency. Our exposure to adverse movements to
foreign exchange rates is not significant. Therefore, we do not currently hedge our foreign currency exposure; however, we do try to limit our foreign currency exposure by negotiating foreign currency
exchange rates within our customer contracts. Historically, foreign currency gains and losses have not had a significant impact on our results of operations or financial position. We will continue to
evaluate the need to adopt a hedge strategy in the future and may implement a formal strategy if our business transacted in foreign currencies increases.

Item 4. Controls and Procedures

Not applicable.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject from time to time to certain claims and legal proceedings arising in the ordinary course of our business. Although we do not believe that the cost
or liability that may result from the resolution of currently pending claims or legal proceedings against us will be material to our financial condition or results of operation, there can be no
assurance in this regard.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

At our Annual Meeting of Stockholders held on June 25, 2002, two proposals were adopted by our stockholders: (1) the election of three directors as
Class I directors for terms expiring at the Annual Meeting of Stockholders in 2005 as described in our Proxy Statement for the Annual Meeting (Messrs. John D. Carreker, Jr., James R.
Erwin and Donald L. House were re-elected as directors; Messrs. James D. Carreker, James L. Fischer, Michael D. Hansen, Richard R. Lee, Jr., David K. Sias and Ronald G. Steinhart
continued as directors); and (2) the ratification of the appointment of Ernst &
Young LLP as independent certified public accountants of the Company for the fiscal year ending January 31, 2003. The number of shares cast for and against as well as the number of abstentions
as to each of these matters (other than the election of directors) are as follows:

|Proposal                    |  | Shares For |  | Shares Against |  | Abstentions
|--------------------------- |  | ---------- |  | -------------- |  | -----------
|Ratification of accountants |  | 11,748,102 |  | 274,503        |  | 4,250      



|Election of Directors |  | Shares For |  | Shares Withheld
|--------------------- |  | ---------- |  | ---------------
|John D. Carreker, Jr. |  | 11,150,946 |  | 875,909        
|James R. Erwin        |  | 11,981,802 |  | 45,053         
|Donald L. House       |  | 11,935,702 |  | 91,153         
|                      |  |            |  |                

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

ExhibitsNumber                        Exhibit Description99.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.2

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-KNone.


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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

|    |  |                                                                                                 |  | CARREKER CORPORATION    
|--- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------
|    |  |                                                                                                 |  |                         
|By: |  | /s/JOHN D. CARREKER, JR.John D. Carreker, Jr.
Chairman of the Board and
Chief Executive Officer |  | Date: September 13, 2002
|By: |  | /s/TERRY L. GAGETerry L. Gage
Executive Vice President and
Chief Financial Officer              |  | Date: September 13, 2002

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CERTIFICATIONS

I, John D. Carreker, Jr., principal executive officer, certify that:



Date:
September 13, 2002

|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:



Date:
September 13, 2002

|By: |  | /s/TERRY L. GAGETerry L. Gage
Executive Vice President and
Chief Financial Officer |  | 
|--- |  | ---------------------------------------------------------------------------------- |  | 

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