UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

OR

o

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

FOR THE TRANSITION PERIOD FROM                     TO                     

ONLINE RESOURCES CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE		52-1623052
(STATE OR OTHER JURISDICTION OF		(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)		IDENTIFICATION NO.)

4795 MEADOW WOOD LANE, SUITE 300,
CHANTILLY, VIRGINIA		20151
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

(703) 653-3100
(REGISTRANT’S TELEPHONE NUMBER,
INCLUDING AREA CODE)

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

YES þ       NO o

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

YES þ       NO o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o       NO þ

     As of November 2, 2005 there were 25,095,094 shares of the issuer’s common stock outstanding.

 

 

ONLINE RESOURCES CORPORATION

FORM 10-Q

TABLE OF CONTENTS

				Page
PART I		FINANCIAL INFORMATION
Item 1:		Consolidated Financial Statements		3
		Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004		3
		Consolidated Statements of Operations for the three and nine months ended September 30, 2005 (unaudited) and 2004 (restated)		4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 (unaudited) and 2004 (restated)		5
		Notes to Consolidated Financial Statements (unaudited)		6
Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3:		Quantitative and Qualitative Disclosures About Market Risk		18
Item 4:		Controls and Procedures		18
PART II		OTHER INFORMATION
Item 1:		Legal Proceedings		19
Item 2:		Changes in Securities and Use of Proceeds		19
Item 3:		Defaults Upon Senior Securities		19
Item 4:		Submission of Matters to a Vote of Security Holders		19
Item 5:		Other Information		19
Item 6:		Exhibits		19

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

ONLINE RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

		SEPTEMBER 30,				DECEMBER 31,
		2005				2004
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	51,528,949			$	3,341,678
Restricted cash			2,219,674				1,650,723
Investments			—				1,298,909
Accounts receivable (net of allowance of approximately $154,000 and $152,000 at September 30, 2005 and December 31, 2004, respectively)			7,290,758				8,433,113
Deferred implementation costs			562,544				460,600
Prepaid expenses and other current assets			1,205,235				2,634,961
Total current assets			62,807,160				17,819,984
Property and equipment, net			14,657,172				13,099,829
Deferred implementation costs, less current portion			524,700				420,035
Goodwill			16,368,602				11,272,463
Intangible assets			2,468,003				1,569,800
Other assets			587,007				351,157
Total assets		$	97,412,644			$	44,533,268
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	824,152			$	1,654,650
Accrued expenses and other current liabilities			3,906,246				3,159,743
Accrued compensation			2,023,209				1,808,233
Deferred revenues			2,419,058				972,890
Deferred rent obligations			158,237				158,237
Capital lease obligations			15,867				10,573
Total current liabilities			9,346,769				7,764,326
Deferred revenues, less current portion			1,035,136				379,036
Deferred rent obligations, less current portion			1,780,040				1,524,828
Other long term liabilities			—				94,422
Total liabilities			12,161,945				9,762,612
Commitments and contingencies			—				—
Stockholders’ equity
Series B junior participating preferred stock, $0.01 par value; 297,500 shares authorized; none issued at September 30, 2005 and December 31, 2004			—				—
Common stock, $0.0001 par value; 70,000,000 shares authorized; 25,127,737 issued and 25,052,212 outstanding at September 30, 2005; and 19,340,222 issued and 19,264,697 outstanding at December 31, 2004			2,505				1,926
Additional paid-in capital			158,992,432				114,647,954
Accumulated deficit			(73,516,438	)			(79,651,309	)
Treasury stock, 75,525 shares at September 30, 2005 and December 31, 2004, respectively			(227,800	)			(227,800	)
Accumulated other comprehensive loss			—				(115	)
Total stockholders’ equity			85,250,699				34,770,656
Total liabilities and stockholders’ equity		$	97,412,644			$	44,533,268

See accompanying notes to consolidated unaudited financial statements.

ONLINE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2005				2004				2005				2004
Revenues:
Account presentation services		$	1,898,573			$	727,518			$	6,923,501			$	2,289,032
Payment services			8,972,203				7,349,478				26,110,389				20,476,526
Relationship management services			1,850,528				2,017,012				5,807,734				5,881,358
Professional services and other			2,571,188				952,646				5,891,855				2,235,563
Total revenues			15,292,492				11,046,654				44,733,479				30,882,479
Costs and expenses:
Service costs			4,823,006				4,120,557				14,840,668				12,449,031
Implementation and other costs			1,249,710				275,731				3,235,802				943,875
Costs of revenues			6,072,716				4,396,288				18,076,470				13,392,906
Gross profit			9,219,776				6,650,366				26,657,009				17,489,573
General and administrative			3,412,671				2,083,215				9,960,199				6,280,917
Sales and marketing			2,599,896				1,748,500				7,566,778				5,399,069
Systems and development			1,195,556				1,024,816				3,493,657				2,838,962
Total expenses			7,208,123				4,856,531				21,020,634				14,518,948
Income from operations			2,011,653				1,793,835				5,636,375				2,970,625
Other income (expense):
Interest income			429,932				30,635				780,896				83,426
Interest expense			(2,158	)			6,069				(10,901	)			2,029
Other income			1,576				33,118				1,382				33,118
Total other income			429,350				69,822				771,377				118,573
Income before income tax provision			2,441,003				1,863,657				6,407,752				3,089,198
Income tax provision			77,600				53,000				272,881				71,000
Net income		$	2,363,403			$	1,810,657			$	6,134,871			$	3,018,198
Net income per share:
Basic net income per share		$	0.09			$	0.10			$	0.27			$	0.17
Diluted net income per share		$	0.09			$	0.09			$	0.24			$	0.15
Shares used in calculation of net income per share:
Basic			25,017,690				18,128,023				22,864,363				18,006,793
Diluted			27,321,956				20,031,531				25,208,877				20,057,026

See accompanying notes to consolidated unaudited financial statements.

ONLINE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2005				2004
Operating activities
Net income		$	6,134,871			$	3,018,198
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,211,949				2,744,719
Loss on impairment of assets			103,967				38,014
Provision for losses on accounts receivable			2,091				14,275
Net realized gain on investments			—				(205	)
Amortization of discount premium			(976	)			(28,051	)
Changes in assets and liabilities, net of acquisitions:
Restricted cash			(568,951	)			(763,189	)
Accounts receivable			1,298,869				(650,037	)
Prepaid expenses and other current assets			1,431,893				(725,911	)
Deferred implementation costs			(206,609	)			(3,682	)
Other assets			(210,116	)			8,230
Accounts payable			(874,861	)			1,324,099
Accrued expenses			600,148				982,284
Deferred revenues			1,186,450				(38,491	)
Deferred rent obligation			255,212				—
Other long term liabilities			(94,422)				—
Net cash provided by operating activities			13,269,515				5,920,253
Investing activities
Purchases of property and equipment			(5,391,624	)			(4,911,452	)
Purchases of available-for-sale securities			(3,100,000	)			(9,814,405	)
Sales of available-for-sale securities			4,400,000				8,779,164
Acquisition of Integrated Data Systems, Inc., net of cash acquired			(3,316,653	)			—
Net cash used in investing activities			(7,408,277	)			(5,946,693	)
Financing activities
Net proceeds from issuance of common stock (non-secondary related)			2,123,411				892,940
Net proceeds from issuance of common stock in secondary offering			40,221,834				—
Repayment of capital lease obligations			(19,212	)			(93,209	)
Net cash provided by financing activities			42,326,033				799,731
Net increase in cash and cash equivalents			48,187,271				773,291
Cash and cash equivalents at beginning of period			3,341,678				7,054,537
Cash and cash equivalents at end of period		$	51,528,949			$	7,827,828
Supplemental information to statement of cash flows:
Cash paid for interest		$	10,744			$	4,902
Income taxes paid			178,600				25,275
Net unrealized gain (loss) on investments			115				(10,521	)
Common stock issued in connection with Integrated Data Systems, Inc. acquisition			1,999,791				—

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     Online Resources Corporation (the “Company”) provides Internet technology services consisting of account presentation, payment, relationship management and professional services to financial services providers nationwide. The Company offers services, branded in the clients’ name, that integrate seamlessly into a single-vendor, end-to-end solution, supported by 24x7 customer care, targeted consumer marketing, training and other network and technical professional products and services. The Company currently operates in two business segments — Banking and eCommerce (“banking”) and Card and Credit Services (“card”). The card segment is the result of the acquisition of Incurrent Solutions, Inc. (“Incurrent”) on December 22, 2004.

INTERIM FINANCIAL INFORMATION

     The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These consolidated financial statements should be read in conjunction with our consolidated audited financial statements for the year ended December 31, 2004 included in the Annual Report on Form 10-K/A filed by the Company with the Securities and Exchange Commission on August 19, 2005. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

2. RESTATEMENT

     On August 15, 2005, the Company concluded that the its financial statements for fiscal periods ending December 31, 2004 and 2003 and the first interim period of 2005 should be restated to reflect a change in its policy regarding unclaimed bill payment checks and correct its accounting treatment with regard to its prior policy.

     In the third quarter of 2003, the Company adopted a policy to recognize stale bill payment checks as assets and began withdrawing funds related to certain stale unclaimed bill payment checks from an escrow account held for bill payments. The Company believed that there was a basis for making a claim of ownership of these funds for unclaimed bill payment checks after reviewing an appropriate legal analysis. Based on the length of time that the unclaimed checks were outstanding, the Company would withdraw the cash from the escrow accounts and record an asset with a corresponding liability. The Company then reduced the liability in accordance with FASB Statement No. 5, Accounting for Contingencies, based on an analysis of its payment history related to stale unclaimed bill payments with a corresponding reduction to payment processing costs. The amount by which payment processing costs were reduced from July 1, 2003 through March 31, 2005 totaled $1.9 million. The Company has determined that under this policy, the liability for the unclaimed bill payments should not have been reduced as the liability was not legally extinguished under paragraph 16 of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

     Under its revised policy, the Company will either return unclaimed funds to its financial institution clients or surrender the funds to the appropriate state escheat funds. The policy was revised to derive consistency with that of other bill payment providers, to take cognizance of changes occurring in the adoption of unclaimed property laws and to resolve issues regarding the manner in which the Company accounted for unclaimed bill payment funds following the adoption of its initial policy. As a result of this revised policy, the Company restated its financial statements, which resulted in a reduction to net income of $1.0, $0.7 and $0.2 million and reduced earnings per share by $0.05, $0.04 and $0.01 for the years ended December 31, 2004 and 2003 and the quarter ended March 31, 2005, respectively.

     Unclaimed bill payment funds are now no longer reflected in the Company’s statements of operations, nor do they contribute to its financial performance. Unclaimed bill payment funds no longer are used to reduce the Company’s service costs, thereby resulting in a corresponding decrease in the Company’s gross profits and net income. In addition, the Company has accrued a liability equal to the cash it obtained subsequent to the adoption of its initial policy to reflect its obligation to either return funds to its clients or to surrender the funds in accordance with unclaimed property laws. This cash and the corresponding liability will remain on the Company’s balance sheet until such funds have been disposed of in accordance with the new policy.

     The following table sets forth the effects of the restatement on certain line items within the Company’s consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2004:

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30, 2004								SEPTEMBER 30, 2004
		PREVIOUSLY								PREVIOUSLY
		REPORTED				RESTATED				REPORTED				RESTATED
Service costs		$	3,781,504			$	4,120,557			$	11,697,390			$	12,449,031
Gross profit			6,989,419				6,650,366				18,241,214				17,489,573
Income from operations			2,132,888				1,793,835				3,722,266				2,970,625
Net income			2,149,710				1,810,657				3,769,839				3,018,198
Net income per share:
Basic		$	0.12			$	0.10			$	0.21			$	0.17
Diluted		$	0.11			$	0.09			$	0.19			$	0.15

3. RECLASSIFICATION

     Certain amounts reported in prior periods have been reclassified to conform to the 2005 presentation.

4. ACQUISITIONS

Incurrent

     On December 22, 2004, the Company completed the acquisition of Incurrent, a New Jersey corporation, pursuant to which Incurrent merged with and into the Company’s wholly-owned subsidiary, Incurrent Acquisition LLC, a New Jersey limited liability company. The Company now operates the Incurrent business as its card division. Founded in 1997, Incurrent develops and operates advanced web-based products for financial institutions in the global payment card industry, including issuers of consumer, small business, purchasing, corporate and private label cards. Incurrent’s products enhance the card issuers’ relationship with their cardholders by allowing the issuers to achieve enhanced service and functionality on the Internet. Services provided by Incurrent include account, statement and transaction inquiry, account maintenance requests, payments, compliant statements and collections. The Company issued 1,000,014 shares of common stock to the Incurrent shareholders. The Company paid to, and for the benefit of, the Incurrent shareholders, approximately $7.9 million in cash.

     The Company’s primary reasons for acquiring Incurrent were to allow the Company to enter a complementary vertical market, exploit potential product and customer synergies between the companies and acquire management for that business line. The value of this acquisition to the Company lay in what could be created by marketing new products to the card issuer community and through layering its technology onto the Incurrent platform.

     The acquisition has been accounted for using the purchase method of accounting. The purchase price was allocated to the estimated fair value of the assets acquired and liabilities assumed. The estimated fair value of the tangible assets acquired and liabilities assumed approximated the historical basis. Incurrent lacked significant intangible assets other than its customer list, technology and employee base. Identified values were assigned for the customer list and technology and the identified value assigned to the employee base was included in goodwill. No other significant intangible assets were identified or included in goodwill. The Company engaged a qualified, independent valuation firm to identify and value any intangible assets acquired in the transaction.

     The preliminary purchase price allocation to identifiable intangible assets was $1.6 million and goodwill was $11.6 million. The identifiable intangible assets will be amortized on a straight-line basis over the estimated useful life of five years.

Integrated Data Systems, Inc. (“IDS”)

     On June 27, 2005, the Company completed the acquisition of IDS, a California corporation, pursuant to which IDS merged with and into the Company’s wholly-owned subsidiary, IDS LLC, a California limited liability company. The Company now operates the IDS business as part of its banking division. Founded in 1990, IDS is a privately held software development firm that develops and implements software applications for credit unions and other financial institutions. The acquisition adds approximately 30 employees and facilities in Woodland Hills, California and Pleasanton, California.

     The Company’s primary reasons for acquiring IDS were to acquire additional distribution and complimentary software products and to exploit the potential product synergies between the companies and to acquire management for that business line. The value of this acquisition to the Company lay in what could be created by exploiting the potential product synergies between the two companies.

     The Company issued 181,108 shares of common stock to the IDS shareholders. The Company paid to, and for the benefit of, the IDS shareholders, approximately $3.3 million in cash. The acquisition has been accounted for using the purchase method of accounting. The purchase price was allocated to the estimated fair value of the assets acquired and liabilities assumed. The estimated fair value of the tangible assets acquired and liabilities assumed approximated the historical basis. IDS lacked significant intangible assets other than its customer list, non-compete covenants, technology and employee base. Identified values were assigned for the customer list, non-compete covenants and technology, and the identified value assigned to the employee base was included in goodwill. No other significant intangible assets were identified or included in goodwill. The Company engaged a qualified, independent valuation firm to identify and value any intangible assets acquired in the transaction.

     The preliminary purchase price allocation to identifiable intangible assets was $1.2 million and goodwill was $4.7 million. The identifiable assets will be amortized on a straight-line basis over the estimated useful life of five years.

     The results of operations for IDS are included in the unaudited consolidated statements of operations beginning July 1, 2005. The financial information in the table below summarizes the results of operations of the Company and IDS on a pro forma basis, as though the companies had been combined as of the beginning of the periods being presented. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place as of the beginning of the period being presented.

		Three Months Ended
		September 30,				Nine Months Ended September 30,
		2004				2005				2004
Revenues		$	11,950,329			$	46,138,226			$	33,048,353
Net income		$	1,774,132			$	4,451,083			$	2,314,242
Net income per share:
Basic		$	0.10			$	0.19			$	0.13
Diluted		$	0.09			$	0.18			$	0.11

5. REPORTABLE SEGMENTS

     The Company manages its business through two reportable segments: banking and card. On January 1, 2005 the Company established the card segment with the acquisition of Incurrent. The operating results of the business segments exclude the allocation of intangible asset amortization.

     The results of operations from these reportable segments were as follows for the three and nine months ended September 30, 2005 and 2004:

										UNALLOCATED
		BANKING				CARD				EXPENSES (1)				TOTAL
Three months ended September 30, 2005:
Revenues		$	13,540,790			$	1,751,702			$	—			$	15,292,492
Costs of revenues			4,952,544				1,029,032				91,140				6,072,716
Gross profit			8,588,246				722,670				(91,140	)			9,219,776
Operating expenses			6,514,441				646,665				47,017				7,208,123
Income from operations		$	2,073,805			$	76,005			$	(138,157	)		$	2,011,653
Three months ended September 30, 2004:
Revenues		$	11,046,654			$	—			$	—			$	11,046,654
Costs of revenues			4,396,288				—				—				4,396,288
Gross profit			6,650,366				—				—				6,650,366
Operating expenses			4,856,531				—				—				4,856,531
Income from operations		$	1,793,835			$	—			$	—			$	1,793,835
Nine months ended September 30, 2005:
Revenues		$	38,511,276			$	6,222,203			$	—			$	44,733,479
Costs of revenues			14,719,281				3,166,049				191,140				18,076,470
Gross profit			23,791,995				3,056,154				(191,140	)			26,657,009
Operating expenses			18,754,048				2,162,589				103,997				21,020,634
Income from operations		$	5,037,947			$	893,565			$	(295,137	)		$	5,636,375
Nine months ended September 30, 2004:
Revenues		$	30,882,479			$	—			$	—			$	30,882,479
Costs of revenues			13,392,906				—				—				13,392,906
Gross profit			17,489,573				—				—				17,489,573
Operating expenses			14,518,948				—				—				14,518,948
Income from operations		$	2,970,625			$	—			$	—			$	2,970,625

6. SECONDARY OFFERING

     The Company completed the placement of 4,400,000 shares of its common stock on April 4, 2005 at a public offering price of $8.50. The underwriters subsequently exercised their option to purchase an aggregate of 720,734 additional shares on April 29,2005. The Company generated net proceeds from the offering of approximately $40 million, which it intends to use for acquisitions and accelerating development of products and services.

7. STOCK BASED COMPENSATION

     The Company has accounted for stock option grants using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), for stock-based compensation and to furnish the pro forma disclosures required under Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS No. 148”). In electing to continue to follow APB No. 25 for expense recognition purposes, the Company has provided below the expanded disclosures required under SFAS No. 148 for stock-based compensation granted, including, if materially different from reported results, disclosure of pro forma net earnings or losses and earnings or losses per share had compensation expense relating to grants been measured under the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”).

     The weighted-average fair values at date of grant for options granted during the three months ended September 30, 2005 and 2004 were $6.67 and $4.55, respectively, and during the nine months ended September 30, 2005 and 2004 were $6.65 and $4.69, respectively. The fair values were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2005				2004				2005				2004
Dividend yield			—				—				—				—
Expected volatility			79	%			84	%			80	%			86	%
Risk-free interest rate			3.88	%			3.38	%			3.73	%			3.32	%
Expected life in years			5.1				5.4				5.1				5.5

     A reconciliation of the Company’s net income to pro forma net income and the related basic and diluted pro forma net income per share amounts for the three and nine months ended September 30, 2005 and 2004 is provided below. For purposes of pro forma disclosure, stock-based compensation expense is recognized in accordance with the provisions of SFAS No. 123. Further, pro forma stock-based compensation expense is amortized to expense on a straight-line basis over the vesting

period.

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2005				2004				2005				2004
Net income as reported		$	2,363,403			$	1,810,657			$	6,134,871			$	3,018,198
Adjustment to net income for:
Pro forma stock-based compensation expense			(391,573	)			(309,381	)			(1,253,800	)			(1,231,689	)
Pro forma net income		$	1,971,830			$	1,501,276			$	4,881,071			$	1,786,509
Basic net income per share
As reported		$	0.09			$	0.10			$	0.27			$	0.17
Pro forma		$	0.08			$	0.08			$	0.21			$	0.10
Diluted net income per share
As reported		$	0.09			$	0.09			$	0.24			$	0.15
Pro forma		$	0.07			$	0.07			$	0.19			$	0.09

     As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, generally recognizes no compensation expense for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s, Share-Based Payment (“SFAS No. 123(R)”), fair value method on January 1, 2006 will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, however, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and net income per share in Note 7 to our consolidated unaudited financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), there were no operating cash flows recognized in the three and nine months ended September 30, 2005 and 2004 for such excess tax deductions.

8. MAJOR CUSTOMER

     One of the Company’s card segment clients, Sears, accounted for approximately $1.3 million, or 3% of the Company’s revenues, for the nine months ended September 30, 2005. During 2004, Citigroup acquired the Sears credit card portfolio and converted the Sears customers to the Citigroup platform in the second quarter of 2005. The Company anticipated the loss of Sears as part of its acquisition of Incurrent.

9. NET INCOME PER SHARE

     The following table sets forth the computation of basic and diluted net income per share:

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2005				2004				2005				2004
Net income		$	2,363,403			$	1,810,657			$	6,134,871			$	3,018,198
Shares used in calculation of income per share:
Basic			25,017,690				18,128,023				22,864,363				18,006,793
In the money warrants			—				58,618				—				60,648
In the money options			2,304,266				1,844,890				2,344,514				1,989,585
Diluted			27,321,956				20,031,531				25,208,877				20,057,026
Net income per share
Basic		$	0.09			$	0.10			$	0.27			$	0.17
Diluted		$	0.09			$	0.09			$	0.24			$	0.15

10. COMPONENTS OF COMPREHENSIVE INCOME

     SFAS No. 130, Reporting Comprehensive Income, requires that items defined as comprehensive income or loss be separately classified in the financial statements and that the accumulated balance of other comprehensive income or loss be reported separately from accumulated deficit and additional paid-in capital in the equity section of the balance sheet.

     The following table summarizes the Company’s comprehensive income:

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2005				2004				2005				2004
Net income		$	2,363,403			$	1,810,657			$	6,134,871			$	3,018,198
Unrealized gain (loss) on marketable securities			—				1,229				115				(10,521	)
Total comprehensive income		$	2,363,403			$	1,811,886			$	6,134,986			$	3,007,677

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS.
CAUTIONARY NOTE

     The following management’s discussion and analysis should be read in conjunction with the accompanying Consolidated Unaudited Financial Statements and Notes thereto. This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to:

•		Any statements in this document that are not statements of historical fact may be considered forward-looking;
•		Statements regarding trends in our revenues, expense levels, and liquidity and capital resources;
•		Statements about the sufficiency of the proceeds from the sale of securities and cash balances to meet currently planned working capital and capital expenditure requirements for at least the next twelve months; and
•		Other statements identified or qualified by words such as “likely”, “will”, “suggest”, “may”, “would”, “could”, “should”, “expects”, “anticipates”, “estimates”, “plans”, “projects”, “believes”, “seek”, “intend” and other similar words that signify forward-looking statements.

     These forward-looking statements represent our best judgment as of the date of the Quarterly Report on Form 10-Q, and we caution readers not to place undue reliance on such statements. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including but not limited to, the risks and uncertainties described or discussed in the section “Risk Factors” in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on August 19, 2005. These risks include, among others, the following:

•		our history of prior losses and lack of certainty as to our continuing profitability;
•		possible fluctuations of our quarterly financial results;
•		our failure to retain or increase our end-users;
•		our dependence on the marketing efforts of third parties;
•		our dependence on our clients to market our services;
•		the possibility that we may not be able to expand to meet increased demand for our services and related products;
•		the potential adverse impact that a loss of a material client may have on our financial results;
•		our inability to attract and retain qualified management and technical personnel and our dependence on our executive officers and key employees;
•		possible security breaches or system failures disrupting our business and the liability associated with these disruptions;
•		the failure to properly develop, market or sell new products;
•		reduction or elimination of the fees we charge for some services due to the consumer demand for low-cost or free online financial services;
•		the potential impact of the consolidation of the banking and financial services industry;
•		interference with our business from the adoption of government regulations;
•		our need to maintain satisfactory ratings from federal depository institution regulators;
•		the potential of litigation;
•		our volatile stock price; and
•		the trading of a substantial number of shares adversely impacting the price of our shares.

OVERVIEW

     We provide Internet technology services consisting of account presentation, payment, relationship management and professional services to financial services providers nationwide. Our services, branded in the clients’ name, integrate seamlessly into a single-vendor, end-to-end solution, supported by 24×7 customer care, targeted consumer marketing, training and other network and technical professional products and services.

     We manage our business through two reportable segments: banking and card. The operating results of the business segments exclude the allocation of intangible asset amortization.

     Registered end-users using account presentation, bill payment or both, are the major drivers of our revenues. Since September 30, 2004, the number of users using our account presentation services increased 583%, and the number of users using our payment services increased 25%, for an overall 269% increase in users. Exclusive of the 2.6 million users added through the acquisition of Incurrent, account presentation services users increased 25% and overall users increased 26%.

		PERIOD ENDED SEPTEMBER 30,								INCREASE/(DECREASE)
		2005				2004				CHANGE				%
Account presentation users (000s):
Banking segment			577				463				114				25	%
Card segment			2,587				—				2,587				N/A
Enterprise			3,164				463				2,701				583	%
Payment services users (000s):
Banking segment			907				728				179				25	%
Total users (000s):
Banking segment			1,346				1,065				281				26	%
Card segment			2,587				—				2,587				N/A
Enterprise			3,933				1,065				2,868				269	%

     We have long-term service contracts with most of our financial services provider clients. The majority of our revenues are recurring, though these contracts also provide for implementation, set-up and other non-recurring fees. Account presentation services revenues are based on either a monthly license fee, allowing our financial institution clients to register an unlimited number of customers, or a monthly fee for each registered customer. Payment services revenues are based on either a monthly fee for each customer enrolled, a fee per executed transaction, or a combination of both. Our clients pay nearly all of our fees and then determine if or how they want to pass these costs on to their users. They typically provide account presentation services to users free of charge, as they derive significant potential benefits including account retention, delivery and paper cost savings, account consolidation and cross-selling of other products. As of September 30, 2005 approximately 40% of our clients were charging their users for providing payment services.

     As a network-based service provider, we have made substantial up-front investments in infrastructure, particularly for our proprietary systems. While we continue to incur ongoing development and maintenance costs, we believe the infrastructure we have built provides us with significant operating leverage. In 2003 we began an effort to upgrade and rewrite certain of our applications infrastructure that will continue into 2006. We expect that this effort will require incremental capital expenditures, primarily for additional development labor, of between $3.0 million and $5.0 million over that period.

     We continue to automate processes and develop applications that allow us to make only small increases in labor and other operating costs relative to increases in customers and transactions. We believe our financial and operating performance will be based primarily on our ability to leverage additional end-users and transactions over this relatively fixed cost base.

Financial Condition

     While we have achieved net income for the past seven quarters and expect our profitability to be sustainable, we have historically experienced operating losses and negative cash flow due to the initial costs of developing our infrastructure and the early revenues typical of an emerging market segment. As a result, at September 30, 2005 we had an accumulated deficit of $73.5 million. We have funded our operations primarily through the issuance of equity and debt securities. Our ongoing working capital requirements consist primarily of personnel costs related to providing our services and operating, enhancing and maintaining our systems.

     Cash and cash equivalents were $51.5 and $3.3 million as of September 30, 2005 and December 31, 2004, respectively. The $48.2 million increase in cash and cash equivalents results from $13.3 and $42.3 million in cash provided by operating and financing activities, respectively, $1.3 million in net sales of available-for-sale securities, partially offset by $5.4 million in capital expenditures and $3.3 million used to acquire IDS.

Results of Operations

     The following table presents the summarized results of operations for our two reportable segments, banking and card:

		THREE MONTHS ENDED SEPTEMBER 30,																NINE MONTHS ENDED SEPTEMBER 30,
		2005								2004								2005								2004
		Dollars				%				Dollars				%				Dollars				%				Dollars				%
Revenues:
Banking		$	13,540,790				89	%		$	11,046,654				100	%		$	38,511,276				86	%		$	30,882,479				100	%
Card			1,751,702				11	%			—				0	%			6,222,203				14	%			—				0	%
Total		$	15,292,492				100	%		$	11,046,654				100	%		$	44,733,479				100	%		$	30,882,479				100	%

		Dollars				Margin				Dollars				Margin				Dollars				Margin				Dollars				Margin
Gross profit:
Banking		$	8,588,246				63	%		$	6,650,366				60	%		$	23,791,995				62	%		$	17,489,573				57	%
Card			722,670				41	%			—				0	%			3,056,154				49	%			—				0	%
Unallocated			(91,140	)							—								(191,140	)
Total		$	9,219,776				60	%		$	6,650,366				60	%		$	26,657,009				60	%		$	17,489,573				57	%

		Dollars				%				Dollars				%				Dollars				%				Dollars				%
Operating expenses:
Banking		$	6,514,441				90	%		$	4,856,531				100	%		$	18,754,048				89	%		$	14,518,948				100	%
Card			646,665				9	%			—				0	%			2,162,589				10	%			—				0	%
Unallocated			47,017				1	%							0	%			103,997				1	%							0	%
Total		$	7,208,123				100	%		$	4,856,531				100	%		$	21,020,634				100	%		$	14,518,948				100	%

		Dollars				Margin				Dollars				Margin				Dollars				Margin				Dollars				Margin
Income from operations:
Banking		$	2,073,805				15	%		$	1,793,835				16	%		$	5,037,947				13	%		$	2,970,625				10	%
Card			76,005				4	%			—				0	%			893,565				14	%			—				0	%
Unallocated			(138,157	)							—								(295,137	)							—
Total		$	2,011,653				13	%		$	1,793,835				16	%		$	5,636,375				13	%		$	2,970,625				10	%

THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004

Revenues

     We generate revenues from account presentation services, payment services, relationship management services and professional services and other revenues. Revenues increased $4.3 million, or 38%, to $15.3 million for the three months ended September 30, 2005, from $11.0 million for the same period of 2004. This increase was attributable to a 23% increase in banking segment revenues and $1.8 million in revenues contributed by the new card segment acquired on December 22, 2004.

		THREE MONTHS ENDED
		SEPTEMBER 30,								INCREASE/(DECREASE)
		2005				2004				CHANGE				%
Revenues (in millions):
Account presentation services		$	1.9			$	0.7			$	1.2				161	%
Payment services			9.0				7.3				1.7				22	%
Relationship management services			1.8				2.0				(0.2	)			-8	%
Professional services and other			2.6				1.0				1.6				170	%
Total revenues		$	15.3			$	11.0			$	4.3				38	%
Payment metrics:
Payment services clients			770				728				42				6	%
Payment transactions (000s)			11,563				9,571				1,992				21	%
Adoption rates:
Account presentation services — Banking (1)			26.9	%			21.1	%			5.8	%			27	%
Account presentation services — Card (1)			16.4	%			N/A				N/A				NA
Payment services (2)			9.1	%			6.8	%			2.3	%			34	%

Notes:

     Account Presentation Services. Both the banking and card segments contribute to account presentation services revenues, which increased $1.2 million compared to the same period of last year to $1.9 million. The inclusion of the new card segment in 2005 is the reason for the increase, with account presentation services revenue generated by the banking segment decreasing by 2% compared to 2004. This is the result of the loss of one of our largest banking clients in the first quarter of 2005 and our decision to fix price the account presentation service to our banking segment clients in an effort to drive adoption of those services. This allows our financial services provider clients to register an unlimited number of account presentation services users (as evidenced by the 27% increase in banking account presentation services adoption since September 30, 2004) to whom we can then attempt to up-sell our higher margin bill pay products and other services.

     Payment Services. Primarily composed of revenues from the banking segment, payment services revenues increased to $9.0 million for the three months ended September 30, 2005 from $7.3 million in the prior year. This was driven by a 25% increase in the number of period-end payment services users and a 21% increase in the number of payment transactions processed during the period. The increases in period-end payment services users and the number of payment transactions processed were driven by two factors: an increase in financial services provider clients using our payment services and an increase in payment services adoption. Compared to September 30, 2004, the number of financial services provider clients using our payment services increased from 728 clients to 770 clients. Additionally, we increased the adoption rate of our payment services from 6.8% at September 30, 2004 to 9.1% at September 30, 2005.

     Relationship Management Services. Consisting entirely of revenues from the banking segment, relationship management services revenues decreased to $1.8 million from $2.0 in 2004. This is the result of the loss of one of our largest banking clients in the first quarter of 2005, partially offset by additional relationship management services revenues attributable to an increase of 26% in the number of period-end banking segment end-users utilizing either account presentation or payment services compared to 2004. We expect relationship management services revenues growth to be flat as more of our financial services provider clients move to a monthly license fee pricing model similar to the one we use for account presentation services.

     Professional Services and Other. Both the banking and card segments contribute to professional services and other revenues, which increased $1.6 million from $1.0 million in 2004 to $2.6 million in 2005. The increase was the result of the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment) in 2005 and increased professional services revenues in the banking segment in 2005 compared to 2004.

Costs and Expenses

		THREE MONTHS ENDED
		SEPTEMBER 30,								INCREASE/(DECREASE)
		2005(1)				2004(1)				CHANGE(1)				%
Revenues		$	15.3			$	11.0			$	4.3				38	%
Costs of revenues			6.1				4.4				1.7				38	%
Gross profit			9.2				6.6				2.6				39	%
Gross margin			60	%			60	%			0	%			0	%
Operating expenses
General & administrative			3.4				2.1				1.3				64	%
Sales & marketing			2.6				1.7				0.9				49	%
Systems & development			1.2				1.0				0.2				17	%
Total operating expenses			7.2				4.8				2.4				48	%
Income from operations			2.0				1.8				0.2				12	%
Other income, net			0.4				—				0.4				0	%
Net income		$	2.4			$	1.8			$	0.6				31	%
Net income per share:
Basic		$	0.09			$	0.10			$	(0.01	)			-10	%
Diluted		$	0.09			$	0.09			$	(0.00	)			0	%
Shares used in calculation of net income per share:
Basic			25.0				18.1				6.9				38	%
Diluted			27.3				20.0				7.3				36	%

Notes:

     Costs of Revenues. Costs of revenues encompass the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional services work. Costs of revenues increased by $1.7 million to $6.1 million for the three months ended September 30, 2005, from $4.4 million for the same period in 2004. In addition to the inclusion of costs associated with the new card segment and custom solutions group (formerly IDS and part of the banking segment), the increase related to increases in volume-related payment processing and systems operations costs and increased amortization of software development costs capitalized in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP No. 98-1”).

     Gross Profit. Gross profit increased to $9.2 million for the three months ended September 30, 2005 from $6.6 million for the same period of 2004. Of the $2.6 million increase, $0.7 million, or 28%, related to the inclusion of the new card segment, and the remaining $1.9 million, or 72%, related to growth in the banking segment and the addition of the new custom solutions group (formerly IDS and part of the banking segment). Gross margin stayed flat at 60%.

     General and Administrative. General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance, and depreciation. General and administrative expenses increased $1.3 million, or 64%, to $3.4 million for the three months ended September 30, 2005, from $2.1 million in the same period of 2004. The increase related to the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment), and to increased depreciation expense, rent expense, and salary and benefits costs as a result additional headcount.

     Sales and Marketing. Sales and marketing expenses include salaries and commissions paid to sales and marketing personnel, consumer marketing costs, public relations costs, and other costs incurred in marketing our services and products. Sales and marketing expenses increased $0.9 million, or 49%, to $2.6 million for the three months ended September 30, 2005, from $1.7 million in 2004. In addition to the costs related to the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment), the increase was the result of increased salary and benefits costs as a result of the expansion of our sales and client services groups, increased remuneration expenses to our reseller partners owing to higher user and transaction volumes, increased marketing costs resulting from running a higher number of client-sponsored marketing programs and increased sales commissions due to higher sales activity in 2005.

     Systems and Development. Systems and development expenses include salaries, consulting fees and all other expenses incurred in supporting the research and development of new services and products and new technology to enhance existing products. Systems and development expenses increased $0.2 million to $1.2 million for the three months ended September 30, 2005. The increase was the result of the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment), respectively, in 2005. Even though systems and development costs in the banking segment increased relative to 2004 as a result of increased headcount, this increase was offset by an increase in the amount of costs capitalized in accordance with SOP No. 98-1. We capitalized $1.3 million of development costs associated with software developed or obtained for internal use during the three months ended September 30, 2005, compared to $0.7 million in 2004.

     Income from Operations. Income from operations increased $0.2 million, or 12%, to $2.0 million for the three months ended September 30, 2005. The increase was due to an increase in service fee revenues leveraged over relatively fixed costs and $0.1 million in additional operating income for the new card segment.

     Other Income, Net. Other income increased $0.4 million due to a $0.4 million increase in interest income resulting from interest earned on the proceeds from the secondary offering completed in April 2005.

     Net Income. Net income was $2.4 million for the three months ended September 30, 2005, compared to $1.8 million for the same period of 2004. Basic net income per share was $0.09 and $0.10 for the three months ended September 30, 2005 and 2004, respectively. Diluted net income per share was $0.09 for the three months ended September 30, 2005 and 2004. Basic and diluted shares outstanding increased by 38% and 36%, respectively, compared to 2004 as a result of shares issued as part of the secondary offering in April 2005 and shares issued related to the Incurrent and IDS acquisitions. Diluted shares outstanding also increased as a result of the impact of our rising share price on the fully diluted share calculation.

NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004.

		NINE MONTHS ENDED
		SEPTEMBER 30,								INCREASE/(DECREASE)
		2005				2004				CHANGE				%
Revenues (in millions):
Account presentation services		$	6.9			$	2.3			$	4.6				202	%
Payment services			26.1				20.5				5.6				28	%
Relationship management services			5.8				5.9				(0.1	)			-1	%
Professional services and other			5.9				2.2				3.7				164	%
Total revenues		$	44.7			$	30.9			$	13.8				45	%
Payment metrics:
Payment services clients			770				728				42				6	%
Payment transactions (000s)			33,790				26,906				6,884				26	%
Adoption rates:
Account presentation services — Banking (1)			26.9	%			21.1	%			5.8	%			27	%
Account presentation services — Card (1)			16.4	%			N/A				N/A				N/A
Payment services (2)			9.1	%			6.8	%			2.3	%			34	%

Notes:

     We generate revenues from account presentation services, payment services, relationship management services and professional services and other revenues. Revenues increased $13.8 million, or 45%, to $44.7 million for the nine months ended September 30, 2005, from $30.9 million for the same period of 2004. This increase was attributable to a 25% increase in banking segment revenues and $6.2 million in revenues contributed by the new card segment acquired on December 22, 2004.

     Account Presentation Services. Both the banking and card segments contribute to account presentation services revenues, which increased $4.6 million compared to the same period of last year to $6.9 million. The inclusion of the new card segment in 2005 is the reason for the increase, with account presentation services revenue generated by the banking segment decreasing by 2% compared to 2004. This is the result of the loss of one of our largest banking clients in the first quarter of 2005 and our decision to fix price the account presentation service to our banking segment clients in an effort to drive adoption of those services. This allows our financial services provider clients to register an unlimited number of account presentation services users (as evidenced by the 27% increase in banking account presentation services adoption since September 30, 2005) to whom we can then attempt to up-sell our higher margin bill pay products and other services.

     Payment Services. Primarily composed of revenues from the banking segment, payment services revenues increased to $26.1 million for the nine months ended September 30, 2005 compared to $20.5 million in the prior year. This was driven by a 25% increase in the number of period-end payment services users and a 26% increase in the number of payment transactions processed during the period. The increases in period-end payment services users and the number of payment transactions processed were driven by two factors: an increase in financial services provider clients using our payment services and an increase in payment services adoption. Compared to September 30, 2004, the number of financial services provider clients using our payment services increased from 728 clients to 770 clients. Additionally, we increased the adoption rate of our payment services from 6.8% at September 30, 2004 to 9.1% at September 30, 2005.

     Relationship Management Services. Consisting entirely of revenues from the banking segment, relationship management services revenues decreased to $5.8 million from $5.9 million. This is the result of the loss of one of our largest banking clients in the first quarter of 2005, partially offset by additional relationship management services revenues attributable to an increase of 26% in the number of period-end banking segment end-users utilizing either account presentation or payment services compared to 2004. We expect relationship management services revenues growth to be flat as more of our financial services provider clients move to a monthly license fee pricing model similar to the one we use for account presentation services.

     Professional Services and Other. Both the banking and card segments contribute to professional services and other revenues, which increased $3.7 million from $2.2

million in 2004 to $5.9 million in 2005. The increase was the result of the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment) in 2005 and increased termination fees and professional services work in the banking segment in 2005 compared to 2004.

Costs and Expenses

		NINE MONTHS ENDED
		SEPTEMBER 30,								INCREASE/(DECREASE)
		2005(1)				2004(1)				CHANGE(1)				%
Revenues		$	44.7			$	30.9			$	13.8				45	%
Costs of revenues			18.1				13.4				4.7				35	%
Gross profit			26.6				17.5				9.1				52	%
Gross margin			60	%			57	%			3	%			5	%
Operating expenses
General & administrative			9.9				6.3				3.6				59	%
Sales & marketing			7.6				5.4				2.2				40	%
Systems & development			3.5				2.8				0.7				23	%
Total operating expenses			21.0				14.5				6.5				45	%
Income from operations			5.6				3.0				2.6				90	%
Other income, net			0.5				—				0.5
Net income		$	6.1			$	3.0			$	3.1				103	%
Net income per share:
Basic		$	0.27			$	0.17			$	0.10				59	%
Diluted		$	0.24			$	0.15			$	0.09				60	%
Shares used in calculation of net income per share:
Basic			22.9				18.0				4.9				27	%
Diluted			25.2				20.1				5.1				26	%

Notes:

     Costs of Revenues. Costs of revenues encompass the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional services work. Costs of revenues increased by $4.7 million to $18.1 million for the nine months ended September 30, 2005, from $13.4 million for the same period in 2004. In addition to the inclusion of costs associated with the new card segment and custom solutions group (formerly IDS and part of the banking segment), the increase related to increases in volume-related payment processing and systems operations costs and increased amortization of software development costs capitalized in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP No. 98-1”).

     Gross Profit. Gross profit increased to $26.6 million for the nine months ended September 30, 2005 from $17.5 million for the same period of 2004. Of the $9.1 million increase, $3.1 million, or 33%, related to the inclusion of the new card segment, and the remaining $6.0 million, or 67%, related to growth in the banking segment and the addition of the new custom solutions group (formerly IDS and part of the banking segment). Gross margin increased to 60% from 57% due to increased service fees leveraged over our relatively fixed costs of revenues.

     General and Administrative. General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance, and depreciation. General and administrative expenses increased $3.6 million, or 59%, to $9.9 million for the nine months ended September 30, 2005, from $6.3 million in the same period of 2004. The increase related to the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment), and to increased depreciation expense, rent expense and salary and benefits costs as a result additional headcount.

     Sales and Marketing. Sales and marketing expenses include salaries and commissions paid to sales and marketing personnel, consumer marketing costs, public relations costs, and other costs incurred in marketing our services and products. Sales and marketing expenses increased $2.2 million, or 40%, to $7.6 million for the nine months ended September 30, 2005, from $5.4 million in 2004. In addition to the costs related to the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment), the increase was the result of increased salary and benefits costs as a result of the expansion of our sales and client services groups, increased remuneration expenses to our reseller partners owing to higher user and transaction volumes, increased marketing costs resulting from running a higher number of client-sponsored marketing programs and increased sales commissions due to higher sales activity in 2005.

     Systems and Development. Systems and development expenses include salaries, consulting fees and all other expenses incurred in supporting the research and development of new services and products and new technology to enhance existing products. Systems and development expenses increased $0.7 million to $3.5 million for the nine months ended September 30, 2005. The increase was the result of the inclusion of the new card segment and custom solutions group (formerly IDS and part of the banking segment), respectively, in 2005. Even though systems and development costs in the banking segment increased relative to 2004 as a result of increased headcount, this increase was offset by an increase in the amount of costs capitalized in accordance with SOP No. 98-1. We capitalized $3.2 million of development costs associated with software developed or obtained for internal use during the nine months ended September 30, 2005, compared to $2.0 million in 2004.

     Income from Operations. Income from operations increased $2.6 million, or 90%, to $5.6 million for the nine months ended September 30, 2005. The increase was due to an increase in service fee revenues leveraged over relatively fixed costs, $0.9 million in additional operating income for the new card segment and additional one-time termination fees received in 2005 compared to 2004.

     Other Income, Net. Other income increased $0.5 million due to a $0.7 million increase in interest income resulting from interest earned on the proceeds from the secondary offering completed in April 2005, partially offset by a $0.2 million increase in income tax expense.

     Net Income. Net income was $6.1 million for the nine months ended September 30, 2005, compared to $3.0 million for the same period of 2004. Basic net income per share was $0.27 and $0.17 for the nine months ended September 30, 2005 and 2004, respectively, while diluted net income per share was $0.24 and $0.15 for the nine months ended September 30, 2005 and 2004, respectively. Basic and diluted shares outstanding increased by 27% and 26%, respectively, compared to 2004 as a result of shares issued as part of the secondary offering in April 2005 and shares issued related to the Incurrent and IDS acquisitions. Diluted shares outstanding also increased as a result of the impact of our rising share price on the fully diluted share calculation.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have primarily financed our operations through private placements and public offerings of our common and preferred stock and the issuance of debt. We have also entered into various capital lease financing agreements. Cash and cash equivalents were $51.5 and $3.3 million as of September 30, 2005 and December 31, 2004, respectively. The $48.2 million increase in cash and cash equivalents results from $13.3 and $42.3 million in cash provided by operating and financing activities, respectively, $1.3 million in net sales of available-for-sale securities, partially offset by $5.4 million in capital expenditures and $3.3 million used to acquire IDS.

     Net cash provided by operating activities was $13.3 million for the nine months ended September 30, 2005 as compared to $5.9 million during the nine months ended September 30, 2004. Approximately 90% of the cash generated by operating activities in 2005 was recurring in nature, while approximately 91% of the cash generated by operating activities in 2004 was recurring in nature.

     Net cash used in investing activities for the nine months ended September 30, 2005 was $7.4 million, which was the result of $5.4 million in capital expenditures, $3.3 million used to acquire IDS, partially offset by $1.3 million in net sales of securities available-for-sale. Net cash used in investing activities for the nine months ended September 30, 2004 was $5.9 million, which was the result of net purchases of $1.0 million in available-for-sale securities and $4.9 million in capital expenditures.

     Net cash provided by financing activities was $42.3 million for the nine months ended September 30, 2005 compared to $0.8 million for the nine months ended September 30, 2004. During the nine months ended September 30, 2005, we generated $2.1 million in cash through the exercise of company-issued stock options and our employees’ participation in our employee stock purchase plan compared to $0.9 million during the nine months ended September 30, 2004. We also generated $40.2 million in cash through the issuance of common stock in connection with a secondary offering in April 2005. We issued 5.1 million primary shares of our common stock at an offering price of $8.50, which we intend to use for acquisitions and accelerating development of products and services.

     Our material commitments under operating and capital leases and purchase obligations are as follows:

		TOTAL				2005				2006				2007				THEREAFTER
Capital lease obligations		$	15,867			$	8,169			$	7,698			$	—			$	—
Operating lease			19,893,514				658,515				2,747,749				2,257,216				14,230,034
Purchase obligations			490,000				65,000				305,000				120,000				—
Total obligations		$	20,399,381			$	731,684			$	3,060,447			$	2,377,216			$	14,230,034