S1 CORPORATION

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended June 30, 2006


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: 000-24931

S1 CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		58-2395199
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3500 Lenox Road, Suite 200
Atlanta, Georgia		30326
(Address of principal executive		(Zip Code)
offices)

Registrant’s Telephone Number, Including Area Code: (404) 923-3500

NOT APPLICABLE
(Former name if changed since last report.)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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

Shares of common stock outstanding as of August 2, 2006: 70,999,705

PART 1 — FINANCIAL INFORMATION

Item 1 — Financial Statements

S1 CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)


	June 30,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	79,227		$	85,108
Short-term investments		32,337			44,170
Accounts receivable, net		56,291			48,659
Prepaid expenses		4,381			4,885
Other current assets		2,642			3,870
Assets of business held for sale, net		9,106			—

Total current assets		183,984			186,692
Property and equipment, net		12,851			11,351
Intangible assets, net		15,369			18,375
Goodwill, net		125,299			125,808
Other assets		2,115			2,297

Total assets	$	339,618		$	344,523


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	5,617		$	5,292
Accrued compensation and benefits		7,038			8,267
Accrued restructuring		4,868			7,675
Accrued other expenses		11,469			17,587
Accrued purchase price consideration		—			12,900
Deferred revenues		32,102			27,499
Current portion of capital lease obligation		2,496			1,222
Liabilities of business held for sale, net		10,229			—

Total current liabilities		73,819			80,442
Capital lease obligation, excluding current portion		3,124			791
Accrued restructuring, excluding current portion		6,027			7,810
Other liabilities		2,278			3,094

Total liabilities		85,248			92,137


Stockholders’ equity:
Preferred stock		10,000			10,000
Common stock		750			744
Additional paid-in capital		1,920,695			1,915,617
Common stock held in treasury — at cost		(25,000	)		(25,000	)
Accumulated deficit		(1,649,759	)		(1,647,204	)
Accumulated other comprehensive loss:
Net (loss) gain on derivative financial instruments		(109	)		104
Cumulative foreign currency translation adjustment		(2,207	)		(1,875	)

Total stockholders’ equity		254,370			252,386

Total liabilities and stockholders’ equity	$	339,618		$	344,523


Preferred shares issued and outstanding		749,064			749,064

Common shares issued and outstanding		75,041,591			74,410,099

Common stock held in treasury		4,053,886			4,053,886

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30
	2006			2005			2006			2005
Revenues:
Software licenses	$	6,369		$	8,051		$	12,412		$	17,629
Support and maintenance		11,197			11,383			21,854			22,983
Professional services		16,950			17,840			31,571			36,221
Data center		11,911			9,883			23,497			19,547
Other		312			334			845			637

Total revenues		46,739			47,491			90,179			97,017


Operating expenses:
Cost of software licenses		1,062			1,427			2,092			2,641
Cost of professional services, support and maintenance ^{(1) (2)}		15,761			15,644			30,451			31,039
Cost of data center ^{(1) (2)}		5,759			4,439			11,175			9,288
Cost of other revenue		133			42			449			250
Selling and marketing ⁽²⁾		6,683			8,130			12,558			15,064
Product development ⁽²⁾		9,876			10,228			19,483			21,392
General and administrative ⁽²⁾		6,479			6,020			12,195			12,651
Restructuring costs		549			—			882			—
Depreciation		1,971			2,375			3,723			4,693
Amortization of other intangible assets		327			328			654			657

Total operating expenses		48,600			48,633			93,662			97,675

Operating loss		(1,861	)		(1,142	)		(3,483	)		(658	)
Interest and other income, net		1,040			816			2,249			1,015

(Loss) income before income tax expense		(821	)		(326	)		(1,234	)		357
Income tax (expense) benefit		(263	)		43			(654	)		(329	)

(Loss) income from continuing operations		(1,084	)		(283	)		(1,888	)		28
(Loss) income from discontinued operations, net of tax ⁽²⁾		(1,027	)		2,599			(667	)		3,008

Net (loss) income	$	(2,111	)	$	2,316		$	(2,555	)	$	3,036


Basic earnings per share:
Continuing operations	$	(0.02	)	$	(0.01	)	$	(0.03	)	$	0.00
Discontinued operations	$	(0.01	)	$	0.04		$	(0.01	)	$	0.04

Net (loss) income per share	$	(0.03	)	$	0.03		$	(0.04	)	$	0.04


Diluted earnings per share:
Continuing operations	$	(0.02	)	$	(0.01	)	$	(0.03	)	$	0.00
Discontinued operations	$	(0.01	)	$	0.04		$	(0.01	)	$	0.04

Net (loss) income per share	$	(0.03	)	$	0.03		$	(0.04	)	$	0.04

Weighted average common shares outstanding — basic		70,958,696			70,191,090			70,692,207			70,391,240
Weighted average common shares outstanding — fully diluted		n/a			n/a			n/a			71,570,373


(1)		Cost of professional services, support and maintenance and cost of data center excludes charges for depreciation.

(2)		Includes stock based compensation expense of:


Cost of Professional services, support and maintenance	$	125	$	—	$	287	$	—
Cost of Data center		13		—		48		—
Selling and marketing		345		—		756		—
Product development		176		—		571		—
General and administrative		475		—		985		—
Discontinued operations		93		—		156		—

Total	$	1,227	$	—	$	2,803	$	—

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(Unaudited)


	Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net (loss) income	$	(2,555	)	$	3,036
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		6,479			7,580
Gain on disposal of Edify, net of tax		(554	)		—
Provision for doubtful accounts receivable and billing adjustments		1,918			1,041
Stock based compensation expense		2,803			—
Changes in assets and liabilities:
Increase in accounts receivable		(13,752	)		(4,405	)
(Increase) decrease in prepaid expenses and other assets		(320	)		2,363
Increase (decrease) in accounts payable		900			(1,536	)
Decrease in accrued expenses and other liabilities		(9,725	)		(14,505	)
Increase in deferred revenues		11,086			8,329

Net cash (used in) provided by operating activities		(3,720	)		1,903

Cash flows from investing activities:
Cash paid in connection with acquisition of Mosaic businesses		(14,000	)		—
Maturities of short-term investment securities		26,900			33,800
Purchases of short-term investment securities		(15,067	)		(21,171	)
Proceeds from sale of subsidiary		554			—
Purchases of property, equipment and technology		(4,610	)		(3,229	)

Net cash (used in) provided by investing activities		(6,223	)		9,400

Cash flows from financing activities:
Proceeds from employee stock option plans		2,281			309
Payments on capital lease obligations		(765	)		(973	)
Proceeds from sale-lease back transaction		2,502			—
Repurchase of common stock held in treasury		—			(3,407	)

Net cash provided by (used in) financing activities		4,018			(4,071	)

Effect of exchange rate changes on cash and cash equivalents		44			(474	)

Net (decrease) increase in cash and cash equivalents		(5,881	)		6,758
Cash and cash equivalents at beginning of period		85,108			43,223

Cash and cash equivalents at end of period	$	79,227		$	49,981


Noncash investing and financing activities:
Property and equipment financed through capital leases	$	4,372		$	527

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BACKGROUND AND BASIS OF PRESENTATION

S1 Corporation (“S1”) is a global provider of software solutions for financial organizations including banks, credit unions and insurance companies. We operate and manage S1 in two business segments: Enterprise segment and Postilion segment. The Enterprise segment represents North America retail banking solutions business, global wholesale banking solutions business, and our State Farm business. The Postilion segment represents the community financial business, global ATM/payments business, and the retail banking business outside of North America. We sell our solutions to small, mid-sized and large financial organizations in four geographic regions: (i) the Americas region, (ii) Europe and Middle East (EME), (iii) Africa, and (iv) Asia-Pacific (APAC).

Our Enterprise segment software supports the primary channels a bank uses to interact with its customers, including self service channels like the internet for personal, business and corporate online banking and trade finance, as well as full service banking including the teller at the branch, sales and service activities including new account opening and the call center agent’s desktop applications. In the community bank and credit union market, our Postilion segment provides on-line personal and business banking applications as well as a telephone banking application in a robust single-channel platform that offers an excellent balance between cost and feature set and performance for this highly competitive market. In addition we offer our payments platform which provides software that operates ATM networks and Point of Sale debit card transaction processing networks.

During the second quarter of 2006, management determined the plan approved to sell our Risk and Compliance business had become probable. Our Risk and Compliance business, previously an operating segment, provides a suite of regulatory reporting solutions with financial intelligence and analytic solutions to financial institutions worldwide. We are accounting for the planned divestiture as a business “held for sale.” As a result we have:

	•		presented the total assets of the Risk and Compliance business on one line as “assets of business held for sale” in our consolidated balance sheet as of June 30, 2006;

	•		presented the total liabilities of the Risk and Compliance business on one line as “liabilities of business held for sale” in our consolidated balance sheet as of June 30, 2006;

	•		presented the results of operations for the Risk and Compliance business as “discontinued operations” on one line in our consolidated statements of operations for all periods presented; and

	•		ceased depreciation of fixed assets and amortization of intangible assets associated with the Risk and Compliance business from July 1, 2006 forward.

The classification of the Risk and Compliance business assets and liabilities as “held for sale” will continue until such time that we sell the business, which we anticipate will happen no later than June 30, 2007.

We license the right to use our software through a direct sales channel and with channel partners including information systems integrators and select core processors. We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring data center revenues by charging our data center customers a monthly fixed fee or a fee based on the number of their end users who use the solutions we provide and the level of use of the solutions, subject to a minimum charge. We also generate recurring revenues by charging our customers a periodic fee for maintenance. We also generate recurring revenues by charging our customers a periodic fee for term licenses including the right-to-use software and receive maintenance and support for a specified period of time.

S1 is headquartered in Atlanta, Georgia, USA, with additional domestic offices in Norcross, Georgia; Littleton, Massachusetts; Charlotte, North Carolina; Austin, Texas; Deerfield Beach, Florida; Fairport, New York; Colorado Springs, Colorado; and West Hills, California; and international offices in Brussels, Cape Town, Dublin, Johannesburg, London, Melbourne, Munich, Pune, Chertsey and Singapore. S1 is incorporated in Delaware.

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not

contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K as amended for the year ended December 31, 2005. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of our financial condition as of June 30, 2006 and our results of operations for the three and six months ended June 30, 2005 and 2006 and cash flows for the six months ended June 30, 2005 and 2006. The data in the condensed consolidated balance sheet as of December 31, 2005 was derived from our audited consolidated balance sheet as of December 31, 2005, as presented in our Annual Report on Form 10-K as amended for the year ended December 31, 2005, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The condensed consolidated financial statements include the accounts of S1 and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. We reclassified certain amounts in the prior years’ consolidated financial statements to conform to the current year presentation. Our operating results for the six months ended June 30, 2006 are not necessarily indicative of the operating results that may be expected for the full year ending December 31, 2006.

2. RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

Recent accounting pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. SFAS No. 123R requires all share-based payments to employees to be recognized in the income statement based on their grant date fair values over the corresponding service period and also requires an estimation of forfeitures when calculating compensation expense. We used the transition election under Financial Staff Position (“FSP”) FAS 123(R)-c to calculate the net excess tax benefits that would have qualified as such had the entity adopted SFAS No. 123 for recognition purposes. Under this methodology we have no excess tax benefits, because of our historical operating losses which have generated NOLs. We adopted SFAS No. 123R on January 1, 2006 using the “modified prospective” method. We expect to record stock based compensation expense of between $4 million and $6 million during the year ending December 31, 2006.

In May 2005, the FASB issued SFAS No. 154. “Accounting Changes and Error Correction — A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1, 2006.

In June 2006, the FASB issued Financial Interpretation 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with Financial Accounting Statement No. 109, “Accounting for Income Taxes.” The interpretation is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 on our financial statements.

Except as disclosed below, our significant accounting policies are included in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K as amended for the year ended December 31, 2005.

Stock-based compensation

Prior to January 1, 2006, we accounted for our stock option plans in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” As such, no expense was recognized for options to purchase our common stock that were granted with an exercise price equal to fair market value at the date of grant. We only recorded compensation expense on the date of grant if the current market price of the underlying stock exceeded the exercise price. Additionally, if a modification was made to an existing grant, any related compensation expense was calculated on the date both parties accept the modification and recorded on the date the modification becomes effective.

On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. Statement 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. SFAS No. 123R requires all share-based payments to employees during the period to be based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Under SFAS No. 123R, the pro forma disclosures previously permitted under SFAS No. 123 is no longer an alternative to financial statement recognition. Effective January 1, 2006, we have adopted SFAS No. 123R using the “modified prospective” method. Under this method, the compensation expense recognized during the three months ended March 31, 2006 included compensation expense for share based compensation granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for share-based compensation granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. We did not change our method of attributing the value of stock-based compensation to expenses. Under both SFAS No. 123 and SFAS No. 123R the expense is amortized on a straight-line basis over the options’ vesting period. Pro forma results have not been restated. As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three months and six months ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimates.

The fair value is estimated at the date of grant using a Black-Scholes option pricing model. In determining the fair value, management makes certain estimates related primarily to the expected life of the option, the volatility of our stock, the risk-free interest rate and the estimated forfeiture rate. These assumptions affect the estimated fair value of the option. As such, these estimates will affect the compensation expense we record in future periods. These assumptions are subjective and generally require significant analysis and judgment. Some of the assumptions will be based on external data, while some assumptions will be derived from our historical experience with share-based payments. We currently estimate expected life using our historical exercise and post-vested termination activity. We currently estimate volatility by considering our historical stock volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with the remaining term equal to the expected life used as the input to the Black-Scholes model. We estimated the forfeitures using a weighted average historical forfeiture rate. Our estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimates.

The fair values were determined using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	Six Months Ended June,
	2005			2006
Expected dividend yield		0	%		0	%
Expected volatility		87.5	%		60.7	%
Risk-free interest rate		3.9	%		4.8	%
Expected life	4.0		years	4.0		years

The following table shows the increase in our loss from continuing operations, discontinued operations and net loss as a result of adopting SFAS No. 123R on January 1, 2006 compared to the results had we continued to account for stock-based employee compensation under APB No. 25 (in thousands, except for per share data):


	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2006			2006
Loss from continuing operations	$	(1,134	)	$	(2,647	)
Loss from discontinued operations		(93	)		(156	)

Net loss	$	(1,227	)	$	(2,803	)

Basic and diluted net loss per share for the three and six months ended June 30, 2006 would have been $(0.01) and $0.00 had we not adopted SFAS No. 123R, compared to reported basic and diluted net loss per share of $(0.03) and $(0.04). See Note 5 for additional information.

The following table shows the effect on net loss and net loss per share had we determined compensation cost based on the fair value at the grant date for our stock options and stock purchase rights under SFAS No. 123 for the three and six months ended June 30, 2005, our net income would have decreased to the pro forma net loss amounts indicated below (in thousands, except per share data):


	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2005			2005
Net income, as reported	$	2,316		$	3,036
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,927	)		(6,167	)

Pro forma net loss	$	(611	)	$	(3,131	)


Basic and diluted net income (loss) per share:
As reported — basic	$	0.03		$	0.04
As reported — diluted		0.03			0.04
Pro forma — basic and diluted		(0.01	)		(0.04	)

The effect of applying SFAS No. 123 for providing these pro forma disclosures is not necessarily representative of the effects on reported net income (loss) in future periods.

The above pro forma disclosure was not presented for the three and six month periods ended June 30, 2006 because stock-based compensation has been accounted for using the fair value recognition method under SFAS No. 123R for this period.

The following table shows the stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended June 30, 2006 (in thousands):


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2006		2006
Costs and expenses:
Cost of professional services, support and maintenance	$	125	$	287
Cost of data center		13		48
Selling and marketing		345		756
Product development		176		571
General and administrative		475		985
Discontinued operations		93		156

Total stock-based compensation expense	$	1,227	$	2,803

There was no capitalized stock-based compensation cost as of June 30, 2006. There were no recognized tax benefits during the six months ended June 30, 2006.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” We have elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent APIC pool and Consolidated Statement of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R.

We use the “with-and-without” or “incremental” approach for ordering tax benefits derived from the share-based payment awards. Using the with-and-without approach actual income taxes payable for the period are compared to the amount of tax payable that would have been incurred absent the deduction for employee share-based payments in excess of the amount of compensation cost recognized for financial reporting. As a result of this approach tax net operating loss carryforwards not generated from share-based payments in excess of cost recognized for financial reporting are considered utilized before the current period’s share-based deduction. As a result of this accounting treatment as of June 30, 2006, of our approximate $241.8 million of domestic tax net operating loss carryforwards associated with the group of companies included in the S1 Corporation consolidated federal income tax return, the benefit of approximately $209.4 million of these tax net operating loss carryforwards will be accounted for directly to equity as additional paid-in-capital. Additionally, we have approximately $4.3 million and $112.1 million of domestic and foreign tax net operating loss carryforwards respectively unaffected by this accounting treatment.

3. DISCONTINUED OPERATIONS

During the second quarter of 2006, management determined the plan approved to sell our Risk and Compliance business had become probable. Under the FRS brand, our Risk and Compliance business provides regulatory reporting solutions with a suite of regulatory reporting, financial intelligence and analytic solutions to financial institutions worldwide. The Risk and Compliance business was previously reported as a separate segment under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. This business is not focused specifically on customer-interaction software for the financial service market, which is our primary strategic market. The Risk and Compliance business develops software that helps banks comply with regulatory authorities’ requirements. Following the planned divestiture of this business, all of our remaining businesses will be focused on our strategic customer-interaction software for the financial services market.

The Risk and Compliance business is available for immediate sale. We are actively taking actions to complete the sale of the business. As of June 30, 2006 the sale of the Risk and Compliance business is probable and the business is being actively marketed for sale at a price that is reasonable in relation to its fair value. It is unlikely that there will be any significant changes in the plan to sell the business.

Beginning June 30, 2006, we accounted for this business as “held for sale” and presented its operating results for the current and prior year periods as “discontinued operations” according to the provisions of statement of Financial Accounting Standard No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144. We anticipate the sale of these assets to be completed no later than June 30, 2007.

On December 30, 2005, we completed the sale of our Edify segment. Under the terms of the agreement, we received approximately $33.5 million in cash. We recorded a gain of $24.4 million, net of tax in 2005. We recorded expenses of approximately $4.4 million in connection with the sale including legal fees and employee severance payments. In 2006, we resolved the working capital adjustment provision of the agreement. We received $554,000 in the second quarter of 2006 bringing the total sale price to $34.1 million. In addition, under the agreement, S1 has contracted to continue to be a reseller of Edify products following the closing of the transaction.

Revenues and income (loss) from discontinued operations are as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Risk and Compliance	$	5,161		$	6,995		$	10,258		$	12,947
Edify		—			8,018			—			15,534

Total		5,161		$	15,013		$	10,258		$	28,481


Pretax income (loss) from discontinued operations:
Risk and Compliance	$	(1,019	)	$	2,175		$	(1,257	)	$	2,659
Davidge		—			(31	)		—			(31	)
Edify		—			599			—			631
Gain (loss) on disposal of Edify		—			—			554			—
Income tax (expense) benefit		(8	)		(144	)		36			(251	)

(Loss) income from discontinued operations	$	(1,027	)	$	2,599		$	(667	)	$	3,008

Assets and liabilities of the discontinued operation as of June 30, 2006 were as follows (in thousands):


Current assets	$	5,901
Property and equipment, net		1,027
Other non-current assets		134
Intangible assets		480
Goodwill		1,564
Current liabilities		(9,669	)
Long-term tax liabilities		(560	)

Net liabilities of discontinued operation	$	(1,123	)

4. GOODWILL AND OTHER INTANGIBLE ASSETS

At June 30, 2006, our other intangible assets consisted of the following:


	Gross		Accumulated
	Carrying Value		Amortization
	(In thousands)
Purchased and acquired technology	$	19,489	$	(11,742	)
Customer relationships		12,000		(4,378	)

Total	$	31,489	$	(16,120	)

We have $0.5 million, net intangible assets related to the Risk and Compliance business that is held for sale.

5. STOCK OPTION PLANS

We maintain certain stock option plans providing for the grant of stock options to officers, directors and employees. The plans provide for 14,980,040 shares of S1 common stock to be reserved for issuance under the plans. Substantially all stock options granted under the plans have ten-year terms and generally vest and become exercisable ratably over four years from the date of grant. At June 30, 2006, 1,196,882 shares were available for future grants under the plans.

A summary of our stock options as of June 30, 2006, and changes during the six months ended June 30, 2006 is presented below:


						Weighted-
				Weighted-		average		Aggregate
				average		Remaining		Intrinsic
	Shares			Exercise		Contractual		Value
	(000)			Price		Life		($000)
Outstanding at December 31, 2005		14,932		$	9.40
Granted		456			4.59
Exercised		(632	)		3.61			$	651
Forfeited/canceled		(973	)		11.31

Outstanding at June 30, 2006		13,783		$	9.37		4.81	$	3,116

Exercisable at June 30, 2006		10,022		$	11.06		3.26	$	1,076

The aggregate intrinsic value for the stock options outstanding and exercisable in the preceding table represents the total pretax value, based on our closing stock price of $4.80 as of June 30, 2006.

Non-vested share activity of our stock options for the six months ended June 30, 2006 is presented below:


	Non-Vested			Weighted-
	Number of			average
	Shares			Grant-Date
	(000)			Fair Value
Non-vested balance at December 31, 2005		4,339		$	3.73
Granted		456		$	2.34
Cancelled		(385	)	$	3.70
Vested		(649	)	$	6.68

Non-vested balance at June 30, 2006		3,761		$	3.05

As of June 30, 2006, $10.0 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 1.4 years. The total fair value of shares vested during the six months ended June 30, 2006 was $4.3 million.

The following table summarizes information about stock options outstanding at June 30, 2006:


				Options Outstanding
				Weighted-				Options Exercisable
				average		Weighted-				Weighted-
		Number		Remaining		average		Number		average
		Outstanding		Contractual		Exercise		Exercisable		Exercise
Range of Exercise Price		(000)		Life		Price		(000)		Price
$	0.95 — 4.00		1,114		5.3	$	3.56		744	$	3.53
	4.01 — 5.00		2,953		8.4		4.22		446		4.52
	5.01 — 7.00		2,610		2.0		6.33		2,366		6.44
	7.01 — 8.50		2,914		4.4		8.04		2,412		8.07
	8.51 — 11.00		648		5.5		9.34		510		9.39
	11.01 — 15.00		695		4.5		13.10		695		13.10
	15.01 — 20.00		2,492		4.0		16.73		2,492		16.73
	20.01 — 97.44		357		2.5		44.78		357		44.67

	0.95 — 97.44		13,783		4.8	$	9.37		10,022	$	11.06

For stock options granted where the exercise price equaled the market price of the stock on the date of grant, the per share weighted-average exercise price was $5.29 and $4.59 and the per share weighted-average fair value was $3.37 and $2.34 for stock options granted during the six months ended June 30, 2005 and 2006, respectively.

6. COMPREHENSIVE (LOSS) INCOME

The components of comprehensive (loss) income are as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net (loss) income	$	(2,111	)	$	2,316		$	(2,555	)	$	3,036
Foreign currency translation adjustment		(226	)		(357	)		(332	)		(1,043	)
Unrealized (loss) income on cash flow hedges		(158	)		91			(223	)		57

Comprehensive (loss) income	$	(2,495	)	$	2,050		$	(3,110	)	$	2,050

7. DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative financial instruments to manage certain exposures to fluctuations in foreign currency to mitigate the risk that changes in exchange rates will adversely affect the eventual dollar cash flows resulting from the hedged transactions with a series of foreign currency options. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments will be offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. We do not hold or issue derivative financial instruments for trading purposes.

We entered into a long-term hosting agreement with a customer wherein S1 will provide the customer with hosting services for a period of approximately four years. Our costs associated with those services are denominated in United States Dollars (USD) and the customer will pay us in British Pounds Sterling (GBP). In this arrangement, ordinary fluctuations in currency exchange rates could adversely impact our profit margin on the hosting agreement. Consequently, during the quarter ended March 31, 2005, we purchased a series of options to exchange USD for GBP at dates throughout the term of the agreement for amounts proportional to the minimum fees to be earned under the contract.

The foreign currency options are designated as cash flow hedges and the options with expiration dates of September 30, 2006 to March 31, 2009 are deemed effective in the period ended June 30, 2006. Any mark-to-market gains or losses on these currency options are included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into sales in the period during which a specific hedged transaction affects earnings.

The foreign currency option with the June 30, 2006 expiration date was designated as ineffective in the period ended June 30, 2006. The change in the value of the June 30, 2006 option was recognized in current earnings. The June 30, 2006 option was out of the money and expired. The premium paid for the June 30, 2006 option resulted in a loss of approximately $14,000.

For the three and six months ended June 30, 2006, we recorded a decrease in Accumulated Other Comprehensive Income (AOCI) of approximately $144,000 and $213,000, respectively related to loss on the foreign currency cash flow hedge. The following table summarizes activity in AOCI related to derivatives designated as cash flow hedges held by S1 during the applicable periods (in thousands):


	Three Months
	Ended
	June 30, 2006
Accumulated derivative net gain as of April 1, 2006	$	35
Net change in fair value of derivatives		(158	)
Net losses reclassified from AOCI into earnings		14

Accumulated derivative net loss as of June 30, 2006	$	(109	)


	Six Months
	Ended
	June 30, 2006
Accumulated derivative net gain as of January 1, 2006	$	104
Net change in fair value of derivatives		(223	)
Net losses reclassified from AOCI into earnings		10

Accumulated derivative net loss as of June 30, 2006	$	(109	)

Financial instruments held as part of the hedging transaction discussed above are recorded at fair value based upon comparable market transactions as quoted by the broker. The fair value and carrying amount of the options totaled $118,000 as of June 30, 2006. Deferred currency option premiums are included in other assets.

8. RESTRUCTURING CHARGES

For restructuring plans undertaken prior to December 31, 2004, the restructuring reserves as of December 31, 2005 and June 30, 2006 and their utilization for the six months ended June 30, 2006 are summarized as follows (in thousands):


	Lease Costs
Balance at December 31, 2005	$	5,800
Amounts utilized through June 30, 2006		(526	)
Change in estimate		(159	)

Balance at June 30, 2006	$	5,115

In 2005, we approved a restructuring plan. The restructuring charges from this plan and the restructuring reserves as of December 31, 2005 and June 30, 2006 and their utilization for the six months ended June 30, 2006 are summarized as follows (in thousands):


	Personnel Costs			Lease Costs			Total
Balance at December 31, 2005	$	4,635		$	5,050		$	9,685


2006 restructuring charge	$	333		$	—		$	333
Amounts utilized		(3,576	)		(1,370	)		(4,946	)
Change in estimate		—			708			708

Balance at June 30, 2006	$	1,392		$	4,388		$	5,780

In the first quarter of 2006, we recorded restructuring charges of $0.3 million for employee termination benefits for employees who were placed on transition plans. In the second quarter of 2006, we adjusted our estimates based on sublease assumptions for certain vacant office space. As a result of this change in estimate of the leases related to previously vacated facilities, we recorded restructuring charges of $0.5 million.

The remaining restructuring reserves at June 30, 2006 relate to future rent expense for vacated facilities, net of sublease income, severance payments to terminated employees and other costs. We expect to make future cash expenditures, net of anticipated sublease income, related to these restructuring activities of approximately $10.9 million, of which we anticipate to pay approximately $4.9 million within the next twelve months. The leases expire on various terms through 2011.

9. CONTINGENCIES

Litigation

Except as noted below, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which S1, or any of its subsidiaries is a party or which their property is subject.

As previously reported, we were involved in litigation with Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the Southern District of New York. The action was filed March 2003 against S1 Corporation, Bank of America Corporation and Bank of America National Association. In March 2006, a jury decided in our favor that we were not infringing and that Tradecard’s patent is invalid. Tradecard has submitted a motion to the Federal District Court for reconsideration of the verdict. If that motion is denied, Tradecard may appeal the jury verdict to the Federal Court of Appeals.

Sale-Leaseback Transaction

In May 2006, we received $2.5 million for computer equipment and software (the “assets”) in a sale-leaseback transaction. In accordance with SFAS No.13, we accounted for this lease as a capital lease. The assets were purchased during first quarter of 2006 and we had recorded $0.2 million of depreciation expense related to the assets. The $0.2 million gain resulting from the transaction was deferred and is being amortized to depreciation expense over the life of the lease.

Guarantees

We typically grant our customers a warranty that guarantees that our product will substantially conform to our current specifications for 90 days from the delivery date. We also indemnify our customers from third party claims of intellectual property infringement relating to the use of our products. Our standard software license agreements contain indemnification clauses that are limited in amount. Pursuant to these clauses, we indemnify and agree to pay any judgment or settlement relating to a claim. We account for these clauses under FASB Staff Position FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” Accordingly, there are no liabilities recorded for these agreements as of June 30, 2006.

10. SEGMENT REPORTING AND MAJOR CUSTOMERS

In the first quarter of 2006, we disaggregated our previously aggregated Financial Institution Segment into two segments, the Enterprise and Postilion segments. Management believes that disaggregating the Financial Institutions segment into the Enterprise and Postilion segments will provide users of financial statements more information to help them to better understand our performance, better assess prospective future net cash flows and make more informed judgments about the company as a whole. In the second quarter of 2006, we reported our Risk and Compliance segment as “held for sale,” reporting their operating results in discontinued operations.

We operate and manage S1 in two business segments: Enterprise and Postilion. The Enterprise segment represents North America retail banking business, global wholesale banking business, and State Farm. The Postilion segment represents the community financial business, global ATM/payments business, and the retail banking business outside of North America.

We evaluate the performance of our operating segments based on their contribution before interest, other income and income taxes, as reflected in the tables presented below for the three and six months ended June 30, 2006 and 2005. We do not use any asset-based metrics to measure the operating performance of our segments.

The following table shows revenues from continuing operations by revenue type for our reportable segments (in thousands):


	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Three Months Ended June 30, 2006:
Enterprise	$	2,591	$	6,353	$	14,207	$	5,079	$	100	$	28,330
Postilion		3,778		4,844		2,743		6,832		212		18,409

Total	$	6,369	$	11,197	$	16,950	$	11,911	$	312	$	46,739


	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Three Months Ended June 30, 2005:
Enterprise	$	3,675	$	5,944	$	15,004	$	3,838	$	89	$	28,550
Postilion		4,376		5,439		2,836		6,045		245		18,941

Total	$	8,051	$	11,383	$	17,840	$	9,883	$	334	$	47,491


	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Six Months Ended June 30, 2006:
Enterprise	$	5,460	$	11,876	$	26,330	$	10,290	$	264	$	54,220
Postilion		6,952		9,978		5,241		13,207		581		35,959

Total	$	12,412	$	21,854	$	31,571	$	23,497	$	845	$	90,179


	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Six Months Ended June 30, 2005:
Enterprise	$	7,173	$	12,335	$	31,230	$	8,144	$	338	$	59,220
Postilion		10,456		10,648		4,991		11,403		299		37,797

Total	$	17,629	$	22,983	$	36,221	$	19,547	$	637	$	97,017

The following table shows operating results for our reportable segments (in thousands):


	Three Months Ended June 30, 2006
	Enterprise			Postilion			Total
Revenues	$	28,330		$	18,409		$	46,739
Operating expenses:
Direct costs		14,148			8,567			22,715
Selling and marketing		3,010			3,673			6,683
Product development		7,890			1,986			9,876
General and administrative		3,376			3,103			6,479
Restructuring costs		330			219			549
Depreciation		1,276			695			1,971
Amortization of other intangible assets		103			224			327

Total operating expenses		30,133			18,467			48,600

Segment operating loss	$	(1,803	)	$	(58	)	$	(1,861	)


	Three Months Ended June 30, 2005
	Enterprise			Postilion		Total
Revenues	$	28,550		$	18,941	$	47,491
Operating expenses:
Direct costs		13,429			8,123		21,552
Selling and marketing		4,490			3,640		8,130
Product development		8,657			1,571		10,228
General and administrative		2,852			3,168		6,020
Depreciation		1,554			821		2,375
Amortization of other intangible assets		103			225		328

Total operating expenses		31,085			17,548		48,633

Segment operating (loss) income	$	(2,535	)	$	1,393	$	(1,142	)


	Six Months Ended June 30, 2006
	Enterprise			Postilion		Total
Revenues	$	54,220		$	35,959	$	90,179
Operating expenses:
Direct costs		27,144			17,023		44,167
Selling and marketing		5,650			6,908		12,558
Product development		15,749			3,734		19,483
General and administrative		6,284			5,911		12,195
Restructuring costs		638			244		882
Depreciation		2,365			1,358		3,723
Amortization of other intangible assets		206			448		654

Total operating expenses		58,036			35,626		93,662

Segment operating (loss) income	$	(3,816	)	$	333	$	(3,483	)


	Six Months Ended June 30, 2005
	Enterprise			Postilion		Total
Revenues	$	59,220		$	37,797	$	97,017
Operating expenses:
Direct costs		27,553			15,665		43,218
Selling and marketing		8,177			6,887		15,064
Product development		17,842			3,550		21,392
General and administrative		5,884			6,767		12,651
Depreciation		3,037			1,656		4,693
Amortization of other intangible assets		206			451		657

Total operating expenses		62,699			34,976		97,675

Segment operating (loss) income	$	(3,479	)	$	2,821	$	(658	)

Currently, we have one major customer in the Enterprise segment (defined as any customer who individually contributes more than 10% of total revenues). We derived 25% of our total revenues from State Farm Mutual Automobile Insurance Company during the three months ended June 30, 2005 and 2006. We derived 25% of our total revenues from State Farm Mutual Automobile Insurance Company during the six months ended June 30, 2005 and 2006. We derived 41% of our Enterprise segment revenues from State Farm Mutual Automobile Insurance Company during the three months ended June 30, 2005 and 2006, respectively. We derived 41% and 42% of our Enterprise segment revenues from State Farm Mutual Automobile Insurance Company during the six months ended June 30, 2005 and 2006, respectively.

11. NET (LOSS) INCOME PER COMMON SHARE

We calculate earnings per share using the two-class method during periods which we recorded income from continuing operations. For periods which we record a loss from continuing operations, we calculate net loss per share as the net loss during the period divided by the weighted average number of common shares outstanding during the period as the effect of applying the two-class method would be anti-dilutive.

Net income has been allocated to the common and preferred stock based on their respective rights to share in dividends. Net losses have not been allocated to preferred stock, as there is no contractual obligation for the holders of the participating preferred stock to share in our losses. We excluded the preferred convertible stock from diluted earnings per share under the if-converted method because the effect is anti-dilutive.

Diluted earnings per share is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common stock that would share in the earnings of the Company. Because of our loss from continuing operations in the second quarter of 2006, the issuance of additional shares of common stock through the exercise of stock options and the conversion of preferred stock were excluded as they would have an anti-dilutive effect on our loss per share for that period.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(in thousands, except per share data)
Basic earnings per share:
(Loss) income from continuing operations	$	(1,084	)	$	(283	)	$	(1,888	)	$	28
Amount allocated to participating preferred stockholders		—			—			—			—

(Loss) income from continuing operations available to common stockholders — basic	$	(1,084	)	$	(283	)	$	(1,888	)	$	28


Weighted average common shares outstanding		70,959			70,191			70,692			70,391
Basic (loss) income from continuing operations per share	$	(0.02	)	$	(0.01	)	$	(0.03	)	$	0.00

Diluted earnings per share:
(Loss) income from continuing operations	$	(1,084	)	$	(283	)	$	(1,888	)	$	28
Amount allocated to participating preferred stockholders		—			—			—			—

(Loss) income from continuing operations available to common stockholders — diluted	$	(1,084	)	$	(283	)	$	(1,888	)	$	28


Weighted average common shares outstanding		70,959			70,191			70,692			70,391
Weighted average effect of common stock equivalent
Stock options		289			681			201			1,179
Convertible preferred stock		1,070			1,070			1,070			—

Weighted average diluted shares outstanding		72,318			71,942			71,963			71,570
Diluted (loss) income from continuing operations per share	$	(0.02	)	$	(0.01	)	$	(0.03	)	$	0.00

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

This quarterly report contains forward-looking statements and information relating to our subsidiaries and us. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on the beliefs of management as well as assumptions made using information currently available to management. Because these statements reflect the current views of management concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. You are urged to read the risk factors described in our Annual Report on Form 10-K as amended for the year ended December 31, 2005, as filed with the Securities and Exchange Commission, as well as the risk factors discussed under Item 1A of Part II of this Form 10-Q. Except as required by law, we undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes appearing elsewhere herein and our Annual Report on Form 10-K as amended for the year ended December 31, 2005.

Overview

We operate and manage S1 in two business segments: Enterprise and Postilion. The Enterprise segment represents North America retail banking solutions and global wholesale banking solutions, including State Farm. The Postilion segment represents the community financial business, global ATM/payments business, and the retail banking business outside of North America.

We sell our solutions primarily to traditional financial services providers, such as banks and insurance companies, as well as non-traditional financial providers, such as retailers. Our solutions address the needs of small, mid-sized and large financial organizations. We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring revenue from support and maintenance as well as from hosting revenue related to hosting applications sold to customers in our data center. We also generate recurring revenues by charging our customers a periodic fee for term licenses including the right-to-use software and receive maintenance and support for a specified period of time. In discussions with our customers and investors, we use the term “subscription” as being synonymous with a term license. We intend to primarily license Enterprise Suite of Products, Lending, Foreign Exchange and our suite of Community and Regional products and future versions as well as certain other applications primarily on a subscription basis wherein revenue will be recognized evenly over the term of the contract.

We sell our solutions to small, mid-sized and large financial organizations in four geographic regions: (i) the Americas region, (ii) the Europe and Middle East (EME) region, (iii) the Asia-Pacific (APAC) region and (iv) the Africa region. Our S1 Enterprise solutions target banks, credit unions and insurance companies. We have over 3,000 financial institution customers, the majority of which are located in the United States.

Throughout 2006, we continued to invest in the development of the integrated S1 Enterprise Platform as the technology foundation for the S1 Enterprise family of products. The S1 Enterprise Platform includes the following applications: Internet based operations including retail/personal banking, small business banking, cash management and trade finance. In addition the following full service branch applications are offered: teller, sales and service platform, call center, voice banking and analytics. These can be sold as stand-alone applications or as an integrated suite of products. In 2006, we have been focusing on delivering quality solutions on the S1 Enterprise Platform. We released our Enterprise 3.5 products from development in a Managed Introduction Program (“MIP”) in February 2006. The MIP is designed to enable the entire organization to work with a limited number of customers in pre-product and live production environments. The MIP is expected to continue throughout 2006 and will include all of the released Enterprise applications. Additionally, we will invest in our next-generation community banking solution sold by our Postilion segment which will include our

packaged Internet and voice banking solutions, and the payments engine of our Postilion payments solution.

Recent Developments

On May 3, 2006, we announced that we reached a definitive agreement with a group of investors led by Ramius Capital Group, L.L.C. (“Ramius”) to settle their dispute relative to the nomination of certain directors to the S1 Board of Directors at the 2006 Annual Meeting. As a result of this settlement, Ramius agreed to withdraw the notice of its intention to nominate directors and make other shareholder proposals at the Company’s 2006 Annual Meeting. Additionally, Jeffrey C. Smith, a managing director of Ramius, joined the S1 Board of Directors. The Company also agreed to amend its Bylaws to restore the right of stockholders owning 10 percent of the outstanding shares of common stock to call a special meeting.

On May 3, 2006, we also announced that we retained Friedman, Billings Ramsey Group to assist us in evaluating strategic alternatives to maximize stockholder value. There are various uncertainties and risks relating to our exploration of strategic alternatives, including the following: (i) the exploration of strategic alternatives may distract management and disrupt operations, which could have a material adverse effect on our operating results; (ii) we may not be able to successfully achieve the benefits of any strategic alternative undertaken by us; (iii) the process of exploring strategic alternatives may be time consuming and expensive; (iv) the market prices of our common stock could be highly volatile as we explore strategic alternatives; and (v) perceived uncertainties as to our future direction may make it difficult to attract and retain employees and customers. There can be no assurance that the exploration of strategic alternatives will result in a transaction. We do not intend to disclose developments with respect to the exploration of strategic alternatives unless and until our Board of Directors has approved a specific transaction or course of action.

Recent Accounting Pronouncements

On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” (“SFAS 123R”) which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. SFAS 123R requires all share-based payments to employees during the period to be based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Under SFAS No. 123R, the pro forma disclosures previously permitted under SFAS No. 123 is no longer an alternative to financial statement recognition. Effective January 1, 2006, we have adopted SFAS No. 123R using the “modified prospective” method. Under this method, the compensation expense recognized during the three months ended March 31, 2006 included compensation expense for share based compensation granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for share-based compensation granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. We did not change our method of attributing the value of stock-based compensation to expenses. Under both SFAS No. 123 and SFAS No. 123R the expense is amortized on a straight-line basis over the options vesting period. Prior period and pro forma results have not been restated. As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

In May 2005, the FASB issued SFAS No. 154. “Accounting Changes and Error Correction – A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1, 2006.

In June 2006, the FASB issued Financial Interpretation 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with Financial Accounting Statement No. 109, “Accounting for Income Taxes.” The interpretation is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 on our financial statements.

Stock based compensation recognized in the financial statements under SFAS No. 123R for the six months ended June 30, 2006 was $2.8 million which consisted of stock-based compensation expense related to employee stock options. Under the previous standards this expense was only disclosed in the pro forma information in the notes to the financial statements.

Critical Accounting Policies and Estimates

For a complete list of our critical accounting policies and estimates, please refer to the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K as amended for the year ended December 31, 2005. An addition to that list is provided below.

Determination of the fair value of employee stock options. We are required to determine the fair value of stock options when they are granted to our employees. Historically, the pro-forma expense was presented in a footnote. However, beginning January 1, 2006, this expense was recorded in our statement of operations due to the adoption of SFAS No. 123R, “Share-Based Payment”. The fair value is estimated at the date of grant using a Black-Scholes option pricing model. In determining the fair value, management makes certain estimates related primarily to the expected life of the option, the volatility of our stock, the risk-free interest rate and the estimated forfeiture rate. These assumptions affect the estimated fair value of the option. As such, these estimates will affect the compensation expense we record in future periods. These assumptions are subjective and generally require significant analysis and judgment. Some of the assumptions will be based on external data, while some assumptions will be derived from our historical experience with share-based payments. We currently estimate expected life using our historical exercise and post-vested termination activity. We currently estimate volatility by considering our historical stock volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with the remaining term approximately the same as the expected life used as the input to the Black-Scholes model. We estimated the forfeitures using a weighted average historical forfeiture rate. Our estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimates.

Comparison of the Three Months Ended June 30, 2006 and 2005

Revenues. The following table sets forth our revenue data for the three months ended June 30, 2006 and 2005 (in thousands).


	Software		Support and		Professional
	Licenses		Maintenance		Services		Data Center		Other		Total
Three Months Ended June 30, 2006:
Enterprise	$	2,591	$	6,353	$	14,207	$	5,079	$	100	$	28,330
Postilion		3,778		4,844		2,743		6,832		212		18,409

Total	$	6,369	$	11,197	$	16,950	$	11,911	$	312	$	46,739


	Software		Support and		Professional
	Licenses		Maintenance		Services		Data Center		Other		Total
Three Months Ended June 30, 2005:
Enterprise	$	3,675	$	5,944	$	15,004	$	3,838	$	89	$	28,550
Postilion		4,376		5,439		2,836		6,045		245		18,941

Total	$	8,051	$	11,383	$	17,840	$	9,883	$	334	$	47,491

Total revenues decreased by $0.8 million or 2%, to $46.7 million for the three months ended June 30, 2006 compared to $47.5 million for the same period in 2005.

Since 2005, we have been licensing the Enterprise suite of products, Lending and our suite of Community and Regional products and future versions as well as certain other applications primarily on a subscription basis. Subscription license revenue is recognized evenly over the term of the contract which is typically between 12 and 60 months whereas perpetual license revenue is generally recognized upon execution of the contract and delivery or on a percentage of completion basis over the installation period. Subscription, or term, licenses combine the right to use the licensed software and the right to receive support and maintenance and unspecified enhancements into one periodic fee and typically do not transfer the right to use at the end of its initial term. During 2006, we expect to continue to recognize perpetual license revenue through sales of our legacy products, including add-on sales to customers with existing perpetual licenses, as well as through our reseller channels. As the ratio of subscription licenses sold increases, the amount of license revenue for any given period could decrease which could also decrease earnings. As subscription licenses include the right to receive support and maintenance, growth in subscription licenses will tend to diminish support and maintenance revenues over time. We believe the long term benefits of recurring subscription revenue outweigh any temporary impact on license revenue and earnings.

Our Enterprise segment generated revenues of $28.3 million for the quarter ended June 30, 2006 compared with $28.6 million for the same period in 2005. The decline in revenues from our Enterprise business during the second quarter of 2006 is primarily due to a delay in the release of the next version of our Enterprise product and a slow down in the sales process after we announced that the company is exploring strategic alternatives, which in turn discouraged some customers from entering into long term commitments with us. This was partially offset by an increase in data center revenues. Software license revenues for our Enterprise segment were $2.6 million for the three months ended June 30, 2006, a decrease of $1.1 million from the same period in 2005. Support and maintenance revenues for our Enterprise segment were $6.4 million for the three months ended June 30, 2006 as compared to $5.9 million for the same period in 2005. Professional services revenues for our Enterprise segment were $14.2 million for the three months ended June 30, 2006, a decrease of $0.8 million from the same period in 2005. This decrease is principally attributable to the completion of several projects which have not been replaced with new projects. Services revenue in any one quarter can be impacted by one or two large customer projects and therefore can increase or decrease based on the projects. Data center revenues for our Enterprise segment were $5.1 million for the second quarter of 2006, an increase of $1.3 million from $3.8 million for the second quarter of 2005. The increase resulted from increases in the number of hosted customers and an increase in usage. In addition a large international customer went live in the first quarter of 2006 in our global data center. We released the next version of our Corporate Banking product at the end of the second quarter. Therefore, we expect license revenues to increase during the second half of the year.

Revenues for our Postilion segment were $18.4 million for the three months ended June 30, 2006 compared with $18.9 million for the same period in 2005. Software license revenues for our Postilion segment were $3.8 million for the three months ended June 30, 2006, a decrease of $0.6 million from the same period in 2005 due to the transition to subscription licenses in our community and regional business. This decrease is partly a result of a slow down in the sales process after we announced that the company is exploring strategic alternatives, which in turn discouraged some customers from entering into long term commitments with us. Support and maintenance revenues for the Postilion segment were $4.8 million for the three months ended June 30, 2006, a decrease of $0.6 million from the same period in 2005. As subscription licenses include the right to receive support and maintenance, growth in subscription licenses will tend to diminish support and maintenance revenues over time. The Postilion segment recorded $2.7 million for professional services revenues during the second quarter of 2006, a decrease of $0.1 million from $2.8 million for the second quarter of 2005. Data center revenues for our Postilion segment were $6.8 million for the second quarter of 2006, an increase of $0.8 million from $6.0 million for the second quarter of 2005. The increase resulted from increases in the number of hosted customers, including a large international customer that went live in the first quarter. As we add hosted customers on our Postilion products and our existing customer base grows, we expect data center revenues to increase on a sequential quarter basis throughout 2006.

Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenue fluctuates based on the mix of products and services sold and is not typical in our sales arrangements. The related cost of the hardware sold is included in “cost of other revenue” as the hardware is delivered. There is only minimal gross margin associated with other revenue.

Direct Costs. Direct costs increased by $1.2 million to $22.7 million for the three months ended June 30, 2006 from the same period in 2005. As a percentage of revenues, direct costs, excluding depreciation, were 49% and 45% for the three months ended June 30, 2006 and 2005, respectively.

Direct costs exclude charges for depreciation of property and equipment.

Cost of software licenses for our products sold includes the cost of software components that we license from third parties as well as the amortization of purchased technology. In general, the cost of software licenses for our products is minimal because we internally develop most of the software components, the cost of which is reflected in product development expense as it is incurred. The cost of software licenses could increase in future periods as we license and install more of our new S1 Enterprise products. These products include software components that we license from third parties. However, cost of software licenses will continue to vary with the mix of products sold. Overall, software license costs were 17% and 18% of software license revenues for the second quarter of 2006 and 2005, respectively.

Costs of professional services, support and maintenance consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services, support and maintenance was $15.8 million for the three months ended June 30, 2006, an increase of $0.2 million from $15.6 million for the same period in 2005. This increase is primarily stock based compensation expense of $0.1 million. As a percentage of revenue, costs of professional services, support and maintenance were 56% and 54% of related revenues for the second quarter of 2006 and 2005, respectively. This increase is attributable to lower revenues.

Costs of data center consist of personnel costs, facility costs and related infrastructure costs to support our data center business. A portion of the data center direct costs are fixed. As such, the incremental costs to add customers and/or users is minimal. However, direct data center costs increased $1.4 million to $5.8 million for the three months ended June 30, 2006 from $4.4 million for same period in 2005. As a percentage of data center revenues, data center costs excluding depreciation were 48% and 45% for the three months ended June 30, 2006 and 2005, respectively. This increase is attributable to an increase in contractors to support the migration of new platforms and security initiatives. We expect data center costs to be approximately 45% to 50% of data center revenues for the remainder of 2006.

Selling and Marketing Expenses. Total selling and marketing expenses decreased by $1.4 million to $6.7 million for the three months ended June 30, 2006 from $8.1 million for the same period in 2005. This decrease is primarily attributable to a reduction in personnel related expenses as a result of lower headcount from the reduction in force during the second half of 2005. This was partially offset by stock based compensation expense of $0.3 million.

Product Development Expenses. Total product development expenses decreased by $0.3 million to $9.9 million for the three months ended June 30, 2006 from $10.2 million for the same period in 2005. This decrease is primarily attributable to a reduction in personnel related expenses as a result of lower headcount from the reduction in force during the second half of 2005. This was partially offset by stock based compensation expense of $0.2 million. As a percentage of revenues, product development expenses were 21% and 22% in the second quarter of 2006 and 2005.

Historically we have not capitalized software development costs because of the insignificant amount of costs incurred between technological feasibility and general customer release. However, if the amount of time between the completion of beta testing and general customer release lengthens, we may be required to capitalize certain software development costs in the future.

General and Administrative Expenses. General and administrative expenses increased by $0.5 million to $6.5 million for the three months ended June 30, 2006 from $6.0 million for the same period in 2005. As a percentage of revenues, general and administrative expenses were 14% and 13% for the three months ended June 30, 2006 and 2005, respectively. This increase is primarily attributable to $0.7 million of costs related to the proxy contest and ultimate settlement agreement with the shareholder group led by Ramius and stock based compensation expense of $0.5 million. This was partially offset by a reduction in personnel related expenses as a result of lower headcount from the reduction in force during the second half of 2005.

Depreciation. Depreciation was $2.0 million and $2.4 million for the three months ended June 30, 2006 and 2005, respectively.

Amortization of Other Intangible Assets. Amortization of other intangible assets remained at $0.3 million for each of the three months ended June 30, 2006 and 2005. Amortization expense is expected to be approximately $0.3 million each

quarter for the remainder of 2006.

Interest and Other Income, Net. Interest and other income net was $1.0 million and $0.8 million for the three months ended June 30, 2006 and 2005, respectively. Interest income increased due to higher average balances for cash and short-term investments as well as higher interest rates.

Income Tax (Expense) Benefit. We recorded income tax expense of $263,000 and a benefit of $43,000 for the three months ended June 30, 2006 and 2005, respectively.

Although we have fully reserved net deferred tax assets of approximately $175.8 million as of December 31, 2005 primarily related to our net operating loss carryforwards (NOLs) and tax credit carryforwards, from time-to-time we are required to record an income tax provision in periods:

	•		for tax expense in certain subsidiaries or jurisdictions for which do not have NOLs to utilize;

	•		in the United States due to limitations on the use of our federal NOLs for alternative minimum tax purposes which will be paid in cash; or

	•		if there are NOLs that were acquired as part of a business combination, upon which we placed a valuation allowance at acquisition date. This results in non-cash income tax expense as goodwill is reduced and the valuation allowance is released.

We incurred foreign income tax expense in certain European countries in the second quarter of 2006 and 2005. In 2006 and 2005, we recorded alternative minimum tax expense for components of our domestic operations as a result of limitations on the use of our federal NOLs. In 2006, some components of our domestic operations incurred income tax expense at regular statutory rates because they are not included in our consolidated federal income tax return and therefore do not benefit from our federal NOLs. There was minimal income tax expense related to pre-acquisition NOLs for the three months ended June 30, 2006.

APB Opinion 28 requires that companies report income taxes on interim periods’ financial statements using an estimated annual effective tax rate. Using this method income taxes are computed at the end of each interim period based on the best estimate of the effective rate expected to be applicable for the full fiscal year. Income forecasts prepared by the Company do not reflect the distinct taxable jurisdictions required to utilize this approach. Due to the break-even nature of our quarterly operational results and various domestic and foreign jurisdictions that have and do not have NOLs available, it is difficult to produce jurisdictionally accurate income forecast. Therefore, a reliable estimate of the annual effective rate cannot be made and the Company uses the actual effective tax rate for the year-to-date as the best estimate for the annual effective rate.

(Loss) income from discontinued operations. In the second quarter of 2006, management approved a plan to sell our Risk and Compliance business. We are accounting for the planned divestiture as a business “held for sale.” As a result we have:

	•		presented the total assets of the Risk and Compliance business on one line as “assets held for sale” in our consolidated balance sheet as of June 30, 2006;

	•		presented the total liabilities of the Risk and Compliance business on one line as “liabilities of business held for sale” in our consolidated balance sheet as of June 30, 2006;

	•		presented the results of operations for the Risk and Compliance business as “(loss) income from discontinued operations, net of tax” on one line in our consolidated statements of operations for all periods presented; and

	•		ceased depreciation of fixed assets and amortization of intangible assets associated with the Risk and Compliance business from July 1, 2006 forward;

	•		Removed the Risk and Compliance business from segment results.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” establishes criteria for determining when a business to be sold can be classified as held for sale. The criteria, all of which must be met, are:

	•		authorized management has committed to a plan to sell the business;

	•		the business is available for immediate sale in its present condition;

	•		an active program to locate a buyer and other actions required to complete the plan to sell have been initiated;

	•		the sale of the business is probable and expected to be complete within one year;

	•		the business is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

	•		actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Although there is no certainty that we will sell the Risk and Compliance business prior to July 1, 2007 or at a price which we believe represents the business’ fair value, we believe we met these criteria as of June 30, 2006 and as of the filing date of this document. If subsequently, we determined that we did not meet these criteria, we would be required to include the revenues and expenses, assets and liabilities of this business together with those that comprise our continuing operations.

In some cases, the separation of the assets and liabilities and results of operations from our continuing operations requires us to make estimates and/or assumptions about the classification of accounts and transactions between continuing and discontinued operations. Accordingly, the results of operations of the continuing and discontinued operations for the periods presented in this report are not necessarily indicative of what they would have been if the Risk and Compliance business had been sold prior to those periods, nor are the results of operations of the continuing and discontinued operations for the periods presented in this report representative of what they will be in future periods on a stand-alone basis.

We are also required to present the net assets held for sale at the lower of their carrying value or fair value. Accordingly, if we believed that the net proceeds from the sale of the business would be less than the net book value of the business held for sale, we would be required to record a charge to reflect the business at a carrying value equal to its estimated fair value. We believe the fair value of the Risk and Compliance business is greater than the carrying value.

We recorded a loss from discontinued operations of $1.0 million, including $0.1 million in stock based compensation expense during the three months ended June 30, 2006 as compared to income of $2.6 million for the three months ended June 30, 2005. (Loss) income from discontinued operations consisted of (in thousands):


	Three Months Ended June 30,
	2006			2005
(Loss) income from Risk and Compliance	$	(1,019	)	$	2,175
Loss from Davidge		—			(31	)
Income from Edify		—			599
Income tax expense		(8	)		(144	)

Total	$	(1,027	)	$	2,599

Comparison of the Six Months Ended June 30, 2006 and 2005

Revenues. The following table sets forth our revenue data for the six months ended June 30, 2006 and 2005 (in thousands).


	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Six Months Ended June 30, 2006:
Enterprise	$	5,460	$	11,876	$	26,330	$	10,290	$	264	$	54,220
Postilion		6,952		9,978		5,241		13,207		581		35,959

Total	$	12,412	$	21,854	$	31,571	$	23,497	$	845	$	90,179


	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Six Months Ended June 30, 2005:
Enterprise	$	7,173	$	12,335	$	31,230	$	8,144	$	338	$	59,220
Postilion		10,456		10,648		4,991		11,403		299		37,797

Total	$	17,629	$	22,983	$	36,221	$	19,547	$	637	$	97,017

Total revenues decreased by $6.8 million or 7%, to $90.2 million for the six months ended June 30, 2006 compared to $97.0 million for the same period in 2005.

Our Enterprise segment generated revenues of $54.2 million for the six months ended June 30, 2006 compared with $59.2 million for the same period in 2005. The decline in revenues from our Enterprise business during the first six months of 2006 is primarily due to a delay in the release of the next version of our Enterprise product and a slow down in the sales

process after we announced that the company is exploring strategic alternatives, which in turn discouraged some customers from entering into long term commitments with us. This was partially offset by an increase in data center revenues. Software license revenues for our Enterprise segment were $5.5 million for the six months ended June 30, 2006, a decrease of $1.7 million from the same period in 2005. Support and maintenance revenues for our Enterprise segment were $11.9 million for the six months ended June 30, 2006 as compared to $12.3 million for the same period in 2005. As subscription licenses include the right to receive support and maintenance, growth in subscription licenses will tend to diminish support and maintenance revenues over time. Professional services revenues for our Enterprise segment were $26.3 million for the six months ended June 30, 2006, a decrease of $4.9 million from the same period in 2005. This decrease is principally attributable to the decrease in professional services revenues from our largest customer and the completion of several projects which have not been replaced with new projects. Services revenue in any one quarter can be impacted by one or two large customer projects and therefore can increase or decrease based on the projects. Data center revenues for our Enterprise segment were $10.3 million for the first six months of 2006, an increase of $2.2 million from $8.1 million for the first quarter of 2005. The increase resulted from increases in the number of hosted customers and an increase in usage. In addition a large international customer went live in the first quarter of 2006 in our global data center.

Revenues for our Postilion segment were $36.0 million for the six months ended June 30, 2006 compared with $37.8 million for the same period in 2005. Software license revenues for our Postilion segment were $7.0 million for the six months ended June 30, 2006, a decrease of $3.5 million from the same period in 2005 due to a decrease in software license revenues for our Mosaic business, as well as the transition to subscription licenses in our community and regional business. This decrease is partly a result of a slow down in the sales process after we announced that the company is exploring strategic alternatives, which in turn discouraged some customers from entering into long term commitments with us. Support and maintenance revenues for the Postilion segment were $10.0 million for the six months ended June 30, 2006, a decrease of $0.7 million from the same period in 2005. The Postilion segment recorded $5.2 million for professional services revenues during the first six months of 2006, an increase of $0.2 million from $5.0 million for the first six months of 2005. Data center revenues for our Postilion segment were $13.2 million for the first six months of 2006, an increase of $1.8 million from $11.4 million for the first six months of 2005. The increase resulted from increases in the number of hosted customers, including a large international customer that went live in the first quarter. As we add hosted customers on our Postilion products and our existing customer base grows, we expect data center revenues to increase on a sequential quarter basis throughout 2006.

Direct Costs. Direct costs increased by $0.9 million to $44.2 million for the six months ended June 30, 2006 from the same period in 2005. As a percentage of revenues, direct costs, excluding depreciation, were 49% and 45% for the six months ended June 30, 2006 and 2005, respectively.

Direct costs exclude charges for depreciation of property and equipment.

Cost of software licenses for our products sold includes the cost of software components that we license from third parties as well as the amortization of purchased technology. In general, the cost of software licenses for our products is minimal because we internally develop most of the software components, the cost of which is reflected in product development expense as it is incurred. The cost of software licenses could increase in future periods as we license and install more of our new S1 Enterprise products. These products include software components that we license from third parties. However, cost of software licenses will continue to vary with the mix of products sold. Overall, software license costs were 17% and 15% of software license revenues for the first six months of 2006 and 2005, respectively.

Costs of professional services, support and maintenance consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services, support and maintenance was $30.5 million for the six months ended June 30, 2006, a decrease of $0.5 million from $31.0 million for the same period in 2005. This decrease is primarily attributable to a reduction in headcount in our Enterprise business, offset in part by stock based compensation expense of $0.3 million. As a percentage of revenue, costs of professional services, support and maintenance were 57% and 52% of related revenues for the first six months of 2006 and 2005, respectively. This increase is attributable to lower revenues.

Costs of data center consist of personnel costs, facility costs and related infrastructure costs to support our data center business. A portion of the data center direct costs are fixed. As such, the incremental costs to add customers and/or users is minimal. However, direct data center costs increased $1.9 million to $11.2 million for the six months ended June 30, 2006 from $9.3 million for same period in 2005. As a percentage of data center revenues, data center costs excluding depreciation were 48% for the six months ended June 30, 2006 and 2005. This increase is attributable to an increase in contractors to support the migration of new platforms and security initiatives. We expect data center costs to be approximately 45% to 50% of data center revenues for the remaining of 2006.

Selling and Marketing Expenses. Total selling and marketing expenses decreased by $2.5 million to $12.6 million for the six months ended June 30, 2006 from $15.1 million for the same period in 2005. This decrease is primarily attributable to a reduction in personnel related expenses as a result of lower headcount from the reduction in force during the second half of 2005. This was partially offset by stock based compensation expense of $0.8 million.

Product Development Expenses. Total product development expenses decreased by $1.9 million to $19.5 million for the six months ended June 30, 2006 from $21.4 million for the same period in 2005. This decrease is primarily attributable to a reduction in personnel related expenses as a result of lower headcount from the reduction in force during the second half of 2005. This was partially offset by stock based compensation expense of $0.6 million. As a percentage of revenues, product development expenses were 22% during the first six months of 2006 and 2005.

General and Administrative Expenses. General and administrative expenses decreased by $0.5 million to $12.2 million for the six months ended June 30, 2006 from $12.7 million for the same period in 2005. As a percentage of revenues, general and administrative expenses were 14% and 13% for the six months ended June 30, 2006 and 2005, respectively. This decrease is primarily attributable to a reduction in personnel related expenses as a result of lower headcount from the reduction in force during the second half of 2005. This was partially offset by $0.7 million of costs related to the proxy contest and ultimate settlement agreement with the shareholder group led by Ramius Capital Group, L.L.C. and stock based compensation expense of $1.0 million.

Depreciation. Depreciation was $3.7 million and $4.7 million for the six months ended June 30, 2006 and 2005, respectively.

Amortization of Other Intangible Assets. Amortization of other intangible assets remained at $0.7 million for each of the six months ended June 30, 2006 and 2005. Amortization expense is expected to be approximately $0.3 million each quarter for the remainder of 2006.

Interest and Other Income, Net. Interest and other income net was $2.2 million and $1.0 million for the six months ended June 30, 2006 and 2005, respectively. Interest income increased due to higher average balances for cash and short-term investments as well as higher interest rates.

Income Tax Expense. We recorded income tax expense of $654,000 and $329,000 for the six months ended June 30, 2006 and 2005, respectively.

We incurred foreign income tax expense in certain European countries in the first six months of 2006 and 2005. In 2006 and 2005, we recorded alternative minimum tax expense for components of our domestic operations as a result of limitations on the use of our federal NOLs. In 2006, some components of our domestic operations incurred income tax expense at regular statutory rates because they are not included in our consolidated federal income tax return and therefore do not benefit from our federal NOLs. Approximately $51,000 of our income tax expense in 2006 resulted from the release of the valuation allowance against pre-acquisition NOLs and does not represent anticipated cash taxes to be paid.

(Loss) income from discontinued operations. We recorded a loss from discontinued operations of $667,000,

including $0.2 million in stock based compensation expense during the first six months of 2006 as compared to income of $3.0 million for the six months ended June 30, 2005. (Loss) income from discontinued operations consisted of (in thousands):


	Six Months Ended June 30,
	2006			2005
(Loss) income from Risk and Compliance	$	(1,257	)	$	2,659
Loss from Davidge		—			(31	)
Income from Edify		—			631
Gain on disposal of Edify		554			—
Income tax benefit (expense)		36			(251	)

Total	$	(667	)	$	3,008

Liquidity and Capital Resources

The following tables show information about our cash flows during the six months ended June 30, 2006 and 2005 and selected balance sheet data as of June 30, 2006 and December 31, 2005:


	Six Months Ended June 30,
	2006			2005
	(In thousands)
Net cash provided by operating activities before changes in operating assets and liabilities	$	8,091		$	11,657
Change in operating assets and liabilities		(11,811	)		(9,754	)

Net cash (used in) provided by operating activities		(3,720	)		1,903
Net cash (used in) provided by investing activities		(6,223	)		9,400
Net cash provided by (used in) financing activities		4,018			(4,071	)
Effect of exchange rates on cash and cash equivalents		44			(474	)

Net (decrease) increase in cash and cash equivalents	$	(5,881	)	$	6,758


	As of
	June 30, 2006		December 31, 2005
	(In thousands)
Cash and cash equivalents	$	79,227	$	85,108
Short term investments		32,337		44,170
Working capital		110,165		106,250
Total assets		339,618		344,523
Total stockholders’ equity		254,370		252,386

Operating Activities. During the six months ended June 30, 2006, cash used in operations was $3.7 million compared to cash provided by operations of $1.9 million for same period in 2005. The decrease in net cash flows from operating activities generally reflects the effects of changes in operating assets and liabilities. Changes in operating assets and liabilities, especially trade accounts receivable, trade accounts payable and accrued expenses, are generally the result of timing differences between the collection of fees billed and payment of operating expenses.

Cash used in operations for the six months ended June 30, 2006 included the effects of:

	•		our net loss of $2.6 million;

	•		depreciation and amortization expense of $6.5 million;

	•		gain on the disposal of Edify of $0.6 million;

	•		provision of doubtful accounts receivable and billing adjustments of $1.9 million;

	•		stock based compensation expense of $2.8 million;

	•		a decrease in accrued expenses and other liabilities of $9.7 million;

	•		an increase of $13.8 million in accounts receivable due to the timing of revenue recognized and billing terms on fixed price implementation projects during the quarter;

	•		a $11.1 million increase in deferred revenues resulting from annual billing of maintenance and subscription fees; and

•

changes in other operating assets and liabilities of $0.6 million.

Cash provided by operations for the six months ended June 30, 2005 included the effects of:

	•		our net income of $3.0 million;

	•		depreciation and amortization expense of $7.6 million;

	•		provision of doubtful accounts receivable and billing adjustments of $1.0 million;

	•		a decrease in accrued expenses and other liabilities of $14.5 million, approximately $4.7 million related to the payment of annual expenses, including annual employee bonuses and incentive pay;

	•		an increase of $4.4 million in accounts receivable due to the timing of revenue recognized and billing terms on fixed price implementation projects during the quarter

	•		a $8.3 million increase in deferred revenues resulting from annual billing of maintenance and subscription fees; and

	•		changes in other operating assets and liabilities of $0.8 million.

Investing Activities. Cash used in investing activities was $6.2 million for the six months ended June 30, 2006 compared to cash provided by investing activities of $9.4 million in the same period in 2005.

In the first six months of 2006, we:

	•		paid $14.0 million to the sellers of Mosaic in settlement of the earn-out;

	•		converted $11.8 million, net, from short-term investments to cash and cash equivalents;

	•		received $0.6 million working capital adjustment from the sale of Edify; and

	•		purchased $4.6 million of property and equipment.

In the first six months of 2005, we:

	•		converted $12.6 million, net, from cash and cash equivalents to short-term investments; and

	•		purchased $3.2 million of property and equipment.

Financing Activities. Cash provided by financing activities was $4.0 million for the six months ended June 30, 2006 compared to cash used in financing activities of $4.1 million in same period in 2005.

In the first six months of 2006, we:

	•		received $2.3 million from the sale of common stock under our employee stock option plans; and

	•		received $2.5 million from a sale lease back transaction ; and

	•		paid $0.8 million for capital lease obligations.

In the first six months of 2005, we:

	•		received $0.3 million from the sale of common stock under our employee stock option plans; and

	•		repurchased $3.4 million of our common stock; and

	•		paid $1.0 million for capital lease obligations.

We believe that our expected cash flows from operations together with our existing cash and short term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or issue debt securities or establish a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. The addition of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure that financing will be available in amounts or on terms acceptable to us, if at all.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk were included in Item 7A of the Company’s 2005 Annual Report on Form 10-K as amended. With the exception of the long term contract described below, there have been no significant changes in our market risk from December 31, 2005.

In general we do not use financial instruments to hedge our foreign exchange exposure because the effect of the foreign exchange rate fluctuations are not material. We entered into a long-term hosting agreement with a customer wherein S1 will provide the customer with hosting services for a period of approximately four years. Our costs associated with those services are denominated in United States Dollars (USD) and the customer will pay us in British Pounds Sterling (GBP). In this arrangement, ordinary fluctuations in currency exchange rates could adversely impact our profit margin on the hosting agreement. Consequently, during the quarter ended March 31, 2005, we purchased a series of options to exchange USD for GBP at dates throughout the term of the agreement for amounts proportional to the minimum fees under the contract. As of June 30, 2006, the fair value of these options was $0.1 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in within the time periods specified in Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring that information required to be disclosed in our Exchange Act reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2006, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors

The following discussion supplements the Risk Factors in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2005.

You should consider carefully the following risks. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could decline, and you may lose all or a part of the money you paid to buy our common stock.

Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price of our common stock

Our quarterly operating results have fluctuated significantly to date. If we fail to meet the expectations of securities analysts or investors as a result of any future fluctuations in our quarterly operating results, the market price of our common stock would likely decline. We may experience fluctuations in future quarters because:

§		we cannot accurately predict the number and timing of contracts we will sign in a period, in part because the budget constraints and internal review processes of existing and potential customers are not within our control;

§		as we transition from selling our financial institutions products on a perpetual license to a term or subscription license, we cannot accurately predict how long it will take to complete this transition or the mix of perpetual licenses to term licenses sold in any one quarter. Term licenses significantly reduce the amount of revenue recognized in the first year of the contract, but is intended to increase the overall revenue earned from the customer during the typical customer life cycle;

§		the length of our sales cycle to large financial organizations generally lasts from six to eighteen months, which adds an element of uncertainty to our ability to forecast revenues;

§		if we fail to introduce new or enhanced products, or if our competitors introduce new or enhanced products, sales of our products and services may not achieve expected levels and/or may decline;

§		our ability to expand the mix of distribution channels through which our products are sold may be limited;

§		our products may not achieve widespread consumer acceptance, which could cause our revenues to be lower than expected;

§		we have had significant contracts with legacy customers that have decreased or terminated their services and we may not be able to replace this revenue and / or the gross margins associated with this revenue;

§		our sales may be constrained by the timing of releases of third-party software that works with our products;

§		a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in the short term if revenues decrease; and

§		the migration of our license sales model to be more focused on recurring revenue contracts may result in less predictable revenue due to an inability to predict the rate at which it is adopted by our customers, or the rate at which it may be deferred.

In 2006, we will depend on one customer, State Farm, for a significant portion of our revenue and if that customer terminates its contract with us, our revenues and financial performance would decline

In 2005, we derived 22% of our total revenues from continuing operations from State Farm. State Farm accounted for 21% and 23% of our total revenue from continuing operations in 2003 and 2004, respectively. We expect revenues from State Farm to be between $44 million and $48 million in 2006. We can give no assurance that we will be able to retain State Farm as a customer. State Farm’s license and possession rights for the source code of the Enterprise and insurance products give them great flexibility on how they choose to further invest in these products.

Our exploration of strategic alternatives may create uncertainties that could affect our business

On May 3, 2006, we announced that we retained Friedman, Billings Ramsey Group to assist us in evaluating strategic alternatives to maximize stockholder value. As this exploration is in its early stages, we are uncertain as to what strategic alternatives may be available to us, whether we will elect to pursue any such strategic alternatives, or what impact any particular strategic alternative will have on our stock price if pursued.

There are various uncertainties and risks relating to our exploration of strategic alternatives, including the following: (i) the exploration of strategic alternatives may distract management and disrupt operations, which could have a material adverse effect on our operating results; (ii) we may not be able to successfully achieve the benefits of any strategic alternative undertaken by us; (iii) the process of exploring strategic alternatives may be time consuming and expensive; (iv) the market prices of our common stock could be highly volatile as we explore strategic alternatives; and (v) perceived uncertainties as to our future direction may make it difficult to attract and retain employees and customers.

There can be no assurance that the exploration of strategic alternatives will result in a transaction. We do not intend to disclose developments with respect to the exploration of strategic alternatives unless and until our Board of Directors has approved a specific transaction or course of action.

System failures or performance problems with our products could cause demand for these products to decrease, require us to make significant capital expenditures or impair customer relations

There are many factors that could adversely affect the performance, quality and desirability of our products. In certain instances, product releases have been delayed. This has impacted and may continue to impact or prevent these products from gaining market acceptance. These factors include, but are not limited to the following:

§		delays in completing and/or testing new products, resulting in significant delays;

§		extraordinary end-user volumes or other events could cause systems to fail;

§		our products could contain errors, or “bugs”, which could impair the services we provide;

§		during the initial implementation of some products, we have experienced significant delays in implementing and integrating software, and we may experience similar difficulties or delays in connection with future implementations and upgrades to new versions; and

§		many of our products require integration with third-party products and systems, and we may not be able to integrate these products with new or existing products.

We have experienced substantial losses in the past and may not achieve or maintain profitable operations in the future

We incurred losses from continuing operations in fiscal years 2003 and 2005. We are beginning the transition from a perpetual license revenue model to a term or subscription license model which may significantly reduce the amount of revenue in any one quarter during the transition. As a result, we could experience losses, which could negatively impact the value of our common stock.

We are engaged in offshore software development activities, which may not be successful and which may put our intellectual property at risk

In order to optimize available research and development resources and meet development timeframes, in 2002, we acquired a development center in Dublin, Ireland. In 2004, we acquired an Indian based development center. This center had been operated by a third party since 2002. In 2004, associated with our acquisition of Mosaic, we acquired a development center in Cape Town, South Africa. While our experience to date with these offshore development centers has been positive, there is no assurance that this will continue. Specifically, there are a number of risks associated with this activity, including but not limited to the following:

§		communications and information flow may be less efficient and accurate as a consequence of the time, distance and language differences between our primary development organization and the foreign based activities, resulting in delays in development or errors in the software developed;

§		potential disruption from the involvement of the United States in political and military conflicts around the world;

§		the quality of the development efforts undertaken offshore may not meet our requirements because of language, cultural and experiential differences, resulting in potential product errors and/or delays;

§		we have experienced a greater level of voluntary turnover of personnel in India than in other development centers which could have an adverse impact on efficiency and timeliness of development as well as the opportunity for misappropriation of our intellectual property;

§		in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general risk of the potential for misappropriation of our intellectual property that might not be readily discoverable; and

§		currency exchange rates could fluctuate and adversely impact the cost advantages intended from maintaining these facilities.

We are from time to time involved in litigation over proprietary rights, which may be costly and time consuming

From time to time, we have received claims that certain of our products, or other proprietary rights require a license of intellectual property rights of a party and infringe, or may infringe, the intellectual property rights of others. Those claims, with or without merit, could:

§		be time-consuming to investigate and defend;

§		result in costly litigation;

§		cause product shipment delays;

§		require us to enter into royalty or licensing agreements; or

§		result in an injunction being issued against the use of our products.

Royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all, which could harm our business, financial condition and results of operations. Litigation to determine the validity of any claims could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not the litigation is determined in our favor. In the event of an adverse ruling, we may be required to:

§		pay substantial damages;

§		discontinue the use and sale of infringing products;

§		expend significant resources to develop non-infringing technology; or

§		obtain licenses to infringing technology.

Our failure to develop or license a substitute technology could significantly harm our business.

Our operating results would suffer if we were subject to a protracted infringement claim or a significant damage award.

Substantial intellectual property litigation and threats of litigation exist in our industry. The number of patents issued protecting software and business methods has grown significantly in recent years, with the scope of such patents often unclear. Additionally, copyright and trade secrets are regularly asserted as a means for protecting software. We expect software to be increasingly subject to third-party intellectual property infringement claims as a result of the increased level of

intellectual property based actions relating to such technology and methods, and as the number of competitors grows and the functionality of products in different industry segments overlaps.

Third parties may have, or may eventually be issued, patents or assert copyrights and/or trade secrets that would be infringed by our products or technology. Any of these third parties could make a claim of infringement against us with respect to our products or technology. In some instances, our customers may be accused of infringing the intellectual property rights of third parties. As a result, we provide limited indemnity for our customers against infringement claims. Even if such accusations ultimately prove lacking in merit, the disposition of such disputes may be costly, distracting, and result in damages, royalties, or injunctive relief preventing the use of the intellectual property in question and may require entering into licensing agreements, redesigning our products or ceasing production entirely.

Any claims, with or without merit, could have the following negative consequences:

§		costly litigation and damage awards;

§		diversion of management attention and resources;

§		product shipment delays or suspensions;

§		injunction prohibiting us from selling our products; and

§		the need to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all.

Acquisitions and divestitures may be costly and difficult to integrate / divest, divert management resources or dilute stockholder value

We acquired three companies in 2004 and one company in 2005. We also divested one company in 2004 and one company in 2005. The integration of these companies and any future acquisitions into our existing operations is a complex, time-consuming and expensive process and may disrupt our business. With acquisitions made prior to 2001, we have encountered difficulties, costs and delays in integrating the acquired operations with our own and may continue to do so in the future. Among the issues related to integration are:

§		potential incompatibility of business cultures;

§		potential delays in rationalizing diverse technology platforms;

§		potential difficulties in coordinating geographically separated organizations;

§		potential difficulties in re-training sales forces to market all of our products across all of our intended markets;

§		potential difficulties implementing common internal business systems and processes;

§		potential conflicts in third-party relationships; and

§		the loss of key employees and diversion of the attention of management from other ongoing business concerns.

A significant portion of our customers are in a consolidating financial services industry, which is subject to economic changes that could reduce demand for our products and services

For the foreseeable future, we expect to derive most of our revenue from products and services we provide to the banking industry and other financial services firms such. Changes in economic conditions and unforeseen events, like recession or inflation, could occur and reduce consumers’ use of banking services. Any event of this kind, or implementation for any reason by banks of cost reduction measures, could result in significant decreases in demand for our products and services. Mergers and acquisitions are pervasive in today’s banking industry. Our existing customers may be acquired by or merged into other financial institutions that have their own financial software solutions or decide to terminate their relationships with us for other reasons. As a result, our sales could decline if an existing customer is merged into or acquired by another company.

Market volatility may affect the price of our common stock

The trading prices of technology stocks in general, and ours in particular, have experienced extreme price fluctuations. Our stock price has declined significantly since reaching a high in 2000. Any further negative change in the public’s perception of the prospects of technology based companies, particularly those which are associated with the Internet or e-commerce such as ours, could further depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our operating performance. Market

fluctuations, as well as general political and economic conditions such as a recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to the following factors:

§		actual or anticipated variations in our quarterly operating results;

§		21% of our common stock is owned by 5 institutions, a rapid change in position of any one of these holders could cause a significant drop in our stock price if market demand is insufficient to meet sales demand;

§		announcements of new products, product enhancements, technological innovations or new services by us or our competitors;

§		changes in financial estimates by securities analysts;

§		conditions or trends in the computer software, electronic commerce and Internet industries;

§		changes in the market valuations of other technology companies;

§		developments in Internet regulations;

§		announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

§		unscheduled system downtime of our products in either a hosted or in-house environment;

§		additions or departures of key personnel; and

§		sales of our common stock or other securities in the open market.

Future sales of our common stock in the public market could negatively affect our stock price

If our stockholders sell substantial amounts of our common stock, including shares issued when options and warrants are exercised or shares of our preferred stock are converted into common stock, the market price of our common stock could fall. As of March 1, 2006, we had 70.5 million shares of common stock outstanding, assuming no exercise of outstanding options or warrants or conversion of preferred stock. As of March 1, 2006, there were outstanding employee stock options to purchase 14.7 million shares of our common stock and 0.8 million shares of preferred stock convertible into an aggregate of 1.1 million shares of our common stock. The common stock issuable after vesting and upon exercise of these options and warrants and upon conversion of this preferred stock will be eligible for sale in the public market from time to time. The possible sale of a significant number of these shares may cause the market price of our common stock to fall. By exercising their registration rights and causing a large number of shares to be sold in the public market, these stockholders could cause the market price of our common stock to fall.

Our market is highly competitive and if we are unable to keep pace with evolving technology our revenue and future prospects may decline

The market for our products and services is characterized by rapidly changing technology, intense competition and evolving industry standards. We have many competitors who offer various components of our suite of applications or who use a different technology platform to accomplish similar tasks. In some cases, our existing customers also use some of our competitors’ products. Our future success will depend on our ability to develop, sell and support enhancements of current products and new software products in response to changing customer needs. If the completion of the next version of any of our products is delayed, our revenue and future prospects could be harmed. In addition, competitors may develop products or technologies that the industry considers more attractive than those we offer or that render our technology obsolete.

International operations may adversely affect us

We conduct our business worldwide and may be adversely affected by changes in demand resulting from:

§		fluctuations in currency exchange rates;

§		governmental currency controls;

§		changes in various regulatory requirements;

§		political and economic changes and disruptions;

§		difficulties in enforcing our contracts in foreign jurisdictions;

§		export/import controls;

§		tariff regulations;

§		difficulties in staffing and managing foreign sales and support operations;

§		greater difficulties in trade accounts receivable collection; and

§		possible adverse tax consequences.

Our solutions use encrypted technology, the export of which is regulated by the United States government. If the United States government were to adopt new legislation restricting the export of software or encryption technology, we could experience delays or reductions in our shipments of products internationally. In addition, existing or future export regulations could limit our ability to distribute our solutions outside of the United States.

We maintain international offices and portions of our maintenance, consulting, and research and development operations in Europe, Africa and Asia. Therefore, our operations may also be affected by economic conditions in international regions. The risks associated with international operations may harm our business.

Infringement of our proprietary technology could hurt our competitive position and income potential

Our success depends upon our proprietary technology and information. We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary technology and information. Because it is difficult to police unauthorized use of software, the steps we have taken to protect our services and products may not prevent misappropriation of our technology. Any misappropriation of our proprietary technology or information could reduce any competitive advantages we may have or result in costly litigation. We now also have a significant international presence. The laws of some foreign countries may not protect our proprietary technology as well as the laws of the United States. Our ability to protect our proprietary technology abroad may not be adequate.

If we are unable to attract and retain highly skilled technical employees, we may not be able to compete

Based on the need for highly skilled technical employees, we believe that our future success will depend in large part on our ability to attract and retain highly skilled technical personnel. Because the development of our software requires knowledge of computer hardware, as well as a variety of software applications, we need to attract and retain technical personnel who are proficient in all these disciplines. There is substantial competition for employees with the technical skills we require. If we cannot hire and retain talented technical personnel, this could adversely affect our growth prospects and future success.

We are subject to government regulation

We are subject to examination, and are indirectly regulated, by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the various state financial regulatory agencies that supervise and regulate the banks and thrift institutions for which we provide data processing services. Matters subject to review and examination by federal and state financial institution regulatory agencies include our internal controls in connection with our performance of data processing services and the agreements giving rise to those processing activities.

The adoption or modification of laws or regulations relating to the Internet, or interpretations of existing law, could adversely affect our business

Laws and regulations which apply to communications and commerce over the Internet are becoming more prevalent. Currently, there are Internet laws regarding copyrights, taxation and the transmission of specified types of material. Congress also adopted legislation imposing obligations on financial institutions to notify their customers of the institution’s privacy practices, restrict the sharing of non-public customer data with non-affiliated parties at the customer’s request, and establish procedures and practices to protect and secure customer data. These privacy provisions are implemented by regulations with which compliance is now required. Additionally, many legislative and regulatory actions have been enacted or are pending at the state and federal level with respect to privacy. Further, our customers and we may be faced with state and federal requirements that differ drastically, and in some cases conflict. In addition, the European Union enacted its own privacy regulations and is currently considering other Internet-related legislation. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet. In addition, the growth and development of the market for online financial services, including online banking, may prompt calls for more

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

(a)		S1’s 2006 annual meeting of shareholders was held on June 29, 2006.

(b)		John W. Spiegel and Thomas P. Johnson, Jr. were re-elected as directors at the 2006 annual meeting. Continuing directors include James S. Mahan, III, M. Douglas Ivester, Ram Gupta, Gregory J. Owens and Jeffrey C. Smith.

(c)		The election of two directors for three-year terms was voted on and approved by S1’s shareholders at the 2006 annual meeting of shareholders held on June 29, 2006.

		The results of the voting by shareholders at the annual meeting were as follows:


			Against/
Director Nominee	For		Withheld		Broker Non-Votes
John W. Spiegel		58,982,743		1,411,610		-0-
Thomas P. Johnson, Jr.		59,235,329		1,159,024		-0-

(d)		On May 3, 2006, Company entered into a settlement agreement (the “Settlement Agreement”) with Starboard Value and Opportunity Master Fund Ltd., Ramius Master Fund, Ltd, Ramius Fund III, Ltd., Parche, LLC, RCG Ambrose Master Fund, Ltd., RCG Halifax Fund, Ltd., C4S & Co., L.L.C., Admiral Advisors, LLC, Ramius Advisors, LLC, Ramius Capital Group, L.L.C., Morgan B. Stark, Peter A. Cohen, Jeffrey M. Solomon, Thomas W. Strauss, Barington Companies Equity Partners, L.P., James A. Mitarotonda, Barington Companies Investors, LLC, Barington Companies Offshore Fund, Ltd. (BVI), Barington Investments, L.P., Barington Companies Advisors, LLC, Barington Capital Group, L.P., LNA Capital Corp., Arcadia Partners, L.P., Arcadia Capital Management, LLC, William J. Fox, Jeffrey C. Smith, Jeffrey Glidden, Richard Rofe, Edward Terino and John Mutch (collectively, the “Ramius Group”).

		Pursuant to the Settlement Agreement, the Company agreed to convene a meeting of its Board of Directors (the “Board”) no later than the first business day after execution of the Settlement Agreement, which meeting was held on May 3, 2006, to take the following actions:

	•		fix the size of the Board at seven members;

	•		appoint Jeffrey Smith, managing director or Ramius Capital Group, L.L.C., to the Board. Mr. Smith’s term expires at the 2008 Annual Meeting of Stockholders;

	•		nominate Messrs. Thomas Johnson and John Spiegel to stand for election as directors at the 2006 Annual Meeting of Stockholders;

	•		set a record date of 21 business days after the Board meeting for the 2006 Annual Meeting of Stockholders, at which the only matter to be presented by the SI Board to the stockholders will be the election of Messrs. Johnson and Spiegel;

	•		adopt an amendment to Section 2.3 of the Company’s bylaws to allow stockholders holding at least 1/10^th of the outstanding common stock to call a special meeting of stockholders; and

	•		explore strategic alternatives available to the Company to maximize stockholder value.

The Company also agreed in the Settlement Agreement not to do any of the following from the date of execution of the Settlement Agreement through September 30, 2006:

	•		present any proposals to the stockholders, other than the election of Messrs. Johnson and Spiegel at the 2006 Annual Meeting of Stockholders and any proposals that may be necessary in furtherance of a strategic alternative;

	•		take any action to amend the Company’s bylaws, except for the amendment to Section 2.3 of the Company^‘s bylaws described above; and

	•		take any action to increase the size of the Board to more than seven members.

Pursuant to the Settlement Agreement, the Ramius Group agreed:

	•		to support the election of Messrs. Johnson and Spiegel to the Board and to vote the Ramius Group’s shares in favor of such candidates;

	•		not to solicit authority from any of the Company’s stockholders to vote in favor of any proposal at the 2006 annual meeting of stockholders, other than the election of Messrs. Johnson and Spiegel to the Board and any other proposals by the Board;

	•		not engage in any campaign against Messrs. Johnson and Spiegel in connection with the 2006 Annual Meeting of Stockholders or cause or assist any other party to do; and

	•		to rescind (i) the nominations and proposals for the 2006 Annual Stockholders Meeting and (ii) the demand to inspect certain books and records of the Company.

Also, from the date of execution of the Settlement Agreement through September 30, 2006 the Ramius Group agreed:

	•		not engage in any solicitation of proxies or consents, or have others do so, except in support of Board-approved proposals; provided that the Ramius Group may announce its opposition to any Board-approved stockholder proposals not supported by Director Smith;

	•		amend the Schedule 13D (filed on April 6, 2006 filed by Ramius Capital Group, LLC, together with certain other reporting persons) to indicate that they are ending the proxy battle; and

	•		not form, join or in any way participate in any “group” with respect to any voting securities, other than a “group” that includes all or some lesser number of the persons identified as part of the Ramius Group, but does not include any other members who are not currently identified as Ramius Group members as of the date hereof.

		The Company will reimburse the Ramius Group up to $87,500 for its reasonable, documented out-of-pocket fees and expenses incurred in connection with its dispute with the Company relative to the nomination of directors to the Company^‘s Board at the 2006 annual meeting of stockholders.

		The Company estimates that it has incurred additional costs of $0.8 million, including amounts to be paid to the Ramius Group under the Settlement Agreement, in connection with the 2006 annual meeting, excluding the amount of such costs normally expended for a solicitation for an election of directors in the absence of a contest and excluding salaries and wages of regular employees and officers of the Company.

		The foregoing summary is qualified in its entirety by the detailed provisions of the Settlement Agreement, a copy of which is attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2006, and incorporated by reference herein.


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005			3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005			4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005			5

Notes to Condensed Consolidated Financial Statements as of June 30, 2006			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21

Item 3. Quantitative and Qualitative Disclosures About Market Risk			31

Item 4. Controls and Procedures			32

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			33

Item 1A. Risk Factors			33

Item 4. Submission of Matters to a Vote of Security Holders			40

Item 6. Exhibits			41

Signature			42
EX-10.1 CHANGE IN CONTROL SEVERANCE PLAN
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO


	2006		2007		2008		2009		2010
Enterprise	$	2,199	$	1,780	$	1,057	$	303	$	210
Postilion	$	2,733	$	2,210	$	2,108	$	1,897	$	880


				Risk and Compliance
	Enterprise			Postilion		(held for sale)			Total
	(In thousands)
Balance, January 1, 2006	$	66,064		$	58,186	$	1,558		$	125,808
Additional consideration		—			1,100		—			1,100
Utilization of acquisition related income tax benefits		(51	)		—		—			(51	)
Transferred to assets held for sale		—			—		(1,558	)		(1,558	)

Balance, June 30, 2006	$	66,013		$	59,286	$	—		$	125,299


Exhibit
No.		Exhibit Description

10.1		S1 Corporation Change in Control Severance Plan*

31.1		Certification of Chief Executive Officer

31.2		Certification of Chief Financial Officer

32.1		Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes -Oxley Act of 2002

32.2		Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes -Oxley Act of 2002


	S1 CORPORATION
	By:	/s/ JOHN A. STONE
		John A. Stone
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)