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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the transition period from        to

Commission file number: 000-24931

S1 CORPORATION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (404) 812-6200

Securities registered pursuant to Section 12(b) of the Act:

Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share
Title of Class

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

      As of March 22, 2001, the aggregate market value of the shares of common stock of the registrant issued and outstanding on such date, excluding 3,453,927 shares held by all affiliates of the registrant, was approximately $365,634,065. This figure is based on the closing sales price of $6.6562 per share of the registrant’s common stock on March 22, 2001, and excludes shares held by directors and executive officers because such persons may be deemed to be affiliates. This reference to affiliate status is not necessarily a conclusive determination for other purposes.

      Shares of common stock outstanding as of March 22, 2001: 58,385,279

DOCUMENTS INCORPORATED BY REFERENCE

      List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

      Portions of the definitive proxy statement for the annual meeting of shareholders to be held May 23, 2001, which the registrant intends to file no later than 120 days after December 31, 2000, are incorporated by reference in Part III.

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PART I

ITEM 1. BUSINESS.

      This annual report on Form 10-K and the documents incorporated into this annual report on Form 10-K by reference contain forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act. These statements include statements with respect to our financial condition, results of operations and business. 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. The risk factors described below provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as provided by law, we undertake no obligation to update any forward-looking statement.

      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.

We do not expect to achieve profitable operations for the foreseeable future and this may negatively impact the value of our common stock

We incurred losses in 2000 and we expect to incur losses in 2001. At December 31, 2000, we had an accumulated deficit of $1.4 billion. Moreover, we expect that our operating expenses will continue to increase over the near term, even though revenues may not keep pace with these expenses. As a result, we could continue to incur net losses for the foreseeable future. Our future operating results will be adversely affected if, among other things:

	•		there is insufficient demand for our products;
	•		we are unsuccessful in attracting and retaining motivated and qualified personnel; or
	•		the amount of price and product competition we face increases as a result of the growth of financial services activity on the Internet.

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

      We acquired three companies in 1999 and three companies in 2000. One of these companies was sold in early 2001. The continued 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. We have encountered substantial 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 conflicts in third-party relationships; and
	•		the loss of key employees and diversion of the attention of management from other ongoing business concerns.

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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 expect that 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 clients are not within our control;
	•		our clients’ orders tend to be relatively large, and in any given period a substantial portion of our revenues may be attributable to a few clients;
	•		the length of our sales cycle to large financial organizations generally lasts from six to 18 months, which adds an element of uncertainty to our ability to forecast revenues;

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	•		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 may even 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;
	•		our sales may be constrained by the timing of releases of third-party software that works with our products; and
	•		a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses if revenues decrease.

We face litigation that could have a material adverse effect on our business, financial condition and results of operations

      We and some of our directors and executive officers are named as defendants in a private securities class action lawsuit relating to securities fraud. It is possible that we may be required to pay substantial damages or settlement costs which could have a material adverse effect on our financial condition or results of operation. Regardless of the outcome of any of these matters, it is likely that we may incur substantial defense costs and that such actions will cause a diversion of management time and attention.

We depend on a limited number of clients for most of our revenue and, if any of those clients terminates its contract, our revenues and financial performance would decline

      Our business success depends in part on our relationships with a limited number of large clients. We had one client which accounted for 31% of our revenue for 2000. We expect that we will continue to derive a significant portion of our revenue from a limited number of clients in the future. A substantial number of our client contracts do not allow our clients to terminate their contracts prior to the termination date without financial penalties. These financial penalties are usually insufficient to replace the ongoing revenue we would have otherwise received.

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 client relations

      There are many factors which could adversely affect the performance, quality and desirability of our products and could delay or prevent these products from gaining market acceptance. These factors include:

	•		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 experienced significant delays integrating software and bringing banks online, 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.

Network or Internet security problems could damage our reputation and business

      Despite our security measures, the core of our network infrastructure could be vulnerable to unforeseen computer problems. Although we believe we have taken steps to mitigate much of the risk, we may in the future experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Unknown security risks may result in liability to us and also may deter financial organizations from licensing our software and services. Although we intend to continue to implement and establish security measures, there can be no assurance that measures we have implemented will not be circumvented in the future, which could have a material adverse effect on our business, financial condition or results of operations. The occurrence of any of these problems could reduce product demand from potential customers and cause existing customers to terminate their license or data center contracts with us. These problems could also require us to spend significant capital to remedy any failure and could subject us to costly litigation with clients or their end users.

We may become involved in litigation over proprietary rights, which may be costly and time consuming

      Other parties may assert that our products, trademarks or other proprietary rights require a license of intellectual property rights or infringe, or may infringe, on their intellectual property rights. Any claims, with or without merit, could:

	•		be time-consuming;
	•		result in costly litigation;
	•		cause product shipment delays; or
	•		require us to enter into royalty or licensing agreements.

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      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. We expect software to be increasingly subject to third-party infringement claims 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 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 addition, we may become involved in costly and time-consuming litigation to protect the validity of our proprietary rights, including patents and trademarks.

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 clients 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 client 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.

A significant portion of our clients are in the rapidly 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 as insurance and securities brokerage companies. Changes in economic conditions and unforeseen events, like recession or inflation, could occur and reduce consumers’ use of bank 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 clients may be acquired by or merged into other financial institutions which already have their own financial Internet software solution or which decide to terminate their relationships with us for other reasons. As a result, our sales could decline if an existing client is merged into or acquired by another company.

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 significant growth in our operations, 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.

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Internet-related laws could adversely affect our business

      As the Internet continues to evolve, we expect federal, state and foreign governments to adopt laws and regulations covering issues such as user privacy, taxation of goods and services provided over the Internet, pricing, content and quality of products and services. If enacted, these laws and regulations could limit the market for Internet-based financial services. Although many of these regulations may not apply directly to our business, we expect laws regulating the solicitation, collection or processing of personal or consumer information could indirectly affect our business.

      The financial services industry is subject to extensive and complex federal and state regulation, and financial institutions operate under high levels of governmental supervision. Our customers must ensure our services and related products work within the extensive and evolving regulatory requirements applicable to them. Federal, state or foreign authorities could adopt laws, rules or regulations affecting our business operations, such as requiring us to comply with data, record keeping and other processing requirements. Any of these laws, rules or regulations, or new laws, rules and regulations affecting our customers’ businesses, could lead to increased operating costs and could also reduce the convenience and functionality of our services, possibly resulting in reduced market acceptance.

Restrictions on our export of encrypted technology could cause us to incur delays in international sales

      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.

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 22, 2001, we had 58.4 million shares of common stock outstanding, assuming no exercise of outstanding options or warrants or conversion of preferred stock. As of March 22, 2001, there were outstanding employee stock options to purchase 21.4 million shares of our common stock, options and warrants to acquire 5.8 million shares of our common stock, and 1.2 million shares of preferred stock convertible into an aggregate of 8.6 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. Some of the holders of restricted shares of our common stock, our preferred stock and vested options or warrants have rights which may require us to register shares of common stock with the SEC. 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.

Ownership of our common stock by our officers, directors and principal stockholders may prevent a change in control

      Our directors, executive officers, principal stockholders and their affiliates beneficially own a significant percentage of our outstanding common stock. This concentration of ownership may:

	•		delay, defer or prevent a change in control of our operations, which could prevent you from selling your shares at a premium;
	•		impede a merger, consolidation, takeover or other business combination; or
	•		discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, and may cause the market price of our common stock to fall.

Market volatility may affect the price of our common stock

      The trading prices of Internet stocks in general, and ours in particular, have experienced extreme price fluctuations. Since reaching a high in 2000, our stock price has declined significantly. Any further negative change in the public’s perception of the prospects of Internet or e-commerce companies 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 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:

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	•		actual or anticipated variations in our quarterly operating results;
	•		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 Internet and online commerce industries;
	•		changes in the market valuations of other Internet or online service companies;
	•		developments in Internet regulations;
	•		announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
	•		unscheduled system downtime;
	•		additions or departures of key personnel; and
	•		sales of our common stock or other securities in the open market.

International operations and currency exchange rate fluctuations 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.

      In addition, we maintain our international executive offices and a significant portion of our maintenance, consulting, and research and development operations in Europe. Therefore, our operations may also be affected by economic conditions in Europe. These risks associated with international operations may harm our business.

Business Overview

      We are a global provider of infrastructure solutions for financial organizations. We provide the solutions that empower our client banks, brokerage firms and insurance companies to enable their customers to access their financial information and conduct transactions over multiple delivery channels. We believe our solutions empower our clients to increase revenue, strengthen customer relationships and gain competitive advantage by meeting the evolving needs of their customers across various lines of business, market segments and delivery channels.

      We provide a comprehensive set of financial services solutions which touch every significant facet of the financial services industry. From banking, brokerage and insurance to personal financial management and tax preparation capabilities, our suites of consumer, small business and corporate applications provide a comprehensive set of solutions for global, national, regional and local financial organizations. Our solutions are designed to reach beyond traditional online financial services to help organizations deliver value to their customers, resulting in greater customer retention and increased revenue opportunities for our clients.

      We surround our applications with flexible implementation, maintenance and support options. We provide professional services for the installation and integration of our products, including installation at third-party data processing centers and direct licensee sites or integration of the financial organization’s data processing systems within our Data Centers. In addition, we provide training, consulting and product enhancement services.

      Our revenue model is based on charging our clients for our technology as they use it to deliver added value to their customers. To date, we have derived a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring revenues based on the number of our clients’ end users who use the solutions we provide, as well as from the customers we process through our Data Centers.

      We made numerous strategic acquisitions that were designed to provide additional technology, product and service offerings, additional industry expertise, a broader client base and an expanded geographic presence. In November 1999, we acquired Edify Corporation, based in Santa Clara, California; FICS Group, N.V., based in Brussels, Belgium; and VerticalOne Corporation, based in

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Atlanta, Georgia. In April 2000, we acquired Davidge Data Systems, Inc., a New York, New York based provider of order routing services to brokerage firms and Q-Up Systems, Inc., an Austin, Texas based provider of Internet financial services solutions to community banks. In November 2000, we acquired Level Next, Inc., a provider of global trade banking systems.

The S1 Organization

      During 2000, we operated and managed our Company in three business segments: Financial Institutions, Call Center Technology and Internet Aggregation Services.

Financial Institutions Segment

      The Financial Institutions segment builds, delivers and operates integrated, transactional and brandable Internet applications for financial institutions worldwide, available as an in-house solution or outsourced to the S1 Data Center. During the third quarter of 2000, the Financial Institution segment was reported in two parts – Large Financial Institutions and Community Banks. We combined these two segments in the fourth quarter of 2000 as a result of a change in the way we operate and manage the business. The Financial Institutions segment provides highly customized solutions to large global and national financial institutions, as well as solutions that require little or no customization and are primarily sold to community and regional banks.

      Our core financial services products enable customers of financial organizations to access their account information and conduct most of their financial transactions over the Internet. Our financial services products can be combined with financial planning tools and personalized content which enhance our clients’ abilities to keep their customers engaged.

      Our products and services address the needs of financial organizations to offer solutions across multiple markets ranging from the typical consumer to high net worth individuals and from small businesses to large corporations. Our products integrate components covering the full scope of the financial services industry, including banking, brokerage and insurance applications. We design our products to ensure scalability as the number of customers using our clients’ Internet financial services applications increases.

      Our products are a comprehensive and customizable suite that allow financial organizations to provide their customers with Internet banking, brokerage, bill payment and insurance products and services. This suite creates financial destination sites with broad, robust functionality integrated across multiple financial products, including many optional add-ons such as customer care, tax preparation and financial planning tools. In February 2001, S1 announced the availability of its wealth management solution, the industry’s first cross-product, multi-channel application that enables financial advisors and consumers to collaborate on wealth management activities and execute transactions accordingly.

      We also offer products designed for financial organizations that want to deepen their relationships with small to mid-sized businesses by offering remote access to their financial information along with cash and financial management tools. Our product delivers a wide range of financial services including banking, cash management, and customizable content to create a financial destination site for the business user.

      Our corporate banking product is designed for financial organizations that want to focus on their large corporate customers by offering a comprehensive, Internet-based cash management offering. Our corporate product offers broad-ranging banking functionality over the Internet for global payments, balance and transaction reporting, check services, customer messaging, custody and trade finance. It is designed for financial organizations looking to provide integrated Internet banking applications to meet their customers’ worldwide needs.

      Through our Data Center operations, we provide organizations with a cost-effective alternative to building, staffing and maintaining their own data centers to host their Internet financial services offerings. By outsourcing to our Data Centers, organizations can gain immediate access to highly skilled information systems specialists who know the online financial services business and can deliver solutions to the organizations’ customers faster.

      In August 1999, we opened a new Data Center in Atlanta to accommodate our clients’ increasing outsourcing needs. In 2000, we established a Data Center in the U.K. for our European operations and a Data Center in Singapore for our Asia/Pacific regional operations. The Data Centers employ the latest, proven technology to support some of our largest financial organization clients. We earn recurring revenues for each end user we process for our clients through our Data Centers.

Call Center Technology Segment

      Through our Edify subsidiary, our Call Center Technology segment offers interactive voice response and voice e-commerce

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solutions that allow organizations to automate, integrate and personalize interactions with customers through multiple channels, yielding stronger, more profitable relationships. Using customer-determined profiles and interests, our clients can notify their customers about new products or services. Calls that do require human assistance can automatically be routed to the most appropriate person. All of these goals can be accomplished through a combination of channels, including telephone, Internet, e-mail, fax, and pager.

      In addition, we offer a natural language speech recognition product and an optional marketing campaign management component that enables businesses to deliver products and services to targeted prospects consistently through multiple channels.

Internet Aggregation Services Segment

      Through our VerticalOne subsidiary, our Internet Aggregation Services segment provided technology that enables consumers to aggregate personal account information from multiple sources. In January 2001, we sold our VerticalOne subsidiary to Yodlee.com, Inc. However, we will continue to be a reseller of account aggregation services through our relationship with Yodlee.

Clients and Markets

      We provide innovative infrastructure solutions to global financial services organizations as well as regional and local financial institutions. In 2000, we also provided aggregation services to leading Internet portal providers. In addition, we provide our interactive voice response solutions to companies in the consumer goods, manufacturing, insurance and healthcare, technology and telecommunications industries.

      During 2000, we provided implementation and product enhancement services through our Financial Services segment for State Farm Mutual Automobile Insurance Company. We derived 31% of our total revenues in 2000 from State Farm.

Sales and Marketing

      We sell our solutions to small, mid-sized and large financial organizations. As of year-end 2000, our sales force was comprised of professionals structured in three major regional groups — Americas, EMEA (Europe, Middle East and Africa) and APJ (Asia/Pacific/Japan). Within each group, we divide our sales force into two teams: named accounts and field sales. Our named accounts sales team manages our relationships with existing customers and markets our products to the 300 largest financial organizations in the world based on asset size. Our named accounts sales force focuses on developing long-term relationships with senior management of large financial organizations, typically including these organizations’ chief executive officers and the heads of their retail banking and information technology divisions. The sales cycle for these large financial organizations generally lasts from six to 18 months. Contracts we enter into with these large financial organizations typically have multi-year terms. Once we have established a relationship with these organizations and their senior management teams, we continue to market additional products and services to them.

      For the year ended December 31, 2000, we had revenues of $233.9 million, of which approximately 80% was attributed to sales in the United States and approximately 20% was attributed to sales outside of the United States. For the year ended December 31, 1999, we had revenues of $92.9 million, of which approximately 88% was attributed to sales in the United States and approximately 12% was attributed to sales outside of the United States. For the year ended December 31, 1998, we had revenues of $24.2, substantially all of which was attributed to sales inside of the United States.

      Our field sales team focuses on building successful relationships with smaller financial organizations. In addition, our field sales team assumes responsibility for our relationships with our distribution partners including Metavante Corporation, Fiserv and NCR, thereby maximizing our market penetration through the reseller channel. The sales cycle for these small to mid- sized financial organizations typically lasts from two to six months, and the contracts we enter into with them typically provide for direct delivery and service requirements which we perform over a shorter period of time than our contracts with large financial organizations.

      To maximize the understanding of our solutions, our sales support team provides functional and technical sales support.

      In addition to our internal sales efforts and our joint efforts with distribution partners like Accenture, Metavante Corporation, Fiserv and NCR, we market our products and services in other ways to build awareness of the S1 brand. Our marketing efforts include participating in and exhibiting at industry conferences and trade shows, maintaining memberships in key industry organizations and establishing close relationships with industry analysts to help guide our product development and marketing efforts.

Competition

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      The market for online banking and financial software is competitive, rapidly evolving and subject to technological change. With the continued development of the Internet as an accepted avenue for providing financial services, we expect competition to intensify. Currently, we perceive that our primary competition comes from the in-house development efforts of our target clients, as some financial organizations believe in using their own resources to build solutions. We believe that this strategy is inefficient for financial organizations because:

	•		building an Internet-based financial services solution greatly lengthens time to market;
	•		building, maintaining and upgrading the solution is very costly;
	•		attracting and retaining the necessary technical personnel is difficult for these organizations; and
	•		technology development may be too far outside the financial organizations’ core competencies to be effective or successful.

      Additional competitors currently include software companies that provide turnkey online banking and brokerage solutions and Internet integration tools. Among the companies we know that offer Internet banking solutions are BroadVision, BROKAT Infosystems AG, Corillian Corporation, Digital Insight Corporation, Financial Fusion, Inc., Fundtech, IBM, Magnet, Online Resources Corporation, Siebel Systems, Inc. and Sybase.

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, or “FRB”, 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. For example, a recent session of the United States Congress resulted in 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 required by July 1, 2001. In addition, the European Union recently 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 stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online. We are also subject to encryption and security export laws which, depending on future developments, could adversely affect our business.

Employees

As of March 10, 2001, we had 1,683 employees.  In addition to full-time employees, we have used the services of various independent contractors for professional services projects and product development.

ITEM 2. PROPERTIES.

      Our executive offices are currently located at 3390 Peachtree Road, NE, Atlanta, Georgia. We have entered into a lease for new executive office space at a location near our current facilities and expect to move into the new space once construction is completed in the fourth quarter of 2001. Our primary office for EMEA operations is in the U.K. and our primary office for APJ operations is in Sydney. We have a Data Center in Georgia for the Americas, in the U.K for EMEA and in Singapore for APJ. Our Data Centers employ the latest, proven technology to support some of our largest financial organization clients. We also maintain offices in the United States in Boston, Charlotte, Austin, Dallas, and Santa Clara. We maintain international offices in Brussels,

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Lisbon, London, Luxembourg, Madrid, Melbourne, Paris, Rotterdam and Singapore.

      The Financial Institutions segment is based out of our executive offices in Atlanta and has operations in all of our offices, except for the office in Santa Clara. The Call Center Technology segment is based out of the office in Santa Clara. The Internet Aggregation Services segment was based out of an office located in Atlanta.

      We lease all of our office space as well as our Data Center sites.

ITEM 3. LEGAL PROCEEDINGS.

      Commencing May 8, 2000, several substantially similar complaints were filed in the United States District Court in Atlanta, Georgia against S1, Michel Akkermans, James Mahan and Robert Stockwell alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Section 20 of the Securities Exchange Act of 1934. The named plaintiffs seek to represent a class of all persons who purchased S1 shares between November 2, 1999 and May 2, 2000. Their complaints assert generally that S1 and the individual defendants made or authorized the issuance of false and misleading statements concerning the anticipated performance of S1, which they claim led to artificial inflation of the price at which S1’s shares were traded. S1 expects that several cases will be consolidated into one proceeding. S1 believes that the allegations in these complaints are wholly devoid of merit, and it and the individual defendants intend to defend themselves vigorously against these claims.

      On March 20, 2000, S1, Inc., a wholly owned subsidiary of S1, filed a Complaint against Corillian Corporation (“Corillian”) in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 1:00-CV-708-WBH. The Complaint alleges generally that Corillian’s Voyager products infringe S1’s Three Tier Financial Transaction System With Cache Memory Patent number 6,023,684, issued by the United States Patent and Trademark Office on February 8, 2000. The parties are currently in the discovery phase of that litigation.

      Other than the foregoing, there are no material pending legal proceedings to which S1 or its subsidiaries are a party or of which any of our property or the property of our subsidiaries is the subject, other than ordinary routine litigation incidental to our business.

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

      (a) Not applicable.

      (b) Not applicable.

      (c) Not applicable.

      (d) Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

      (a) Our common stock is quoted on the Nasdaq National Market under the symbol “SONE”. The following table shows, for the periods indicated, the high and low prices per share of our common stock as reported on the Nasdaq National Market, as adjusted for the May 1999 two-for one stock split of our common stock.

      As of the close of business on March 22, 2001, there were 630 holders of record of our common stock.

      We have never paid or declared cash dividends on our common stock or preferred stock and do not anticipate paying cash

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dividends on our capital stock in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA.

      The following table presents our selected statement of operations data and our selected balance sheet data on a consolidated basis. We derived the selected historical consolidated financial data presented below from our audited consolidated financial statements and related notes. You should read this data together with our audited consolidated financial statements and related notes.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

      The following discussion should be read in conjunction with the audited consolidated financial statements and notes appearing elsewhere herein.

Overview

      We are a global provider of infrastructure solutions for financial organizations. We provide the solutions that empower our client banks, brokerage firms and insurance companies to enable their customers to access their financial information and conduct transactions over multiple delivery channels. We believe our solutions empower our clients to increase revenue, strengthen customer relationships and gain competitive advantage by meeting the evolving needs of their customers across various lines of business, market segments and delivery channels.

      We provide a comprehensive set of financial services solutions which touch every significant facet of the financial services industry. From banking, brokerage and insurance to personal financial management and tax preparation capabilities, our suites of consumer, small business and corporate applications provide a comprehensive set of solutions for global, national, regional and local financial organizations. Our solutions are designed to reach beyond traditional online financial services to help organizations deliver value to their customers, resulting in greater customer retention and increased revenue opportunities for our clients.

      During 2000, we operated and managed our business in three segments: Financial Institutions, Call Center Technology and Internet Aggregation Services. The Financial Institutions segment builds, delivers and operates integrated, transactional and brandable Internet applications for financial institutions worldwide, available as an in-house solution or outsourced to the S1 Data Center. During the third quarter of 2000, the Financial Institution segment was reported in two parts – Large Financial Institutions and Community Banks. We combined these two segments in the fourth quarter of 2000 as a result of a change in the way we operate and manage the business. The Financial Institutions segment provides highly customized solutions to large global and national financial institutions, as well as solutions that require little or no customization and are primarily sold to community and regional banks. Through the Call Center Technology business segment, we offer interactive voice response and voice e-commerce technology. Through our VerticalOne subsidiary, our Internet Aggregation Services segment provided technology that enables consumers to aggregate personal account information from multiple sources. In January 2001, we sold our VerticalOne subsidiary to Yodlee.com, Inc. In 2001, this segment will no longer exist and the investment in Yodlee will be accounted for on an equity basis. In addition, through our relationship with Yodlee, we will be a reseller of account aggregation services.

Revenues

      We derive our revenues primarily from three sources:

      Software licenses. We receive license fees from direct licensees and third-party data processors. Direct licensees install and operate our products in their own environments. We generally receive an initial license fee plus ongoing fees, which are based on either the number of end-users or a percentage of the initial license fee. We generally recognize revenues from software license sales upon delivery. When services are considered essential to the functionality of the software, the software license and the related services are recognized over the implementation period using the percentage of completion method of accounting.

      A portion of our software license revenue is being recognized on a straight-line basis over either the term of the agreement or, for contracts without a term, the estimated period during which post-contract support is expected to be provided. Under these arrangements, post-contract support and maintenance were bundled as part of the license agreements and sufficient vendor specific evidence did not exist to allocate the total fee to all elements of the arrangement.

      Third-party data processors install our products in their own data processing centers and license the product to their client institutions, typically smaller financial services entities like community banks and thrifts. We receive monthly fees from third party data processors based on the total number of end-users served by the processors’ client institutions. These fees are recognized as revenue in the period earned.

      Professional Services. We provide professional services related to the installation and integration of our products. These services include:

•

installing the product at direct licensees and third-party data processing centers;

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	•		integrating the financial organization data processing systems with our data center for data center clients;
	•		providing product enhancements;
	•		consulting; and
	•		training.

      Revenues derived from contracts to provide services on a time and materials basis are recognized as the related services are performed. Revenues from professional services provided on a fixed fee basis are recognized using the percentage of completion method, measured by the percentage of labor hours incurred to date to estimated total labor hours for each contract.

      Data Center. We receive recurring monthly fees from financial institutions that have chosen to use our software and outsource the processing of their financial transactions to our data center. These fees are generally based on the number of end users of the client institution. In addition, we receive monthly fees for technical support. We recognize these revenues as the services are performed.

      As a result of the size of the companies with which we do business, the magnitude of our implementations and our limited amount of capacity to perform implementations, a significant portion of our revenues may be attributed to a limited number of clients in any given period.

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Comparison of the Year Ended December 31, 2000 to Year ended December 31, 1999

      In 2000, we operated and managed our business in three segments: Financial Institutions, Call Center Technology and Internet Aggregation Services. The following is a discussion of the results of the Company for 2000 as compared to 1999. The discussion includes an analysis of costs that are not allocated to segments, including depreciation and amortization, marketing cost from warrants issued, merger related and restructuring costs, acquired in-process research and development costs and amortization and impairment of acquisition intangibles. In addition, we provide general and administrative to the operating segments on a shared services basis and we do not allocate these costs to the individual segments. A discussion of the operating segments, including revenues, direct costs, gross margins, sales and marketing costs and product development costs follows the consolidated operations discussion.

Consolidated Operations

      Revenues, Direct Costs and Gross Margins. Total revenues increased by $141.0 million to $233.9 million for the year ended December 31, 2000 from $92.9 million for the year ended December 31, 1999, an increase of 152%. Approximately $101.0 million of the increase in total revenues is attributed to the three acquisitions completed in the fourth quarter of 1999 and two acquisitions completed in the second quarter of 2000. The primary components of revenue for the year ended December 31, 2000 were $51.7 million in software license fees, $154.4 million in professional services fees, $22.8 million in data center fees and $4.9 million in other revenue. Direct costs increased by $85.4 million to $138.6 million for the year ended December 31, 2000 from $53.2 million for the year ended December 31, 1999, and increase of 161%. Approximately $51.5 million of the increase in direct costs is attributed to the three acquisitions completed in the fourth quarter of 1999 and two acquisitions completed in the second quarter of 2000. Gross margins were 41% and 43% of total revenues for 2000 and 1999, respectively.

      Selling and Marketing and Product Development Expenses.Total selling and marketing and product development expenses increased by $89.1 million to $126.0 million for the year ended December 31, 2000 from $36.9 million for the year ended December 31, 1999. Approximately $69.3 million of the increase in these expenses is attributed to the three acquisitions completed in the fourth quarter of 1999 and two acquisitions completed in the second quarter of 2000. These expenses are discussed further in the Segment Analysis section.

      General and administrative. General and administrative expenses increased by $34.6 million to $48.8 million for the year ended December 31, 2000 from $14.2 million for the year ended December 31, 1999. General and administrative expenses represented 21% and 15% of total revenues for 2000 and 1999, respectively. The increase in general and administrative expenses resulted from the five acquisitions completed between the fourth quarter of 1999 and the second quarter of 2000. In addition, we increased our expenditures on general and administrative expenses to increase personnel required to manage the growth as well as to establish a global infrastructure.

      Depreciation and Amortization. Depreciation and amortization expenses increased by $19.0 million to $25.9 million for the year ended December 31, 2000 from $6.9 million for the year ended December 31, 1999, an increase of 275%. Depreciation and amortization expenses were 11% and 7% of total revenues for the year ended December 31, 2000 and 1999, respectively. A substantial portion of the increase is the result of the acquisition of five companies and their existing infrastructures during the fourth quarter of 1999 and the second quarter of 2000. The balance of the increase is primarily the result of the acquisition of additional equipment for data center customers and the build out of the new data centers in Singapore and UK. We anticipate that the depreciation and amortization related to the new data centers will continue to increase as the new UK data center went into full production during the fourth quarter of 2000 and as new and existing customers expand their activities in the data centers.

      Marketing Cost for Warrants Issued. The Company recorded $5.0 million of marketing costs for the year ended December 31, 2000 which includes a charge for $362,000 related to the vesting of a warrant previously granted to Accenture and a charge of approximately $4.6 million for a warrant issued in connection with a pilot project and distribution agreement between a third-party and one of our subsidiaries. The fair values of the warrants were determined based on the Black-Scholes option-pricing model.

      Merger Related and Restructuring Costs. During 2000 and 1999, the company incurred merger related costs of $22.5 million and $8.7 million, respectively. The merger related costs were related to the three acquisitions completed in the fourth quarter of 1999, two acquisitions in the second quarter of 2000 and one acquisition in the fourth quarter of 2000. These costs were incurred to integrate the products and platforms of the acquired companies, training personnel on the new products acquired, and the cost of building the infrastructure necessary to support a global operation. Included in the merger related costs are approximately $1.8 million of personnel costs related to professional service employees who were being cross-trained on the products and services of the acquired companies. Approximately $5.9 million of merger related costs consist of the cost of product development personnel working on the integration of the products and platforms acquired. Approximately $14.8 million of merger related costs consist of the cost of upgrading worldwide systems and infrastructure required to manage a global operation. Any continuing costs related to continuing

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integration efforts, which will be limited, will be included in the professional services and product development categories in the statement of operations in future periods. In addition, included in merger related costs are expenses incurred pursuing transactions that did not result in a strategic arrangement.

      In November 2000, we approved a restructuring plan related to the streamlining of operations which resulted in the decision to discontinue development on the Edify retail banking platform. As a result of the restructuring plan, we reduced our workforce by approximately 220 employees and closed several facilities worldwide. During the fourth quarter of 2000, we recorded a charge for the costs associated with the exit plan of approximately $14.7 million. S1 will continue to offer support services to the approximately 140 financial institutions using this platform for up to 24 months. During this period, we will offer the existing customers a migration path to other S1 products. As a result of discontinuing the product, certain customers may elect to move to our competitor’s products resulting in a potential reduction in future revenues from the discontinued products.

      Acquired In-process Research and Development. On April 7, 2000, in connection with the acquisition of Q-Up, we allocated a $14.1 million of $414.9 million purchase price to acquired in-process research and development. Q-Up was involved in the development of technology to provide financial institutions with the means to deploy a suite of automated banking services via the Internet. The allocation of $14.1 million to in-process research and development represented its estimated fair value using the methodology described below. We allocated the $14.1 million to the Internet Banking Systems (IBS). At the time of the acquisition, we forecasted that aggregate revenues attributable to the projects would reach approximately $42.6 million in 2001. We expected revenues for the projects to peak between 2002 to 2003 with limited revenues thereafter as we expect to introduce new product technologies. At the acquisition date, we estimated costs to complete the research and development efforts related to the initial release of the projects to be approximately $130 million. We utilized an average risk-adjusted discount rate of 20% to discount projected cashflows.

      Development of the in-process IBS project started in December 1999 and was anticipated to, and did, reach technological feasibility in October 2000. The most substantial upgrade to the core technology will be the migration of the system from a flat file format to a more dynamic SQL database format. As part of the process of analyzing the acquisition of Q-Up, we made a decision to buy technology that had not yet been commercialized rather than develop the technology internally. We based this decision on factors such as the amount of time it would take to bring the technology to market, available resources and its progression in developing comparable technology, if any.

      We determined the fair value of in-process research and development for the Q-Up acquisition using an income approach. This involved estimating the present value of the after-tax cash flows expected to be generated by the purchased in-process research and development, using risk-adjusted discount rates and revenue forecasts as appropriate. Estimates of future cash flows related to the in-process research and development were made for each project based on our estimates of revenue, operating expenses and income taxes from the project. These estimates were consistent with historical pricing, margins and expense levels for similar products. Revenues were estimated based on relevant market size and growth factors, expected industry trends, individual product sales cycles and the estimated life of each product’s underlying technology. Estimated operating expenses, income taxes and charges for the use of contributory assets were deducted from estimated revenues to determine estimated after-tax cash flows for each project. Estimated operating expenses include cost of goods sold, selling, general and administrative expenses and research and development expenses. The research and development expenses include estimated costs to maintain the products once they have been introduced into the market.

      The selection of the discount rate was based on consideration of our weighted average cost of capital, as well as factors including the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances that were known at the time, and the stage of completion of each technology. We believe that the estimated in-process research and development amounts represent fair value and do not exceed the amount a third party would pay for the projects.

      At the date of acquisition, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. Accordingly, the values allocated to these projects were immediately expensed upon acquisition. Where appropriate, we deducted an amount reflecting the contribution of developed technology to the anticipated cash flows of in-process research and development projects. The project was completed during 2000. However, as we begin the marketing and distribution of this product, our product pricing and growth rates may not be achieved and we may not realize the financial benefits expected from the projects.

      Amortization and Impairment of Acquisition Intangible Assets. Amortization and impairment of acquisition intangible assets increased $1.0 billion to $1.1 billion for the year ended December 31, 2000 from $40.2 million for the year ended December 31, 1999. Of the increase, approximately $415.0 million related to the amortization of goodwill and other identifiable intangible assets resulting from the three acquisitions in the fourth quarter of 1999 and the two acquisitions in the second quarter of 2000 and $664.9

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million related to an impairment charge taken in the fourth quarter of 2000.

      We continually monitor the results of operations and other developments within the industry to adjust cash flow forecasts, as necessary, to determine if any adjustment is necessary to the carrying value of the our intangible assets. Accordingly, at December 31, 2000, we recorded an impairment charge of $664.9 million to adjust the intangible assets acquired in connection with the FICS, Edify, Q-Up and Davidge acquisitions.

      In accordance with established policy, we evaluated the recoverability of the carrying amount of our intangible assets in light of developments during the fourth quarter of 2000. As a result of (i) significant declines in projected revenues; (ii) a significant and sustained decline in our stock price since the dates of acquisitions; (iii) the abandonment of certain technology related to the restructuring effort and (iv) a reduction in the workforce at FICS and Edify, management prepared an undiscounted, net operating cash flow analysis to determine if the intangible assets were recoverable. The following key assumptions were used in management’s analysis (i) revenues would grow in the range of 10% to 30%, depending on the operating unit, over the next 5 years; and (ii) operating expenses would grow in proportion to the revenue growth projected for each operating unit. Since the undiscounted cash flow model indicated an impairment of the intangible assets, we used a discounted cash flow model to measure the fair value of these intangible assets which determined that the fair value of the intangible assets was approximately $155.0 million. Accordingly, we wrote off $644.0 million of goodwill, $10.0 million of purchased technology, $6.9 million of assembled workforce and $4.0 million of customer lists related to the FICS, Edify, Q-Up and Davidge acquisitions. Of the $664.9 million impairment charge, $656.8 million related to the financial institutions segment and $8.1 million related to the call center segment.

Segment Analysis

      During 2000, we operated and managed the Company in three business segments: Financial Institutions, Call Center Technology and Internet Aggregation Services. The Financial Institutions segment builds, delivers and operates integrated, transactional and brandable Internet applications for financial institutions worldwide, available as an in-house solution or outsourced to the S1 Data Centers. This segment offers Internet applications that require little or no customization and are primarily sold to local and regional banks. Through the Call Center Technology segment, we offer interactive voice response and voice e-commerce technology. Through our VerticalOne subsidiary, the Internet Aggregation Services segment provided technology that enables consumers to aggregate personal account information from multiple sources. In January 2001, we sold our VerticalOne subsidiary to Yodle.com, Inc. in a stock-for-stock merger. Under the terms of the deal, we received an approximate 32% ownership interest in Yodlee. In 2001, this segment will no longer exist and the investment in Yodlee will be accounted for on an equity basis. In connection with the sale of VerticalOne, we expect to record a loss on sale in the first quarter of 2001 of approximately $85.7 million.

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Financial Institutions Segment
(Dollars in thousands)

General

      In the fourth quarter of 1999 and in the second quarter of 2000, we completed certain acquisitions whose results are included in the Financial Institutions segment. The operations acquired in the Financial Institutions segment include FICS, a division of Edify, Q-Up and Davidge. A significant portion of the change in the revenues and costs for 2000 as compared to the prior year is the result of these acquisitions. During the fourth quarter of 2000, we recorded an impairment charge of $664.9 million, of which $656.8 million related to the Financial Institutions segment. See further discussion of the impairment charge under “Amortization and Impairment of Acquisition Intangible Assets” earlier in this section.

      In November 2000, we announced a restructuring plan related to the streamlining of operations which resulted in the decision to discontinue forward development on the Edify retail banking platform. As a result of the restructuring plan, we reduced our workforce by approximately 220 employees and closed several facilities worldwide. We will continue to offer support services to the approximately 140 financial institutions using this platform for up to 24 months. During this period, we will offer the existing customers a migration path to other products. The revenues and costs associated with the discontinued platform are primarily reflected in the Financial Institution segment. As a result of discontinuing the product, certain customers may elect to move to our competitor’s products resulting in a potential reduction in future revenues from the discontinued products.

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Revenues, Direct Costs and Gross Margins

      Total revenues increased by $102.9 million to $187.8 million for the year ended December 31, 2000 from $84.9 million for the year ended December 31, 1999, an increase of 121%. The primary components of revenue in 2000 were $24.4 million in software license fees, $138.0 million in professional service fees, $20.6 million in data center fees and $4.9 million of other revenue. Direct costs increased by $71.4 million to $122.7 million for the year ended December 31, 2000 from $51.3 million for the year ended December 31, 1999, an increase of 139%. The gross margin for 2000 was 35% compared to 40% of total revenues in 1999.

      Software licenses. Software license fees increased by $11.0 million to $24.4 million for the year ended December 31, 2000 from $13.4 million for the year ended December 31, 1999, an increase of 82%. Software license fees represented 13% of total segment revenues for the year ended December 31, 2000 as compared to 16% of total segment revenues for the year ended December 31, 1999. All of the increase in license revenues for the year ended December 31, 2000 relate to the acquisitions of Edify and FICS, which occurred in the fourth quarter of 1999 and the acquisition of Q-Up and Davidge which occurred in the second quarter of 2000.

      Direct software license costs consist primarily of the cost of third-party software used in the our products. Direct costs associated with software licenses increased by $0.5 million to $0.9 million for the year ended December 31, 2000 from $0.4 million for the year ended December 31, 1999. Gross margins of software licenses were 96% and 97% for 2000 and 1999, respectively. We anticipate that direct costs associated with software licenses as a percentage of revenue could increase in future periods as additional products are sold that include third-party software.

      Professional services. Professional services revenues increased by $83.8 million to $138.0 million for the year ended December 31, 2000 from $54.1 million for the year ended December 31, 1999, an increase of 155%. Professional services revenues represented 73% of total revenues for the year ended December 31, 2000 compared to 64% of total revenues for the year ended December 31, 1999. Of the $83.8 million increase in the year ended December 31, 2000, $46.3 million is related to the acquisitions. Several large implementation projects and a large product enhancement project drove the remaining increase in 2000.

      Direct professional services costs consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services increased by $64.0 million to $98.9 million for the year ended December 31, 2000 from $34.9 million for the year ended December 31, 1999, an increase of 183%. Approximately $32.7 million of the increase in professional services costs in 2000 is attributable to the acquisitions. Gross margin on professional services for the years 2000 and 1999 were 28% and 35%, respectively. This decrease is primarily due to lower margin contracts inherited as part of the acquisitions made in 1999. As the acquired contracts with lower gross margins are completed, we anticipate that professional services margins will increase in future periods.

      During 2000, we recognized approximately $10.9 million in professional services and maintenance fees from the implementation and maintenance of the products that were discontinued in November. At the time of announcement, several customers were in the process of implementing the discontinued product. These implementations have either been completed or terminated and we anticipate that further implementation fees from the discontinued product will be minimal.

      Data Center. Data Center revenues increased by $11.7 million to $20.6 million for the year ended December 31, 2000 from $8.9 million for the year ended December 31, 1999, an increase of 132%. Data Center revenues represented 11% of total segment revenues for the year ended December 31, 2000 compared to 10% of total revenues for the year ended December 31, 1999. We anticipate that data center revenue will continue to grow both domestically and internationally as a result of the new data centers in the UK and Singapore, which were opened in 2000.

      Direct data center costs consist of personnel and infrastructure to support customer installations. Direct costs associated with data center services increased by $9.6 million to $18.5 million for the year ended December 31, 2000 from $8.9 million for the year ended December 31, 1999, an increase of 108%. The increase in cost is primarily attributed to additional personnel and infrastructure necessary to support new customers, the addition of new applications by our existing customers and the operations of our new data centers in the UK and Singapore. The gross margin for the data centers was 10% for the year ended December 31, 2000, compared to a negative margin of 1% for the year ended December 31, 1999.

      Other. Other revenues, primarily related to the sale of third party hardware and software that are used in connection with our products, decreased by $3.7 million to $4.9 million for the year ended December 31, 2000 from $8.6 million for the year ended December 31, 1999, an decrease of 43%. Other revenues represented 3% and 10% of total segment revenues for the year ended December 31, 2000 and 1999, respectively

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Operating Expenses

      Operating expenses, which includes selling and marketing and product development expenses, increased by $54.0 million to $83.4 million for the year ended December 31, 2000 from $29.4 million for the year ended December 31, 1999.

      Selling and Marketing. Selling and marketing expenses increased by $24.9 million to $33.2 million for the year ended December 31, 2000 from $8.3 million for the year ended December 31, 1999, an increase of 300%. The increase in selling and marketing expenses in 2000 as compared to 1999 was primarily due to the acquisitions completed in the fourth quarter of 1999 and second quarter of 2000. Selling and marketing expenses were 18% and 10% of total revenues for the years ended December 31, 2000 and 1999, respectively.

      Product Development. Product development expenses increased by $29.1 million to $50.2 million for the year ended December 31, 2000 from $21.1 million for the year ended December 31, 1999, an increase of 138%. Product development expenses were 27% and 25% of total segment revenues for the years ended December 31, 2000 and 1999, respectively. The increase in product development expense for 2000 as compared to 1999 was primarily due to the acquisitions completed in the fourth quarter of 1999 and the second quarter of 2000. In addition, we are committed to enhancing products by migrating the existing products to a more efficient software architecture and to developing new applications.

      In November 2000, we announced our decision to discontinue forward development on the Edify retail-banking platform. The expenses associated with developing this product have been reflected in this segment. As a result of the decision to discontinue this product, we anticipate that product development expenses should remain stable in future periods.

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Internet Aggregation Services Segment
(Dollars in thousands)

      General. The Internet Aggregation Services segment was established following the acquisition of VerticalOne in the fourth quarter of 1999, therefore a substantial portion of the increase as compared to 1999 relates to the acquisition. In January 2001, we sold our VerticalOne subsidiary to Yodlee.com, Inc. in a stock-for-stock merger. Under the terms of the deal, we received approximately a 32% ownership interest in Yodlee. In 2001, this segment will no longer exist. The investment in Yodlee will be accounted for on an equity basis. In addition, through our relationship with Yodlee, we will be a reseller of account aggregation services.

      Revenues, Direct Costs and Gross Margins. Total revenues for the Internet Aggregation Services segment were $2.2 million for the year ended December 31, 2000 and $5,000 for the year ended December 31,1999. Total direct costs were $1.9 million for the year ended December 31, 2000 as compared to $0.1 million for the year ended December 31, 1999. The gross margin for 2000 and 1999 were 16% and negative 1,940%, respectively.

      Operating Expenses. Selling and marketing expenses increased by $5.0 million to $5.9 million for the year ended December 31, 2000 from $0.9 million for the year ended December 31, 1999, an increase of 565%. The increase in selling and marketing expenses was primarily related to the timing of the acquisition in the fourth quarter of 1999. In addition, during 2000, we made investments in our selling and marketing activities to establish market share and promote our aggregation services both domestically and internationally. Product development expenses increased by $9.5 million to $11.1 million for the year ended December 31, 2000 from $1.6 million for the year ended December 31, 1999, an increase of 604%. The increase in product development expenses was primarily related to the timing of the acquisition in the fourth quarter of 1999.

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Call Center Technology Segment

(Dollars in thousands)

      General. The Call Center Technology segment was established following the acquisition of Edify in the fourth quarter of 1999, therefore substantially all of the increase as compared to 1999 relates to the timing of the acquisition. During the fourth quarter of 2000, we recorded an impairment charge of $664.9 million of which $8.1 million related to the Call Center Technology segment. See further discussion of the impairment charge under “Amortization and Impairment of Acquisition Intangible Assets” earlier in this section.

      Revenues, Direct Costs and Gross Margins. Total revenues increased by $35.9 million to $43.8 million for the year December 31, 2000 from $8.0 million for the year ended December 31, 1999, an increase of 451%. The primary components of revenue were $27.3 million in software license fees and $16.5 million in professional service fees. Direct costs increased by $12.3 million to $14.1 million for the year ended December 31, 2000 from $1.8 million for the year ended December 31, 1999, an increase of 674%. The gross margin for 2000 was 68% compared to 77% of total revenues in 1999.

      Software licenses. Software license fees increased by $21.7 million to $27.3 million for the year ended December 31, 2000 from $5.6 million for the year ended December 31, 1999, an increase of 386%. Software license fees represented 62% of total segment revenues for the year ended December 31, 2000 as compared to 71% of total segment revenues for the year ended December 31, 1999. Substantially all of the increase in license revenues was due to the timing of the acquisitions in the fourth quarter 2000.

      Direct software license costs consist primarily of the cost of third-party software used in the Call Center products. Direct costs associated with software licenses increased by $3.4 million to $3.7 million for the year ended December 31, 2000 from $0.3 for the year ended December 31, 1999. Gross margins of software licenses were 87% and 95% for 2000 and 1999, respectively. The decrease of gross margins of software licenses is the result of selling more products that include third-party software in 2000 as compared to 1999.

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      Professional services. Professional services revenues increased by $14.2 million to $16.5 million for the year ended December 31, 2000 from $2.3 million for the year ended December 31, 1999, an increase of 610%. Professional services revenues represented 38% of total revenues for the year ended December 31, 2000 compared to 29% of total revenues for the year ended December 31, 1999. Substantially all of the increase in professional services revenues was due to the timing of the acquisitions in the fourth quarter 2000.

      Direct professional services costs consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services increased by $8.9 million to $10.4 million for the year ended December 31, 2000 from $1.5 million for the year ended December 31, 1999, an increase of 581%. Substantially all of the increase in professional services revenues was due to the timing of the acquisitions in the fourth quarter 2000. Gross margin on professional services for the years 2000 and 1999 were 37% and 34%, respectively. The decrease in the gross margin is primarily due to increasing resources providing customer support to users of the Call Center products.

      Operating Expenses. Total operating expenses, which includes sales and marketing and product development expenses, increased by $20.6 million to $25.6 million for the year ended December 31, 2000 from $5.0 million for the year ended December 31, 1999. Selling and marketing expenses increased by $13.3 million to $16.4 million for the year ended December 31, 2000 from $3.1 million for the year ended December 31, 1999, an increase of 428%. Selling and marketing expenses were 37% and 39% of total revenues for the years ended December 31, 2000 and 1999, respectively. Product development expenses increased by $7.3 million to $9.2 million for the year ended December 31, 2000 from $1.9 million for the year ended December 31, 1999, an increase of 386%. Product development expenses were 21% and 24% of total segment revenues for the years ended December 31, 2000 and 1999, respectively. The increases in sales and marketing and product development expenses for 2000 as compared to 1999, was primarily due to the timing of the acquisition completed in the fourth quarter of 1999.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

      Prior to the acquisitions of Edify, FICS and VerticalOne in November 1999, our business consisted entirely of the financial institutions segment.

Revenues

      Total revenues increased by $68.7 million to $92.9 million for the year ended December 31, 1999 from $24.2 million in the year ended December 31, 1998, an increase of 284%. The components of 1999 revenue were $19.1 million in software license fees, $56.4 million in professional service fees, $8.9 million in data center fees and $8.5 million in other revenue.

      Software Licenses. Software license fees increased by $14.3 million to $19.1 million in the year ended December 31, 1999 from $4.8 million in the year ended December 31, 1998, an increase of 298%. Software license fees represented 21% of total revenues in the year ended December 31, 1999 compared to 20% of total revenues in the year ended December 31, 1998. Approximately $9.9 million of the increase in software license fees relates to the acquisitions of Edify and FICS in the fourth quarter of 1999. Approximately $4.0 million of the remaining increase relates to the recognition of revenue from licensing agreements entered into in the fourth quarter of 1998. These license fees have been recorded as deferred revenue and are recognized as revenue over a three-year maintenance period.

      Professional Services. Professional services revenues increased by $42.7 million to $56.4 million in the year ended December 31, 1999 from $13.7 million in the year ended December 31, 1998, an increase of 312%. Professional services revenues represented 61% of total revenues in the year ended December 31, 1999 compared to 57% of total revenues in the year ended December 31, 1998. Approximately $8.3 million of the increase relates to the acquisitions of Edify and FICS during the fourth quarter of 1999. Excluding the effect of the acquisitions, the increase in professional services revenue related to several large implementation projects and product enhancement projects performed for existing clients during 1999.

      Data Center. Data Center revenues increased by $5.7 million to $8.9 million in the year ended December 31, 1999 from $3.2 million in the year ended December 31, 1998, an increase of 178%. Data Center revenues represented 10% of total revenues in the year ended December 31, 1999 compared to 13% of total revenues in the year ended December 31, 1998. The decrease in Data Center revenue as a percentage of total revenues is a result of the increase in total revenues due to the acquisitions discussed above. The dollar increase can be attributed to increased end user demand for our Internet financial applications, minimum fees for new financial institutions implemented during the year and increased support fees. The average quarterly revenue per end user increased slightly to $15.45 in the fourth quarter of 1999 from $15.21 in the fourth quarter of 1998.

      Revenues associated with the our Data Centers are directly influenced by the number of financial services entities that are using our products through our Data Centers and the number of end users of these financial services entities. During the month of December

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1999, our Atlanta-based Data Center processed in excess of 347,000 Internet accounts, representing approximately 226,000 end users. This amount represents an increase of 134% in the number of accounts processed from approximately 148,000 and an increase of 143% in the number of end users from approximately 93,000 for the month of December 1998.

      Other. Other revenue increased by $6.1 million to $8.6 million in the year ended December 31, 1999 from $2.5 million in the year ended December 31, 1998, an increase of 244%. Other revenue, primarily related to the sale of third-party hardware and software used in connection with our products, represented 9% of total revenues in the year ended December 31, 1999 compared to 10% of total revenues in the year ended December 31, 1998. The increase relates to the sale of third party hardware and software for two large implementations, which occurred during 1999.

Direct Costs

      Direct costs increased by $35.0 million to $53.2 million in the year ended December 31, 1999 from $18.2 million in the year ended December 31, 1998, an increase of 192%. Direct costs represented 57% of total revenues in the year ended December 31, 1999 compared to 75% of total revenues in the year ended December 31, 1998.

      Software License Costs. Direct software license costs consist primarily of the cost of third-party software used in our products. Direct costs associated with software licenses increased by $0.1 million to $0.6 million in the year ended December 31, 1999 from $0.5 million in the year ended December 31, 1998, an increase of 20%. Direct costs associated with software licenses represented 3% of software license fees in the year ended December 31, 1999 compared to 10% of software license fees in the year ended December 31, 1998. The decrease in direct costs as a percentage of revenue from 1998 to 1999 relates primarily to license sales generated from acquired companies that did not include third-party software.

      Professional Services Costs. Direct professional services costs consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services increased by $28.2 million to $36.4 million in the year ended December 31, 1999 from $8.2 million in the year ended December 31, 1998, an increase of 344%. The increase in direct professional services costs relates primarily to increased personnel working on an increased number of professional services projects. In addition, the increase relates to the acquisitions of Edify and FICS during the fourth quarter of 1999. Direct costs associated with professional services represented 65% of professional services revenues in the year ended December 31, 1999 compared to 60% of professional services revenues in the year ended December 31, 1998.

      Data Center Costs. Direct Data Center costs consist of personnel and computer equipment costs. Direct costs associated with Data Center services increased by $1.8 million to $9.0 million in the year ended December 31, 1999 from $7.2 million in the year ended December 31, 1998, an increase of 25%. The increase in direct Data Center costs is primarily attributable to additional costs of our new Atlanta-based Data Center facility, which went into full operation in July 1999. Direct Data Center costs represented 102% of Data Center revenues in the year ended December 31, 1999 compared to 227% of Data Center revenues in the year ended December 31, 1998. The improvement was primarily the result of increased end user volume.

      Other Direct Costs. Other direct costs consist of the cost of third-party hardware and software sold to customers for use with our products. Other direct costs increased by $4.8 million to $7.1 million in the year ended December 31, 1999 from $2.3 million in the year ended December 31, 1998, an increase of 209%. The increase relates to the sale of third-party hardware and software for two large implementations, which occurred during 1999. Other direct costs represented 83% of other revenues in the year ended December 31, 1999 compared to 92% of other revenues in the year ended December 31, 1998.

Operating Expenses

      Operating expenses increased by $166.9 million to $220.2 million in the year ended December 31, 1999 from $53.3 million in the year ended December 31, 1998, an increase of 313%.

      Selling and Marketing. Selling and marketing expenses increased by $7.6 million to $12.3 million in the year ended December 31, 1999 from $4.7 million in the year ended December 31, 1998, an increase of 162%. Selling and marketing expenses were 13% of total revenues in the year ended December 31, 1999 compared to 20% of total revenues in the year ended December 31, 1998. The dollar increase was due primarily to the acquisition of Edify during the fourth quarter of 1999. Edify’s sales model was targeted at a larger number of smaller financial institutions, resulting in higher sales expense as a result of having a larger sales force. The decrease in selling and marketing expenses as a percentage of sales was due to our ability to leverage our relatively fixed selling and marketing expenses over a larger revenue base.

      Product Development. Product development expenses increased by $10.0 million to $24.6 million in the year ended December 31,

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1999 from $14.6 million in the year ended December 31, 1998, an increase of 68%. Product development expenses were 26% of total revenues in the year ended December 31, 1999 compared to 60% of total revenues in the year ended December 31, 1998. The dollar increase relates primarily to an increase in personnel expenses for additional product development initiatives, the integration of the products of acquired companies and the acquisitions of Edify and FICS. During 1999, we completed the development of the next version of Consumer Suite and continued development efforts on bill presentment, the next version of investments and the integration of the Intuit products with our products. The increase in product development costs represents our commitment to enhancing the current products by migrating the existing products to a more efficient software architecture and to developing new applications. The decrease as a percentage of total revenues in the year ended December 31, 1999 from the year ended December 31, 1998 resulted from our ability to leverage product development expenses over a larger revenue base.

      General and Administrative. General and administrative expenses increased by $8.2 million to $14.2 million in the year ended December 31, 1999 from $6.0 million in the year ended December 31, 1998, an increase of 137%. General and administrative expenses were 15% of total revenues in the year ended December 31, 1999 compared to 25% of total revenues in the year ended December 31, 1998. The dollar increase is attributable to the increased personnel and infrastructure related to the acquisitions of Edify, FICS and VerticalOne. The decrease as a percentage of our total revenues in the year ended December 31, 1999 from the year ended December 31, 1998 resulted from our ability to leverage general and administrative expenses over a larger revenue base.

      Depreciation and Amortization. Depreciation and amortization expenses increased by $1.6 million to $6.9 million in the year ended December 31, 1999 from $5.3 million in the year ended December 31, 1998, an increase of 30%. Depreciation and amortization expenses were 7% of total revenues for the year ended December 31, 1999 compared to 22% of total revenues in the year ended December 31, 1998. Approximately $1.1 million of the increase was due to the acquisitions during the fourth quarter of 1999. The remaining increase is primarily related to the completion of our new Atlanta Data Center in 1999.

      Marketing Cost for Warrant Issued. We recorded $0.7 million of marketing costs in the year ended December 31, 1999 related to the issuance to a third-party of a stock warrant to purchase 84,994 shares of our common stock at an exercise price of $80.00 per share. The warrant was issued in connection with a pilot project and distribution agreement between the third-party and one of our subsidiaries. The fair value of the warrant was determined based on the Black Scholes option-pricing model. This amount is being amortized over the period of the pilot project and distribution agreement, which is approximately 60 days.

      Merger Related and Restructuring Costs. We recorded $8.7 million in the year ended December 31, 1999 related to the acquisitions of Edify, FICS, and VerticalOne. Merger related costs consist primarily of expenditures related to building and consolidating infrastructure and other operations of the companies we acquired in the fourth quarter of 1999.

      Acquired In-process Research and Development. In connection with the acquisitions of Edify, FICS and VerticalOne, we allocated a portion of the respective purchase prices to acquired in-process research and development. As part of the process of analyzing each of these acquisitions, we made a decision to buy technology that had not yet been commercialized rather than develop the technology internally. We based this decision on factors such as the amount of time it would take to bring the technology to market, available resources and its progression in developing comparable technology, if any.

      We determined the fair value of in-process research and development for each of the above acquisitions using an income approach. This involved estimating the present value of the after-tax cash flows expected to be generated by the purchased in-process research and development, using risk-adjusted discount rates and revenue forecasts as appropriate. Estimates of future cash flows related to the in-process research and development were made for each project based on our estimates of revenue, operating expenses and income taxes from the project. These estimates were consistent with historical pricing, margins and expense levels for similar products. Revenues were estimated based on relevant market size and growth factors, expected industry trends, individual product sales cycles and the estimated life of each product’s underlying technology. Estimated operating expenses, income taxes and charges for the use of contributory assets were deducted from estimated revenues to determine estimated after-tax cash flows for each project. Estimated operating expenses include cost of goods sold, selling, general and administrative expenses and research and development expenses. The research and development expenses include estimated costs to maintain the products once they have been introduced into the market.

      The selection of the discount rate was based on consideration of our weighted average cost of capital, as well as factors including the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances that were known at the time, and the stage of completion of each technology. We believe that the estimated in-process research and development amounts represent fair value and do not exceed the amount a third party would pay for the projects.

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      At the date of acquisition, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. Accordingly, the values allocated to these projects were immediately expensed upon acquisition. Where appropriate, we deducted an amount reflecting the contribution of developed technology to the anticipated cash flows of in-process research and development projects. If the projects are not successful or completed in a timely manner, our product pricing and growth rates may not be achieved and we may not realize the financial benefits expected from the projects. The acquisitions and related in-process research and development expenses are detailed in the table below (in millions):

      Specific details relating to the three acquisitions are discussed below.

      On November 10, 1999, we completed the purchase of Edify for $381.7 million. Edify was involved in the development of interactive voice response (“IVR”) and related customer service technology. Edify also was involved in the development of technology to provide financial institutions with the means to deploy a suite of automated banking services via the Internet. The allocation of $20.0 million to in-process research and development represents its estimated fair value using the methodology described above. We allocated the $20.0 million to the following projects: Electronic Workforce (“EWF”) ($6.7 million) and Electronic Banking System (“EBS”), which was renamed S1 Retail Banking after the acquisition ($13.3 million). At the time of the acquisition we forecasted that aggregate revenues attributable to the projects would reach approximately $120.0 million in 2000. We expected revenues for the projects to peak between 2001 to 2003 and decline thereafter through the end of the products’ lives (2006) as we expected to introduce new product technologies. At the acquisition date, we estimated costs to complete the research and development efforts related to the initial release of the projects to be approximately $8.8 million. We utilized an average risk-adjusted discount rate of 19% to discount projected cashflows.

      Development of the in-process EWF technologies started in April 1999 and had a scheduled release date of April 2000, which was the achieved. The most substantial features of the in-process EWF technologies were international capabilities and significant improvements to scalability. These improvements are critical to compete in the international markets. At the acquisition date, Edify had completed the investigation phase, identified the business requirements, and created an engineering task list with a preliminary development schedule, cost and a resource plan. Efforts remaining included completion of the external and internal design, quality assurance, and documentation. The EWF projects were determined to be approximately 60% complete at the acquisition date.

      Development of the in-process EBS technologies began in December 1998 and was slated for completion in late 1999. This project consisted of one-to-one marketing functionality and was designed to provide private branding and cross-selling functionality. The technologies also were expected to incorporate significant enhancements to bill payment and bill presentment functionality. At the acquisition date, Edify had completed its technical investigation of the project and determined the business requirements. Primary efforts remaining to complete the project included external and internal implementation of the branding functionality. The development of the in-process EBS technology was completed in December 1999. Edify also was in the process of developing EBS add-ons related to a small business portal. This project was expected to serve as a one-stop solution for the small business owner. Features were slated to include business banking as well as Web-based payroll, human resources, and procurement applications. These development efforts were expected to require significant work related to the integration of the architecture. At the acquisition date, Edify had completed its investigation of the project, developed a business case, and was in the process of finalizing the business requirements. Development of a significant portion of the content of the financial portal had also been completed. Efforts remaining included external and internal design, IVR integration, and implementation of the financial portal. This project was slated for introduction in the second quarter of 2000. The EBS projects were determined to be approximately 40% complete at the acquisition date. During 2000, this project was completed.

      On November 18, 1999, we completed the purchase of FICS for $426.1 million. FICS was involved in the development of online customer interaction solutions for corporate and retail banking customers. The allocation to in-process research and development of $32.0 million represents its estimated fair value using the methodology described above. We allocated approximately $19.0 million to Corporate Internet Banking (“CIB”), which was renamed S1 Corporate Suite after the acquisition, a system that will enable secure, browser-based corporate banking over the Internet. We allocated approximately $13.0 million to Retail Internet Banking (“RIB”), which was renamed S1 Retail Banking after the acquisition, a system that will enable secure, browser-based retail banking over the Internet. At the time of the acquisition, we forecasted that aggregate revenues attributable to the projects would reach approximately $68.0 million in 2000. We expected revenues to peak in 2004 and decline thereafter through the end of the products’ lives (2006) as we expected to introduce new product technologies. At the acquisition date, we estimated costs to complete the research and

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development efforts to be approximately $4.3 million. We utilized an average risk-adjusted discount rate of 25% to discount projected cashflows.

      The CIB and RIB products were designed with three distinct segments: the core, localization and customization layers. The primary development efforts were to make the core and localization layers standardized, so that they require minimal client-specific customization work.

      The in-process CIB technology was slated for introduction in late 1999. Additions planned for the technology included retrofitting the development of billing into the new code base, introduction of file import/ export capability, structured messaging functionality, fax-out functionality, and support of the Euro currency. The in-process CIB technology was completed in December 1999. A follow-on release requiring a major architecture upgrade was scheduled for February 2000. This release was intended to support usage in geographical markets with slow Internet connections and will also contain separate localized modules for different regions. Several new features and functions also were planned to be introduced, including trade finance functionality, multiple payments, and automated customer notification. Developmental efforts as of the acquisition date included creation of the concept plan, function analysis, and high-level architecture design. The CIB project was determined to be approximately 50% complete as of the acquisition date.

      The in-process RIB technology was intended to introduce new customer interface and filtering features. The new features are one-to-one marketing, customer alerting functionality, and smart forms. Related efforts include developmental projects utilizing an Extensible Markup Language (“XML”)-based tool kit to define data and business rules for internet banking solutions. These related projects commenced in October 1998 and were intended to ease the work required for customization and localization of the CIB and RIB products. The work required addresses identification, performance benchmarking, and validating to determine which middleware application is best and to customize its performance. The feasibility of these new technologies was slated to be validated in late 1999. Overall, the RIB project was estimated to be approximately 70% complete at the acquisition date. The in-process RIB technology was completed in December 1999.

      On November 10, 1999, we completed the purchase of VerticalOne for $179.4 million. VerticalOne was involved in the development of a system that allows users to aggregate their online personal account information on a single, highly secure site. The allocation to in-process research and development of $7.3 million represents its estimated fair value using the methodology described above. At the time of the acquisition, we forecasted that revenues attributable to the in-process projects would reach approximately $6.5 million in 2000. We expected revenues to peak in 2002 and decline thereafter through the end of the product’s life (2004) as we expected to introduce new product technologies. At the acquisition date, we expected costs to complete the research and development efforts related to the in-process project to be approximately $2.3 million. We utilized an average risk-adjusted discount rate of 45% to discount projected cashflows.

      VerticalOne completed a limited-functionality version of its system in September 1999, which was categorized as developed technology. In-process technology consists of a vastly expanded version that will support commercially necessary features such as access to multiple accounts from a single provider (e.g., two checking or cellular phone accounts) and wireless access to the system via devices such as the Palm VII personal digital assistant. These features were completed in December 1999. The technology under development also was slated to incorporate an extensive redesign of the system and related databases to improve performance and increase scalability. Development efforts related to creation of core engines to handle registration, data mining, account aggregation, display information and quick login functions, as well as product support systems that handle its interface with external content providers. Developments of additional technologies, including the wireless overlay, began in August 1999.

      Amortization and Impairment of Acquisition Intangible Assets. Amortization of acquisition intangible assets increased by $35.8 million to $40.2 million in the year ended December 31, 1999 from $4.4 million in the year ended December 31, 1998, an increase of 814%. Amortization of acquisition intangibles was 43% of total revenues in the year ended December 31, 1999 compared to 18% of total revenues in the year ended December 31, 1998. The increase related to the amortization of goodwill and other identifiable intangible assets resulting from the acquisitions of Edify, FICS, and VerticalOne. There were no impairment charges of acquisition intangible assets in the years ended December 31, 1999 and 1998.

      Loss from Continuing Operations. Loss from continuing operations increased by $96.5 million to $125.1 million in the year ended December 31, 1999 from $28.6 million in the year ended December 31, 1998. The increase in net loss was primarily the result of the increase in amortization of acquisition intangible assets, merger related costs and acquired in-process research and development resulting from the acquisitions in November 1999.

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Consolidated Quarterly Operating Results

      The following table shows selected unaudited consolidated quarterly statement of operations data and that data as a percentage of total revenues for the years ended December 31, 2000 and 1999. In our opinion, this unaudited information has been prepared on substantially the same basis as the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments (consisting of normal recurring adjustments) necessary to present fairly the unaudited consolidated quarterly data. The unaudited consolidated quarterly data should be read together with the audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. The results for any quarter are not necessarily indicative of results for any future period.