ONLINE RESOURCES CORP - 10-K Annual Report

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

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 the 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. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No

As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sales price of the registrant’s common stock of $6.37 per share as reported on the Nasdaq National Market System, was approximately $97.4 million. As of February 12, 2003, the registrant had 17,924,472 shares of its common stock outstanding.

The registrant intends to file a definitive proxy statement for its 2004 Annual Meeting of Stockholders pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2003. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “potential,” “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from any forward-looking statement. In evaluating these statements, you should specifically consider various factors, including the risks outlined under “Risk Factors” in Item 1 of Part I.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K.

Online Resources Corporation is an outsourcer of Internet banking and payment services to over 600 financial institutions nationwide. We own and operate the critical banking, payments and marketing infrastructure that enable our clients to provide their customers with end-to-end Internet channel functionality and a high quality user experience. Our services, branded to our financial institution clients, power approximately 100 million transactions and $8 billion in consumer bill payments annually.

Our clients are primarily regional and community-based depository financial institutions with assets of $10 billion or less. Regional and community financial institutions serve over half of the nation’s retail checking accounts, but often lack the internal resources to build or operate Internet-based remote financial services. We enable these clients to offer services through the Internet channel on a cost effective basis and without the resource commitment of building and supporting the infrastructure internally.

Depending on their needs, our financial institution clients choose one of our two primary product lines: full service, which includes a suite of Internet banking, bill payment, call center and other support services, or stand-alone bill payment and presentment services. One third of our implemented financial institution clients use our full suite of services, while the rest use our stand-alone bill payment services. Our full service Internet banking clients typically pay us a recurring monthly fee based on the number of their customers who use our services. Our stand-alone bill payment clients also typically pay us a recurring monthly fee based on their number of customers and, in some cases, pay us an additional fee per payment transaction. In addition, they typically pay us a one-time implementation fee to link our respective systems, allowing their customers to connect to us through the Internet.

The customers of our full service clients may access our proprietary banking service, which allows them to view account statements and balances of accounts maintained with our clients, and perform funds transfers and certain other funds management functions. These customers may also use our bill payment and presentment services, allowing them to pay any bill automatically. Our banking and bill payment services are complemented by our call center, database services, consumer marketing, web site design and hosting and other support services, giving our clients the benefit of a single, integrated solution. We help our clients drive increased adoption of Internet-based services and create a profitable Internet channel through our extensive consumer marketing capabilities. We also back our services with a comprehensive end-to-end service quality guarantee.

Our bill payment services are built on patented debit architecture that we believe offers substantial cost and quality advantages. By connecting to our clients through online payments networks, we realize the advantage of real-time, guaranteed debits in reducing paper remittances and improving the speed of payments. We have certified over 50 online payment networks, commonly known as electronic funds transfer, or EFT networks, operated by both core processors and ATM networks, potentially allowing us access to approximately 95% of U.S. consumer checking accounts. We believe our patented EFT connectivity is unique and has broad applications for payments products beyond the payment of bills.

As of December 31, 2003, we provided services to approximately 841,000 customers of our 633 client financial institutions. These 633 financial institutions collectively serve an aggregate of approximately 19.5 million retail accounts, including approximately 10.6 million checking accounts.

We are a Delaware corporation with our principal executive offices located at 7600 Colshire Drive, McLean, Virginia. Our telephone number is 703-394-5100 and our website address is www.orcc.com. We make available free of charge through the Investor Relations section of our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website.

The outlook for the e-financial services industry continues to be vigorous with consumers and small businesses increasingly banking online because of the 24 hours a day, 7 days a week convenience and related processing cost savings. In its December 2003 report, Jupiter Media Matrix, a technology research and advisory firm, estimated that 31.4 million U.S. households banked online in 2003, and that the number of U.S. households banking online will more than double to 54.6 million by 2007.

Today, the overwhelming majority of U.S. financial institutions with more than $100 million in assets have adopted the Internet as a means of delivering financial services to their customers. Financial institutions recognize the advantages offered by online delivery systems, including the opportunity to offer their services to targeted audiences while reducing or eliminating workload, paper and other back office expenses associated with traditional distribution channels. Additionally, these solutions provide financial institutions the opportunity to gain market share by attracting new customers and then increase profitability by more successfully retaining them. In 2003, the Boston Consulting Group and Forrester Research, financial research and advisory firms, both conducted studies concluding that the profitability of online bill payment consumers over a 12 month period was up to 40 percent higher than those consumers who did not pay bills online, due to increases in the number of accounts and balances.

Historically, very large financial institutions have been the drivers of the online banking trend. Regional and community financial institutions were compelled to offer comparable services to remain competitive. Initially, there were many obstacles in making e-financial services available to their customers. In particular, they often lacked the capital and human resources required to develop and manage the technology infrastructure to provide their customers with online banking services.

Today, however, the picture is very different. With the majority of financial institutions having already adopted the Internet, either by developing the capability in-house or outsourcing to one of several providers, there are new obstacles:


	•	Managing technology vendors, which could mean multiple relationships in order to provide online banking, bill payment and other services;

	•	Providing integrated customer support for their online banking services to an increasingly sophisticated consumer base;

	•	Understanding how to evaluate channel profitability and/or return on investment; and

	•	Maximizing the value of the channel by increasing adoption through consumer marketing and other means.

As a service provider, we believe that we must help our financial institution clients to meet these challenges as a part of inducing them to choose, or switch to, our solution for providing competitive online banking and payments services.

We provide a single source, fully integrated solution through our Quotien^SM e-financial suite of services, which we believe enables depository financial institutions to offer the breadth of financial services needed to remain competitive as well as profit from their Internet channel. We bring economies of scale and technical expertise to our clients, who would otherwise lack the resources to compete in the rapidly changing, complex financial services industry. We differentiate ourselves by internally developing, integrating and controlling many critical services, such as bill payment, consumer marketing and call center support, rather than relying primarily on third-party providers for these services. As a single source vendor, we believe our clients benefit from having one point of accountability and control. We believe our solution provides our clients with a cost-

effective means to retain and expand their customer base, deliver their services more efficiently and strengthen their customer relationships. We provide our services through:

Our Technology Infrastructure. We provide our Quotien^SM e-financial suite of services by connecting our financial institution clients, their customers and other financial service providers through our integrated communications, systems, processing and support capabilities. Our middleware enables us to integrate customer and financial data in order to coordinate customer authorization, transactions, settlement, security, user profiles, data warehousing, database marketing, registration, fulfillment, administrative support and our customer call center services. These functions operate substantially in real-time and provide an integrated application for our clients and their customers.

Our Operating and Technical Expertise. We provide regional and community based depository financial institutions with our operating and technical expertise. We believe that our industry focus and outsourcing capabilities add value for our clients by simplifying complex processes and technologies. After more than a decade of operating experience, we have established the processes, procedures, controls and staff necessary to keep our systems running reliably and securely. At the same time, we have developed the organizational flexibility and staff relationships necessary to adjust to a rapidly changing environment.

Our Consumer Contact Services. We drive the Internet channel through the entire user lifecycle, using Integrated Consumer Management (ICM) a unique process that combines cutting-edge customer relationship management technology with our multiple consumer touch-points. Marketing costs are born by or shared with our clients. The marketing programs include web-based marketing, direct marketing, telemarketing, statement stuffers and branch incentives. We privately brand the marketing programs for our financial institution clients so that they may take advantage of their existing relationships.

Our Support Services. We provide a comprehensive set of support services to complement our Internet banking and bill payment services. These support services include our call center, web site design and hosting, training, professional services and administrative services. We provide each of these services on an optional basis and have fully integrated them into our service platform.

Our goal is to become the vendor of choice for regional and community-based banks, thrifts and credit unions who outsource remote delivery of consumer and small business e-financial services. We position ourselves as a single, outsourced solution to our financial institution clients, providing them our Internet banking and bill payment services, and other complementary e-financial services. Our consumer and small business services and content are further supported by our proprietary infrastructure and support services, such as our call center, consumer marketing, real-time payments processing, customization and other professional services.

We believe our offering gives our clients the advantage of a single point-of-contact, an end-to-end service quality guarantee, relatively seamless customer care, packaged pricing advantages, and integrated data for consumer marketing and service enhancement purposes. Approximately one-third of our implemented financial institution clients use our full suite of services, while the rest use our stand-alone bill payment services. Both enjoy the benefit of our real-time debit capabilities, integrated customer care, and relatively high percentage of electronic remittances.

We have grown our business organically and developed by December 31, 2003, a base of 633 financial institution clients, who have typically entered into two to five year service contracts. They typically pay us based on their number of users and volume of transactions, as well as on the number of products and services used. Our primary strategy, therefore, is to focus on our substantial existing client base, and to promote Internet banking usage and the cross-selling of our proprietary bill payment services. Also important is our goal to retain and add to our client base, expanding our distribution channel for an integrated suite of e-financial transaction, cultivation and communication services.

We have become profitable but believe that our shareholders, clients, employees and partners still place a high premium on our ability to increase and sustain our profitability. Our business model is driven by financial

and operating leverage derived from earning largely recurring user and transaction fees spread over our relatively fixed cost base. Therefore, our near-term efforts center on:


	•	Increasing adoption of our Internet banking services among the customers of our 211 full service clients, who have approximately 2.5 million checking account and 2.1 million non-checking account relationships;

	•	Cross-selling our proprietary bill payment, as well as other services, to those Internet banking users;

	•	Cross-selling our bill payment, as well as other services, to the customers of our 422 stand-alone bill payment clients, who have approximately 8.1 million checking account and 6.8 million non-checking account relationships;

	•	Retaining and expanding the financial institution distribution channel for our services, particularly by attracting clients who wish to replace another provider, bringing with them an already established base of Internet banking and bill payment customers; and

	•	Controlling our costs by keeping growth in our overhead expenses low, gaining operating efficiencies through ongoing automation and process improvement efforts, and creating further standardization of our technology infrastructure.

Though near-term growth in profitability is an important objective, we recognize, and are investing in, a number of strategic initiatives that we believe will result in high, sustainable profitability. These include:

Consumer Marketing. We have invested heavily in a variety of consumer marketing capabilities where we materially supplement the marketing efforts of our client institutions. These programs are fully funded or co-funded by our clients, with the goal of increasing customer adoption and converting the Internet into a cost-effective means to promote and deliver a profitable set of financial services. Our integrated consumer management process makes extensive use of multiple consumer touch-points and data derived from our banking and bill payment applications to drive consumers through the online banking user lifecycle from activation to retention. These consumer touch-points include real-time personalized and targeted messages within our banking application, use of our call center, targeted emails, and offline media. Our database capabilities include data mining, analysis, campaign management and data integration. All of our consumer marketing efforts use patented methods for the collection and analysis of confidential banking and bill payment data that are fully self-contained and compliant with privacy laws.

Strategic New Products. We believe our large business base of 633 financial institutions with its potential of approximately 20 million consumer relationships represents an attractive distribution channel for the additional financial services and content provided by us and by our third-party partners. Therefore, we will continue our strategy to cross-sell new products to clients with the goal of increasing the recurring revenue per customer. In the later half of 2003, we introduced a package of premium online financial services called Money HQ^SM, which includes account aggregation, bill presentment, inter-bank funds transfer, person-to-person payments and alerts. The new services are tightly integrated within our existing online banking and bill payment services and leverage our real-time financial transaction processing over the Internet. A limited number of financial institutions were launched on this service at the end of 2003. We believe that we can further leverage patented payments architecture to develop additional new products and services. By the end of 2003, we were processing approximately 100 million in annual transactions and our bill payment service was processing over $8 billion in consumer payments per year. The increased volume and efficiency of these transactions not only is critical to our business, but also will generate potentially valuable data using our patented method for confidential messaging without compromising consumer privacy. This data can be extracted using various data mining and aggregation tools and techniques, and packaged for new personalized products and services.

Enhanced Technology Infrastructure. We believe that the scope and integration of our technology-based services gives us a competitive advantage. Our data center and front-end web server-based technology is integrated with our back-end payments processing and multiple databases through middleware and a set of

tools that manage it completely. We continue to standardize protocols and interfaces to both internal and external content and services in order to more effectively integrate additional capabilities.

Other Strategic Initiatives. While we have built our business organically, without mergers or acquisitions, we have relied on partnerships and alliances to augment our growth and provide critical technologies. These include both software providers and core processors who resell our Internet banking and payment services. We have relationships with specialized technology providers in cases where we believe we are better off using third-party technology for a portion of our service than developing it ourselves. We also have product partnerships where third-party software and services are integrated into our platform. We intend to further develop both existing and new partnerships, as well as pursue merger and acquisition opportunities to supplement our organic growth.

We offer our outsourced services under the Quotien^SM brand to our client financial institutions, which in turn brand them under the financial institution’s name. Client financial institutions typically contract with us for one of two major service lines: full service, consisting of our integrated suite Internet banking, bill payment, call center and other support services; or stand-alone bill payment and presentment service, which is unbundled from our full service suite. In addition, we offer a number of complementary e-financial services, such as cash management, and additional functionality from third-party providers that enhance our solution. Finally, we offer professional services to support new client and product implementations, as well as customization.

Most of our services generate revenue from recurring monthly fees charged to financial institution clients, typically based on the number of customers they have using our system. The pricing of these services to customers is at the discretion of each financial institution. Because our clients generally derive internal cost savings, account retention and other return on investment and marketing benefits by offering our services, the majority of our clients do not pass all of these charges through to their customers, and most of our clients offer the banking portion of our services free-of-charge.

Our Quotien^SM Internet Banking and Bill Payment service provides a comprehensive set of online services for a financial institution’s customers. The services include the following features:


	•	Viewing transaction histories and real-time account balances;

	•	Transferring funds within and between financial institutions either immediately or in the future;

	•	“Pay anyone” functionality by initiating immediate and future bill payments or transfers;

	•	Accessing account information and initiating transactions through Intuit’s Quicken application;

	•	Guaranteed, real-time payments and transfers through the patented EFT gateway; and

	•	Viewing projected balances based upon bill payment and account activities.

	•	For customers who register for Money HQ: aggregating online financial accounts from other financial service providers, viewing bills from these accounts, transferring funds between accounts, making payments to individuals via email, and setting balance and due date alerts.

Using our bill payment service, Internet banking customers may pay any merchant biller or individual. Approximately 65% of our bill payments are currently made electronically to merchants. We guarantee electronic bill payments will be received by the payee within two business days of initiation by the customer. We guarantee paper check payments will be received by the payee within five business days. Paper and electronic payments are drawn on our escrow account. As of December 31, 2003, we had a bill payment database of approximately 634,000 discrete merchants.

We believe our real-time debit process offers substantial cost and quality advantages in our bill payment services. Under alternative batch-oriented debit systems, the bill payment processor cannot immediately verify the availability of sufficient funds to cover the bill payment. This may result in potential collections issues, the need to assess credit risk and increased use of paper versus electronic payments. We therefore believe that real-time debit capability results in a higher percentage of electronic payments, lower operating costs and a higher quality of service.

Our Quotien^SM Internet Bill Payment Service is an unbundled version of the bill payment service featured in our full service suite of services. It is unique in the industry because it leverages the banking industry’s EFT infrastructure for online payments. By leveraging this patented technology, our clients take advantage of existing trusted systems, security, clearing, settlement, regulations and procedures. Users of Quotien^SM Internet Bill Payment Service also benefit from a secure, reliable real-time direct link to their accounts. As in our full service suite, customers schedule transactions and view balances via our intuitive web user interface, which is branded for the financial institution. We provide users of this service with complete support and payment inquiry processing through our call center. Additionally, users of this service can register for Money HQ, which includes account aggregation, bill presentment, inter-bank funds transfer, person-to-person payments and alerts.

Our Quotien^SM Remittance Service is an attractive add-on service for financial institutions of all sizes that run their own in-house online banking system or other providers of Internet banking solutions that do not have a bill payment infrastructure. It provides their system with the extra functionality of bill payment processing, and is backed by complete funds settlement, payment research, inquiry resolution, and merchant services. Customers provide bill payment instructions via their existing online banking interface, which validates the availability of funds on the date bills are to be paid. If funds are available, the user’s account is debited and a designated clearing account is credited. On a daily basis, we receive a file of all bill payment requests and we respond immediately, processing bill payment requests and remitting payments to designated merchants. We return a file of transaction confirmations, error descriptions, and data updates. Additionally we provide instant access to comprehensive payment processing and status information through our web-based Payment IQ system.

Our Quotien^SM Cash Management service is a key component of our business banking service offering. Through customized software developed by Magnet Communications, Inc. and integrated into our platform, we provide added value in a number of ways. Quotien^SM Cash Management’s comprehensive application platform provides financial institutions with additional leverage to attract a greater spectrum of business customers. And, as it helps them build their business base, Quotien^SM Cash Management can help them retain that base with a highly flexible selection of applications, compelling support features, 24 hours a day, seven days a week online accessibility, and a secure environment. Just as important, Quotien^SM Cash Management provides additional revenue opportunities through fee-based transactions such as ACH, balance reporting, wire transfers, book transfers, and stop payments.

Our Quotien^SM Customer Care service provides critical “high touch” customer support to the consumer and small business users of our services, all branded in our financial institution client’s name. We maintain a customer service center for financial institution clients that choose to outsource this service to us. Customers can access the customer service operation by phone or e-mail 24 hours a day, seven days a week. As of December 31, 2003, our customer service center had over 100 employees available to respond to customers’ questions relating to enrollment, transactions or technical support. Customer care services generate revenue from recurring monthly fees charged to financial institution clients, typically based on the number of enrolled customers.

Our Quotien^SM Web Design and Hosting capabilities give clients an integrated, outsourced solution for their informational web site. We charge an upfront fee for design which is recognized as revenue immediately and a recurring monthly maintenance fee for hosting the web site which is recognized monthly.

Our Quotien^SM Training Services fit the needs of our clients, ranging from operational training to service-oriented sales workshops. Our training services team develops and delivers effective and professional programs in banking, operations, call centers, sales and communications for our clients. We generally charge our clients on an hourly basis for these services and revenue is recognized when services are completed.

Our Quotien^SM Integrated Consumer Management Support provides consumer marketing capabilities to our clients to help maximize adoption and usage of their Internet channel by their customers. We have developed a customer relationship management approach designed to motivate customers to sign up for Internet banking, begin using Internet banking, sign up for Internet bill payment and, finally, to continue ongoing usage of the Internet channel. We employ a variety of offline, online and call center based marketing programs to contact the customers and influence their use of our clients’ Internet channel. We charge our clients on a marketing program basis when they are completed and revenue is recognized when services are provided.

Our Quotien^SM Administrative Services provides administrative and MIS support services to our financial institution clients including the compilation of customized reports regarding their customers’ account activity. We generally charge our clients on an hourly basis for these services and revenue is recognized when earned.

We facilitate customers’ linking to additional service capabilities and content that are provided or controlled outside of our platform by third parties who enhance our Quotien^SM suite of services. The following services are available or scheduled for launch within the next twelve months.


	•	Fully integrated bill payment and account retrieval through Intuit’s Quicken®;

	•	Check ordering, available through either Harland, Deluxe, Clarke American or Liberty;

	•	Inter-institution funds transfer and account aggregation, provided by CashEdge;

	•	Check imaging, provided by AFS, Bisys, FiServ, FSI/ Vsoft, Empire, Intercept, and Mid-Atlantic; and

	•	Statement through BIT Statement.

To provide our clients with a business application and complement our cash management offering, we provide “small office/ home office” capabilities and have partnered with Intuit to support Quicken online access.

We have also developed business arrangements and links to third parties for expanded customer access. We currently have such arrangements with third-party access providers, typically banking and credit union software providers such as Ultradata (a subsidiary of Harland), Aftech and Users, Inc. (subsidiaries of Fiserv), and Symitar (a subsidiary of Jack Henry).

By aggregating the customers of our financial institution clients into a large online community, we believe we have begun to assemble an attractive audience for third parties to market their products and services. In cooperation with our financial institution clients, we believe that over time this aggregated community will generate significant buying power and could attract many additional third-party providers.

The majority of our professional services are implementation services, consisting of systems integration work. At the time of entering into a contract, the financial institution client pays a one-time fee, which generally ranges from $2,500 to $25,000, depending on the size and complexity of the implementation. A project management team is assembled to integrate our platform with a financial institution client’s legacy host system, typically via an ATM network or a direct host communications interface. A financial institution’s

legacy host system houses its transaction accounts. Upon completion of systems integration, we conduct a testing period using selected customers and employees of the client financial institution. Following the testing, the financial institution client is fully launched and services are made available to its customers. Generally, at this point, the financial institution client begins to pay at least the minimum service fees. For clients who are linked to the over 50 core processors and ATM networks with whom we are certified, implementation typically takes 90 to 180 days between signing and launch.

Additionally, we offer professional services intended to tailor our services to meet the financial institution’s specific needs. Our financial institution clients generally pay us an hourly rate for these customization services.

In addition to our extensive consumer marketing capabilities to drive customer adoption and cross-selling, we seek to retain and expand our financial institution client base, which serves as a distribution channel for our consumer and small business online financial services. Our client services function consists of a 14 person team of account managers who support and cross-sell our services to existing financial institution clients and an 11 person sales team focusing on new financial institution prospects.

Our account management team focuses primarily on helping our clients increase the profitability of their Internet channel. They do this by introducing our extensive consumer marketing capabilities and supporting our clients’ own marketing programs. The account management team also cross-sells our clients to new and enhanced services, and was responsible for almost 1,000 sales events in 2003. This team also handles contract renewals and supports our clients in resolving operating issues.

Our sales team focuses on new client acquisition, either through direct contact with prospects or through our network of reseller relationships. Our target prospects are typically regional and community-based banks, thrifts and credit unions who are either looking to replace their current Internet banking or bill payment solution, and institutions who have no existing capability. We believe that our suite of services is especially attractive to prospects whose Internet solution has limited capabilities, or who seek a more integrated set of banking, bill payment, call center, marketing and other services. Further, we offer these prospects a single point of accountability backed by our unique end-to-end service guarantee, which covers access systems availability, response time, payments speed and quality, problem resolution, call center access and other service functions that we own, operate and control.

Overview. We designed our systems and technology around real-time communications and processing, which optimizes quality, scalability and cost. Our systems are based on a multi-tiered architecture consisting of:


	•	Front-end servers — proprietary and commercial communications software and hardware providing Internet and private communications access to our platform for customers;

	•	Middleware — proprietary and commercial software and hardware used to integrate customer and financial data and to process financial transactions;

	•	Back-end systems — databases and proprietary software which support our banking and bill payment services;

	•	Support systems — proprietary and commercial systems supporting our customer service and other support services; and

	•	Enabling technology — software enabling clients and their customers to easily access our platform.

Our systems architecture is designed to provide customer access into a common database integrated with our banking and bill payment services and our proprietary support services software. Third-party financial services are linked to our systems through the Internet, which we integrate into our customer application and

transaction processing. Incorporating such third-party capabilities into our system, enable us to focus our technical resources on our proprietary middleware and integrating capabilities.

Connectivity for Real-Time Financial Information and Online Payments. We typically link to our client financial institutions in two ways; we operate an information gateway to gather customer account information and we operate an EFT payment gateway for online debits, settlement authentication and limited supplemental financial information. We believe that our extensive connectivity to financial institutions is unique, particularly our EFT gateway component that links to the online payments infrastructure of core processors and ATM networks.

By using an online payment network to link into a financial institution client’s primary database for customer accounts, we take advantage of established electronic funds transfer infrastructure. This includes all telecommunications and software links, security, settlements and other critical operating rules and processes. Using this real-time payments architecture, financial institution clients avoid the substantial additional costs necessary to expand their existing infrastructure. The net result of using this architecture is that high quality remote financial electronic commerce services can be provided, enabling customers to access their financial account information and pay bills by debiting funds from their accounts.

In addition to quality and cost benefits associated with bill payment, we believe that our real-time architecture is more scalable than traditional batch systems, which warehouse and store duplicate data. Instead of duplicating each financial institution’s host system by daily batch transmittal of customer balance information, we communicate in real-time through EFT networks and directly to our clients or their core processors to retrieve account balances as needed.

Security and Systems Integrity. Our services and related products are designed to provide security and system integrity, based on Internet and other communications standards, EFT network transaction processing procedures, and banking industry standards for control and data processing. Prevailing security standards for Internet-based transactions are incorporated into our Internet services, including but not limited to, Secure Socket Layer 128K encryption, using public-private key algorithms developed by RSA Security, along with firewall technology for secure transactions. In the case of payment and transaction processing, we meet security transaction processing and other operating standards for each EFT network or core processor through which we route transactions. Additionally, we have established a business resumption plan to ensure that our technical services and operating infrastructure could be resumed within an acceptable time frame should some sort of business interruption affect our data center. Furthermore, management receives feedback on the sufficiency of security and controls built into our information technology, payment processing, and customer support processes from independent reviews such as semi-annual network penetration tests, an annual SAS70 — Type II Examination, periodic FFIEC examinations, and internal audits.

Patents are important to our business; no particular patent is so important, however, that its loss would significantly adversely affect our operations as a whole.

In June 1993, we were awarded U.S. patent number 5,220,501 covering our real-time EFT network-based payments process. This patent covers bill payment and other online payments made from the home using any enabling device where the transaction is routed in real-time through an EFT network. We have licensed this patent to other parties for limited use. In March 1995 we cross-licensed this patent to Citibank for their internal use in settlement of litigation.

On February 9, 1999, we were awarded U.S. patent number 5,870,724 for targeting advertising in a home banking delivery service. This patent provides for the targeting of advertising or messaging to home banking users, using their confidential bill payment and other financial information, while preserving consumer privacy. Acting in cooperation and on behalf of a financial institution client, we first analyze their bill payment and other financial data to determine an advertising profile or purchasing power. The patent provides for the targeted advertisement or other message to the selected person or group based on their profile. No third parties gain access to the customers’ sensitive financial data. Through interactive messaging, selected customers of

our financial institutions receiving the advertisement or message then have the choice of releasing their names to the advertiser or messenger. The confidentiality of their sensitive financial information is thereby preserved and released only with the approval of the financial institution client and their customers.

On March 13, 2001, we were awarded U.S. patent number 6,202,054 that is a continuation of U.S. patent number 5,220,501. The continuation expands and clarifies the claims in that patent thereby increasing its applicability and usefulness. For example, the continuation broadens the original narrow definitions: PIN is replaced by user identification info; ATM network is replaced by inter-bank financial services network; debit becomes debit or credit.

In addition to our patents, we have registered trademarks. A significant portion of our systems, software and processes are proprietary. Accordingly, as a matter of policy, all management and technical employees execute non-disclosure agreements as a condition of employment.

We believe that the principal competitive factors in our market are industry trust, technical capabilities, operating effectiveness, cost and scalability, customer service, security, speed to market, and capital. Many of our competitors have the financial, technical and marketing resources, plus established industry relationships, to better compete based on these factors. Competitive pressures we face may have a materially adverse effect on our business, financial condition or operating results.

We are not aware of any other company that offers a similar suite of Internet banking and payment services that fully integrates support services and online payment links to other financial service providers. However, many of our current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources. Further, some of our more specialized competitors, such as CheckFree, while currently targeting bill payment services to large financial institutions, may increasingly direct their marketing initiatives towards our targeted smaller financial institution client base.

Other competitors that serve primarily smaller depository financial institutions, such as Jack Henry, Metavante, EDS, Fiserv and other core banking processors, have large distribution channels that bundle broader services and products for their clients. These competitors also have developed or acquired Internet banking capabilities of their own, including a bill payment service in the case of Metavante, which may be further expanded to exceed or meet our capabilities.

In addition, a significant number of companies offer portions of the services provided by us and compete directly with us to provide such services. For example, the web servers of companies such as Digital Insight, FundsXpress and S1 Corporation compete with our front-end Internet banking capabilities. These companies may in turn use bill payment providers, such as CheckFree, Princeton eCom, and Metavante, to compete with our full service offering. There are also other software providers such as Intelidata, Corillian and Sybase Financial Fusion that market their software to large financial institutions, that may seek to penetrate our targeted regional and community banking market.

There are also Internet financial service providers who target non-banking firms, who may target our depository financial institution market. These potential competitors support brokerage firms, credit card issuers, insurance and other financial service companies. There are also Internet financial portals, such as Quicken.com, Yahoo Finance and MSN, who offer bill payment and aggregate consumer financial information from multiple financial institutions. Suppliers to these remote financial service providers potentially compete with us.

We are not licensed by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the National Credit Union Administration or other federal or state agencies that regulate or supervise depository institutions or other providers of financial services. We are subject to examination by federal depository

institution regulators under the Bank Service Company Act, and the Gramm Leach Bliley Act of 1999, among other regulations. As such, we have agreed to periodic examinations by these agencies and these agencies have broad supervisory authority to remedy any shortcomings identified in any such examination.

We are also subject to encryption and security export laws and regulations that, depending on future developments, could render our business or operations more costly, less efficient or impossible.

Federal, state or foreign agencies may attempt to regulate our activities. Congress could enact legislation that would require us to comply with consumer privacy, data, record keeping, processing and other requirements. The Federal Reserve Board may adopt new rules and regulations for electronic funds transfers that could lead to increased operating costs and could also reduce the convenience and functionality of our services, possibly resulting in reduced market acceptance. Because of the growth in the electronic commerce market, Congress has held hearings on whether to regulate providers of services and transactions in the electronic commerce market, and Federal or state authorities could enact laws, rules or regulations affecting our business operations. We also may be subject to Federal, state and foreign money transmitter laws, encryption and security export laws and regulations and state and foreign sales and use tax laws. If enacted or deemed applicable to us, such laws, rules or regulations could be imposed on our activities or our business thereby rendering our business or operations more costly, burdensome, less efficient or impossible, any of which could have a material adverse effect on our business, financial condition and operating results.

The market we currently target, depository financial institutions, is subject to extensive and complex Federal and state regulation. Our current and prospective clients, which consist of financial institutions such as commercial banks, thrifts, credit unions, brokerage firms, credit card issuers, consumer finance companies, other loan originators, insurers and other providers of retail financial services, operate in markets that are subject to extensive and complex Federal and state regulations and oversight. While we are not generally subject to such regulations, our services and related products must be designed to work within the extensive and evolving regulatory constraints in which our clients operate. These constraints include Federal and state truth-in-lending disclosure rules, state usury laws, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act, the Community Reinvestment Act, the Financial Services Modernization Act, the Bank Service Company Act, the Electronic Signatures in Global and National Commerce Act, privacy and information security regulations, laws against unfair or deceptive practices, the Electronic Signatures in Global and National Commerce Act, the USA Patriot Act of 2001 and other state and local laws and regulations. Because many of these regulations were promulgated before the development of our system, the application of such regulations to our system must be determined on a case-by-case basis. We do not make representations to clients regarding the applicable regulatory requirements, but instead rely on each such client making its own assessment of the applicable regulatory provisions in deciding whether to become a client. Furthermore, some consumer groups have expressed concern regarding the privacy, security and interchange pricing of financial electronic commerce services. It is possible that one or more states or the Federal government may adopt laws or regulations applicable to the delivery of financial electronic commerce services in order to address these or other privacy concerns. We cannot predict the impact that any such regulations could have on our business.

We currently offer services on the Internet. It is possible that laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, content, characteristics and quality of services and products. The adoption of any such laws or regulations may limit the growth of the Internet, which could affect our ability to utilize the Internet to deliver financial electronic commerce services.

At December 31, 2003, we had 299 employees. None of our employees are represented by a collective bargaining arrangement. We believe our relationship with our employees is good.

You should carefully consider the following risk factors in your evaluation of us. Our business and results of operations could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.

Prior to the third quarter of 2002, we had a history of net losses; we have achieved net income profitability for five of six quarters since and cannot be sure that we will be profitable in future periods.

Although we achieved profitability under generally accepted accounting principles, or GAAP, in the third quarter of 2002, we cannot be certain that we can be profitable in future periods. As of December 31, 2003, we had an accumulated deficit of $82.9 million. Although we believe we have achieved economies of scale, if growth in our revenues does not significantly outpace the increase in our expenses, we may not be profitable in future periods.

Our quarterly financial results are subject to fluctuations and could cause our stock price to fluctuate.

Our quarterly revenues, expenses and operating results may vary from quarter to quarter in the future based upon a number of factors, many of which are not within our control. Our revenue model is based largely on recurring revenues derived from actual customer counts. The number of our total customers is affected by many factors, many of which are beyond our control, including the number of new user registrations, customer turnover, loss of clients, and general consumer trends. Our results of operations for a particular period may be adversely affected if the revenues based on the number of customers forecasted for that period are less than expected. As a result, our operating results may fall below market analysts’ expectations in some future quarters, which could have a material adverse effect on the market price of our stock.

We may need to raise capital in order to accelerate revenue and profit growth.

Although we achieved positive income in the year 2003 and we believe that we have sufficient capital resources to meet our operating needs during 2004, we may require additional infusions of capital to sustain operations after 2004. This capital may not be available on favorable terms, or at all. We may need to raise additional funds sooner than we expect if we incur unforeseen required capital expenditures or substantial operating losses. If adequate funds are not available or are not available on acceptable terms, we may not be able to develop or enhance our services, take advantage of future opportunities or respond to competitive pressures, which could have a material adverse effect on our business.

There is no guarantee that the number of customers using our services will continue to increase. Because our fee structure is designed to establish recurring revenues through monthly usage by customers of our financial institution clients, our recurring revenues are dependent on the acceptance of our services by customers and their continued use of online banking, bill payment and other financial services. Failing to retain the existing customers and the change in spending patterns and budgetary resources of financial institutions and their customers will affect our operating results.

To market our services to customers, we depend upon our financial institution clients. We generally charge our clients fees based on the number of their customers who have enrolled with our clients for online bill payment services and, in some cases, online banking services. Therefore, customer enrollment affects our revenue and is important to us. Because our clients offer our services under their name, we must depend on those clients to get their customers to use our services. Although we conduct extensive marketing programs for our clients, our clients may decide not to participate in our programs or our financial institution clients may not effectively market our services to their customers. Any failure of our clients to effectively market our services could have a material adverse effect on our business.

Consumer demand for low-cost or free online financial services may force us to reduce or eliminate the fees we charge for some services.

Consumers of many of the online services we offer, including home-banking, bill payment and bill presentment, may demand that these services be offered for lower cost or even for free. Consumers may therefore reject our services in favor of companies that can offer more competitive prices. Thus, consumer demand and competition may place significant pressure on our pricing structure and revenues, and may have an adverse effect on our financial condition.

We depend in part upon the assistance of marketing partners who include some or all of our services and related products as a part of their offerings to financial institutions. Failure by these marketing partners to continue to offer our services and related products could have a material adverse effect on our business.

We may not be able to expand or adapt our services and related products to meet the demands of our financial institution clients and their customers quickly or at a reasonable cost. The number of customers registered for our services has increased from 21,000 as of December 31, 1997 to 841,000 as of December 31, 2003. This resulting growth has placed, and is expected to continue to place, significant demands on our personnel, management and other resources. We will need to continue to expand and adapt our infrastructure, services and related products to accommodate additional financial institution clients and their customers, increased transaction volumes and changing customer requirements. This will require substantial financial, operational and management resources. If we are unable to scale our system and processes to support the variety and number of transactions and customers who ultimately use our services, our business may be materially adversely affected.

Loss of any material financial institution contract could negatively impact our ability to increase our revenues and maintain profitability in the future. Additionally, the departure of a large financial institution could impact our ability to attract and retain other financial institution clients.

One of our financial institution clients, California Federal Bank, accounted for 9%, 15% and 13% of our revenue for the years ended December 31, 2003, 2002 and 2001. During 2002, Citigroup acquired California Federal Bank or Cal Fed and converted the Cal Fed customers to the Citigroup banking and bill payment platform in the first quarter of 2003.

Additionally, BB&T Corporation acquired our second largest customer, First Virginia Banks, Inc., in the third quarter of 2003. In the years ended December 31, 2003, 2002 and 2001, First Virginia accounted for 5% of our revenue. BB&T Corporation converted the First Virginia customers to the BB&T banking and bill payment platform in the fourth quarter of 2003.

Consolidation of the banking and financial services industry could negatively impact our business.

The continuing consolidation of the banking and financial services industry could result in a smaller market for our services. Consolidation frequently results in a complete change in the electronic infrastructure of the combined entity. This could result in the termination of our services and related products if the acquiring institution has its own in-house system or outsources to competitive vendors. This would also result in the loss of revenue from actual or potential retail customers of the acquired financial institution.

We may not be able to compete with larger, more established businesses offering similar products or services.

We may not be able to compete with current and potential competitors, many of whom have longer operating histories, greater name recognition, larger, more established customer bases and significantly greater

financial, technical and marketing resources. Further, some of our competitors provide or have the ability to provide the same range of services we offer. They could market to our targeted regional and community financial institution client base. Other competitors, such as core banking processors, have broad distribution channels that bundle competing products directly to financial institutions. Also, competitors may compete directly with us by adopting a similar business model or through the acquisition of companies, such as resellers, who provide complimentary products or services.

A significant number of companies offer portions of the services we provide and compete directly with us. For example, the web servers of some companies compete with our front-end Internet access capabilities. Other software providers have created units to provide on an outsourced basis a portion of services like ours. These companies may use bill payers who team with access providers. Also, certain services may be available to retail customers independent of financial institutions such as Intuit’s Quicken.com and Yahoo! Finance. Finally, there are some ATM and other networks that provide similar services in addition to connecting to financial institutions.

Many of our competitors may be able to afford more extensive marketing campaigns and more aggressive pricing policies in order to attract financial institutions. Our failure to compete effectively in our markets would have a material adverse effect on our business.

System failures could hurt our business and we could be liable for some types of failures.

Like other system operators, our operations are dependent on our ability to protect our system from interruption caused by damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry or other events beyond our control. Although we have an agreement with an offsite disaster recovery facility, Savvis, in the event of major disasters, both locations could be equally impacted. We do not currently have sufficient backup facilities to provide full Internet services, if the Savvis facility is not functioning. We could also experience system interruptions due to the failure of our systems to function as intended or the failure of the systems we rely upon to deliver our services such as ATM networks, the Internet, or the systems of financial institutions, processors that integrate with our systems and other networks and systems of third parties. Loss of all or part of our systems for a period of time could have a material adverse effect on our business. We may be liable to our clients for breach of contract for interruptions in service. Due to the numerous variables surrounding system disruptions, we cannot predict the extent or amount of any potential liability.

Like other system operators, our computer systems may be vulnerable to computer viruses, hackers, and other disruptive problems caused by unauthorized parties entering our system. We transmit confidential financial information in providing our services. Although we intend to continue to implement state-of-the-art security measures, computer attacks or disruptions may jeopardize the security of information stored in and transmitted through the computer systems of our financial institution clients and their customers using our services, which may result in significant losses or liability. This, or the perception and concern that our systems may be vulnerable to such attacks or disruptions, also may deter retail customers from using our services.

Data networks are also vulnerable to attacks, unauthorized access and disruptions. For example, in a number of public networks, hackers have bypassed firewalls and misappropriated confidential information. It is possible, that despite existing safeguards, an employee could divert retail customer funds while these funds are in our control, exposing us to a risk of loss or litigation and possible liability. In dealing with numerous consumers, it is possible that some level of fraud or error will occur, which may result in erroneous external payments. Losses or liabilities that we incur as a result of any of the foregoing could have a material adverse effect on our business.

The potential obsolescence of our technology or the offering of new, more efficient means of conducting Internet banking and bill payment could negatively impact our business.

The industry for Internet banking services and bill payment services is relatively new and unproven and is subject to rapid change. Our success will depend substantially upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet the changing financial institution and retail customer requirements and incorporate technological advancements. If we are unable to develop new products and enhanced functionalities or technologies to adapt to these changes or if we cannot offset a decline in revenues of existing products by sales of new products, our business would suffer.

Any new or enhanced products we introduce may contain undetected or unresolved software or hardware defects when they are first introduced or as new version are released. These defects could result in a loss of sales and additional costs as well as damage to our reputation and the loss of relationship with our financial institution clients and their customers.

We depend on our officers and skilled employees due to our complex business.

If we fail to attract, assimilate or retain highly qualified managerial and technical personnel our business could be materially adversely affected. Our performance is substantially dependent on the performance of our executive officers and key employees who must be knowledgeable and experienced in both banking and technology. We are also dependent on our ability to retain and motivate high quality personnel, especially management and highly skilled technical teams. The loss of the services of any executive officers or key employees could have a material adverse effect on our business. Our future success also depends on the continuing ability to identify, hire, train and retain other highly qualified managerial and technical personnel. If our managerial and key personnel fail to effectively manage our business, our results of operations and reputation could be harmed.

Potential litigation and liability claims may have a material adverse effect on the operations, financial performance and cash flows.

Our industry in general is susceptible to litigation, liability claims and risks. Any negative outcome in any significant legal proceeding or prolonged litigation may result in material losses to us. Any errors, defects or other performance problems in our products and services could result in financial or other damages to our financial institutions for which we may be liable. Moreover, we may be liable for transactions executed using Internet services based on our products and services even if the errors, defects or other problems are unrelated to our products and services.

As of February 28, 2004, management and directors beneficially owned approximately 15% of our outstanding common stock. As a result, they may have the ability to effectively control us and direct our affairs and business, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying, deferring or preventing a change in control, and make some transactions more difficult or impossible without the support of such stockholders, including proxy contests, mergers, tender offers, open-market purchase programs or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for shares of common stock.

The market price of our common stock has been subject to significant fluctuations and may continue to be volatile in response to:


	•	actual or anticipated variations in quarterly operating results;

	•	announcements of technological innovations;

	•	new products or services offered by us or our competitors;

	•	changes in financial estimates or ratings by securities analysts;

	•	conditions or trends in the Internet and online commerce industries;

	•	changes in the economic performance and/or market valuations of other Internet, online service industries;

	•	announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

	•	additions or departures of key personnel;

	•	future equity or debt offerings or acquisitions or our announcements of these transactions; and

	•	other events or factors, many of which are beyond our control.

The stock market in general and the Nasdaq National Market have experienced extreme price and volume fluctuations and volatility that has particularly affected the market prices of many technology, emerging growth and developmental stage companies. Such fluctuations and volatility have often been unrelated or disproportionate to the operating performance of such companies. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against a company. Litigation, if instituted, whether or not successful, could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business.

The financial services industry is subject to extensive and complex federal and state regulation. Financial institutions such as commercial banks, savings and loans associations, savings banks, and credit unions operate under high levels of governmental supervision. Our customers must ensure that our services and related products work within the extensive and evolving regulatory requirements applicable to them.

Neither federal depository institution regulators nor other federal regulators of financial services require us to obtain any licenses. We are subject to examination by federal depository institution regulators under the Bank Service Company Act and the Gramm Leach Bliley Act of 1999 among other regulations. Although we believe we are not subject to direct supervision by federal and state banking agencies relating to other regulations, we have from time to time agreed to examinations of our business and operations by these agencies. These regulators have broad supervisory authority to remedy any shortcomings identified in any such examination.

Federal, state or foreign authorities could also adopt laws, rules or regulations relating to the financial services industry that affect our business, such as requiring us or our customers to comply with data, record keeping and processing and other requirements. It is possible that laws and regulations may be enacted or modified with respect to the Internet, covering issues such as end user privacy, pricing, content, characteristics, taxation and quality of services and products. If enacted or deemed applicable to us, these laws, rules or regulations could be imposed on our activities or our business, thereby rendering our business or operations more costly, burdensome, less efficient or impossible and requiring us to modify our current or future products or services.

If we cannot achieve and maintain a satisfactory rating from the federal depository institution regulators, we may lose existing clients and have difficulty attracting new clients.

We are subject to examination by the Federal Financial Institutions Examination Council, FFIEC, under the Bank Service Company Act, the Gramm-Leach-Bliley Act of 1999, and various other federal regulations. In our most recent examination report, dated as of March 2002, these regulators noted several opportunities for improvement in our documentation and operations, and we received a less satisfactory rating than we had in our previous examination. This examination report has been distributed, or is available to our client financial institutions through their regulatory agencies. This less satisfactory rating increases the obligation of our clients to monitor our capabilities and performance as a part of their own compliance process.

We have taken the appropriate steps to mitigate the regulators’ concerns, and based on these efforts they do not intend to take any further actions prior to our next examination, which we expect to occur in April 2004. If we do not improve our rating, our financial institution clients and prospects may lose confidence in us and seek alternate providers. This would affect our revenue and revenue growth and could lower our profit margins.

We have a substantial number of shares of common stock that may be sold, which could affect the trading prices of our common stock.

We have a substantial number of shares of common stock that may be issued upon exercise of stock options and warrants. We cannot predict the effect, if any, that future sales of shares of common stock or the availability of shares of common stock for future sale will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of stock options or warrants), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

Our stockholder rights plan contains provisions that could discourage a takeover.

In January 2002, we announced that our Board of Directors has adopted a stockholder rights plan. This plan along with provisions contained in our Certificate of Incorporation may discourage or prevent a change of control through the issuance of additional equity securities that can substantially dilute the interests of a third party seeking to gain control over our company in the absence of the approval of our Board of Directors.

Terrorism and the possibility of further acts of violence may have a material adverse effect on our operations.

War, the threat of war, terrorist attacks, such as the attacks that occurred on September 11, 2001, the response by the United States and further acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate, and our operations and profitability. Further terrorist attacks against the United States may occur. The potential near-term and long-term effect of these attacks on our business, the market for our common stock and the economy is uncertain. The consequences of any terrorist attacks, or any armed conflicts that may result, are unpredictable, and we may not be able to foresee events that could have an adverse material effect on our business or the trading price of our common stock.

We are headquartered in McLean, Virginia where we lease approximately 54,000 square feet of office space. The lease expires July 31, 2004. We believe that all of our facilities are in good condition and are suitable and adequate to meet our operations. Additionally, we believe that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

From time to time we may be involved in litigation arising in the normal course of our business. We are not a party to any litigation, individually or in the aggregate, that we believe would have a material adverse effect on our financial condition or results of operations.

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2003.

Our common stock began trading on the Nasdaq National Market on June 4, 1999 under the symbol “ORCC”. The following table sets forth the range of high and low closing sales prices of our common stock for the periods indicated, as reported by Nasdaq:

The market price of our common stock is highly volatile and fluctuates in response to a wide variety of factors. See “Business — Risk Factors — Our Stock Price is Volatile.”

On December 31, 2003, we had approximately 171 holders of record of common stock. This does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.

We have not paid any cash dividends on our common stock. We expect to invest any future earnings to finance growth, and therefore do not intend to pay dividends in the foreseeable future. Our board of directors will determine if we pay any future dividends.

On June 9, 2003, we increased our stockholders’ equity by $4.4 million through a private placement of 1,336,000 newly issued common shares to a group of institutional investors. This transaction was priced at a discount to the Online Resources volume weighted average closing share price for the 10 trading days prior to the seventh trading day before closing. In separate transactions, these proceeds were used to repurchased $3.9 million of its Convertible Notes at par. The remaining $8.1 million in Convertible Notes were converted into 2,001,314 shares of common stock in October and November of 2003.

The following balance sheet data and statements of operations were derived from our financial statements. You should read the following selected financial information in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

The following discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors including, but not limited to, those under “Business— Risk Factors” and elsewhere in this report.

We are a leading outsourcer of Internet banking, payment and customer contact services to financial institution clients nationwide. Our services, branded in the clients’ name, integrate seamlessly into a single-vendor, end-to-end solution, supported by 24x7 customer care, targeted consumer marketing, training and other network and technical professional products and services.

Registered customers using Internet banking, bill payment or both, are the major driver of our revenue. During 2003 the number of customers using our banking services increased by 3% and the number of customers using our payment services increased 61%, for an overall 35% increase in customers. This resulted in a 19% increase in revenue. While we have seen some reduction in average monthly recurring revenue per user, due largely to our decision to fix price the banking service to our clients, this has been more than offset by a decline in the average monthly recurring cost per user. Although the average monthly recurring revenue per user decreased by 15% in 2003, the average monthly recurring gross margin per user increased from 55% in 2002 to 57% in 2003 as a result of a 19% decrease in the average monthly recurring cost of revenues per user.

We have long-term service contracts with our financial institution clients. The majority of our revenue is recurring, though these contracts also provide for implementation, set-up and other non-recurring fees. Internet banking services revenue is based either on a monthly license fee allowing our financial institution client to register an unlimited number of customers, or on a monthly fee for each registered customer. Payment services revenue is based on either a monthly fee for each customer enrolled, a fee per executed transaction, or a combination of the two. Our financial institution clients pay all of our fees and then determine if or how they want to pass these costs on to their customers. They typically provide Internet banking services to customers free of charge, as they derive significant potential benefits including account retention, delivery and paper cost savings, account consolidation and cross-selling of other products. However, almost all of our financial institution clients charge their customers for providing payment services.

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

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

The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

The provision for losses on accounts receivable and allowance for doubtful accounts are recognized based on our estimate, which considers our historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data and financial health of specific customers. We reduced the allowance for doubtful accounts $10,000 during 2003. There were no write-offs of uncollectible accounts in 2003. At December 31, 2003 the allowance for doubtful accounts was $67,000, which represents management’s estimate of the probable losses in the accounts receivable balance at December 31, 2003. While the allowance for doubtful accounts and the provision for losses on accounts receivable depend to a large degree on future conditions, management does not forecast significant adverse developments in 2004.

Property and equipment, including leasehold improvements, are recorded at cost. Software and hardware consisting of central processing systems and terminals represent the majority of the property and equipment and are potentially subject to technological changes and obsolescence. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, which is generally five years. Equipment recorded under capital leases is amortized over the estimated useful life of the asset.

We capitalize the cost of computer software developed or obtained for internal use in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized computer software costs consist primarily of payroll-related and consulting costs incurred during the development stage. We expense costs related to preliminary project assessments, research and development, re-engineering, training and application maintenance as they are incurred. Capitalized software costs are being depreciated on a straight-line method over a period of three years upon being placed in service. We periodically evaluate the assets for recoverability when events or circumstances indicate a potential impairment.

We generate revenues from service fees, professional services, and other supporting services. Service fees are primarily composed of three business lines, Internet banking services, payment services and consumer contact services. Revenues from service fees include new user registration fees, account access fees, transaction fees, customer service fees and relationship marketing support fees. Revenue from service fees are recognized over the term of the contract as the services are provided.

Professional services revenues consist of implementation fees associated with the linking of our financial institution client’s to our Quotien^SM e-financial suite through various networks, web development and hosting fees, training fees and communication services. In accordance with Staff Accounting Bulletin No. 101— Revenue Recognition in Financial Statements (“SAB 101”), as superseded by SAB 104, which we adopted effective January 1, 2000, implementation fees and related direct implementation costs are recognized on a straight line basis over the contract term as the services are provided, which typically range from one to five years (generally three years). Prior to 2000, we recognized nonrefundable implementation fees as revenue under the percentage of completion method as certain milestone output measures were completed. Due to the adoption of SAB 101, revenue that was previously recognized under our prior revenue recognition policy will be recognized under our revised revenue recognition policy through periods up to 2004 because some contract periods extend through 2004. During the years ended December 31, 2003, 2002 and 2001, we recognized

revenue of $37,000, $275,000, and $541,000, respectively, and related direct incremental costs that were included in the cumulative effect adjustment at January 1, 2000. Revenue from web development, web hosting and training are recognized over the term of the contract as the services are provided.

Other revenue consists of service fees associated with enhanced third-party solutions and termination fees. Service fees for enhanced third-party solutions include fully integrated bill payment and account retrieval through Intuit’s Quicken, check ordering, inter-institution funds transfer, account aggregation and check imaging. Revenue from these service fees are recognized over the term of the contract as the services are provided. Termination fees are recognized upon termination of a contract.

In December 2002, Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) was released effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 establishes new requirements for determining whether an arrangement involving multiple deliverables contains more than one unit of accounting. We adopted EITF 00-21 and there has been no material impact on the financial position or results of operations from the adoption of EITF 00-21.

As of December 31, 2003, we have a full valuation allowance on our deferred tax asset resulting from $88 million of net operating loss carry forwards since the likelihood of the realization of that asset cannot be determined. We have cumulative losses of over $7 million during the three years ended December 31, 2003. These cumulative losses constitute significant negative evidence about the realization of the deferred tax asset and our projection of future taxable income does not provide positive evidence of equal or greater significance to overcome the negative evidence. Therefore, in accordance with SFAS 109 “Accounting for Income Taxes,” we recognize a full valuation allowance on our net deferred tax assets until sufficient positive evidence exists that it is “more likely than not” that the benefit will be realized.

In the third quarter of 2003, we adopted a policy to recognize as assets the amounts underlying bill payment checks drawn upon our escrow accounts that have been outstanding for at least a year after reviewing legal analysis from outside counsel to ensure that there is a basis for making a claim of ownership to such funds. Our policy is to recognize as assets funds from checks that have been outstanding more than a year and are less than $200 as an offset to payment processing costs. Checks greater than $200 will be recognized as assets after they are outstanding for two years. During 2003, we recognized $0.6 million in assets as an offset to payment processing costs net of a $51,000 reserve for estimated bill payments that could potentially be processed.

While we achieved net income profitability in the first, third and fourth quarters of 2003 and expect our profitability to be sustainable, we have historically experienced operating losses and negative cash flow due to the initial costs of developing our infrastructure and the early revenues typical of an emerging market segment. As a result, at December 31, 2003 we had an accumulated deficit of $82.9 million. We have funded our operations primarily through the issuance of equity and debt securities, and ongoing working capital requirements consist primarily of personnel costs related to providing our services and operating, enhancing and maintaining our systems.

Cash and investments in securities available-for-sale were $13.6 and $6.8 million as of December 31, 2003 and 2002, respectively. The $6.8 million increase in cash and investments resulted primarily from cash provided by operating and financing activities of $7.0 and $2.5 million, respectively, offset by cash used for capital expenditures of $2.7 million. Total liabilities decreased from $15.8 million as of December 31, 2002 to $3.9 million as of December 31, 2003 primarily as a result of the repurchase and conversion of $12.0 million of 8% convertible subordinated notes (the “Convertible Notes”). Accordingly, no long term debt was outstanding as of December 31, 2003.

The following table presents certain items derived from our statements of operations expressed as a percentage of revenue.

Although inflation has slowed in recent years, it is still a factor in our economy and we do not believe it will have a material impact on the results of operations.

We generate revenue from Internet banking services, payment services, consumer contact services and professional services and other revenue. Revenue increased $6.0 million, or 19%, to $38.4 million for the year ended December 31, 2003, from $32.4 million for the same period of 2002. This increase was attributable to 38% and 75% increases in payment services and professional services and other revenue, respectively, partially offset by 23% and 6% decreases in Internet banking services and consumer contact services revenue, respectively.


(1)	Represents the percentage of users subscribing to our Internet banking services out of the total number of checking accounts enabled for banking services.

(2)	Represents the percentage of users subscribing to our payment services out of the total number of checking accounts enabled for payment services.

Internet Banking Services. During 2003 Internet banking services revenue decreased $1.2 million to $4.1 million, driven by a loss of Internet banking services revenue resulting from the departures of Calfed and First Virginia in March and October 2003, respectively. Internet banking services revenue generated by our remaining client base remained flat versus 2002 even though the number of year-end Internet banking services users increased by 3% compared to the prior year-end. This was the result of a 33% decrease in the average monthly revenue per Internet banking services user. This decrease was attributable to our decision to move from a monthly user fee pricing model to a monthly license fee pricing model for Internet banking services in an effort to drive adoption of those services. This allows our financial institution clients to register an unlimited number of Internet banking services users (as evidenced by the 50% increase in Internet banking services adoption in 2003) to whom we can then attempt to up-sell our higher margin bill pay products and other services.

Payment Services. Payment services revenue increased to $21.0 million in 2003 compared to $15.3 million in the prior year. Even with the departures of Calfed and First Virginia during 2003, payment services revenue increased 38%, driven by a 61% increase in the number of year-end payment services users and a 51% increase in the number of payment transactions processed during the year. The increases in year-end payment services users and the number of payment transactions processed were driven by two factors: an increase in financial institution clients using our payment services and an increase in payment services adoption. During 2003, the number of financial institution clients using our payment services increased from 534 clients to 633 clients. Additionally, we were able to increase the adoption rate of our payment services from 4.2% at the end of 2002 to 5.1% at the end of 2003.

Consumer Contact Services. Consumer contact services revenue decreased from $9.0 million in 2002 to $8.5 million in 2003 as a result of the departures of Calfed and First Virginia in March and October 2003, respectively. However, these losses were partially offset by increased consumer contact services revenue from

our remaining client base driven by an increase of 35% in the number of year-end customers utilizing either Internet banking or payment services.

Professional Services and Other. Professional services and other revenue increased $2.0 million from $2.8 million in 2002 to $4.8 million in 2003. This increase was the result of a $2.2 million termination payment received from Calfed. Including this payment, we received $2.8 million in termination payments during the year ended December 31, 2003, compared to $0.5 million during the year ended December 31, 2002. This increase in termination payments during 2003 resulting from the Calfed termination payment was offset by a decrease in implementation fee revenue resulting from lower average implementation fees per enabled bank.


(1)	In millions except for diluted income (loss) per share and per user metrics.

(2)	Calculation excludes revenues and costs associated with professional services and implementation activities.

Costs of Revenues. Costs of revenues encompasses the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional service work. Costs of revenues increased by $0.8 million, or 6%, to $15.5 million for the year ended December 31, 2003, from $14.7 million for 2002. This increase was primarily attributable to a $1.0 million increase in bill payment processing costs, a $0.5 million increase in systems operations support costs and a $0.3 million increase in telecommunications costs, offset by a $0.8 million decrease in customer service costs. The increases in payment processing, systems operations support and telecommunications costs resulted from increases in the number of billable users and transactions and in the cost of supporting the systems on which our users conduct their transactions. The decrease in customer service costs was due to reductions in headcount resulting from technological efficiencies implemented over the past two years. Although total costs of revenues increased by 6% in 2003, the average monthly recurring costs of revenues per user decreased by 19% due to a 35% increase in the number of customers using our services.

Additionally, beginning in the third quarter of 2003, we began to offset payment costs with idle funds we recapture from bill payment transactions that have not been completed after 12 or 24 months from the authorization of the transactions. The amount of funds recovered and recognized in 2003 was $0.6 million.

Gross Profit. Gross profit increased to $22.9 million for the year ended December 31, 2003 from $17.7 million for the same period of 2002. Gross margin improved to 60% from 55% in the prior year, due to increased service fees leveraged over our relatively fixed cost of revenues in addition to the $2.2 million termination fee received from Calfed. Gross profit also improved as a result of improved efficiency from technology development and cost control initiatives.

General and Administrative. General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance, and depreciation. General and administrative expenses increased $1.6 million, or 23%, to $8.6 million in 2003, from $7.0 million in 2002. The increase in general and administrative expenses was primarily attributable to increased salary and benefits costs and the implementation of a profit sharing plan in 2003 and increased depreciation expenses.

Sales and Marketing. Sales and marketing expenses include salaries and commissions paid to sales and marketing personnel, consumer marketing costs, public relations costs, and other costs incurred in marketing our services and products. Sales and marketing expenses increased $1.1 million, or 20%, to $6.5 million in 2003, from $5.4 million in 2002. The primary reason for the increase in sales and marketing expenses was increased salary and benefits costs and the implementation of a profit sharing plan in 2003.

Systems and Development. Systems and development expenses include salaries, consulting fees and all other expenses incurred in supporting the research and development of new services and products and new technology to enhance existing products. Systems and development expenses decreased $0.5 million, or 12%, to $3.8 million in 2003, from $4.3 million in 2002. The decrease in our systems and development expenses was due to an increase in work associated with capitalizable projects as defined by Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” These projects included major enhancements to our applications infrastructure and development of our Money HQSM product. We capitalized $1.6 million of development costs associated with software developed or obtained for internal use in 2003, compared to $1.1 million in 2002. The decrease in expenses related to this shift in work was partially offset by an increase in salary and benefits costs as a result of the restoration of salaries and the implementation of a profit sharing plan in 2003.

Income from Operations. Income from operations increased $3.0 million, or 311%, to $4.0 million for the year ended December 31, 2003 from $1.0 million in 2002. The significant increase in income from operations was primarily due to increases in service fee revenue leveraged over relatively fixed costs and the $2.2 million termination fee received from Calfed.

Other Expense, Net. Interest income decreased $48,000, or 38%, to $79,000 in 2003, from $127,000 for 2002. The decrease was due to lower interest rates. Interest and other expense decreased $0.4 million, or 33%, to $0.8 million in 2003, as compared to $1.3 million in 2002, as the result of lower interest expense and amortization of debt issuance costs due to the repurchase and conversion of the Convertible Notes in 2003. The conversion of $1.0 million of Convertible Notes in March 2002 resulted in a non-cash debt conversion expense of $0.2 million attributable to the issuance of 45,031 incremental shares of common stock. The repurchase of $3.9 million of Convertible Notes in June 2003 and the conversion of $8.1 million of Convertible Notes in October and November 2003 resulted in a non-cash debt conversion expense of $0.5 million attributable to the issuance of 2,001,314 incremental shares of common stock.

Net Income (Loss) Per Share. Net income was $2.8 million for the year ended December 31, 2003, compared to a loss of $0.4 million for 2002. Basic income (loss) per share was $0.18 and $(0.03) for the years ended December 31, 2003 and 2002, respectively, while diluted income (loss) per share was $0.17 and $(0.03) for the years ended December 31, 2003 and 2002, respectively.

Revenue increased $7.8 million, or 31%, to $32.4 million for the year ended December 31, 2002, from $24.6 million for the same period of 2001. This increase was attributable to 5%, 48% and 44% increases in Internet banking services revenue, payment services revenue and consumer contact services revenue, respectively, partially offset by a 7% decrease in professional services and other revenue.


(1)	Represents the percentage of users subscribing to our Internet banking service out of the total number of checking accounts enabled for banking services.

(2)	Represents the percentage of users subscribing to our payment services out of the total number of checking accounts enabled for payment services.

Internet Banking Services. Although the number of year-end Internet banking services users increased by 38% in 2002, Internet banking services revenue increased only 5% from $5.1 million in 2001 to $5.3 million in 2002. This is the result of a 30% decrease in the average monthly revenue per Internet banking services user. This decrease was attributable to our decision to move from a monthly user fee pricing model to a monthly license fee pricing model for Internet banking services in an effort to drive adoption of those services. This allows our financial institution clients to register an unlimited number of Internet banking services users (as evidenced by the 56% increase in Internet banking services adoption in 2002) to whom we can then attempt to up-sell our higher margin bill pay products and services.

Payment Services. Payment services revenue increased to $15.3 million in 2002 compared to $10.3 million in the prior year. This increase was driven by a 40% increase in the number of year-end payment services users and a 46% increase in the number of payment transactions processed during the year. The increases in year-end payment services users and the number of payment transactions processed were driven by two factors: an increase in financial institution clients using our payment services and an increase in payment services adoption. During 2002, the number of financial institution clients using our payment services increased from 472 clients to 534 clients. Additionally, even with the increased pool of potential customers to

which to sell, we were able to increase the adoption rate of our payment services from 2.7% at the end of 2001 to 4.2% at the end of 2002.

Consumer Contact Services. Consumer contact services revenue increased 44% from $6.3 million in 2001 to $9.0 million in 2002 as a result of an increase of 39% in the number of year-end customers utilizing either Internet banking or payment services.

Professional Services and Other. Professional services and other revenue remained relatively flat at $2.8 million in 2002 compared to $2.9 million in 2001. This slight decrease was due to a decrease in implementation fees resulting from a lower number of new clients that were enabled in 2002 versus 2001. Also included in other revenues was $0.5 million and $0.3 million from termination payments during the years ended December 31, 2002 and 2001, respectively.


(1)	In millions except for diluted loss per share and per user metrics.

(2)	Calculation excludes revenues and costs associated with professional services and implementation activities.

Costs of Revenue. Costs of revenue encompasses the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional services work. Costs of revenues increased by $0.4 million, or 2%, to $14.7 million for the year ended December 31, 2002, from $14.3 million in 2001. This increase was primarily attributable to a $0.3 million increase in bill payment processing costs, a $0.6 million increase in implementation costs, a $0.2 million increase in systems operations support costs, offset by a $0.8 million decrease in customer service costs. The increases in payment processing, implementation and systems operations support costs resulted from increases in the number of billable users and transactions and in the cost of supporting the systems on which our users conduct their transactions. The decrease in customer service costs was due to

reductions in headcount resulting from technological efficiencies implemented during the 2002 year. Although total cost of revenues increased by 2% in 2002, the average monthly recurring cost of revenues per user decreased by 29%, due to a 39% increase in the number of customers using our services.

Gross Profit. Gross profit increased to $17.7 million for the year ended December 31, 2002 from $10.3 million for 2001. Gross margin improved to 55% from 42% in the prior year, primarily due to increased service fees leveraged over our relatively fixed cost of revenue. Gross profit also improved as a result of improved efficiency from technology development and cost control initiatives.

General and Administrative. General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance, and depreciation. General and administrative expenses increased $0.1 million, or 2%, to $7.0 million in 2002, from $6.9 million in 2001. The increase in general and administrative expenses was primarily attributable to increased depreciation expense partially offset by decreased compensation costs attributable to cost control initiatives implemented in the fourth quarter of 2001.

Sales and Marketing. Sales and marketing expenses include salaries and commissions paid to sales and marketing personnel, consumer marketing costs, public relations costs, and other costs incurred in marketing our services and products. Sales and marketing expenses decreased $0.5 million, or 9%, to $5.4 million in 2002, from $5.9 million in 2001. The primary reason for the decrease in sales and marketing expenses was a reduction in staff as a result of consolidating certain client service responsibilities.

Income (Loss) from Operations. Income from operations increased $9.6 million to $1.0 million for the year ended December 31, 2002, from an $8.6 million loss in 2001. The significant increase in income from operations was primarily due to increases in service fee revenue leveraged over relatively fixed costs and decreases in various operating expenditures derived from our expense control initiatives.

Other Expense, Net. Interest income decreased $0.5 million, or 79%, to $0.1 million in 2002, from $0.6 million for 2001. The decrease was due to the lower average cash and investment balances and lower interest rates. Interest and other expense decreased $0.5 million, or 28%, to $1.3 million in 2002, as compared to $1.8 million in 2001, as the result of lower interest expense and amortization of debt issuance costs due to the conversion of Convertible Notes. The conversion of $1.0 million of Convertible Notes in March 2002 resulted in a non-cash debt conversion expense of $0.2 million attributable to the issuance of 45,031 incremental shares of common stock. Until September 2005, unless the Convertible Notes are earlier converted or repurchased, we will continue to incur interest expense related to the Convertible Notes.

Net Loss Per Share. Net loss was $0.4 million for the year ended December 31, 2002, compared to a loss of $9.8 million for 2001. Basic and diluted loss per share was $(0.03) and $(0.82) for the years ended December 31, 2002 and 2001, respectively.

Since inception, we have primarily financed our operations through private placements and public offerings of our common and preferred stock and the issuance of debt. We have also entered into various capital lease financing agreements. Cash and investments in available for sale securities were $13.6 million and $6.8 million as of December 31, 2003 and 2002, respectively. The $6.8 million increase in cash and investments results from $7.0 million in cash generated by operating activities and $2.5 million in cash generated by financing activities, partially offset by capital expenditures of $2.7 million.

Net cash provided by operating activities was $7.0 million for the year ended December 31, 2003 as compared to $2.7 million during the year ended December 31, 2002. While cash provided by operating activities during the years ended December 31, 2003 and 2002 resulted primarily from income from operations net of non-cash charges, $2.2 million of the cash provided by operating activities in 2003 was the result of the termination payment received from Calfed.

Net cash used in investing activities for the year ended December 31, 2003 was $4.2 million, which was the result of a net increase of $1.5 million in securities available-for-sale and $2.7 million in capital expenditures. For the year ended December 31, 2002, net cash used in investing activities was $2.6 million, of which approximately $1.1 million was provided by sales of securities available-for-sale offset by $3.7 million used for capital expenditures.

Net cash provided by financing activities was $2.5 million in the year ended December 31, 2003 as compared to $3,300 in the year ended December 31, 2002. During 2003 the Company generated $6.6 million in cash— $4.4 million through a private stock placement in June 2003, and $2.2 million through the exercise of stock options. The Company used $3.9 million of the June 2003 private stock placement to repurchase $3.9 million of the Convertible Notes. Additionally, the Company used $0.2 million for the repayment of capital lease obligations. Cash provided by financing activities for the year ended December 31, 2002 resulted primarily from the issuance $0.3 million of common stock offset by the repayment of capital lease obligations.

Future capital requirements will depend upon many factors, including the timing of research and product development efforts and the expansion of our marketing effort. We expect to continue to expend significant amounts on expansion of facility infrastructure, ongoing research and development, computer and related equipment, and personnel.

We currently believe that cash on hand, investments and the cash we expect to generate from operations will be sufficient to meet our current anticipated cash requirements for at least the next twelve months. We expect to have additional cash requirements over the next two to three years because of efforts we are undertaking to upgrade and rewrite certain of our infrastructure applications. We forecast that all incremental expenses related to this undertaking can be financed out of cash provided by operating activities.

There can be no assurance that additional capital beyond the amounts currently forecasted by us will not be required or that any such required additional capital will be available on reasonable terms, if at all, at such time as required. We intend to invest our cash in excess of current operating requirements in marketable government, corporate and mortgage-backed securities.

We invest primarily in short-term, investment grade, marketable government, corporate, and mortgage-backed debt securities. The Company’s interest income is most sensitive to changes in the general level of U.S. interest rates and given the short-term nature of our investments, our exposure to interest rate risk is not material. We do not have operations subject to risks of foreign currency fluctuations, nor do we use derivative financial instruments in our operations or investment portfolio. We have classified all of our investments as

available-for-sale financial instruments. The following table provides information about our available-for-sale investments that are sensitive to changes in interest rates.

Long term debt as of December 31, 2003 is comprised of capital lease obligations with interest rates ranging from 4% to 13%.

We have audited the accompanying balance sheets of Online Resources Corporation as of December 31, 2003 and 2002, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Online Resources Corporation at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

Online Resources Corporation, a Delaware corporation, (the “Company”) is a leading outsourcer of Internet banking, payment and customer contact services to financial institution clients nationwide. The Company offers services, branded in the clients’ name, that integrate seamlessly into a single-vendor, end-to-end solution, supported by 24x7 customer care, targeted consumer marketing, training and other network and technical professional products and services. The Company operates in one business segment.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash held for bill payments in process is immediately disbursed on behalf of users and no net cash balance is reflected on the Company’s financial statements.

At December 31, 2003 and 2002, the carrying value of the following financial instruments: cash and cash equivalents, investments in available-for-sale securities, accounts receivable, accounts payable and accrued liabilities approximates their fair value based on the liquidity of these financial instruments or based on their short-term nature.

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and investments in available-for-sale securities. The Company has cash in financial institutions that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000 per institution. At December 31, 2003 and 2002, the Company had cash and cash equivalent accounts in excess of the FDIC insured limits. Investments in available-for-sale securities are limited to investment-grade securities. The fair value of the Company’s financial instruments is substantially equivalent to their carrying value and, although there is some credit risk associated with these instruments, the Company believes this risk to be insignificant.

The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally does not require collateral. Management believes that any risk of loss is significantly reduced due to the nature of the customers being financial institutions and credit unions as well as the number of its customers and geographic areas. The Company maintains an allowance for doubtful accounts to provide for probable losses in accounts receivable. A receivable is considered past due if payment has not been received within the agreed-upon terms.

Property and equipment, including leasehold improvements, are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, which is generally three to five years. Equipment recorded under capital leases is also amortized over the lease term or

the estimated useful life of the asset. Depreciation and amortization expense was $3.1 million, $2.7 million, and $2.1 million for the years ended December 31, 2003, 2002, and 2001, respectively.

The Company capitalizes the cost of computer software developed or obtained for internal use in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized computer software costs consist primarily of payroll-related and consulting costs incurred during the development stage. The Company expenses costs related to preliminary project assessments, research and development, re-engineering, training and application maintenance as they are incurred. Capitalized software costs are included in Property, Plant & Equipment and are being depreciated on the straight-line method over a period of three years upon being placed in service.

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically evaluates the recoverability of long-lived assets, including deferred implementation costs and property and equipment, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no indicators of impairment that might indicate that impairment exists for a particular asset or asset group.

The Company accounts for taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under SFAS No. 109, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse.

Certain amounts reported in prior periods have been reclassified to conform to the 2003 presentation.

The Company generates revenues from service fees, professional services, and other supporting services. Service fees are primarily composed of three business lines, internet banking services, payment services and consumer contact services. Revenues from service fees include new user registration fees, account access fees, transaction fees, customer service fees and relationship marketing support fees. Revenue from service fees are recognized over the term of the contract as the services are provided.

Professional services revenues consist of implementation fees associated with the linking of the Company’s financial institution client’s to the Company’s Quotien^SM e-financial suite through various networks, web development and hosting fees, training fees and communication services. In accordance with Staff Accounting Bulletin No. 101 — Revenue Recognition in Financial Statements (“SAB 101”), as superseded by SAB 104, which the Company adopted effective January 1, 2000, implementation fees and related direct implementation costs are recognized on a straight line basis over the contract term as the services are provided, which typically range from one to five years (generally three years). Prior to 2000, the Company recognized nonrefundable implementation fees as revenue under the percentage of completion method as certain milestone output measures were completed. Due to the adoption of SAB 101, revenue that was previously recognized under the Company’s prior revenue recognition policy will be recognized under the Company’s revised revenue recognition policy through periods up to 2004 because some contract periods extend through 2004. During the years ended December 31, 2003, 2002 and 2001, the Company recognized revenue of $37,000, $275,000, and $541,000, respectively, and related direct incremental costs that were included in the cumulative effect adjustment at January 1, 2000. Revenue from web development, web hosting and training are recognized over the term of the contract as the services are provided.

In December 2002, Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) was released effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 establishes new requirements for determining whether an arrangement involving multiple deliverables contains more than one unit of accounting. The Company adopted EITF 00-21 and there has been no material impact on the Company’s financial position or results of operations from the adoption of EITF 00-21.

One of the Company’s financial institution clients, California Federal Bank or Cal Fed, accounted for approximately $3.4, $4.8, and $3.2 million or 9%, 15%, and 13%, of the Company’s total revenues for the years ended December 31, 2003, 2002, and 2001, respectively. During 2002, Citigroup acquired Cal Fed, and converted the Cal Fed customers to the Citigroup banking and bill payment platform in the first quarter of 2003. The Company extended its full service contract with Cal Fed through the first quarter of 2003 and terminated a subsequent bill payment only contract that was to run through 2005. In consideration of this extension and termination, the Company received a combination of service and termination fee revenue of $3.3 million that was recognized in the first quarter of 2003. No other customer accounts for more than 10% of the Company’s revenue.

The Company expenses advertising costs as incurred. The Company incurred $695, $250, and $200 in advertising costs for the years ended December 31, 2003, 2002 and 2001, respectively.

Net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding. Shares associated with stock options, warrants and convertible securities are not included to the extent they are anti-dilutive.

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

The weighted-average fair values at date of grant for options granted during 2003, 2002, and 2001 were $3.49, $2.25, and $1.77, respectively, and were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

A reconciliation of the Company’s net income (loss) to pro forma net income (loss), and the related basic and diluted pro forma income (loss) per share amounts, for the years ended December 31, 2003, 2002,and 2001, is provided below. For purposes of pro forma disclosure, stock-based compensation expense is recognized in accordance with the provisions of SFAS No. 123. Further, pro forma stock-based compensation expense is amortized to expense on a straight-line basis over the vesting period.

The Company adopted SFAS No. 145, “Rescission of FASB Statement 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” effective for the Company’s fiscal year beginning on January 1, 2003. SFAS 145 requires that any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Opinion No. 30 for classification as an extraordinary item be reclassified. These gains and losses will now be required to be presented within the statement of operations in appropriate segregated line items. As required by SFAS No. 145, these financial statements reflect the reclassification of the extraordinary gains associated with the extinguishment of debt as “other (expense) income” in the 2001 statement of operations.

The Company classifies its investments as available-for-sale. Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value in the balance sheets. Fair market value is based on quoted market value. Any unrealized gains or losses are reported as a separate component of stockholders’ equity. Realized gains and losses are included in investment income. Interest and dividends also are included in investment income. The net realized gain on investments for the years ended December 31, 2003, 2002 and 2001 were approximately $6,900, $10,000, and $73,000,

respectively. For purposes of determining gross realized gains and losses, the cost of securities sold is based on the average cost method. As of December 31, 2003 and 2002, the unrealized gain on investments was $5,327 and $14,652, respectively.

At December 31, 2003, contractual maturities of available-for-sale securities were as follows:

On September 28, 2000, the Company completed the private placement of $20 million in convertible subordinated notes (the “Convertible Notes”) to a group of accredited investors. The Company received proceeds of $18.7 million net of debt issuance costs of $1.3 million including commission of $917,200. The Convertible Notes carried an 8% coupon. Interest payment dates were April 1 and October 1, commencing April 1, 2001. The Convertible Notes were initially convertible at a price of $4.75 per share but were subject to an annual reset under certain circumstances. In no event could the price be less than $4.00 per share. Subject to certain conditions, the Company was able to redeem all or part of the Convertible Notes prior to maturity. Jefferies & Company, Inc., one of the underwriters of the placement, also obtained 200,000 warrants that expire on September 30, 2005 that are exercisable at the same price as the conversion price under the Convertible Notes (see Note 9).

During 2001, the Company paid $2.2 million to repurchase $3.5 million of the Convertible Notes in privately negotiated transactions. After $289,000 of debt issuance costs were written off, the Company recognized a gain of $1.1 million as a result of the transactions.

On September 28, 2001, November 2, 2001 and March 27, 2002, the Company induced conversion of $2.5 million, $1.0 million and $1.0 million of the Convertible Notes at $2.00, $3.05 and $3.39 per common

share, respectively, instead of the $4.00 conversion price that otherwise existed under the Convertible Notes. These induced conversions resulted in the issuance of 1,250,000, 327,869 and 295,031 shares or 625,000, 77,869 and 45,031 additional shares, respectively, had the Convertible Notes been converted at the $4.00 per common share conversion price. The Company recognized $731,250, $175,205 and $141,848 non-cash debt conversion expense and wrote off $157,157, $51,970 and $70,706 of related debt issuance costs in September 2001, November 2001 and March 2002, respectively, in connection with the transactions.

On May 30, 2003 and June 9, 2003, the Company repurchased $1.9 million and $2.0 million, respectively, of the Convertible Notes at par value. This removed 975,000 shares from possible future issuance in conjunction with conversion of the repurchased Convertible Notes. The Company wrote off $181,179 of related debt issuance costs in connection with these transactions.

Between October 1 and October 28, 2003, Noteholders converted $7.5 million in Convertible Notes into 1,875,000 shares of the Company’s common stock at $4.00 per share pursuant to the terms of the Notes. On October 29, 2003, the conversion price reset to $4.75 per share as defined by the terms of the Notes. And on November 18 and November 20, 2003, remaining Convertible Notes of approximately $0.6 million were converted into 126,314 shares. The Company wrote-off $313,934 of related debt issuance costs in connection with the transactions.

Interest expense related to the Convertible Notes was approximately $627,000, $980,000 and $1,680,000 in 2003, 2002 and 2001, respectively. As of December 31, 2003 and 2002, accrued interest on notes payable totaled approximately $0 and $240,000, respectively.

The Company leases office space and equipment under operating leases expiring in 2004. The office leases provide for escalating rent over the respective lease term. Rent expense under the operating leases and sublease rentals received by the Company for the years ended December 31, 2003, 2002 and 2001, are as follows:

The Company also leases equipment under capital leases. Amortization of assets held under capital leases is included in depreciation and amortization in the statements of cash flows.

In 2003, the Company has a $16,000 current tax liability for federal income taxes as a result of Alternative Minimum Tax (AMT). The Company did not pay income taxes during 2002 and 2001 due to its net operating loss position.

At December 31, 2003, the Company has net operating loss carryforwards of approximately $88 million that expire at varying dates from 2010 to 2022. Of that $88 million, approximately $4.3 million relates to the exercise of stock options. The timing and manner in which the operating loss carryforwards may be utilized by the Company will be limited to the Company’s ability to generate future taxable income. The use of these losses may also be subject to significant limitations due to ownership changes pursuant to Section 382 of the Internal Revenue Code resulting from prior issuances of Preferred and Common Stock. As the Company has not generated consistent earnings and no assurance can be made of future earnings needed to utilize these net operating losses, a valuation allowance in the amount of the deferred tax assets has been recorded. The Company expects to utilize approximately $700,000 of net operating loss carryforwards for the year ended December 31, 2003.

Significant components of the Company’s net deferred tax assets are as follows:

The following is a summary of the items that caused the income tax expense to differ from taxes computed using the statutory federal income tax rate for the years ended December 31, 2003, 2002 and 2001:

There was no incremental effect to the excess tax benefits from the exercise of stock options during 2003 and no benefit was charged to equity. Approximately $770,000 of the decrease in the valuation allowance during 2003 was tagged as excess tax benefits and the benefit will be credited to equity if the valuation allowance is reduced in future periods.

Of the 3,000,000 authorized preferred shares of the Company, 1,000,000 shares have been designated as Series A convertible Preferred Stock (“Series A Preferred Stock”). Holders of Series A Preferred Stock shares are entitled to receive dividends at the same rate as holders of common stock and have voting rights equal to their common stock equivalent on an as if converted basis. Additionally, each Series A Preferred Stock holder is entitled to a liquidation preference equal to $1.00 plus declared but unpaid dividends. There were no shares of Series A Preferred Stock outstanding at December 31, 2003 and 2002.

In anticipation of the adoption of a stockholders rights plan that was implemented on January 11, 2002, the Company, through a certificate of designation that became effective on December 24, 2001, authorized 297,500 shares of Series B Junior Participating Preferred Stock (“Series B Preferred Stock”). Under the stockholders right plan, which is intended to protect the Company’s stockholders from unsolicited attempts to acquire or gain control of the Company, each holder of record on January 11, 2002 of a share of common stock received a right to purchase a unit of 1/100th of a share of Series B Preferred Stock at a price, subject to adjustment, of $115 per unit. The right is not exercisable until an attempt occurs to acquire or gain control of the Company that is unsolicited and does not have the approval of the Company’s board of directors. Upon exercise of a right, each holder of a right will be entitled to receive 1/100th of a share of Series B Preferred Stock or, in lieu thereof, a number of shares of common stock equal to the exercise price of the right divided by one-half of the current market price of the Company’s common stock. Until exercise of a right for 1/100th of a share of Series B Preferred Stock, no shares of Series B Preferred Stock will be issued. Holders of a share of Series B Preferred Stock are entitled to receive cumulative quarterly dividends equal to the greater of $1.00 per share or 100 times any dividend declared on the Company’s common stock and have voting rights equal to 100 votes per share. Additionally, each holder of a share of Series B Preferred Stock is entitled to a liquidation preference equal to $100 plus accrued and unpaid dividends thereon, whether or not declared.

On June 9, 2003, the Company increased stockholders’ equity by $4.4 million through a private placement of 1,336,000 newly issued common shares to a group of institutional investors. This transaction was priced at a discount to the volume weighted average closing share price for the 10 trading days prior to the seventh trading day before closing. In separate transactions, the Company also repurchased $3.9 million of its Convertible Notes at par. The remaining $8.1 million in Convertible Notes were converted into 2,001,314 shares of common stock in October and November of 2003.

In February 1989, the Company adopted an Incentive Stock Option Plan (the “Plan”). During June 1997, the Company’s Board of Directors authorized an increase of 124,747 shares of common stock that can be issued under the Plan. During 1998, the Company’s Board of Directors increased the number of shares of common stock that can be issued under the plan to 2,316,730. The option price under the Plan will not be less than fair market value of the Company’s common stock on the date of grant. The vesting period of the options is determined by the Board of Directors and is generally four years. Outstanding options expire after ten years.

During 1999, the Company adopted the 1999 Stock Option Plan (the “1999 Plan”). The 1999 Plan permits the granting of both incentive stock options and nonqualified stock options to employees, directors and consultants. The aggregate number of shares that can be granted under the 1999 Plan is 5,858,331. The option exercise price under the 1999 Plan will not be less than fair market value of the Company’s common stock on the date of grant. The vesting period of the options is determined by the Board of Directors and is generally four years. Outstanding options expire after seven to ten years.

Additional information with respect to stock option activity under the stock option plans is summarized as follows:

The following table summarizes information about stock options outstanding at December 31, 2003.

Outstanding warrants were issued in 2000 in connection with the Convertible Notes with an exercise price of $4.00 and an expiration date of September 30, 2005.

As of December 31, 2003, the Company has 6,370,264 and 200,000 shares reserved for issuance for stock options and warrants, respectively.

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

Due to their antidilutive effects, outstanding shares from the conversion of the Convertible Notes, stock options and warrants to purchase 4,113,639, 9,736,686 and 9,221,262 shares of common stock at December 31, 2003, 2002 and 2001, respectively, were excluded from the computation of diluted earnings per share.

The Company has a 401(k) plan that allows eligible employees to contribute up to 15% of their salary. The Company has total discretion about whether to make an employer contribution to the plan and the amount of the employer contribution. The Company has historically not chosen to match the employee contributions and, therefore, has not incurred any contribution expense.

The Company has an employee stock purchase plan for all eligible employees to purchase shares of common stock at 85% of the lower of the fair market value on the first or the last day of each six-month offering period. Employees may authorize the Company to withhold up to 10% of their compensation during any offering period, subject to certain limitations. The employee stock purchase plan authorizes up to 400,000 shares to be granted. During the year ended December 31, 2003 and 2002, shares totaling 21,557 and 29,395 were issued under the plan at an average price of $4.11 and $2.20 per share, respectively. At December 31, 2003, 270,586 shares were reserved for future issuance.

During 2001, the Company surrendered the recourse right under the stock subscription receivables for two former employees in the amount of $151,969 and the related collateral of 43,484 shares was retained by the Company. During 2002, the Company surrendered the recourse right under the stock subscription receivables for two employees in the amount of $122,381 and the related collateral of 30,677 shares was retained by the Company. The Company accounted for the conversions as a repurchase of shares previously exercised as a treasury stock transaction. The fair value of the collateral on the conversion date was $126,159, and $79,219, respectively, and was recorded as treasury stock. The shares under the new non-recourse notes were accounted for as the grant of a new stock compensation arrangement and were accounted for as a variable award pursuant to the terms in EITF issue 95-16, “Accounting for Stock Compensation Arrangement with Employer Loan Features”. Stock compensation expense was not material during the three years ended December 31, 2003. The agreements expired during 2003 and were not renewed, and the Company retained the collateral it held.

One director, who resigned in 2003, is Chairman and Chief Executive Officer of a financial institution that generated approximately $1,040,000, $860,000 and $623,000 in revenue for the Company during the years ended December 31, 2003, 2002 and 2001, respectively. The financial institution owed $200,000 and $163,000 to the Company at December 31, 2003 and 2002, respectively. Such amounts are included in “Accounts Receivable” on the balance sheets.

The Company incurred and paid a one-time charge of $209,434 including severance and benefit payments during the twelve months ended December 31, 2001 as a result of the staff reduction of 23 employees, approximately 9% of the total employees, on January 3, 2001.

The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for the years 2003 and 2002 is as follows:

No changes in or disagreements with accountants on accounting and financial disclosure have occurred during the two most recent fiscal years.

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us, was made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.

There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The information required by this item is incorporated by reference to the sections and subsections entitled “Management”, “Executive Compensation”, “Code of Ethics”, “Audit Committee”, “Audit Committee Financial Experts” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in our Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.

The information required by this item is incorporated by reference to the section entitled “Executive Compensation and Transactions” contained in our Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” contained in our Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.

The information required by this item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” contained in our Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.

The information required by this item is incorporated by reference to the section entitled “Principal Accountant Fees and Services” contained in our Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.

(1) Financial Statements. The Company’s financial statements are included in Part II, Item 8 of this report on Form 10-K.


	All other schedules set forth in the applicable accounting regulations of the Securities and Exchange Commission either are not required under the related instructions or are not applicable and, therefore, have been omitted.

We have audited the financial statements of Online Resources Corporation as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated February 2, 2004. Our audits also included the financial statement schedule listed in Item 15(a)(2) of the Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.


(1)	Uncollectible accounts written off.

(2)	Reversal of previously reserved amounts that were collected.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 12, 2004


	By:	/s/ MATTHEW P. LAWLOR _______________________________________ Matthew P. Lawlor


	Chairman and
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.


Delaware		52-1623052
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7600 Colshire Drive
McLean, Virginia		22102
(Address of principal executive offices)		(Zip code)


		Page

PART I
Item 1:	Business		2
Item 2:	Properties		18
Item 3:	Legal Proceedings		19
Item 4:	Submission of Matters to a Vote of Security Holders		19
PART II
Item 5:	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
Item 6:	Selected Financial Data		21
Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 7A:	Quantitative and Qualitative Disclosures About Market Risk		32
Item 8:	Financial Statements and Supplementary Data		33
Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		51
Item 9A:	Controls and Procedures		51
PART III
Item 10:	Directors and Executive Officers of the Company		51
Item 11:	Executive Compensation		51
Item 12:	Security Ownership of Certain Beneficial Owners and Management		51
Item 13:	Certain Relationships and Related Transactions		51
Item 14:	Principal Accountant Fees and Services		51
PART IV
Item 15:	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		52
Signatures			56
Index to financial statements			33



	2003				2002

Fiscal Quarter Ended	High		Low		High		Low

First Quarter	$	3.450	$	2.500	$	3.300	$	2.600
Second Quarter		6.370		2.620		3.850		2.800
Third Quarter		7.400		5.240		3.140		2.510
Fourth Quarter		7.980		6.030		4.640		2.700



			Year Ended December 31

			2003			2002			2001			2000			1999

Statement of Operations Data:
Revenues:
	Service fees		$	33,606,782		$	29,603,510		$	21,679,291		$	13,311,370		$	6,378,175
	Professional services and other			4,800,833			2,750,673			2,956,472			2,332,940			2,067,360

		Total revenues		38,407,615			32,354,183			24,635,763			15,644,310			8,445,535
	Cost of revenues			15,502,564			14,627,981			14,313,734			13,170,656			9,081,269

Gross profit (loss)				22,905,051			17,726,202			10,322,029			2,473,654			(635,734	)
	General and administrative			8,627,640			7,037,884			6,930,462			6,370,848			3,894,475
	Sales and marketing			6,433,211			5,368,177			5,931,222			8,972,094			5,266,044
	Systems and development			3,830,565			4,344,765			5,854,866			6,246,174			3,998,936
	Non-recurring charges			—			—			209,434			—			—

		Total expenses		18,891,416			16,750,826			18,925,984			21,589,116			13,159,455

Income (loss) from operations				4,013,635			975,376			(8,603,955	)		(19,115,462	)		(13,795,189	)
Other (expense) income				(1,234,081	)		(1,380,959	)		(2,291,756	)		501,680			(34,045	)
Gain (loss) from extinguishment of debt (1)				—			—			1,083,153			—			(885,407	)

Income (loss) before change in accounting principle				2,779,554			(405,583	)		(9,812,558	)		(18,613,782	)		(14,714,641	)
Change in accounting principle (2)				—			—			—			(216,818	)		—

Income (loss) before income tax provision				2,779,554			(405,583	)		(9,812,558	)		(18,830,600	)		(14,714,641	)
Income tax provision				15,785			—			—			—			—

Net income (loss)				2,763,769			(405,583	)		(9,812,558	)		(18,830,600	)		(14,714,641	)
Preferred stock accretion				—			—			—			—			(2,236,716	)
Beneficial return on preferred shares (3)				—			—			—			—			(2,668,109	)

Net income (loss) available for common stockholders			$	2,763,769		$	(405,583	)	$	(9,812,558	)	$	(18,830,600	)	$	(19,619,466	)

Net income (loss) per share
	Basic		$	0.18		$	(0.03	)	$	(0.82	)	$	(1.64	)	$	(2.45	)
	Diluted			0.17			(0.03	)		(0.82	)		(1.64	)		(2.45	)

Pro forma, assuming the change in accounting principle was accounted for retroactively: (4) Net loss available for common stockholders												$	(18,613,782	)	$	(19,482,536	)

Basic and diluted loss per share												$	(1.62	)	$	(2.43	)

Shares used in calculation of income (loss) per share
	Basic			15,140,538			13,520,642			12,026,476			11,487,192			8,010,331
	Diluted			16,685,602			13,520,642			12,026,476			11,487,192			8,010,331


(1)	On June 10, 1999, we used $9.4 million of the net proceeds from our initial public offering to pay off corporate debt, which payment resulted in a one-time charge of $885,407. In May 2001, we used $2.2 million of our cash to repurchase $3.5 million of the 8% convertible subordinated notes, which payments resulted in a one-time gain of $1,083,153.

(2)	In the fourth quarter of 2000, we adopted a change in accounting principle for implementation fees, retroactive to January 1, 2000, under Staff Accounting Bulletin 101 (“SAB 101”), Revenue Recognition in Financial Statements.

(3)	We recorded a deemed beneficial return on the Series C preferred stock issued during the first three months of 1999, due to these shares being convertible into common stock at a discount from fair value at the date of issuance.

(4)	Pro forma (as if) amounts, assuming retroactive application of SAB 101 for period of change and all prior periods presented.


Item 5.	*Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



			Year Ended December 31,

			2003			2002			2001

Statement of Operations Data:
Revenues:
	Banking services			10.6	%		16.4	%		20.6	%
	Payment services			54.8			47.2			41.9
	Consumer contact services			22.1			27.9			25.5
	Professional services and other			12.5			8.5			12.0

		Total revenues		100.0			100.0			100.0
Costs and expenses:
	Costs of revenues			40.4			45.2			58.1

Gross profit				59.6			54.8			41.9
	General and administrative			22.5			21.8			28.1
	Sales and marketing			16.7			16.6			24.1
	Systems and development			10.0			13.4			23.7
	Non-recurring charges			—			—			0.9

		Total expenses		49.2			51.8			76.8

Income (loss) from operations				10.4			3.0			(34.9	)
Other expense, net				(1.9	)		(3.6	)		(4.8	)
Debt conversion expense				(1.3	)		(0.7	)		(4.5	)
Gain from the extinguishment of debt				—			—			4.4

Net income (loss)				7.2	%		(1.3	)%		(39.8	)%



			Year Ended
			December 31,						Change

			2003			2002			Difference			%

Revenues (in millions):
	Banking services		$	4.1		$	5.3		$	(1.2	)		(23	)%
	Payment services			21.0			15.3			5.7			38	%
	Consumer contact services			8.5			9.0			(0.5	)		(6	)%
	Professional services and other			4.8			2.8			2.0			75	%

		Total revenues	$	38.4		$	32.4		$	6.0			19	%
Users and transactions (000s):
	Internet banking services users			416			403			13			3	%
	Payment services users			528			327			201			61	%
	All services users			841			623			218			35	%
	Payment transactions			24,825			16,491			8,334			51	%
Average monthly revenue per user:
	Internet banking services		$	0.83		$	1.24		$	(0.41	)		(33	)%
	Payment services			4.10			4.50			(0.40	)		(9	)%
Adoption rates:
	Internet banking services(1)			16.8	%		11.2	%		5.6	%		50	%
	Payment services(2)			5.1	%		4.2	%		0.9	%		21	%


		Total		2004		2005		2006		Thereafter

Capital lease obligations		$	116,103	$	105,087	$	11,016	$	—	$	—
Operating lease			729,458		729,458		—		—		—
Purchase obligations			1,018,000		400,500		515,000		102,500		—

	Total obligations	$	1,863,561	$	1,235,045	$	526,016	$	102,500		—


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*



		December 31, 2003

		Amortized Cost		Fair Value		Interest Rate

U.S. government treasury obligations		$	3,119,026	$	3,122,780		1.00	%
Mortgage backed securities			2,809,516		2,810,935		1.11	%
Commercial obligations			50,000		50,154		1.13	%

	Total investments	$	5,978,542	$	5,983,869


Report of Ernst & Young LLP, Independent Auditors			34
Balance Sheets			35
Statements of Operations			36
Statements of Stockholders’ Equity			37
Statements of Cash Flows			38
Notes to Financial Statements			39


																							Receivable
																				Accumulated			From the
		Common Stock						Additional												Other			Sale of			Total
								Paid-in			Accumulated			Deferred Stock			Treasury			Comprehensive			Common			Stockholders’
		Shares			Amount			Capital			Deficit			Compensation			Stock			Income			Stock			Equity

Balance at December 31, 2000.			11,616,649		$	1,162		$	85,238,538		$	(75,482,307	)	$	(185,894	)	$	—		$	56,075		$	(422,604	)	$	9,204,970
	Comprehensive loss:
	Net loss		—			—			—			(9,812,558	)		—			—			—			—			(9,812,558	)
	Unrealized loss on available-for-sale securities		—			—			—			—			—			—			(30,705	)		—			(30,705	)

	Comprehensive loss																										(9,843,263	)
	Exercise of common stock options		6,488			—			26,148			—			—			—			—			—			26,148
	Exercise of common stock warrants		21,385			2			149,998			—			—			—			—			—			150,000
	Conversion of notes payable		1,577,869			158			4,406,297			—			—			—			—			—			4,406,455
	Issuance of common stock options		—			—			20,303			—			—			—			—			—			20,303
	Issuance of common stock		70,847			7			123,458			—			—			—			—			—			123,465
	Reclassification of stock subscription to notes receivable		—			—			—			—			—			—			—			148,254			148,254
	Amortization of deferred stock compensation		—			—			(60,564	)		—			124,970			—			—			—			64,406
	Surrender of stock subscription receivable		(44,848	)		(4	)		33,493			—			—			(148,581	)		—			151,969			36,877

Balance at December 31, 2001.			13,248,390			1,325			89,937,671			(85,294,865	)		(60,924	)		(148,581	)		25,370			(122,381	)		4,337,615
	Comprehensive loss:
	Net loss		—			—			—			(405,583	)		—			—			—			—			(405,583	)
	Unrealized loss on available-for-sale securities		—			—			—			—			—			—			(10,718	)		—			(10,718	)

	Comprehensive loss																										(416,301	)
	Exercise of common stock options		189,955			19			291,150			—			—			—			—			—			291,169
	Conversion of notes payable		295,031			30			1,141,818			—			—			—			—			—			1,141,848
	Issuance of common stock		29,395			2			45,906			—			—			—			—			—			45,908
	Cancellation of over-issued shares		(25,673	)		(3	)		3			—			—			—			—			—			—
	Amortization of deferred stock compensation		—			—			(6,195	)		—			60,924			—			—			—			54,729
	Surrender of stock subscription receivable		(30,677	)		(3	)		3			—			—			(79,219	)		—			122,381			43,162

Balance at December 31, 2002.			13,706,421			1,370			91,410,356			(85,700,448	)		—			(227,800	)		14,652			—			5,498,130
	Comprehensive income:
	Net income		—			—			—			2,763,769			—			—			—			—			2,763,769
	Unrealized loss on available-for-sale securities		—			—			—			—			—			—			(9,325	)		—			(9,325	)

	Comprehensive income																										2,754,444
	Exercise of common stock options		746,911			75			2,167,806			—			—			—			—			—			2,167,881
	Issuance of common stock		1,357,556			136			4,450,328			—			—			—			—			—			4,450,464
	Conversion of notes payable		2,001,314			200			8,099,800																		8,100,000

Balance at December 31, 2003.			17,812,202		$	1,781		$	106,128,290		$	(82,936,679	)	$	—		$	(227,800	)	$	5,327		$	—		$	22,970,919



	December 31, 2003				December 31, 2002

	Amortized Cost		Fair Value		Amortized Cost		Fair Value

US Government treasury obligations	$	3,119,026	$	3,122,780	$	3,422,947	$	3,435,111
Mortgage backed securities		2,809,516		2,810,935		415,631		417,125
Corporate obligations		50,000		50,154		641,647		642,641

	$	5,978,542	$	5,983,869	$	4,480,225	$	4,494,877


Item 6.	*Selected Financial Data*


Due in	Amortized Cost		Fair Value

2004	$	5,432,033	$	5,434,025
2005		546,509		549,844


			Sublease
	Rent		Income

2001	$	1,121,000	$	26,000
2002		1,179,000		—
2003		1,312,000		—


		Operating		Capital

		December 31,		December 31,
		2003		2003

2004		$	729,458	$	105,087
2005			—		11,016
Thereafter			—		—

	Total minimum lease payments	$	729,458		116,103

Less amount representing interest					(8,551	)

Present value of minimum lease payments					107,552
Less current portion					97,031

Long-term portion of minimum lease payments				$	10,521



	Year Ended December 31, 2002


	2003					2002					2001

				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price

Outstanding at beginning of period		5,925,240		$	5.30		4,529,080		$	6.69		3,135,812		$	9.55
Options granted		484,835			4.88		2,316,821			2.70		1,885,501			2.17
Options exercised		(746,911	)		2.86		(189,955	)		1.54		(6,488	)		1.50
Options canceled or expired		(253,046	)		6.14		(730,706	)		6.79		(485,745	)		7.66

Outstanding at end of period		5,410,118		$	5.47		5,925,240		$	5.30		4,529,080		$	6.69

Options exercisable at end of period		3,410,392		$	6.21		3,721,302		$	5.70		2,508,584		$	7.22



	Options Outstanding
							Options Exercisable
			Weighted-
			Average		Weighted-				Weighted-
			Remaining		Average				Average
	Number		Contractual Life		Exercise		Number		Exercise
	Outstanding		(In Years)		Price		Exercisable		Price

$0.06 to $2.30		1,187,353		6.45	$	1.95		986,138	$	1.93
$2.31 to $2.86		967,645		7.87		2.80		241,288		2.74
$2.88 to $3.81		1,132,840		6.79		3.20		573,596		3.25
$3.84 to $8.40		1,211,588		4.30		7.23		846,050		7.85
$8.42 to $20.19		909,555		3.23		13.37		762,392		13.21
$21.50 to $21.50		1,137		3.20		21.50		928		21.50

		5,410,118		5.75	$	5.47		3,410,392	$	6.21


		Warrants

Balance at December 31, 2000			1,736,397
	Exercise of warrants during 2001		(21,385	)
	Cancellation of warrants during 2001		(272,830	)

Balance at December 31, 2001			1,442,182
	Exercise of warrants during 2002		—
	Cancellation of warrants during 2002		(630,736	)

Balance at December 31, 2002			811,446
	Exercise of warrants during 2003		—
	Cancellation of warrants during 2003		(611,446	)

Balance at December 31, 2003			200,000



		Years Ended December 31,

		2003		2002			2001

Net income (loss)		$	2,763,769	$	(405,583	)	$	(9,812,558	)
Shares used in calculation of income (loss) per share:
	Basic		15,140,538		13,520,642			12,026,476
	In the money warrants		38,073		—			—
	In the money options		1,506,991		—			—

	Diluted		16,685,602		13,520,642			12,026,476
Net income (loss) per share:
	Basic	$	0.18	$	(0.03	)	$	(0.82	)
	Diluted	$	0.17	$	(0.03	)	$	(0.82	)



		Quarter Ended

		March 31,		June 30,			September 30,		December 31,
		2003		2003			2003		2003

Total revenues		$	11,009,998	$	8,417,410		$	9,259,122	$	9,721,085
Gross profit			7,159,509		4,656,985			5,247,600		5,840,957
Net income (loss)		$	2,123,172	$	(148,215	)	$	363,804	$	425,008

Net income (loss) per share:
	Basic	$	0.15	$	(0.01	)	$	0.02	$	0.02
	Diluted	$	0.15	$	(0.01	)	$	0.02	$	0.02


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*


3.1		Form of Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
3.2		Form of Amended and Restated Bylaws of the Company (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
3.3		Certificate of Designation of Shares of Series B Junior Participating Preferred Stock
4.1		Specimen of Common Stock Certificate of the Company (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
4.9		Form of warrants issued to placement agents (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
4.1	0	Registration Rights Agreement for purchasers of Series C preferred stock and Sirrom Capital Corporation (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
4.1	1	Indenture dated September 28, 2000 between the registrant and Bankers Trust Company, as trustee. (Filed as Exhibit 4.1 to our Form 10-Q for the quarter ended September 30, 2000 filed on November 14, 2000 and incorporated herein by reference)
4.1	2	Form of warrants issued to placement agent (Filed as Exhibit 4.3 to our Form 10-Q for the quarter ended September 30, 2000 filed on November 14, 2000 and incorporated herein by reference)
4.1	4	Rights Agreement dated as of January 11, 2002, between the registrant and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to our Form 8-K filed on January 15, 2002 and incorporated herein by reference)
10.1		Lease Agreement for premises at 7600 Colshire Drive, McLean, Virginia (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
10.2		Online Resources & Communications Corporation 1989 Stock Option Plan (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
10.3		1999 Stock Option Plan (Incorporated by reference from our registration statement on Form S-1; Registration No. 333-74777)
10.4		Employee Stock Purchase Plan (Incorporated by reference from our registration statement on Form S-8; Registration No. 333-40674)
13		Annual Report to Shareholders
14		Code of Ethics
23		Consent of Ernst & Young LLP (See Exhibit attached to this Report)
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended


	31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended
	32			Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sabanes-Oxley Act of 2002


		Balance at
		Beginning							Balance at
		of							End of
Classification		Period		Additions		Deductions			Period

Allowance for doubtful accounts:
	Year ended December 31, 2001	$	117,310	$	239,564	$	321,874	(1)	$	35,000
	Year ended December 31, 2002	$	35,000	$	88,000	$	46,095	(1)	$	76,905
	Year ended December 31, 2003	$	76,905	$	—	$	10,000	(2)	$	66,905
Reserve for stale dated payment processing checks:
	Year ended December 31, 2003	$	—	$	51,219	$	—		$	51,219


Signature	Title	Date

/s/ MATTHEW P. LAWLOR Matthew P. Lawlor	Chairman and Chief Executive Officer Executive Vice President and Chief	March 12, 2004

/s/ CATHERINE A. GRAHAM Catherine A. Graham	Financial Officer (Principal Financial Officer)	March 12, 2004
/s/ EDWARD E. FURASH Edward E. Furash	Director	March 12, 2004
/s/ JOSEPH J. SPALLUTO Joseph J. Spalluto	Director	March 12, 2004
/s/ DAVID A. O’CONNER David A. O’Conner	Director	March 12, 2004
/s/ ERVIN R. SHAMES Ervin R. Shames	Director	March 12, 2004
/s/ BARRY D. WESSLER Barry D. Wessler	Director	March 12, 2004
/s/ MICHAEL H. HEATH Michael H. Heath	Director	March 12, 2004