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

_________

FORM 10-Q

Commission File Number: 000-24931

S1 CORPORATION

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

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

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

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

Shares of common stock outstanding as of November 10, 2003: 73,021,589

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S1 CORPORATION AND SUBSIDIARIES

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

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PART 1 — FINANCIAL INFORMATION

S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     S1 Corporation is a global provider of enterprise software solutions for more than 4,000 financial organizations including banks, credit unions, investment firms and insurance companies. Our solutions automate transactions and integrate the channels by which financial institutions interact with their customers. Our objective is to be the leading global provider of integrated enterprise solutions that enable financial institutions to improve the way they service their customers by integrating all delivery channels, expanding the total financial relationship and increasing profits. We sell our solutions to small, mid-sized and large financial organizations in two geographic regions: (i) the Americas region, and (ii) the International region, consisting of Europe, Middle East and Africa (EMEA) and Asia-Pacific and Japan (APJ). We refer to our core business segment as the “Financial Institutions” business.

     Through Edify Corporation and its subsidiaries, we offer voice and speech recognition applications and consultation services to improve customer service and reduce costs through automation and increased operational effectiveness. These products streamline customer inquiries and transactions and deliver a consistent experience to the customer across all channels of communication including voice, email, fax, Web, and wireless. Edify’s products are sold across multiple vertical markets including financial services, travel, retail and telecommunications on a direct basis and through the use of resellers. Our financial institutions segment is the exclusive reseller of Edify Solutions to the financial services marketplace.

     S1 is headquartered in Atlanta, Georgia, USA, with additional domestic offices in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; New York, New York; West Hills, California and Santa Clara, California; and international offices in Brussels, Dublin, Hong Kong, Lisbon, London, Luxembourg, Madrid, Munich, Paris, Rotterdam and Singapore. S1 is incorporated in Delaware.

     We accounted for the Edify business assets and liabilities as “held for sale” for the period from July 1, 2002 until March 31, 2003. In April 2003, we determined that we would not be able to sell the Edify business by June 30, 2003 on terms that were agreeable to us. The accompanying financial statements reflect the Edify business as a part of our continuing operations for all periods presented. As a result, during the quarter ended March 31, 2003, we have:

	•		reclassified the assets and liabilities of the Edify business from “assets held for sale” and “liabilities of business held for sale” as of December 31, 2002 in our condensed consolidated balance sheet;
	•		presented the results of operations for the Edify business as a segment of continuing operations in our consolidated statements of operations for all periods presented, which required a retroactive reclassification of revenues and expenses for prior periods previously reported; and
	•		recorded depreciation expense of $0.3 million on the fixed assets of the Edify business and amortization expense of $1.7 million for other intangible assets associated with the Edify business for the nine-month period from July 1, 2002 through March 31, 2003.

     We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of our financial condition as of September 30, 2003, our results of operations for the three and nine months ended September 30, 2003 and our cash flows for the nine months ended September 30, 2003. The data in the condensed consolidated balance sheet as of December 31, 2002 was derived from our audited consolidated balance sheet as of December 31, 2002, as presented in our Annual Report on Form 10-K for the year ended December 31, 2002. Certain items in the prior financial statements have been reclassified to conform to the current presentation. The condensed consolidated financial statements include the accounts of S1 and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. Our operating results for the three and nine months ended

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September 30, 2003 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2003.

Significant Accounting Policies

     Our significant accounting policies are included in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2002. Below are significant changes to our accounting policies.

     During December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. At this time, we do not anticipate making a voluntary change to the fair value based method of accounting for stock-based employee compensation.

     We account for our stock option plans in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148. As such, we record compensation expense on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Additionally, if a modification is made to an existing grant, any related compensation expense is calculated on the date both parties accept the modification and recorded on the date the modification becomes effective. Otherwise, we do not record stock compensation expense when we grant stock options to S1 employees.

     In the three and nine months ended September 30, 2003 and 2002, we recognized compensation expense relating to stock options granted with exercise prices less than the market price on the date of grant and for modifications made to the terms of existing grants. Had we determined compensation expense based on the fair value at the grant date for our stock options and stock purchase rights under SFAS No. 123, our net loss would have increased to the unaudited pro forma amounts indicated below:

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

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     The fair value of our stock-based option awards to employees was calculated using the Black-Scholes option-pricing model assuming no expected dividends and the following weighted-average assumptions:

Recent Accounting Pronouncements

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance of Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. Under SFAS No. 146, the Board acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. This statement also establishes that fair value is the objective for the initial measurement of the liability. The provisions of this statement became effective for exit or disposal activities initiated after December 31, 2002. We applied the provisions of SFAS No. 146 in accounting for our restructuring activities during the three and nine months ended September 30, 2003. See Note 6 for a discussion of our restructuring activities.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We adopted EITF Issue No. 00-21 effective July 1, 2003 with no material impact on our consolidated financial statements.

     In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” which clarifies disclosure, recognition and measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition and measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. We typically grant our customers a warranty that guarantees that our product will substantially conform to our current specifications for 90 days from the delivery date. We also indemnify our customers from third party claims of intellectual property infringement relating to the use of our products. Historically, costs related to these guarantees have not been significant and we are unable to estimate the potential impact of these guarantees on our future results of operations.

     At September 30, 2003, our other intangible assets consisted of the following:

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     We recorded amortization expense of $14.0 million and $4.9 million during the nine months ended September 30, 2002 and 2003, respectively. We estimate aggregate amortization expense for 2003 and the next four calendar years to be as follows (in thousands):

     The changes in the carrying value of our goodwill for the nine months ended September 30, 2003 are as follows:

     In April 2003, we terminated our efforts to divest the Edify business. We considered our inability to sell the Edify business on terms that were acceptable to us a triggering event under SFAS No. 142 and 144 that required us to perform a current assessment of the carrying value of the Edify business. Based on our current analysis of fair value for the Edify business, including estimates we based on discounted future cash flows, market valuations of comparable businesses and offers from potential buyers, we concluded that the fair value of the Edify business was less than its carrying value. Accordingly, we allocated our estimate of fair value for the unit to the existing assets and liabilities of the Edify business as of March 31, 2003, resulting in a goodwill impairment charge of $11.7 million and accelerated amortization on other intangible assets (developed technology and customer base) and purchased software of $1.2 million and $0.5 million, respectively.

     On September 20, 2003, our series E convertible preferred stock automatically converted into S1 common stock at a rate of one common share for each preferred share. Accordingly, we issued 649,150 shares of S1 common stock in exchange for 649,150 shares of series E preferred stock.

     In July 2002, our board of directors approved a $10.0 million stock repurchase program. We completed this program in January 2003. As of September 30, 2003, we hold 2,051,862 shares of our common stock in treasury at a cost of $10.0 million.

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

     Components of merger related and restructuring costs are as follows (in thousands):

     During the first nine months of 2003, we undertook several initiatives to align our worldwide cost structure with our anticipated 2004 revenues. As a result, management approved restructuring plans in the financial institution and Edify segments to reduce the work force, relocate and consolidate certain office facilities and sell certain corporate assets. In addition we consolidated our EMEA data center operations based in the United Kingdom into our global hosting center in Atlanta. In connection with these plans, we recorded restructuring charges of $21.6 million during the nine months ended September 30, 2003. In total, we eliminated approximately 199 positions worldwide and closed or consolidated office facilities. In the domestic operations of our financial institution segment, we recorded $6.6 million in restructuring charges during the nine months ended September 30, 2003, which were primarily comprised of charges for severance costs associated with headcount reductions, lease payments associated with excess office space, relocation expenses resulting from office consolidation and other corporate charges.

     In the first quarter of 2003, we began the process of reorganizing our international operations. As of September 30, 2003, we believe this reorganization is substantially complete. In the first nine months of 2003, we consolidated our U.K. data center operations into our global hosting center in Atlanta, relocated our remaining U.K operations to a smaller facility, decreased our workforce both in our European and APJ operations and closed offices in our APJ operations. As a result, in the nine months ended September 30, 2003, we recorded restructuring charges of $9.4 million in our European operations and $1.3 million in our APJ operations. These charges were comprised of accelerated depreciation of assets, severance costs, other related costs to relocate the data center operations, losses on the vacated office space, relocation expenses and the write off of abandoned leasehold improvements. Under the provisions of SFAS No. 146, we recorded the loss on vacated office space at the present value of the expected cash flows. We will accrete interest expense of approximately $0.9 million over the remaining term of the lease, which is six years.

     In the third quarter of 2003, we completed the process of reorganizing our Edify business to align costs with expected revenues. As a result, we hired a new general manager, reduced the workforce and closed and consolidated several Edify office facilities worldwide. These actions resulted in restructuring charges of $4.3 million for the nine months ended September 30, 2003.

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     In the first quarter of 2003, we decreased our merger related reserve for legal claims by $0.5 million, which was established in connection with our acquisition of FICS Group, N.V. in November 1999. We were able to resolve this legal matter during the first quarter of 2003 for less than previously estimated. In the second quarter of 2003, we further reduced our merger related accrual by $0.5 million when we determined that we had an alternate use for excess office space that was reserved when we completed the acquisition of Point in March 2002.

     During the nine months ended September 30 2002, we incurred merger related costs of $3.7 million in connection with the acquisition of the assets and subsidiaries of Point Holdings, Ltd. These costs, incurred in connection with our plan to reorganize certain of our European operations, include headcount reduction, consolidation of S1 and acquired Point office facilities and disposal of redundant or obsolete computer equipment. This merger related charge was partially offset by a $1.7 million decrease in reserves for legal claims, which was established in connection with our acquisition of FICS Group, N.V. in November 1999. We were able to resolve this legal matter during the first quarter of 2002 for less than previously estimated. Additionally, in the third quarter of 2002, we recorded a charge of $0.7 million for some excess office space in our Edify business.

     The restructuring reserves as of December 31, 2002 and September 30, 2003 and their utilization for the nine months ended September 30, 2003 are summarized as follows:

     We expect to make future cash expenditures, net of anticipated sublease income, related to these restructuring activities of approximately $14.3 million, of which we anticipate to pay approximately $7.7 million within the next twelve months.

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

	•		S1 Corporation and its subsidiary Davidge Data Systems, Inc. are involved in litigation with Scottrade, Inc. and an affiliate company, Computer Research, Inc., relating to a software development project. The action was initially filed in March 2002 in the U.S. District Court for the Eastern District of Missouri. The plaintiffs filed amended complaints in November of 2002 and January of 2003. The plaintiffs have made a claim for a refund of $0.3 million of amounts paid to S1 and Davidge as well as damages in excess of $19.0 million flowing from the dispute, including service bureau expenses incurred because of the alleged failure to perform. S1 and Davidge have filed a counterclaim for unpaid amounts under the contract. This case is scheduled to go to trial in April 2004. We believe the plaintiffs’ claims are not meritorious and intend to continue vigorously defending the suit.
	•		S1 Corporation is involved in litigation with Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the Southern District of New York. The action was filed in March 2003 against S1 Corporation, Bank of America Corporation and Bank of America National Association. We believe that the plaintiff’s claims are not meritorious and intend to continue vigorously defending the suit.

     There can be no assurance on the ultimate outcome of these matters. An adverse judgment or settlement could be material to our financial position and results of operations.

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     We operate and manage S1 in two business segments: financial institutions, our core business segment, and the Edify business. The financial institutions segment develops, markets and implements integrated, transactional and brandable enterprise applications for small, mid-sized and large financial institutions worldwide, available as in-house or hosted solutions. The Edify business segment provides a variety of voice and speech recognition applications that help organizations globally increase customer retention through automation and improved operational effectiveness.

     We evaluate the performance of our operating segments based on their contribution before interest, other income (expense) and income taxes, as reflected in the tables presented below for the three and nine months ended September 30, 2003 and 2002. We do not use any asset-based metrics to measure the operating performance of our segments.