UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from            to           

Commission file number: 000-24931

Registrant’s telephone number, including area code: (404) 923-3500

Securities registered pursuant to Section 12(b) of the Act:
Not Applicable

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Title of Class

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

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

     Aggregate market value of the common stock held by non-affiliates of the Registrant, computed using the closing price on the for the Registrant’s common stock on June 30, 2003, was $263,512,388.

     Shares of common stock outstanding as of March 5, 2004: 70,893,561

Documents Incorporated by Reference

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

     Portions of the definitive proxy statement for the annual meeting of shareholders to be held May 14, 2004, which the registrant intends to file no later than 120 days after December 31, 2003, are incorporated by reference in Part III.

Table of Contents

S1 CORPORATION AND SUBSIDIARIES

FOR THE YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

PART I

Item 1. Business.

         This annual report on Form 10-K and the documents incorporated into this annual report on Form 10-K by reference contain forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act. These statements include statements with respect to our financial condition, results of operations and business. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on our beliefs as well as assumptions made using information currently available to us. Because these statements reflect our current views concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. The risk factors described below provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as provided by law, we undertake no obligation to update any forward-looking statement.

Business Overview

         We operate and manage S1 in two business segments: financial institutions, our core business segment, and the Edify business. We sell our solutions to small, mid-sized and large financial organizations in two geographic areas: (i) the Americas region, and (ii) the International region, consisting of Europe, Middle East and Africa (EMEA) and Asia-Pacific and Japan (APJ). Additional information about our operating segments, geographic disclosures and major customers is presented in note 17 to our consolidated financial statements contained elsewhere in this report.

     Financial Institutions Segment

         Through our financial institutions segment, we provide enterprise software solutions for financial services organizations, including banks, credit unions and insurance companies around the world. Our solutions help financial institutions to automate and integrate their customer interaction channels and market segments. These interaction channels include:

•		Branch and call center channels, which banks primarily use to provide personalized service and relationship selling through the teller, agent desktop and call center;
•		Internet channel, which financial institutions use as a low-cost way to enable customers to conduct transactions in a self-service manner anytime, anywhere; and
•		Voice channel, which enables financial institutions to efficiently interact with their customers for simple transactions, like balance inquiries and payment information.

         Our applications, which can be sold as standalone applications or as an integrated suite across the enterprise, help financial institutions better service and sell financial products to all of their market segments, ranging from retail consumers and small businesses to global corporations. Our applications also help financial institutions lower the costs associated with supporting their infrastructure and servicing their customers and employees by providing a single platform on which all of their front-office applications and customer information can reside. Our customer relationship management (CRM) software enables institutions to better understand their customers, segment their needs, and more effectively cross-sell services and improve customer satisfaction.

         Our products are designed to run on-premise at a financial institution location, or hosted in a data center. The products can be branded and extended to meet the individual specifications of the financial institution. We provide professional services for the installation and integration of our products, product training, consulting and product enhancement services, all of which are focused on enabling our customers to maximize the value of our applications and meet their particular business needs and strategies. We also provide hosting applications for customers who elect to run S1 solutions in our data center.

         We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring data center revenues by charging our data center customers a monthly fixed fee or a fee based on the number of their end users who use the solutions we provide, subject to a minimum charge. We also generate recurring revenue by charging customers who license our products a periodic fee for software maintenance.

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     Edify Segment

         Through our Edify business segment, we deliver voice and speech solutions for companies across a range of industries. Edify’s products help companies automate their customer service facilities, improve customer satisfaction and create new revenue generating opportunities, while reducing operational costs. Edify’s voice and speech applications are scalable, multilingual and flexible, allowing companies to easily integrate multiple back-end systems with a variety of contact interfaces. Edify’s voice and speech solutions combine speech recognition, speaker verification, text-to-speech, fax, and touch-tone automation with a powerful application development environment and natural language capabilities to help organizations optimize customer service while lowering costs. Revenues from the Edify business segment accounted for approximately 12% of our total revenues in 2003.

General Background

         We created the world’s first bank on the Internet in May of 1996 with the launch of Security First Network Bank. In 1998, we sold the banking operations to Royal Bank of Canada so that we could focus on software development, implementation and services. While our core business was Internet banking for several years, our management team had a broader vision of helping financial institutions consolidate their systems and line-of-business applications to reduce costs, increase revenue and deliver a more consistent experience across their delivery channels and market segments. We make this possible through an integrated suite of applications that address virtually every customer channel of today’s financial institutions.

         Over the past three years, we have invested over $100 million in product development activities to build out our vision, which has now taken the form of our flagship suite of products - S1 Enterprise. S1 is headquartered in Atlanta, Georgia and is a global software and services organization that has more than 4,000 financial institution customers, ranging from some of the world’s largest financial services providers to community and regional banks in the United States. While we primarily operate in the global financial services industry, we also have our Edify division which provides voice and speech solutions to a wide range of industries around the world.

         We have 24 offices in 13 countries around the world, including development centers of excellence located in Atlanta, Georgia; Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; West Hills, California; Pune, India; and Dublin, Ireland.

Financial Industry Background

         Financial institutions interact with their customers through a variety of channels, including but not limited to the branch, call center, phone, ATM and the Internet. As each of these channels was introduced and proliferated, financial institutions took a tactical approach in expanding their offerings, incrementally adding these new channels as they fit in with their evolving business plans. By and large, each channel functioned independently, with limited, if any, interactions and knowledge of the activities occurring in each channel. This siloed infrastructure over time became cumbersome and expensive for institutions to support and painful for consumers and businesses to try to interact with their financial institution.

         Today’s consumers demand a more compelling, personal relationship with a financial provider, who understands their needs and can offer relevant, value-added services. They require their information to be available through any channel at any time. In addition, consumers have more options for their financial services than ever before, including brokerage firms and even retailers. This increased competition and the ever-changing demands from consumers, along with tough economic conditions, is driving financial institutions to consider new ways of implementing their customer interaction applications for a better customer experience, lower operating costs, and a higher return on their technology investments.

         This new way of approaching technology centers around an integrated multi-channel strategy, one in which the financial institution implements a single platform on which all of their customer interaction and market segment applications reside. The strategy employs a single data model that captures all of the transaction information no matter which channel the customer chooses to use with the financial institution as well as all of the pertinent customer information and preferences. These two elements, along with the reuse of business components, were the basis in the design of the S1 Enterprise Platform and all of the applications that operate on it.

         We believe that financial institutions that provide a unified experience for their customers across multiple points of interaction, delivered at the lowest possible price will have a key competitive advantage. Financial institutions will need to deliver a consistent and compelling experience to their customers and provide them with products and services that better

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meet their needs and are relevant to their stage in life. We believe it is very challenging for financial institutions to deal with multiple channels, using different technologies, all of which must be integrated with a variety of legacy applications. Financial institutions are driven by technology and must attempt to keep up with the rapid pace of change. They must determine how to leverage their existing solutions while moving to new technologies that will protect their investments and better position them for the future. Continuing economic pressures and cost and resource cutting have forced them to try and do more with less. In addition, many financial institutions are struggling to absorb acquired businesses and rationalize the technologies and systems involved.

         We believe these factors will drive financial institutions to pursue an enterprise solution that helps them reduce their costs, increase their revenue opportunities and improve customer loyalty. With a single platform and common data model, institutions can reduce their costs by using single points of integration to the legacy applications, decreasing operational complexity and eliminating multi-vendor coordination, as well as drive revenue by enhancing cross-selling opportunities, and improving the relationships they have with their customers. We are in the process of delivering a fully integrated solution that automates and integrates all of the front-office applications, while providing a technology platform to simplify integration and operations as well as speed implementation and time to market. Our activities during 2001, 2002 and 2003 were focused on execution of our strategy around the delivery and implementation of this type of enterprise application and getting financial institutions in production on this new platform.

The S1 Solution

         In mid-2003, we delivered the second major release of our flagship suite of products – S1 Enterprise. This release included the delivery of our retail Internet banking, small business Internet banking, corporate cash management and insurance applications on a single platform – the S1 Enterprise Platform. Later in the year, we released a version of our branch automation applications that integrate with the S1 Enterprise Platform through the common data model. To date, more than 100 financial institutions have purchased an S1 Enterprise application - over forty of these institutions are in live production with an S1 Enterprise application, realizing tangible business benefits from our software with the remainder in some stage of implementation and deployment.

         Our direction for the S1 Enterprise is to take a holistic approach to unifying a financial institution’s multiple channels, applications, and customer segments. By taking a customer-centric view, we expect that the S1 Enterprise will enable financial institutions to deliver a personalized, compelling experience to their retail, small business and corporate customers. By supporting all customer interaction channels — including full-service channels such as branches, agents and call centers; self-service channels such as voice and the Web; and automated interactions such as ACH and wire transfers — we believe that S1 Enterprise will enable financial institutions to deliver a consistent customer experience while helping them rapidly deploy new products and services. S1 Enterprise offers banking, investment, insurance and CRM applications that can be used by both financial institution customers and internal users, such as tellers, agents, brokers, and customer service representatives. We provide flexible, customizable solutions with a modular approach so financial institutions can innovate their enterprise at their own pace, while increasing revenue, lowering costs and building stronger customer loyalty.

         We believe that the S1 Enterprise, when fully implemented, will offer a number of important benefits to our customers, including the following:

•

S1 Enterprise Turns Static Financial Institution Data into Actionable Information to help financial institutions grow their revenues — Financial institutions have a wealth of valuable customer information stored throughout their organizations. Their customers also have multiple financial relationships with other providers. S1 Enterprise will help financial institutions collect the data from internal and external systems, giving greater insight into customers and the ability to deliver more personalized service. S1 Enterprise will feature fully integrated CRM capabilities so that our financial institution customers can leverage customer information and marketing programs across all customer touch points, helping them create profitable and satisfying customer interactions. Our CRM approach goes beyond the traditional approach by turning information such as alerts, awards and promotions into actionable information at the delivery channel of choice for the financial institution’s customer. This includes multiple delivery channels — not just the call center.

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S1 Enterprise Delivers Compelling, Personalized Products and Services that help increase customer retention — In order to build customer loyalty, financial institutions need to deliver personalized products and services that are timely, relevant and accurate. S1 Enterprise will help them understand their customer’s buying behaviors, attitudes toward technology and short and long-term financial goals. S1 Enterprise will help financial institutions create more cross-selling opportunities, while maximizing the existing relationships they have established to up-sell additional

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products and services and to reduce customer turn-over. We believe such personalized service will increase opportunities for cross sell and create more effective push marketing.

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S1 Enterprise Provides Integration of Multiple Applications and Channels to lower a financial institution’s costs — The S1 Enterprise will deliver integrated solutions across all of an institution’s customer-interaction channels and market segments. Delivering all of these services from a common platform will enable financial institutions to achieve significant cost savings over time. With the deployment of one application, they get the most comprehensive functionality on an open, flexible, and operable industry platform. With multiple applications, they begin to see true economies of scale with the single platform. This not only reduces integration, maintenance and implementation costs, it can also leverage the cross-channel CRM capabilities for more effective personalization and sales opportunities. All of this capability will be delivered while leveraging existing investments in back-office system interfaces.

S1 Vision and Strategy

         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. To achieve this objective, we intend to pursue the following initiatives:

Achieve Financial and Operational Stability through a Combination of Enterprise Revenue Growth and Continued Cost Control

         Within our financial institutions business, we generated approximately 39% of our revenues from a subscription license and services provided to our two major customers (Zurich Insurance Company and State Farm Mutual Automobile Insurance Company) in 2003. The remainder of the revenue was generated from the sale of licenses and services in the global financial services market. In the fourth quarter of 2003, we substantially completed the transition from our legacy Internet-only business to an Enterprise software and services business. During the transition, we experienced a decrease of revenue from legacy Internet-only customers. Zurich, which accounted for approximately $43 million in revenue in both 2002 and 2003 will not generate any revenue for S1 in 2004. Revenue from State Farm of approximately $65 million and $46 million in 2002 and 2003, respectively, is expected to be approximately $40 million in 2004. In addition to these two customers, we had a number of other legacy Internet-only customers that have cancelled their hosting contracts or moved to “in house” implementations contributing to a decrease in data center revenue of approximately $5 million in 2004. We believe the majority of these data center revenue transitions were substantially completed during the third quarter of 2003. We believe the financial institutions segment revenue, excluding Zurich, of $42.4 million for the quarter ended September 30, 2003, represents a stable base from which we expect to grow revenues through the sale of single channel and Enterprise solutions to the marketplace and our existing customer base of over 4,000 financial institutions.

         In 2004, we will continue to sell Enterprise solutions to financial institutions. We expect to generate license revenues and implementation fees from these sales. Once these financial institutions have gone live on one of our solutions, we earn recurring maintenance revenues from these customers. In addition, we believe these Enterprise customers will purchase additional Enterprise applications from us.

         In preparation for the revenue transition discussed above, we made a number of changes to our operating structure which reduced total operating expenses, before restructuring charges, from $310 million in 2002 to $271 million in 2003. These cost savings, achieved through a combination of office consolidation, headcount reduction and other cost control initiatives, helped us generate $22 million of cash from operations, increasing our cash and short-term investments from $143 million at December 31, 2002 to $164 million at December 31, 2003. We believe that the combination of new Enterprise revenue and our continuing focus on cost control will result in the generation of continued positive cash flow from operations and profits in 2004.

Increase Revenues by Cross-Selling our Products and Services to Existing Customers

         We intend to generate revenues by selling additional S1 products and services to our existing customer base of over 4,000 financial institutions. We believe that opportunities for cross-selling our products and services will increase as we deliver more of our applications on the S1 Enterprise Platform, and as we continue to add and enhance products through acquisition and internal development. In addition to the sale of new products, the migration of our customer base from single-channel solutions to the integrated Enterprise applications will offer further revenue growth opportunities.

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S1 Products

         We have products that address both the community bank and credit union marketplace, as well as those that address the needs of mid and large-size financial services providers.

         We generate revenues from the following principal product groups: Banking Solutions, Insurance Solutions, CRM Solutions, Website Solutions, Financial Reporting Solutions and Account Aggregation.

     S1 Banking Solutions

         In mid-2003, we delivered the second major release of S1 Enterprise, which included S1 Personal Banking, S1 Business Banking, and S1 Corporate Banking products running on the new S1 Enterprise Platform. These products are primarily focused on meeting the needs of the mid and large-size financial institution. We also delivered a new release of our branch banking applications that integrated with the S1 Enterprise Platform at the core data model level. Going forward, we intend to deliver applications across the entire front-office that are native to the S1 Enterprise Platform. In addition, we will continue to deliver and support more turnkey, packaged applications for Internet and voice banking, which primarily are used by the community bank market and credit unions.

         In the retail and small business banking markets, we offer the following products:

•		S1 Personal Banking gives individual consumers anytime, anywhere access to all of their banking accounts, including deposit, credit card and loan accounts. Functions include the ability to view statements, account activity, and cleared and pending transactions online, to transfer funds between accounts and to pay bills electronically.
•		S1 Business Banking is a comprehensive banking product geared to the unique needs of small business owner-operators. Available services include daily account balance and transaction reporting, disbursement services, payroll, account transfers, wires, and electronic tax payments. Personalization options simplify cash management tasks for easy organization and management of company funds.
•		S1 Internet Banking System (IBS) Retail Banking is designed specifically with the unique needs of the community banking market in mind. This turn-key, more packaged application includes functions such as the ability to view statements, account activity, and cleared and pending transactions online, to transfer funds between accounts and to pay bills electronically.
•		S1 IBS Cash Management System is designed to help community banks deliver services to small businesses in the markets that they serve. Functions include integrated front and back office systems, multiple payment vehicles such as domestic and SWIFT wires, ACH, and EFTPS, integration with the IBS retail Internet banking application and EDI data display.
		In the commercial banking area, we offer the following Internet-based applications:

•

S1 Corporate Banking is a comprehensive Internet-based cash management solution that helps financial institutions better serve large corporations on a global basis. This application offers multi-lingual, multi-currency and multi-delivery channel capability to perform such functions as information reporting, global payments, check services, file services and customer administration on a global basis.

•

S1 Trade Finance solutions help financial institutions increase the efficiency of processing their trade transactions. S1 Trade Finance delivers one integrated system to create and report on trade documents from purchase order, to letter of credit, to direct collections. These solutions enhance the risk evaluation process for global trade using optimized workflow and reporting and deliver up-to-date status reports on all outstanding trade finance engagements.

         In the branch automation space, we currently offer the following Java-based products. In 2004, we will focus on delivery of J2EE-based branch and call center applications and expect to deliver a web-based teller application in late 2004.

•

S1 Teller provides the complete set of transactions and core services necessary for fulfilling the rigorous requirements of today’s teller environment, including host communications, sharing and storing of information, cumulative totals, electronic journal, transaction security and approval, and balancing aids.

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•

S1 Sales and Service Platform includes an extensive set of transactions, sales tools, and core services that expedite selling new products, as well as servicing existing accounts.

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S1 Banking Call Center provides the customer information, sales and service capabilities, process flows, reporting, and fulfillment management that are exclusive to call center operations. The S1 Banking Call Center application integrates with other call center technologies, including integrated voice response (IVR) systems, computer telephony integration servers, and automatic call distributor systems.

         When it comes to voice banking, we currently offer two solutions: (1) a packaged IVR system that is typically used by community banks and mid-size institutions, and (2) a complex set of tools that an institution can use to customize to meet its unique voice banking needs.

•

S1 Voice Banking delivers IVR functionality in a stable, flexible, Windows-based application. With the push of a button or through simple voice commands, users can check on a deposit or account balance, find a CD rate, pay bills or transfer funds.

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S1/Edify Voice and Speech Recognition products help companies automate their customer service facilities, improving customer satisfaction and enabling new revenue-generating opportunities while reducing operational costs. Edify’s voice and speech applications are scalable, multilingual and flexible, allowing companies to easily integrate multiple backend systems with a variety of contact interfaces. Our voice and speech solutions combine speech recognition, speaker verification, text-to-speech, fax, and touch-tone automation with a powerful application development environment and natural language capabilities to help organizations optimize customer service while lowering costs. Edify’s open, standards-based platform manages millions of customer interactions every day across a broad range of industries.

     S1 Insurance Solutions

         S1 Insurance solutions include products for both the customer and the agent/intermediary. The applications support product sales capabilities as well as self-service capabilities for the property and casualty and life and annuity markets.

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S1 Consumer Insurance provides the features and functionality to enable insurance providers to improve customer service, acquire new business and reduce costs by providing anytime, anywhere access to meet insurance needs. Customers can view policy information, request changes to their policies, initiate the claims process and get insurance quotes as well as apply and purchase products online.

     S1 CRM Solutions

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S1 Analytics features easy to use analytical and segmentation tools, comprehensive campaign development and management capabilities, and a unique methodology to drive the results of CRM out to all channels. It permits real time access to customer contact and value information, as well as target campaigns, and significantly enhances the value of CRM efforts.

•

S1 Marketing Center supports the planning and execution of marketing campaigns based on multiple segmentations of customers and prospects. It includes robust inbound and outbound telemarketing features that can be combined with advanced Computer Telephony Integration (CTI) functionality to enhance the efficiency of our customer’s marketing personnel.

•

S1 Sales Center supports sales associates and managers in a telesales or field sales environment by tracking all relevant information and proactively guiding the associate through initiating, closing and tracking opportunities.

•

S1 Support Center enables customer service representatives and managers to create, assign and manage customer support requests such as incidents, problems and resolutions. It provides details of the problem, the ability to request status and history and the ability to suggest products for cross-sell and up-sell.

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     Website Solutions

•

S1 Customer Center is a virtual financial lobby which provides customers with a destination web site or portal that gives them access to product information, news and other content, as well as community pages and bulletin boards. The S1 Customer Center enables financial institutions to efficiently create, manage and quantify their web presence.

     Financial Reporting Solutions

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Under the FRS brand, our financial reporting solutions provide financial institutions worldwide with a suite of optimized regulatory reporting, financial intelligence and analytic solutions. FRS FinancialAnalytics provides a consolidated global data foundation to help banks prepare and comply with Basel II and IAS. FRS Regulatory Reporting eases the burden of complying with national regulatory reporting requirements of central banks, monetary authorities, and other financial regulators in more than 20 countries. More than 600 financial institutions, including 37 of the top 50 European financial institutions and 55 and the top 100 global institutions, utilize our financial reporting solutions.

     Account Aggregation

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Through our reseller agreement with Yodlee, Inc., which is described in Note 18 to our consolidated financial statements included elsewhere in this report, we provide account aggregation capabilities, which allow the delivery of an integrated balance sheet consolidating, organizing and presenting a consumer’s personal account information from a variety of providers for confidential viewing and access.

S1 Services

         We provide services to assist our customers in the planning, implementation and customization of their applications as well as ongoing maintenance and support and, if desired, application hosting services.

     S1 Hosting Services

         Our hosting services provide operational management and control across the full range of banking, brokerage, insurance, loan, credit card and content applications and information. We host S1 applications for more than 400 customers in our global data center facility in Atlanta, which handles more than 2.5 million transactions every day. Our mature operating environment was designed to address mission-critical operational issues for financial applications, such as security, recovery and availability of data. Our global data center is a hardened facility that can scale to support large volumes of customers.

     S1 Customer Support

         The S1 Customer Support team offers various levels of service to meet an organization’s support needs and budgets:

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Technical Support — Customer support engineers will work to provide solutions on S1 products;

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Software Release Management — Software upgrades that include enhancements to our software as well as operational and performance improvements; and

•

Online Support — The S1 Support Website is designed to provide “one-stop” access to technical information for S1 products. The S1 Support Website provides access to technical FAQs, download patches, the latest documentation, and support bulletins.

     S1 Professional Services

         Our professional services team helps financial institutions bring their solutions to market — rapidly and efficiently. Our professional services organization is engaged in the following activities:

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Project Management — Our project managers are responsible for keeping a project on schedule and within budget throughout the implementation cycle;

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•

Custom Software Development — Our developers will customize our solutions to meet the specific business requirements of our customers — from analysis and design to building and testing;

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Technical Services — Our team will design, implement and test the servers and network infrastructure to support our solutions. Our expertise includes software integration, database services, networking and the applications skills required to deliver secure, robust solutions;

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Educational Services — Our training professionals help financial institutions train their employees to use our solutions to better serve their customers; and

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Web Design Services — Our web design group is available to assist with delivery of a complete web presence for financial institutions.

Customers and Markets

            We provide solutions to global financial services organizations as well as regional and community financial institutions. Currently, we serve more than 4,000 banks, credit unions, insurance providers and investment firms. During 2002 and 2003, we had two major customers and during 2001, we had one major customer (defined as those who individually contribute more than 10% of total revenues).

         We provided implementation, hosting and product enhancement services to State Farm Mutual Automobile Insurance Company. Revenues from State Farm were 28%, 22% and 18% of our total revenues during the years ended December 31, 2001, 2002 and 2003, respectively. We expect revenues from this customer to be approximately 18% of our total revenues in 2004.

         The other major customer, Zurich Insurance Company and certain of its affiliates or subsidiaries, accounted for 15% and 17% of our total revenues during the years ended December 31, 2002 and 2003. These revenues were derived from agreements to provide a subscription license, data center services and professional services, all of which ended during 2003. We will not earn any revenues from Zurich in 2004. This customer contributed less than 10% of our total revenues in 2001.

Strategic Alliances and Partners

         We have built a global network of more than 70 alliances, allowing us to more fully extend our expertise, capabilities, and reach within the financial services industry. We have established strategic, technology, and channel relationships with a number of organizations. We have alliances with companies such as IBM and BearingPoint as well as with numerous core processing vendors, bill payment providers, credit card processing vendors and printed product vendors. In certain geographies, including Asia, the Middle East and some European countries, we are using partners as our primary sales channel to increase our market reach.

Sales and Marketing

         We sell our solutions to small, mid-sized and large financial organizations. Our sales force is comprised of professionals structured in three major regional groups: (i) the Americas region, (ii) the Europe, Middle East and Africa region (EMEA) and (iii) the Asia-Pacific and Japan (APJ) region. We reported revenues of $278.3 million, $292.2 million and $252.6 million in 2001, 2002 and 2003, respectively, of which 76%, 73% and 71%, respectively, were attributed to sales in the United States.

         In the Americas region, our sales force is a mix of named account support, geographic support and inside sales support, depending on the size of the financial institution. The named accounts sales force focuses on developing long-term relationships with senior management team members of financial institutions. Once we have established a relationship with these organizations and their senior management teams, the sales team continues to market additional products and services to them. The sales cycle for large financial institutions generally lasts from six to 18 months. Contracts with these large financial organizations typically have multi-year terms. Sales to the small community and regional financial institutions are executed by a telephone sales team. The sales cycle for these small to mid-sized financial organizations typically lasts from six to nine months, and the contracts entered into with them typically provide for direct delivery and service requirements. In addition, we have relationships with distribution partners, thereby maximizing our market penetration through the reseller channel.

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         In the EMEA region, we sell through both a named account structure in specific territories such as the United Kingdom, Belgium, the Netherlands, Germany, France, Luxemburg, Spain and Portugal, and through resellers in other territories such as Switzerland, Italy, the Middle East and Africa. In the APJ region our sales efforts are focused primarily through resellers in countries such as China, Hong Kong, Taiwan, Malaysia and Singapore.

         Within each group are trained sales support personnel who provide functional and technical expertise to maximize the customer’s understanding of S1’s solutions.

         In addition to internal sales efforts and joint efforts with distribution partners, S1 markets its products and services in other ways to build awareness of the S1 brand. Our marketing efforts include participating in and exhibiting at industry conferences and trade shows, hosting an annual users conference, maintaining memberships in key industry organizations and establishing close relationships with industry analysts to help guide product development and marketing efforts.

Product Development

		Our product development efforts are focused on:
•		Enhancing the S1 Enterprise Platform. In mid-2003, we delivered the second major release of our flagship suite of products – S1 Enterprise. This release included the delivery of our retail Internet banking, small business Internet banking, corporate cash management and insurance applications on a single platform – the S1 Enterprise Platform. Later in the year, we released a version of our branch automation applications that could integrate with the S1 Enterprise Platform through the common data model. Utilizing leading industry standards such as J2EE, the S1 Enterprise Platform is an open, flexible and scalable architecture that will serve as a common base for S1 product deployments. Its layered framework ensures that all applications are consistent in their interpretation and presentation of all data and that they can be consistently extended, upgraded, maintained and operated. It also allows all applications and channels to access customer information via a single database.

•

Creating Centers of Development Excellence. In 2003, we created centers of development excellence that focus on development and delivery of specific components of our product line. These development centers include Charlotte, North Carolina for banking; Littleton, Massachusetts for insurance; West Hills, California for branch automation; Dublin, Ireland for CRM and the Enterprise Platform; Austin, Texas for community banking and voice banking and Pune, India which provides general development support to the other centers. Atlanta, Georgia serves as the integration center supporting the development centers. Our development center in Pune was developed through a build-to-buy arrangement with an Indian software development company. In 2004, we expect to establish an S1 owned operation in Pune.

•

Enhancing Existing Products and Services. We are developing new functions and features across our entire product line in order to provide a broader range of capabilities and continue to best meet our customers needs.

         We spent $53.9 million, $51.2 million and $45.1 million on product development efforts in 2001, 2002 and 2003, respectively. During 2004, we expect product development costs to be approximately $45 million.

Competition

         The market for financial software is competitive, rapidly evolving and subject to technological change. We currently perceive our near-term competition as coming from primary three areas: (1) in-house development organizations of financial institutions, (2) best of breed solution providers and (3) core processing vendors. We perceive our long-term competition as coming from other enterprise software providers.

     In-house Development Organizations

         We believe financial organizations may encounter the following challenges when building financial software in-house:

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building, maintaining and upgrading an in-house solution can be very costly;

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attracting and retaining the necessary technical personnel can be difficult and costly; and

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technological development may be too far outside the financial organization’s core competencies to be effective or successful.

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     Best of Breed Solution Providers

         These vendors offer solutions for a specific line of business and/or channel for the financial institution. In the retail Internet banking space, we compete primarily with Digital Insight Corporation, Financial Fusion (a division of Sybase, Inc.) and Corillian Corporation. In branch banking, we compete primarily with Argo Data Resource, Inc. and Fidelity Information Services, Inc. In business banking, we compete primarily with Fundtech Ltd., Politzer & Haney and Metavante Corporation. In CRM, we compete with Siebel Systems, Inc., PeopleSoft, Inc. and Onyx Software Corporation. We believe the disadvantages associated with a best of breed solution approach include:

•

integrating additional applications and channels with multiple vendors greatly lengthens a financial organization’s time-to-market;

•

operating and upgrading solutions from multiple vendors is very costly; and

•

a combination of best of breed solutions across different channels does not provide an integrated view of the customer.

     Core Processing Vendors

         These vendors offer data processing services and outsourcing for financial institutions’ systems of record. In this space we compete with companies such as Metavante, Fiserv, Inc. and Jack Henry and Associates, Inc. Many of these companies offer front-office products at a sharp discount to augment their back-office capabilities. We believe the primary disadvantage of this approach is that these front office applications will lag behind the market to some degree in terms of functions and features and are of secondary focus to the vendor behind their back-office products and services.

     Enterprise Solution Vendors

         As we continue to roll out our Enterprise suite in 2004, we believe we may increasingly see interest and competition from various enterprise software and solution providers such as SAP Aktiengesell, Oracle Corporation and PeopleSoft. We believe our advantage in the financial services market will continue to stem from our deep domain knowledge and tight integration with the various key business systems within our financial organization customers base. Additionally, our large installed base will differentiate our ability to establish, deliver and defend our core market over time.

Government Regulation

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

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

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Employees

         As of February 27, 2004, we had approximately 1,245 employees, including 437 in customer support, hosting services and professional services, 122 in sales and marketing and 386 in product development. In addition to full-time employees, we have used the services of various independent contractors for professional services projects and product development. We also have 217 independent contractors in Pune, India working on product development and professional services activities.

Available Information

         Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are available free of charge at our website at www.s1.com as soon as reasonably practicable after we electronically file such materials with, or furnish to, the Securities and Exchange Commission. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains our reports.

Risk Factors

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

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

In 2004, we will depend on one customer for a significant portion of our revenue and if that customer terminates its contract with us, our revenues and financial performance would decline

         In 2002 and 2003, we derived 37% and 35% of our total revenues from two customers, respectively. One customer accounted for 28%, 22% and 18% of our total revenue in 2001, 2002 and 2003, respectively. Over the past three years, this customer has moved from a period of heavy investment and is now entering a stable maintenance state with their applications. We expect revenues from this customer to be approximately 18% of our total revenues in 2004. In 2002 and 2003, another customer accounted for 15% and 17% of our total revenues. Revenues from this customer were derived from a subscription license, professional services and a hosting agreement all of which ended in 2003. We do not expect to completely replace the loss of revenue from this customer in 2004.

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

         Although we were profitable in the fourth quarter of 2002 and the fourth quarter of 2003, we incurred losses in fiscal years 2001, 2002 and 2003. In the past, we approved restructuring plans to streamline our worldwide operations and to reduce our total operating expenses. We continue to review our cost structure on a worldwide basis and look for additional ways to streamline our operations. We believe our efforts to streamline operations, including headcount reductions and consolidation of our operating facilities, have resulted in cost savings that have improved our margins and our cash flows from operating activities during 2001, 2002 and 2003. We cannot ensure that our efforts to streamline our operations will improve our financial performance, or that we will be able to achieve profitability on a quarterly or annual basis in the future. We generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues. As a result, we may experience losses, which could negatively impact the value of our common stock.

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

         In order to optimize available research and development resources and meet development timeframes, we established a relationship with an Indian-based development organization in 2001 to outsource portions of our product development. In 2002 and 2003, we expanded this relationship resulting in the establishment of a development center in India. We also have a development center in Dublin, Ireland. While our experience to date with these offshore development activities has been positive, there is no assurance that this will continue. Specifically, there are a number of risks associated with this activity, including but not limited to the following:

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

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potential disruption from the involvement of the United States in the conflicts in the Middle East region;

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ramp-up time for our Indian based development efforts may adversely impact the ability to meet anticipated schedules;

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

•

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

•

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

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

         We acquired one company in 2001 and two companies in the first quarter of 2002. We sold one company in January 2001. The integration of these companies and any future acquisitions into our existing operations is a complex, time-consuming and expensive process and may disrupt our business. We have encountered difficulties, costs and delays in integrating the acquired operations with our own and may continue to do so in the future. Among the issues related to integration are:

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potential incompatibility of business cultures;

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potential delays in rationalizing diverse technology platforms;

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potential difficulties in coordinating geographically separated organizations;

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

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potential difficulties implementing common internal business systems and processes;

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potential conflicts in third-party relationships; and

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

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

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

Market volatility may affect the price of our common stock

         The trading prices of technology stocks in general, and ours in particular, have experienced extreme price fluctuations. Our stock price has declined significantly since reaching a high in 2000. Any further negative change in the public’s perception of the prospects of technology based companies, particularly those which are associated with the Internet or e-commerce such as ours, could further depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions such as a recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to the following factors:

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actual or anticipated variations in our quarterly operating results;

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

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changes in financial estimates by securities analysts;

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

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changes in the market valuations of other technology companies;

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developments in Internet regulations;

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

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

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additions or departures of key personnel; and

•

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

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

         If our stockholders sell substantial amounts of our common stock, including shares issued when options and warrants are exercised or shares of our preferred stock are converted into common stock, the market price of our common stock could fall. As of March 5, 2004, we had 70.9 million shares of common stock outstanding, assuming no exercise of outstanding options or warrants or conversion of preferred stock. As of March 5, 2004, there were outstanding employee stock options to purchase 15.1 million shares of our common stock, options and warrants to acquire 0.1 million shares of our common stock, and 0.8 million shares of preferred stock convertible into an aggregate of 1.1 million shares of our common stock. The common stock issuable after vesting and upon exercise of these options and warrants and upon conversion of this preferred stock will be eligible for sale in the public market from time to time. The possible sale of a significant number of these shares may cause the market price of our common stock to fall. Some of the holders of restricted shares of our common stock, our preferred stock and vested options or warrants have rights that may require us to register shares of common stock with the Securities and Exchange Commission. By exercising their registration rights and causing a large number of shares to be sold in the public market, these stockholders could cause the market price of our common stock to fall.

Network or Internet security problems could damage our reputation and business

         Despite our security measures, the core of our network infrastructure could be vulnerable to unforeseen technology problems. Although we have taken steps to mitigate much of the risk, we may in the future experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Unknown security risks may result in liability to us and also may deter financial organizations from licensing our software and services.

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Although we intend to continue to implement and establish security measures, there can be no assurance that measures we have implemented will not be circumvented in the future, which could have a material adverse effect on our business, financial condition or results of operations. The occurrence of any of these problems could reduce product demand from potential customers and cause existing customers to terminate their license or data center contracts with us. These problems could also require us to spend significant capital to remedy any failure and could subject us to costly litigation with customers or their end users.

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

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

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

         There are many factors that could adversely affect the performance, quality and desirability of our products and could delay or prevent these products from gaining market acceptance. These factors include, but are not limited to the following:

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

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

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

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

International operations may adversely affect us

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

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fluctuations in currency exchange rates;

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governmental currency controls;

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changes in various regulatory requirements;

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political and economic changes and disruptions;

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difficulties in enforcing our contracts in foreign jurisdictions;

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export/import controls;

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tariff regulations;

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difficulties in staffing and managing foreign sales and support operations;

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greater difficulties in trade accounts receivable collection; and

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possible adverse tax consequences.

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

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

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

         We have received a claim that certain of our products, trademarks or other proprietary rights require a license of intellectual property rights or infringe, or may infringe, on the intellectual property rights of others. Those claims, with or without merit, could:

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be time-consuming;

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result in costly litigation;

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cause product shipment delays;

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require us to enter into royalty or licensing agreements; or

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

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

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pay substantial damages;

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discontinue the use and sale of infringing products;

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expend significant resources to develop non-infringing technology; or

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obtain licenses to infringing technology.

         Our failure to develop or license a substitute technology could significantly harm our business. We expect software to be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlaps. Third parties may have, or may eventually be issued, patents that would be infringed by our products or technology. Any of these third parties could make a claim of infringement against us with respect to our products or technology. In addition, we may become involved in costly and time-consuming litigation to protect the validity of our intellectual property rights.

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

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

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

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

We are subject to government regulation

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

15

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

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

Item 2. Properties.

         Our executive offices and our headquarters for our financial institutions segment are located in Atlanta, Georgia. For our financial institutions segment, our primary office for EMEA operations is in the United Kingdom and our primary office for APJ operations is in Singapore. Our global data center is located in the Atlanta metropolitan area. We also have data center operations in New York and Singapore. We maintain additional domestic offices in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; New York, New York; Guilford, Connecticut and West Hills, California. We maintain additional international offices in Brussels, Beijing, Dublin, Hong Kong, Lisbon, London, Luxembourg, Madrid, Munich, Paris, and Rotterdam. We lease all of our office space and data center facilities.

         Our Edify business segment is headquartered in Santa Clara, California and maintains offices in the United Kingdom, Ireland and France.

Item 3. Legal Proceedings.

         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.

         As previously reported, S1 Corporation and its subsidiary Davidge Data Systems were involved in litigation with Scottrade, Inc. and Computer Research, Inc. In March 2004, we reached an agreement-in-principle with the parties involved in this matter and expect to settle on undisclosed terms all claims that have been asserted or could have been asserted in connection with this matter.

     As previously reported, 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. There can be no assurance on the ultimate outcome of this matter. An adverse judgment or settlement could be material to our financial position and results of operations.

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

         (a) Not applicable.

         (b) Not applicable.

         (c) Not applicable.

         (d) Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

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

         As of the close of business on March 5, 2004, there were 674 holders of record of our common stock. We have never paid or declared cash dividends on our common stock or preferred stock and do not anticipate paying cash dividends on our capital stock in the foreseeable future, although there are no restrictions on our ability to do so.

         (b) Not applicable.

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Item 6. Selected Financial Data.

         The following table presents selected statement of operations data, selected balance sheet data and other selected data for S1 on a consolidated basis. We derived the selected historical consolidated financial data presented below from our audited consolidated financial statements and related notes. You should read this data together with our audited consolidated financial statements and related notes.

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

         This annual report contains forward-looking statements and information relating to us, including our subsidiaries. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on our beliefs as well as assumptions made using information currently available to us. Because these statements reflect our current views concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. For a summary of significant risks, you should read the risk factors described under the caption “Risk Factors” in Item 1 of Part I of this report. Except as required by law, we undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

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

Executive Overview

         We operate and manage S1 in two business segments: financial institutions, which is our core business segment, and the Edify business. We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring data center revenues by charging our data center customers a monthly fixed fee or a fee based on the number of their end users who use the solutions we provide, subject to a minimum charge. We also generate recurring revenues by charging our customers a periodic fee for maintenance and software support.

         Within our financial institutions business, we generated approximately 39% of our revenues from licenses and services provided to our two major customers (State Farm Mutual Automobile Insurance Company and Zurich Insurance Company). The remainder of the revenue was generated from the sale of licenses and services in the global financial services market. In the fourth quarter of 2003, we substantially completed a transition from our legacy Internet-only business to an Enterprise software and services business. During the transition, we experienced a loss or decrease of revenue from legacy Internet-only customers. Zurich, which accounted for approximately $43 million in revenue in both 2002 and 2003 will not generate any revenue for S1 in 2004. Revenue from State Farm of approximately $65 million and $46 million in 2002 and 2003, respectively, is expected to be approximately $40 million in 2004. In addition to these two customers, we had a number of other legacy Internet-only customers that have cancelled their hosting contracts or moved to “in house” implementations contributing to an anticipated loss of data center revenue from 2003 to 2004 of approximately $5 million. We believe the majority of these data center revenue transitions were substantially completed during the third quarter of 2003.

         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 primarily of Europe, Middle East and Africa (EMEA) and Asia-Pacific and Japan (APJ). Our S1 Enterprise solutions target banks, credit unions and insurance companies. We have over 4,000 financial institution customers; the majority of which are located in the United States.

         Through our Edify business segment, we deliver voice and speech solutions for companies in a wide range of industries. Edify’s products help companies automate their customer service facilities, improve customer satisfaction and create new revenue generating opportunities, while reducing operational costs. Edify’s voice and speech applications are scalable, multilingual and flexible, allowing companies to easily integrate multiple back-end systems with a variety of contact interfaces. Edify’s voice and speech solutions combine speech recognition, speaker verification, text-to-speech, fax, and touch-tone automation with a powerful application development environment and natural language capabilities to help organizations optimize customer service while lowering costs.

         During the nine-month period from July 1, 2002 through March 31, 2003, we reported the Edify business as “held for sale.” 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 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.

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         Our results of operations and cash flows for the year ended December 31, 2002 were affected by the results of operations from acquired businesses, including Software Dynamics, Inc. (September 2001), Regency Systems, Inc. (February 2002) and the assets and subsidiaries of Point Holdings, Ltd. (March 2002). Revenues and expenses from the operations of these acquired businesses were included in our operations from their respective dates of acquisition. During the year ended December 31, 2002, we recorded total revenues of $41.9 million in these acquired businesses. We believe that the results achieved in the acquired businesses significantly exceeded those which they would have achieved on a stand-alone basis. We made these acquisitions because the acquired products and technologies are integral to our S1 Enterprise suite of applications. We have been able to cross sell existing S1 offerings into the acquired customer base and acquired product offerings into our existing customer base. Furthermore, we believe that we have been able to leverage our combined resources to increase the sales opportunities for these acquired products, especially those of SDI, whose revenues increased approximately 68% during the nine months ended September 30, 2002 over the same period in 2001, respectively. You should also read our discussion of “Acquisitions” below and in Note 3 to our consolidated financial statements.

         Excluding merger related costs and restructuring charges of $19.9 million in 2003, $2.4 million in 2002 and $9.3 million in 2001, our total operating expenses were $270.7 million in 2003, $310.4 million in 2002 and $381.8 million in 2001. During 2002 and 2003, we focused on activities to reduce our total operating costs in each of our business segments in order to align our operating costs with our expected 2004 revenues. In 2003, management approved restructuring plans in the financial institutions and Edify segments to reorganize our worldwide operations by reducing the work force, relocating and consolidating certain office facilities and selling certain corporate assets. In connection with these plans, we recorded restructuring charges of $21.2 million during the year ended December 31, 2003. In total, we eliminated approximately 200 positions worldwide and closed or consolidated office facilities. As of December 31, 2003, we believe the reorganization of our businesses are substantially complete, although we continue to look for additional ways to streamline our global operations.

         In 2002 and 2003, our results of operations were positively affected by the adoption of a new accounting principle, Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.” Effective January 1, 2002, we stopped amortizing goodwill and assembled workforce, which was reclassified to goodwill. SFAS No. 142 prohibits retroactive application of this new accounting treatment. Pro forma results for 2001 are presented in Note 8 to our consolidated financial statements giving effect to the accounting change as if it were applicable to those prior periods.

         Throughout 2002 and 2003, we continued to invest in the development of our new integrated S1 Enterprise Platform as the technology foundation for the S1 Enterprise family of products. In the first quarter of 2002, we released for general availability the first two applications to be deployed on the S1 Enterprise Platform: S1 Personal Banking and S1 Business Banking. In 2003, we released for general availability additional applications for the S1 Enterprise Platform including: retail Internet banking, small business Internet banking, corporate cash management and branch automation. As of the date of this report, over forty financial institutions are in production mode with a hosted or on-premise S1 Enterprise solution.

         Historically, we have not capitalized software development costs because of the insignificant amount of costs incurred between technological feasibility and general customer release. If technological feasibility is reached earlier in the development cycle, we may be required to capitalize certain software development costs in the future.

Revenue from Significant Customers

         Within our financial institutions business, we generated approximately 39% of our revenues from license and services provided to our two major customers (State Farm Mutual Automobile Insurance Company and Zurich Insurance Company) in 2003.

         Revenues from State Farm were 33%, 26% and 20% of our financial institution revenues and 28%, 22% and 18% of our total revenues during the years ended December 31, 2001, 2002 and 2003, respectively. Revenues from State Farm for the year ended December 31, 2003 decreased approximately $20 million from the same period in 2002 due to a decrease in projects performed for them in 2003. We expect State Farm to contribute approximately 21% of our financial institution segment revenue for 2004. Over the past three years, State Farm has moved from a period of heavy investment in its Internet solutions including migrating its insurance application to S1 Enterprise and is now entering a stage of reduced investment and maintenance of the applications.

         In March 2003, we amended the terms of our data center arrangement with Zurich to shorten the term over which services would be provided and payments received associated with the provision of data center services by S1. Revenue of $8.6 million from the data center contract, which would have been recognized ratably throughout 2003 and 2004 under the

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previously amended terms of the agreement, was accelerated and recognized entirely in the first six months of 2003. Associated direct costs of $2.6 million were accelerated over the same period. Zurich accounted for 17% and 19% of our revenues from our financial institutions segment and 15% and 17% of our total revenues during the year ended December 31, 2002 and 2003, respectively. For the year ended December 31, 2003, $32.7 million of the revenue earned from Zurich was from a subscription license, which expired on December 31, 2003. We do not expect to earn any revenue from Zurich in 2004 and beyond. This customer accounted for less than 10% of our total revenues in 2001.

Acquisitions

         In March 2002, we acquired the assets and subsidiaries of Point Holdings, Ltd., a Dublin, Ireland based CRM application provider. In February 2002, we acquired Regency Systems, Inc., a Dallas, Texas based provider of telephone and Internet banking applications and web design services for community and mid-market banks. In September 2001, we acquired Software Dynamics, Inc., a West Hills, California based provider of branch automation, teller, call center and CRM solutions for financial institutions.

         We accounted for these acquisitions using the purchase method of accounting with the excess of the purchase price over the estimated fair value of the net assets (liabilities) recorded as goodwill. Other intangible assets include developed technology and customer base. Additionally, for certain of these acquisitions, we allocated a portion of the purchase price to in-process research and development, which was expensed immediately upon closing the acquisition. The consolidated financial statements include the results of operations for the acquired companies from the date of acquisition.

Restructuring Charges

         In 2003, management approved restructuring plans in the financial institutions and Edify segments to reorganize our worldwide operations by reducing the work force, relocating and consolidating certain office facilities and selling certain corporate assets. In connection with these plans, we recorded restructuring charges of $21.2 million during the year ended December 31, 2003. In total, we eliminated approximately 200 positions worldwide and closed or consolidated office facilities.

         In the domestic operations of our financial institution segment, we recorded $6.2 million in restructuring charges during the year ended December 31, 2003, which were primarily comprised of charges for severance costs associated with headcount reductions, lease payments associated with excess office space and other corporate charges. In 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 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 and the write off of abandoned leasehold improvements. 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 year ended December 31, 2003.

         In 2002, we recorded a charge of $0.7 million for excess office space in our Edify business.

         Prior to 2001, we approved a restructuring plan that included plans to close several of our facilities worldwide. During 2001, we determined that, as a result of a softening in the domestic real estate markets, our original estimate of the costs to dispose of unused real estate was below the currently anticipated costs and the restructuring accrual was adjusted resulting in a charge of $5.7 million. In 2001, we approved a restructuring plan to streamline our European operations. In connection with this plan, we reduced our European workforce by 77 people and consolidated the majority of our European operations into two locations, resulting in a charge of $5.6 million.

         We undertook these restructuring activities in 2001, 2002 and 2003 to streamline our worldwide operations following a period of multiple business acquisitions and to reduce our operating expenses to a level that we believe is appropriate based on our estimate of future revenues. We achieved cost savings from these activities throughout the geographic and functional areas of our operating segments. For additional information about these restructuring activities, including tabular presentation of our restructuring charges, see note 9 to our consolidated financial statements contained elsewhere in this report.

         We expect to make future cash expenditures, net of anticipated sublease income, related to these restructuring charges of approximately $11.4 million, of which we expect to pay $4.4 million in 2004.

         Adjustments to the restructuring accrual may be recorded in the future due to changes in estimates of lease termination reserves arising from changing real estate market conditions.

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Merger Related Costs

         During 2002, we incurred merger related costs of $3.7 million in connection with the acquisition of Point. These costs, incurred in connection with our plan to reorganize certain of our European operations, included 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 amounts. Our restructuring and merger related reserves include provisions for obligations for unused real estate less estimates for sub-lease income. In 2002, we were able to secure a sublease for one of our foreign properties at terms that were $0.3 million more favorable than previously anticipated.

         In 2003, we decreased our merger related reserve for legal claims by $0.8 million, which was established in connection with our acquisition of FICS Group, N.V. in November 1999. We were able to resolve two legal matters during 2003 for less than previously estimated. Additionally in 2003, we 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.

Critical Accounting Policies and Estimates

         Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments 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 reported period. Generally, we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under other assumptions or conditions.

         Critical accounting policies are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies include those related to:

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revenue recognition;

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estimation of our allowance for doubtful accounts and billing adjustments;

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valuation and recoverability of long-lived assets, including goodwill;

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determination of technological feasibility and capitalization of software development costs;

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recognition of costs in connection with restructuring plans and merger-related activities; and

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reserve for contingencies.

         Revenue recognition. Revenue is a key component of our results of operations and is a key metric used by management, securities analysts and investors to evaluate our performance. Our revenue arrangements generally include multiple elements such as license fees for software products, installation services, customization services, training services, post-contract customer support, data center services and, in some cases, hardware or other third party products.

         Software license revenue. We recognize software license sales in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” and SOP No. 98-9, “Modification of SOP No. 97-2 With Respect to Certain Transactions.” For software license sales for which any services rendered are not considered essential to the functionality of the software, we recognize revenue upon delivery of the software provided (1) there is evidence of an arrangement, (2) collection of our fee is considered probable and (3) the fee is fixed or determinable. In certain of these arrangements, vendor specific objective evidence of fair value exists to allocate the total fee to all elements of the arrangement. If vendor specific objective evidence of fair value does not exist for the delivered element and exists for all undelivered elements, we use the residual method under SOP No. 98-9.

         When the professional services are considered essential to the functionality of the software, we record revenue for the license and professional services over the implementation period using the percentage of completion method, measured by the percentage of labor hours incurred to date to estimated total labor hours for each contract. For software licenses where the license term does not begin until installation is complete, we recognize license and professional services revenue when we complete the installation of the software.

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         For subscription license arrangements where we allow customers the rights to unspecified products as well as unspecified upgrades and enhancements during a specified term, the license revenue is recognized ratably over the term of the arrangement. For license arrangements in which the fee is not considered fixed or determinable, the license revenue is recognized as payments become due.

         Support and maintenance revenue. Revenues for post-contract customer support and maintenance are recognized ratably over the contract period.

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

         Data center revenue. We recognize data center revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” and Emerging Issues Task Force 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” We also consider the applicability of Emerging Issues Task Force Issue No. 00-03, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” to our data center arrangements on a contract-by-contract basis. If it is determined that a software element covered by SOP No. 97-2 is present in a hosting arrangement, the license, professional services and data center revenue is recognized pursuant to SOP No. 97-2. If it is determined that a software element covered by SOP No. 97-2 is not present in a hosting arrangement, we recognize revenue for the arrangement pursuant to SAB No. 104 and EITF 00-21.

         See a full discussion of our revenue recognition policies in Note 2 to the consolidated financial statements.

         Our contractual arrangements are evaluated on a contract-by-contract basis and often require our judgment and estimates that affect the classification and timing of revenue recognized in our statements of operations. Specifically, we may be required to make judgments about:

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whether the fees associated with our products and services are fixed or determinable;

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whether or not collection of our fees is reasonably assured;

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whether professional services are essential to the functionality of the related software product;

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whether we have the ability to make reasonably dependable estimates in the application of the percentage of completion method; and

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whether we have verifiable objective evidence of fair value for our products and services.

Additionally, we may be required to make the following estimates:

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percentage of labor hours incurred to date to the estimated total labor hours for each contract;

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provisions for estimated losses on uncompleted contracts; and

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the need for an allowance for doubtful accounts or billing adjustments.

         If other judgments or assumptions were used in the evaluation of our revenue arrangements, the timing and amounts of revenue recognized may have been significantly different. For instance, many of our revenue arrangements are accounted for using the percentage of completion method since the services are considered essential to the functionality of the software. If it was determined that those services were not essential to the functionality of the software, we may have recognized the license revenue upon delivery of the license, provided other required criteria were satisfied. Further, if we determined that we cannot make reasonably dependable estimates in the application of the percentage of completion method, we would defer all revenue and recognize it upon completion of the contract.

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         Estimation of allowance for doubtful accounts and billing adjustments. We are required to report accounts receivable at the amount we expect to collect from our customers. As a result, we are required to use our judgment to estimate the likelihood that certain receivables may not be collected or that we might offer future discounts or concessions for previously billed amounts. As a result, we have established a discount allowance for estimated billing adjustments and a bad debt allowance for estimated amounts that we will not collect. We report provisions for billing adjustments as a reduction of revenue and provisions for bad debts as a component of selling expense. We review specific accounts for collectibility based on circumstances known to us at the date of our financial statements. In addition, we maintain reserves based on historical billing adjustments and write-offs. These estimates are based on historical discounts, concessions and bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Accordingly, our judgments and estimates about the collectibility of our accounts receivable affect revenue, selling expense and the carrying value of our accounts receivable.

         Valuation and recoverability of long-lived assets, including goodwill. We evaluate the recoverability of long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amount should be assessed by comparing their carrying value to the undiscounted estimated future net operating cash flows expected to be derived from such assets. If such evaluation indicates a potential impairment, we use discounted cash flows to measure fair value in determining the amount of the long-lived assets that should be written off. For long-term cost and equity investments, we write-down their carrying values if it is determined that an impairment is other than temporary. Factors we consider important which could trigger an impairment review include, but are not limited to, the following:

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significant under-performance relative to expected historical or projected future operating results;

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significant changes in the manner of our use of the acquired assets or the strategy of our overall business;

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significant negative industry or economic trends;

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significant decline in our stock price for a sustained period; and

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our market capitalization relative to net book value.

         During 2001, we recorded impairment charges in the aggregate amount of $4 million for cost-basis investments that we deemed were impaired. Additionally, we recorded an $8.4 million impairment charge during the fourth quarter of 2001 on our investment in Yodlee. See further discussion of our equity investment in Yodlee in Note 4 to the consolidated financial statements. In 2003, we sold one cost-basis investment at a loss of approximately $0.6 million. The aforementioned impairment charges required considerable analysis and judgment in determining the timing and amount of the charges. If other assumptions and estimates were used in our evaluations, the timing and amount of the charges may have been significantly different. At December 31, 2003, the carrying value of these investments was $1.0 million.

         SFAS No. 142, “Goodwill and Other Intangible Assets” which we adopted on January 1, 2002, requires us to perform an annual test of goodwill value to determine whether or not it has been impaired. Based on the results of our initial and annual tests, except as explained in the following paragraph, the fair value of our reporting units exceeds their carrying value. While we no longer record amortization expense for goodwill and other indefinite lived intangible assets, future events and changes in circumstances may require us to record a significant impairment charge in any given period.

         In the first quarter of 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.

         Determination of technological feasibility and capitalization of software development costs. We are required to assess when technological feasibility occurs for products that we develop. Based on our judgment, we have determined that technological feasibility for our products generally occurs when we complete beta testing. Because of the insignificant amount of costs incurred between completion of beta testing and general customer release, we have not capitalized any software development costs in the accompanying consolidated financial statements. If we determined that technological feasibility had occurred at an earlier point in the development cycle and that subsequent production costs incurred before general availability of the product were significant, we would have capitalized those costs and recognized them over future periods. We continue to monitor changes in the software development cycle and may be required to capitalize certain software development costs in the future.

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         Recognition of costs in connection with restructuring plans and merger-related activities. During the last three years, we recorded charges in connection with various restructuring activities. Additionally, we recorded merger related charges related to a reorganization of our European operations in connection with the acquisition of Point in the second quarter of 2002. See further discussion of the terms of these charges in Note 9 to the consolidated financial statements.

         Following the adoption of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we establish a liability for the estimated fair value of exit costs at the date we incur a liability under an approved restructuring plan. At that time, and thereafter until the plan activities are complete, the actual costs or timing of payments associated with the plan may differ from our estimates. We use our judgment and information available to us at the date of the financial statements to reevaluate our initial estimates of the exit costs. If we believe that our previous estimates of exit costs or timing of payments are no longer accurate in light of current conditions, we adjust the liability with a corresponding increase or decrease to current period earnings. Any adjustments to estimates of our exit costs under restructuring plans are reflected on the same line item in the statement of operations as the initial charge to establish the restructuring liability. Additionally, in periods subsequent to the initial measurement, we increase the carrying amount of the liability by the amount of accretion recorded as an expense due to the passage of time. This charge is included in “Other Expense.”

         Accrued restructuring costs at December 31, 2003 reflect our estimate of the fair value of future rental obligations and other costs associated with office space that we do not plan to use in our operations as a result of the restructuring plans, offset by our estimate of the fair value of sublease income for this space. The determination of fair value is based on a discounted future cash flow model using a credit-adjusted risk-free rate. While we know the terms of our contractual lease obligations and related future commitments, we must estimate when and under what terms we will be able to sublet the office space, if at all. Such estimates require a substantial amount of judgment, especially given current real estate market conditions. Actual sublease terms may differ substantially from our estimates. Any future changes in our estimates of lease termination reserves could materially impact our financial condition, results of operations and cash flows.

         In connection with the acquisition of certain businesses, we established reserves for certain contingencies that existed at the date of acquisition. At that time, we believed that the resolution of the contingency would result in future cash expenditures that we estimated based on the information available at the date of acquisition. As those contingencies are resolved, we reduce the related liabilities for any related cash disbursements or if we determine that the contingency is no longer likely to result in a loss. If the settlement occurs beyond one year after the date of the acquisition, any difference in the actual settlement amount is reflected as an adjustment to income or expense in the period of resolution. These adjustments are included in the merger related and restructuring costs line item in the consolidated statements of operations. If the settlement occurs within one year of the date of acquisition, we record the difference as an adjustment to goodwill.

         Reserve for contingencies. When a loss contingency exists, we are required to evaluate the likelihood that a future event or events will confirm the loss. SFAS No. 5 “Accounting for Contingencies” states that a company must accrue for a loss contingency by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and that the amount of loss can be reasonably estimated.

Recent Accounting Pronouncements

         In December 2003, the Securities and Exchange Commission issued SAB No. 104, “Revenue Recognition,” which supercedes SAB 101, “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element arrangements, superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” The guidance contained in SAB 104 reflects the issuance of EITF 00-21, but the revenue recognition principles remaining largely unchanged. As we have already incorporated EITF 00-21 and SAB 101 into our revenue recognition policies, the adoption of SAB 104 did not have a significant impact on our financial statements.

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Results of Operations

         The following table sets forth our statement of operations data for the three years ended December 31, 2001, 2002 and 2003 and the percentage of total revenues of each line item for the periods presented.

         Our results of operations for the year ended December 31, 2002 and 2003 include the acquired operations SDI, Regency and Point, hereafter collectively referred to as the “acquired businesses,” from their respective dates of acquisition. SDI was acquired in September 2001; accordingly the results for that year include SDI’s results for only one quarter.

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Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002

         Revenues. The following table sets forth selected revenue data for the years ended December 31, 2003 and 2002.

         Total revenues decreased by $39.6 million to $252.6 million for 2003 compared to $292.2 million for 2002, a decrease of 14%. This decrease is attributable to a $27.1 million decrease in software license revenue and a $18.3 million decrease in professional services revenue, offset in part by a $4.7 million increase in data center revenues. Our financial institutions segment generated $225.9 million of revenue in 2003 compared to $248.0 million for 2002, a decrease of 9%. Revenues from our Edify business segment were $30.0 million for 2003, a 37% decrease from $47.4 million in 2002. Below is a detailed discussion of changes in revenue by revenue type.

         Software license revenues for our financial institutions segment were $54.9 million for 2003, a $12.0 million decrease from 2002. License revenue earned from Zurich was $32.7 million for 2003 and $31.8 million for 2002. This revenue was earned from a subscription license that expired in December 2003. We will not earn any license revenue from Zurich in 2004 and beyond. License revenues declined in 2003 primarily due to an increase in the number of contracts signed that required accounting for under the percentage of completion method based on the terms of the agreement. As a result, license revenues for these contracts are generally recognized over time as the related implementation and customization services are provided, as opposed to “up front” when the software is delivered in accordance with Statement of Position No. 97-2.

         Software license revenues for our Edify business segment were $7.7 million for 2003, a decrease of $14.2 million from 2002. We believe the following items contributed to the decrease: (1) poor economic conditions in the primary markets served by Edify (telecommunications, travel and retail) and (2) the impact on the business of the reorganization activities. During the third and fourth quarters of 2003, we experienced an improvement in Edify sales activity as the business began to stabilize under new management. We expect continued stability in Edify sales as economic conditions continue to improve in the primary markets served by Edify.

         Support and maintenance revenues for our financial institution segment were $45.2 million for 2003, an increase of $1.4 million or 3% from $43.8 million in 2002. This increase is attributable to new customer maintenance contracts signed from customers who purchased new licenses in 2002 and 2003; partially offset by the attrition from our Internet-only legacy customers and a $1.7 million decrease in support and maintenance fees earned from Zurich. We believe that the attrition of legacy customers is substantially complete and that support and maintenance revenues from our financial institution segment will continue to grow from a stable base of approximately $10 million per quarter.

         Support and maintenance revenues for the Edify business were $16.4 million for 2003, a decrease from $17.3 million for 2002 due principally to customer attrition. The reduction in maintenance is directly related to the downturn in the economy during 2001 and 2002, which saw a certain portion of Edify’s base of customers discontinue maintenance or shut down applications altogether. We believe the quarterly run rate of $4 million at December 31, 2003 represents a stable base for the company.

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         Professional services revenues from our financial institution segment were $77.8 million for 2003, a $17.7 million decrease from $95.5 million for 2002. The decrease is primarily attributable to the $18.5 million decrease in professional services revenues from State Farm and a $1.9 million decrease in professional services revenues from Zurich. Over the past three years, State Farm has moved from a period of heavy investment in its Internet solutions including migrating its insurance application to S1 Enterprise and is now entering a stable maintenance state with their applications. We believe the reported quarterly revenue at September 30, 2003 of $17 million represents a stable base from which to grow. Therefore, professional services revenues from our financial institutions segment will grow on a quarterly basis, as revenues from new projects will replace revenues lost to the completion of current projects.

         The Edify business recorded $5.9 million of revenue for professional services for 2003 compared to $8.1 million for 2002. This decrease is attributable to the decrease in software sales and related implementation projects. We expect professional services to remain stable in 2004, as revenues from new projects should replace those lost to the completion of current projects.

         Data center revenues were $45.2 million for 2003, an increase of $4.7 million for 2002. The increase resulted primarily from the acceleration of data center revenues from Zurich (as discussed in the “Overview”). Increases in data center revenues from new and existing clients were nearly offset by other reductions in transitioning legacy customer revenues (as discussed in the “Overview”). With the transition completed at end of our third quarter 2003, we believe data center revenues will increase from a stable base of approximately $9 million per quarter as new customers are added and our existing customers continue to increase their number of end users.

         Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenue fluctuates based on the mix of products and services sold and is not typical in our sales arrangements. In 2003, we recorded $2.3 million in revenue for third-party hardware delivered from inventory to one financial institution customer. The related cost of the hardware sold is included in “cost of other revenue” as the hardware is delivered. There is only minimal gross margin associated with other revenue.

         Direct Costs and Gross Margins. Direct costs decreased $6.6 million to $115.3 million for the year ended December 31, 2003 from $121.9 million for 2002. Overall gross margins were 54% and 58% for the years ended December 31, 2003 and 2002, respectively. The overall decrease in direct costs was principally due to a $5.2 million reduction in cost of professional services, support and maintenance related to lower staffing levels and reduced facilities costs resulting from the consolidation of offices and a decrease in royalties and other third party fees paid on a lower base of sales (especially in the Edify business). These decreases were offset in part by the establishment of accruals for professional services costs, as discussed below, and the cost of the pass-through hardware (approximately $2.2 million) delivered to one customer in 2003. The decrease in gross margins was primarily due to the mix of revenue earned and a decrease in gross margins for professional services, support and maintenance, from 44% in 2002 to 40% in 2003. Software license revenues represented 24% and 30% of total revenues for the years ended December 31, 2003 and 2002, respectively. Historically, the gross margins on software licenses have been higher than the gross margins on professional service, support and maintenance and data center fees. Therefore, a significant decrease in license revenues as a percentage of total sales negatively affects the overall gross margin percentages. Gross margins on professional services decreased as the amount of revenue from State Farm decreased. We expect a significant decrease in license revenue margin in 2004 following the expiration of the Zurich subscription license in December 2003.

         Direct costs exclude charges for depreciation of property and equipment and the amortization of purchased technology.

         Costs of software licenses principally consist of royalties paid to third parties. Historically, royalties paid on our financial institution software product sales have been minimal because we internally develop most of the software components, the cost of which is reflected in product development expense as it is incurred. We anticipate that costs of software licenses will increase in future periods as we license and install more of our new S1 Enterprise products because these products include some software components that we license from third parties; however, the costs of software licenses will continue to vary with the mix of products sold.

         Software licenses costs for our financial institutions segment increased to $1.6 million in 2003 from $0.5 million in 2002, resulting from a higher volume of product sales including third party software components. Software license costs for the Edify business decreased to $3.5 million in 2003 from $6.5 million in 2002 due to the decrease in product sales and a reduction in the cost of third party voice recognition software.

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         Costs of professional services, support and maintenance consist primarily of personnel and related infrastructure costs.

         Direct costs associated with professional services, support and maintenance were $85.6 million for the year ended December 31, 2003, a decrease of $5.2 million from 2002. This decrease resulted from reductions in professional services headcount, outside contractors and associated facilities costs to a level that is more closely aligned with the projects and services under contract. This decrease was partially offset by the accrual of approximately $3.2 million for the estimated future costs to complete service projects where our expected costs will exceed the contractual revenues. Gross margins for professional services and customer support and maintenance increased due to the revenue mix between lower margin professional services and higher margin support revenues.

         Costs of data center consist of personnel costs, facility costs and related infrastructure costs to support our data center business. Direct data center costs increased $0.2 million to $23.1 million for the year ended December 31, 2003 from $22.9 million for 2002. The increase resulted from the acceleration of data center costs of $1.8 million in the first and second quarters of 2003 associated with the amendment of the Zurich contract, as well as the incremental costs incurred to the transfer the remaining data center business from the U.K. to our global hosting center in Atlanta, Georgia. In 2004, we expect data center costs to be 8% to 12% lower than 2003 related to fewer facilities and increased efficiencies in operations. Data center margins are expected to increase in 2004 related to revenue growth and cost containment.

         Selling and Marketing. For the year ended December 31, 2003, selling and marketing expenses decreased $19.0 million to $39.1 million from $58.1 million in 2002. Selling and marketing expenses decreased $11.8 million and $7.2 million in our financial institutions and Edify segments, respectively, as a result of headcount reductions and the related decrease in compensation expense, other payroll related expense and benefits, and travel expenses.

         Product Development. Total product development expenses decreased $6.1 million to $45.1 million for the year ended December 31, 2003 from $51.2 million for 2002. We achieved cost savings from the realignment of our product development organization in 2002, including replacing outside contractors in our domestic operations with lower cost offshore contractors in India and our development center in Ireland.

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

         General and Administrative. General and administrative expenses were $36.8 million for the year ended December 31, 2003 compared to $38.7 million for 2002, a decrease of $1.9 million or 5%. As a percentage of revenues, general and administrative expenses increased slightly to 14% for the year ended December 31, 2003 from 13% for the same period in 2002. The decrease in general and administrative expenses resulted principally from a decrease in administrative headcount, recruiting fees and professional fees, offset by a $4.5 million reserve for loss contingencies established in the fourth quarter of 2003. We expect general and administrative expenses to be approximately 10% to 12% of revenue in 2004.

         Depreciation. Depreciation decreased $5.7 million to $16.9 million for the year ended December 31, 2003 from $22.6 million in 2003. This decrease was due to reductions in capital expenditures during 2001, 2002 and 2003 as compared with those made in 2000. In addition, depreciation expense decreased approximately $1.5 million as a result of the closure of our U.K. data center operations and our disposal of the data center assets. We expect depreciation expense to be approximately $3 million per quarter in 2004.

         Merger Related and Restructuring Costs. During 2003, we recorded merger related costs and restructuring charges of $19.9 million, as compared to $2.4 million for 2002.

         During 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 $21.2 million during the year ended December 31, 2003. In total, we eliminated approximately 200 positions worldwide and closed or consolidated office facilities. In the domestic operations of our financial institution segment, we recorded $6.2 million in restructuring charges during 2003, which were primarily comprised of charges for

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severance costs associated with headcount reductions, lease payments associated with excess office space and other corporate charges.

         In the first quarter of 2003, we began the process of reorganizing our international operations. As of December 31, 2003, we believe this reorganization is complete. In 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 year ended December 31, 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 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.

         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, replaced the entire senior management team, reduced the workforce and closed and consolidated several Edify office facilities worldwide. These actions resulted in restructuring charges of $4.3 million for the year ended December 31, 2003.

         In 2003, we decreased our merger related reserve for legal claims by $0.8 million, which was established in connection with our acquisition of FICS Group, N.V. in November 1999. We were able to resolve two legal matters during 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 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 2002, we recorded a charge of $0.7 million for some excess office space in our Edify business.

         Acquired In-Process Research and Development. In connection with the purchase price allocation for the Regency and Point acquisitions during the year ended December 31, 2002, we allocated $0.4 million to acquired in-process research and development, which we expensed immediately in accordance with the applicable accounting rules.

         Amortization and Impairment of Acquisition Intangible Assets. Amortization and impairment of acquisition intangible assets decreased $0.1 million to $17.4 million for the year ended December 31, 2003 from $17.5 million for the same period in 2002.

         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 and purchased software of $1.2 million and $0.5 million, respectively.

         Interest, Investment and Other Income. Interest, investment and other income, net was $0.1 million for the year ended December 31, 2003, a decrease from $1.5 million from 2002. We recorded interest and investment income, net of $1.4 million and $1.5 million in 2003 and 2002, respectively. Other expense increased $0.7 million due to an increase in realized foreign currency translation loss in 2003. Also, in 2003, we recorded a loss of $0.6 million on the sale of an investment that we accounted for on a cost basis.

         Income Tax Benefit (Expense). We recorded income tax expense of $0.3 million during the year ended December 31, 2003 compared to an income tax benefit of $2.8 million in 2002. We incurred foreign income tax expense in certain European countries in 2002 and 2003. The income tax benefit in 2002 resulted from the amortization of other intangible assets acquired in

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the acquisition of FICS, which was offset by the foreign income tax expense in 2002. This benefit ended with the complete amortization of the FICS other intangible assets in 2002. Although we have net operating loss carryforwards and tax credit carryforwards of approximately $445.7 million at December 31, 2003, we may be required to record an income tax provision in future periods for certain foreign subsidiaries which do not have net operating loss carryforwards to utilize. Domestically, the limitation on our use of net operating loss carryforwards for alternative minimum tax purposes may result in income tax expense during 2004. At December 31, 2003, we had a valuation allowance of $217.9 million on our deferred tax assets. If we can achieve sustained profitability, we may reverse this valuation allowance, which would have a positive impact on our income tax benefit in the period in which it may be reversed. We do not expect to reverse this allowance during 2004.

Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001

         Revenues. The following table sets forth selected revenue data for the years ended December 31, 2002 and 2001 (in thousands).

         Total revenues for the year ended December 31, 2002 were $292.2 million, an increase of $13.9 million, or 5% from $278.3 for the year ended December 31, 2001. Total revenues for the financial institutions segment increased by $16.2 million to $248.0 million for the year ended December 31, 2002 from $231.8 million for the year ended December 31, 2001, an increase of 7%. During 2002, we continued to provide a substantial amount of implementation, hosting and product enhancement services to State Farm. We derived 26% and 33% of our financial institution segment revenues in 2002 and 2001, respectively, from this customer. Additionally, in 2002, we provided a subscription license, hosting and professional services to Zurich. We derived 17% of our financial institution segment revenues from this customer in 2002. Total revenues for our Edify business decreased $3.2 million to $47.4 million for the year ended December 31, 2002, as compared to $50.6 million for the year ended December 31, 2001.

         Software license revenues for our financial institution segment were $66.9 million for the year ended December 31, 2002, an increase of $24.7 million from 2001. The increase in our license revenue was due to a subscription license with Zurich and license revenues generated from products of the acquired businesses of $12.7 million. Although most of our license revenue has to be replaced each period, license revenue earned from Zurich comprised $31.8 million of our license revenue in 2002, an increase of $26.1 million over 2001. License revenue from our legacy single channel solutions decreased from 2001 and was not completely replaced with revenue from our Enterprise solutions.

         Software license revenues for our Edify segment were $21.9 million for the year ended December 31, 2002, a 25% decrease from $29.1 million for 2001. Software license revenues decreased as a result of poor economic conditions in the primary markets served by Edify (telecommunications, retail and travel) offset in part by the inclusion of the non-financial institution customers of the acquired Point business.

         Support and maintenance revenues for our financial institution segment were $43.8 million for 2002, an increase of $14.5 million from 2001. This increase is primarily attributable to support and maintenance fees of $13.6 million recorded in the acquired businesses.

         In our Edify segment, support and maintenance revenues increased $4.6 million to $17.3 million for the year ended December 31, 2002 from $12.7 million for 2001. This increase is attributable to support and maintenance fees earned from customers who purchased licenses during prior to 2001 and the inclusion of the non-financial institution customers of the acquired Point business.

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         In our financial institutions segment, professional services revenues were $95.5 million for the year ended December 31, 2002, a decrease of $10.8 million from $106.3 million for 2001. This decrease is principally attributable to the decrease in professional services revenue from State Farm and from other large projects, partially offset by professional service fees from the acquired businesses of approximately $7.8 million.

         Professional services for the Edify segment were $8.1 million for the year ended December 31, 2002, a decrease of 8% from $8.8 million in 2001. The decrease is primarily attributable to the decrease in software sales and related professional services projects, offset in part by the inclusion of the non-financial institution customers of the acquired Point business.

         Data center revenues were $40.6 million for the year ended December 31, 2002, a decrease of $12.4 million from 2001. The decrease in data center revenue was primarily due to the loss of several large data center customers, offset by an increase in the number of community and mid-sized financial institutions utilizing S1 solutions in our data centers. Several large financial institution customers moved their Internet banking solutions in-house either on our S1 Enterprise platform or on a competitor’s platform. In addition, one large European bank shut down its Internet banking application during 2001. None of the acquired businesses have a data center solution; accordingly, there was no incremental data center revenue from the acquired businesses during 2002.

         Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenue fluctuates based on the mix of products and services sold.

         Direct Costs and Gross Margins. Total direct costs decreased $3.6 million to $121.9 million for the year ended December 31, 2002 from $125.5 million for 2001. Overall gross margins were 58% and 55% for the years ended December 31, 2002 and 2001, respectively. The overall decrease in direct costs and corresponding increase in gross margins resulted from reductions in employee headcount and higher cost outside contractors, and reduced facilities costs resulting from the consolidation of offices, offset by the added costs of the acquired businesses.

         Direct costs exclude charges for depreciation of property and equipment and the amortization of purchased technology.

         Costs of software licenses for our financial institution software products are generally minimal because we internally develop most of the software components.

         Cost of software licenses for our Edify segment fluctuates with the mix of products sold. For the year ended December 31, 2002, cost of software licenses for our Edify segment were $6.5 million, an increase from $3.5 million in 2001.

         In our financial institutions segment, costs of professional services, support and maintenance consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services, support and maintenance were $79.6 million for the year ended December 31, 2002, a decrease of $11.2 million from 2001. This decrease resulted from reductions in professional services headcount, outside contractors and associated facilities costs to a level that is more closely aligned with the projects and services under contract, offset by the added costs of the acquired businesses. Gross margins for professional services and customer support and maintenance increased due to the cost reductions and the revenue mix between lower margin professional services and higher margin support revenues.

         In our Edify segment, direct costs associated with professional services, support and maintenance were $14.2 million for the year ended December 31, 2002, an increase of $7.2 million from $7.0 million for 2001. This increase was attributable to the inclusion of the costs of the Point non-financial institution business. Gross margins decreased from 68% in 2001 to 44% in 2002 as a result of the change in the mix of products sold.

         Costs of data center consist of personnel costs, facility costs and related infrastructure costs to support our data center business. Direct data center costs decreased $4.2 million to $22.9 million for 2002 from $27.1 million for 2001. The decrease resulted from reductions in personnel, outside contractors and purchases of non-capital equipment. For 2002, the gross margin for data center was 43%, a decrease from 49% for 2001. This decrease is attributable to declining revenues against the fixed costs of the data center. Significant portions of the data center costs are fixed and are difficult to reduce or eliminate proportionally with declining revenues.

         Selling and Marketing. For the year ended December 31, 2002, selling and marketing expenses were $58.1 million, an increase of $4.2 million or 8% over 2001. This increase is primarily attributable to the added costs of the acquired

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businesses (approximately $7.6 million) plus costs associated with the strengthening of our internal sales force in our financial institutions segment. These additional costs were partially offset by a $0.5 million reduction in spending on marketing programs, a $0.6 million reduction in bad debt expense and a decrease in the Edify segment as a result of cost-alignment activities.

         Product Development. Total product development expenses decreased by $2.7 million to $51.2 million for the year ended December 31, 2002 from $53.9 million for 2001. Added product development costs from the acquired businesses were offset by cost savings achieved through reductions of product development personnel, from replacing outside contractors in our domestic operations with lower cost offshore contractors and from the reorganization of the product development organization. In the second half of 2002, we streamlined development activities to eliminate redundancies and we established centers of development excellence that focus on development and delivery of specific components of our product offerings. Overall, product development head count (including employees and offshore contractors) remained constant over the 2001 and 2002.

         General and Administrative. General and administrative expenses were $38.7 million for the year ended December 31, 2002 compared to $39.4 million for 2001, a decrease of $0.7 million or 2%. As a percentage of revenues, general and administrative expenses decreased to 13% for the year ended December 31, 2002 from 14% for the same period in 2001, which is attributable to our ability to leverage our existing infrastructure against increasing revenues. The decrease in general and administrative expenses resulted principally from a decrease in compensation and benefits relative to lower headcount, recruiting fees and professional fees, offset by the added costs of the acquired businesses (approximately $3.1 million) and costs incurred to improve our internal systems. During 2002, we reduced our general and administrative headcount and our use of external resources.

         Depreciation. Depreciation decreased 23% to $22.6 million for the year ended December 31, 2002 from $29.3 million in 2001. This decrease was due to reductions in capital expenditures during 2001 and 2002 as compared with those made in 1999 and 2000. A significant portion of those items that we bought in 1999 and 2000, especially those related to the build-out of our global data centers, became fully depreciated by the end of 2001. This decrease was offset partially by the added depreciation expense of the acquired businesses of approximately $0.6 million.

         Merger Related and Restructuring Costs. During 2002, we recorded merger related costs of $2.4 million, a decrease from $9.3 million for 2001.

         During 2002, we incurred merger related costs of $3.7 million in connection with the acquisition of Point. 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 a reserve 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 amounts. Our restructuring and merger related reserves include provisions for obligations for unused office space less estimates for sub-lease income. When we secure sub-tenants, we adjust our reserves accordingly. Additionally, in 2002, we recorded a charge of $0.7 million for some excess office space in our Edify business.

         During the second quarter of 2001, we approved a restructuring plan to streamline our European operations. In connection with this plan, we reduced our European workforce by 77 people and consolidated most of our European operations into two locations. As a result, we recorded a charge of $5.6 million for the estimated costs associated with the restructuring plan. Also in 2001, we recorded a charge of $4.5 million to increase our restructuring reserves that initially were established during the fourth quarter of 2000. As a result of a softening in the domestic real estate markets, we determined our original estimate of costs to dispose of or sublet our unused real estate was below the currently anticipated costs. Additionally, during 2001, in connection with the closing of certain office facilities, we wrote-off leasehold improvements of $1.2 million, which were not previously anticipated in the initial restructuring accrual. During 2001, we released merger related accruals of $2.0 million related to changes in estimates relative to pending or threatened litigation.

         Acquired In-process Research and Development. In connection with the purchase price allocation for the Regency and Point acquisitions during the year ended December 31, 2002, we allocated $0.4 million to acquired in-process research and development, which we expensed immediately in accordance with the applicable accounting rules.

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         Amortization and Impairment of Acquisition Intangible Assets. Amortization of acquisition intangible assets decreased $62.3 million to $17.5 million for the year ended December 31, 2002 from $79.8 million for 2001. In connection with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002, we stopped recording amortization expense on goodwill and assembled workforce. This reduced our amortization expense for the year ended December 31, 2002 by approximately $59.6 million. During the fourth quarter of 2002, certain intangibles related to the acquisition of FICS in 1999 became fully amortized. The additional amortization of other intangible assets from the acquired businesses of $2.4 million more than offset the reduction in amortization expense from the fully amortized intangibles. Additionally, for six months during 2002, the Edify business was accounted for as “held-for-sale” under which we ceased the amortization of acquisition intangible assets.

         Interest, Investment and Other Income. Interest, investment and other income, net was $1.5 million for the year ended December 31, 2002, a decrease of $1.6 million from 2001. This decrease resulted from the following:

•

a charge of $4.0 million we recorded during 2001 to write down our basis in certain equity investments (accounted for on a cost basis) as a result of impairment in the value of these assets which we believe is other than temporary; offset by

•

a gain of $0.9 million on the sale of investment securities available for sale we recorded during 2001;

•

a $4.1 million decrease in interest income during the year ended December 31, 2002 due to a decrease in average cash to invest and a decrease in interest rates from the prior year period; and

•

a decrease in other items totaling approximately $0.6 million.

         Loss on Sale of Subsidiaries. In 2001, we recorded a loss on sale of VerticalOne of $52.3 million and recorded non-cash charges of $61.9 million based on our equity interest in the net loss of Yodlee, amortization of the underlying goodwill and other intangible assets, and a write-down in the basis of our investment in Yodlee. See further discussion of our investment in Yodlee in Note 4 to the consolidated financial statements. Additionally, during 2001, we recorded a charge of $0.9 million in connection with the sale of a small European subsidiary.

         Equity in Net Loss of Affiliate. On January 16, 2001, we sold our VerticalOne subsidiary to Yodlee in a stock-for-stock transaction in which we received an ownership interest of approximately 33% in Yodlee. During the year ended December 31, 2001, we recorded non-cash charges of $61.9 million based on our equity interest in the net loss of the affiliate, amortization of the underlying goodwill and other intangible assets, and a write-down in the basis of our investment in Yodlee. See further discussion of our investment in Yodlee in Note 4 to the consolidated financial statements. Since our share of Yodlee’s underlying net assets was $0 at December 31, 2001 and we have not made any commitments to Yodlee to provide additional funding, we did not record our share of Yodlee’s operating results in 2002, and we will not record our share of any future operating results until our basis in Yodlee increases above $0, if ever.

         Income Tax Benefit (Expense). We recorded an income tax benefit of $2.8 million during the year ended December 31, 2002 compared to $3.3 million for 2001. The income tax benefit resulted from a reduction in the deferred tax liability related to the 1999 acquisition of FICS offset by foreign income tax expense incurred in certain European countries. The decrease in the benefit is principally attributable to the decrease in the amortization of the FICS intangible assets as described above as well as increases in taxable income in certain of our foreign subsidiaries.

Acquired In-process Research and Development

         In connection with the acquisitions of Regency and Point, we allocated a portion of the respective purchase prices to acquired in-process research and development based on appraisals prepared by independent valuation consultants.

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

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levels of each technology, the uncertainty of technology advances that were known at the time, and the stage of completion of each technology. We believe that the estimated in-process research and development amounts represent fair value at the date of acquisition and do not exceed the amount a third party would have paid for the projects.

         At the date of acquisition, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. Accordingly, the values allocated to these projects were immediately expensed upon acquisition. Where appropriate, we deducted an amount reflecting the contribution of developed technology to the anticipated cash flows of in-process research and development projects. The acquisitions and related in-process research and development expenses are detailed in the table below:

         At the date of acquisition, Regency was working on an IVR system for the NT platform, known as V3.1. Although this technology includes all of the same features of the developed system, it is based on an entirely new code, and includes additional features. We released this new product at the end of 2002 within the estimated costs and timeline used in the valuation.

         As of the acquisition date, Point had two projects under development: e-point Version 6.5 for Windows NT and e-point Version 6.0 for Unix. E-point Version 6.5 incorporates additional functionalities to the existing platform. At the time of acquisition, conceptualization for Version 6.5 was complete, however it had not progressed through the development cycle. e-point Unix has the same features as existing Point technology, but for use as interconnectivity with Unix operating systems. At the time of acquisition, the coding, prototyping and stabilization of the e-point Unix project was not complete. Both of these projects were completed during the first quarter of 2003 within the anticipated costs and timelines.

Liquidity and Capital Resources

         The following tables show information about our cash flows during the years ended December 31, 2001, 2002 and 2003 and selected balance sheet data as of December 31, 2002 and 2003:

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         Operating Activities. During the year ended December 31, 2003, cash provided by operations was $22.4 million compared to $21.4 million and $11.9 million for the years ended December 31, 2002 and 2001, respectively. Changes in operating assets and liabilities, especially trade accounts receivable, trade accounts payable and accrued expenses, are generally the result of timing differences between the collection of fees billed and payment of operating expenses.

         Our net loss of $38.2 million for the year ended December 31, 2003, included non-cash items of $34.3 million in depreciation and amortization, including acquisition intangibles and impairment charges, $3.9 million for the loss on disposal of property and $6.1 million to provide for doubtful accounts and billing adjustments.

         The changes in operating assets and liabilities of $14.4 million in 2003 was primarily attributable to a decrease in accounts receivable of $11.1 million, a decrease in prepaid expenses and other assets of $6.2 million, and an increase in accrued expenses of $6.3 million, offset in part by a $7.6 million decrease in accounts payable.

         Our net loss of $16.4 million for the year ended December 31, 2002, included non-cash items of $40.4 million in depreciation and amortization, including acquisition intangibles and the write-off of acquired in-process research and development and $7.8 million to provide for doubtful accounts and billing adjustments.

         The change in operating assets and liabilities of $9.8 million in 2002 was primarily attributable to a decrease in accounts payable and other liabilities of $6.9 million and an increase in prepaid expenses of $6.7 million and other assets, partially offset by an increase in deferred revenues of $6.6 million.

         Cash provided by operations for the year ended December 31, 2001 included our net loss for the period of $221.5 million offset by the following non-cash items of:

•

$109.0 million of depreciation and amortization;

•

$61.9 million in the equity interest in net loss of an affiliate;

•

$53.2 million in losses recorded on the sale of subsidiaries;

•

$5.2 million to provide for doubtful accounts receivable and billing adjustments; and

•

$4.0 million write-down of cost-basis equity investments for other than temporary impairments.

         The change in operating assets and liabilities of $2.1 million in 2001 was primarily due to a $35.4 million decrease in accounts receivable resulting from aggressive collection efforts and a significant improvement in days sales outstanding, offset by a decrease in accounts payable and accrued expenses of $32.4 million as a result of the timing of payments.

         Investing Activities. Cash used in investing activities was $1.0 million for the year ended December 31, 2003 compared to $3.8 million in 2002 and $42.2 million in 2001.

         We spent $3.9 million and $4.4 million in cash in connection with acquisitions in the years 2002 and 2001, respectively. In 2001, we sold our VerticalOne subsidiary, which included $15.1 million in cash.

         Short term investments consist of investments in certificates of deposit, commercial paper and other highly liquid securities with original maturities exceeding 90 days but less than one year. All of these investments are held to maturity and are reported at amortized cost. We have the ability and the intent to hold these investments to maturity. We converted a net $3.3 million and a net $14.0 million of short-term investments to cash in 2003 and 2002, respectively. In 2001, we made a net investment of $9.1 million in short term investments in 2001.

         In 2002, we invested in a $2.5 million certificate of deposit. Because its remaining maturity exceeded one year at December 31, 2002, it was classified on our balance sheet in “other assets.” The remaining maturity for this investment is less than one year at December 31, 2003; accordingly, it is classified on our balance sheet in “short-term investments.” During 2001, we received $1.0 million from the sale of investment securities.

         We purchased $6.4 million, $11.3 million and $14.7 million of property and equipment in 2003, 2002 and 2001, respectively. During 2003 and 2002, our property and equipment purchases were primarily related to computer equipment. The purchases of property and equipment made in 2001 were primarily related to leasehold improvements for our new corporate headquarters and computer equipment.

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         Financing Activities. Cash provided by financing activities was $37,000 for the year ended December 31, 2003, as compared to cash used in financing activities of $9.9 million and $3.3 million for the years ended December 31, 2002 and 2001 respectively.

         In July 2002, our Board of Directors approved a $10.0 million stock repurchase program. This program was completed in the first quarter of 2003. In October 2003, our Board of Directors approved a $15.0 million stock repurchase program. The principle objective of the stock repurchase plan is to offset dilution of our common stock from shares granted under our employee stock option plans. These programs were and continue to be funded from available cash and short-term investments. In the year ended December 31, 2003, we repurchased 199,562 shares of our common stock for $1.2 million. In the year ended December 31, 2002, we repurchased 1,906,300 shares of our common stock for $9.3 million under this program. As of December 31, 2003, we are authorized to repurchase additional common stock up to $14.6 million. We expect to execute purchases of our common stock under this plan throughout 2004.

         In 2003, 2002 and 2001, we received $3.2 million, $5.4 million and $7.7 million from the sale of common stock under our employee stock plans, respectively.

         We paid $2.0 million, $6.0 million and $7.2 million for capital lease obligations in 2003, 2002 and 2001, respectively. In 2001, we repaid borrowings of $3.8 million.

         In 2001, we entered into an arrangement for a $10.0 million secured line of credit with a bank. During 2002, the secured line of credit expired. As of December 31, 2003, we do not have any borrowing arrangements.

         Commitments. In connection with the lease of certain offices, we issued standby letters of credit in the amount of $7.9 million to guarantee certain obligations under the lease agreements. The amount of the letter of credit reduces as our rent obligation declines. At December 31, 2003, there were no drawings outstanding under the letter of credit.

         We lease office space and computer equipment under non-cancelable operating leases that expire at various dates through 2023. As a result of the consolidation of our offices over the past few years, we have entered into non-cancelable sub-lease agreements for certain of our properties. We also lease certain computer equipment under capital lease arrangements.

         In the normal course of business, we enter into contracts with vendors. Some of these contracts include provisions for fixed or minimum purchase quantities. These obligations are included in aggregate in the table below.

         Future minimum payments under operating and capital leases, operating sublease income, and purchase obligations to vendors are as follows (in thousands):

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

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Item 7A. Qualitative and Quantitative Disclosures about Market Risk.

         The foreign currency financial statements of our international operations are translated into U.S. dollars at current exchange rates, except revenues and expenses, which are translated at average exchange rates during each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities are accumulated in a separate section of stockholders’ equity titled “accumulated other comprehensive income (loss).” Therefore, our exposure to foreign currency exchange rate risk occurs when translating the financial results of our international operations to U.S. dollars in consolidation. At this time, we do not use financial instruments to hedge our foreign exchange exposure because the effect of foreign exchange rate fluctuations are not material. The net assets of our foreign operations at December 31, 2003 were approximately $1.5 million.

         Our capital lease obligations include only fixed rates of interest. Therefore, we do not believe there is any material exposure to market risk changes in interest rates relating to our capital lease obligations.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
  and Stockholders of S1 Corporation:

         In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of S1 Corporation and its subsidiaries (the “Company”) at December 31, 2002 and 2003, and the results of their operations and their 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 of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 8, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002.

PricewaterhouseCoopers LLP

Atlanta, GA
March 12, 2004

40

S1 CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

41

S1 CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

42

S1 CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS