UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission file number: 0-26802

CHECKFREE CORPORATION

4411 East Jones Bridge Road, Norcross, Georgia 30092
(Address of Principal Executive Offices, Including Zip Code)

(678) 375-3000
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 90,043,283 shares of Common Stock, $.01 par value, were outstanding at May 10, 2004.

FORM 10-Q

CHECKFREE CORPORATION

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

CHECKFREE CORPORATION AND SUBSIDIARIES

See Notes to Interim Unaudited Condensed Consolidated Financial Statements.

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CHECKFREE CORPORATION AND SUBSIDIARIES

See Notes to Interim Unaudited Condensed Consolidated Financial Statements.

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CHECKFREE CORPORATION AND SUBSIDIARIES

See Notes to Interim Unaudited Condensed Consolidated Financial Statements.

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CHECKFREE CORPORATION AND SUBSIDIARIES

1. Basis of Presentation and Summary of Significant Accounting Policies

     Unaudited Interim Financial Information

     The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles (“GAAP”) for interim financial reporting. The results of operations for the three and nine months ended March 31, 2004 and 2003, are not necessarily indicative of the results for the full year.

     These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, as filed with the Securities and Exchange Commission on September 15, 2003. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.

     Stock-Based Compensation

     The Company accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense is not required to be recorded when stock options are granted to employees as long as the exercise price is not less than the fair market value of the stock when the option is granted, and in connection with our Associate Stock Purchase Plan as long as the purchase price is not less than 85% of the lower of the fair market value at the beginning or end of each offer period. In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation.” SFAS 123 allows the Company to continue to follow the present APB Opinion 25 guidelines, but requires pro-forma disclosures of net income and earnings per share as if the Company had adopted the provisions of the Statement. In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123,” which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. SFAS 148 requires prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation and amends APB Opinion 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. These disclosure requirements became effective for the Company’s third quarter of fiscal 2003. The Company has continued to account for stock-based compensation under the provisions of APB Opinion 25 using the intrinsic value method.

     Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in accordance with the provisions of SFAS 123, the Company’s net loss and net loss per share would have been as follows (in thousands, except per share data):

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     Foreign Currency Translation

     For all non-U.S. subsidiaries, the functional currency is the local currency. Assets, liabilities, revenues and expenses are translated using current and historical exchange rates in accordance with SFAS No. 52, “Foreign Currency Translation.” Translation adjustments are reported in accumulated other comprehensive income, a separate component of shareholders’ equity.

     Recent Accounting Pronouncements

     FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”) was issued in January 2003 and addresses consolidation by business enterprises of special purpose or off-balance sheet entities. In addition to numerous FASB Staff Positions written to clarify and improve the application of FIN 46, the FASB issued an amendment to FIN 46 entitled FASB Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity (“VIE”) to be consolidated if the Company’s variable interest (i.e., investment in the entity) will absorb a majority of the entity’s expected losses and/or residual returns if they occur. FIN 46 was applicable immediately to any VIE formed after January 31, 2003. A public entity with variable interests in a VIE created before February 1, 2003, was required to apply the provisions of FIN 46 for the first interim or annual reporting period ending after December 15, 2003. The implementation of FIN 46 did not have a material effect on the Company’s financial position or results of operations.

     Reclassifications

     Certain amounts in the prior years’ financial statements have been reclassified to conform to the 2004 presentation.

2. Goodwill and Other Intangible Assets

     On July 1, 2002, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 changes the accounting for goodwill and other intangible assets. Goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. The Company performs its annual impairment test as of April 30.

     In November 2003, the Company completed its acquisition of HelioGraph, Ltd. for approximately $18,756,000 in cash. HelioGraph is a part of CheckFree Financial and Compliance Solutions, a business unit within the Company’s Software Division. In connection with the acquisition of HelioGraph, the Company recorded a charge of $324,000 for purchased in-process research and development. The HelioGraph acquisition is not material to the Company.

     In December 2003, the Company announced an agreement to acquire American Payment Systems, Inc., from its parent corporation UIL Holdings, for approximately $110,000,000 in cash. The transaction is expected to

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close before June 30, 2004, subject to the receipt of state regulatory approvals and satisfaction of customary closing conditions. This acquisition will not be significant to the Company.

     As of March 31, 2004, the Company’s only non-amortizing intangible asset is goodwill of $537,878,000. The changes in the carrying value of goodwill by segment from June 30, 2002, to March 31, 2004, were as follows (in thousands):

     The components of the Company’s various amortized intangible assets are as follows (in thousands):

(1)

Strategic agreements primarily include certain entity-level covenants not to compete.

     Amortization of intangible assets totaled $33,431,000 and $47,664,000 for the three months ended March 31, 2004 and 2003, respectively, and $108,768,000 and $143,408,000 for the nine months ended March 31, 2004 and 2003, respectively. Amortization expense for the year ended June 30, 2004 and the next four fiscal years is estimated to be as follows (in thousands):

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3. Convertible Subordinated Notes

     In December 2003, the Company redeemed its 6.5% Convertible Subordinated Notes that were due on December 1, 2006. The $172,500,000 principal amount, along with a call premium of $4,813,000, was paid in cash. In addition, the Company incurred a non-cash charge of $2,407,000 due to the write off of the remaining unamortized bond issuance costs. These amounts are included in interest expense for the nine months ended March 31, 2004.

4. Common Stock

     In the nine months ended March 31, 2004, the Company issued stock for various employee benefit programs. The Company issued 149,844 shares to fund its 401(k) match, the cost of which was accrued in the year ended June 30, 2003, and 173,693 shares of common stock in conjunction with its employee stock purchase plan, which was funded through employee payroll deductions in the immediately preceding six-month period.

     In June 2003, the Company made an offer (the “Tender Offer”) to certain employees to exchange options with exercise prices greater than or equal to $44.00 per share currently outstanding under the Company’s 1983 Incentive Stock Option Plan, 1983 Non-Statutory Stock Option Plan, 1993 Stock Option Plan, Third Amended and Restated 1995 Stock Option Plan, BlueGill Technologies, Inc. 1997 Stock Option Plan, BlueGill Technologies, Inc. 1998 Incentive and Non-Qualified Stock Option Plan, and 2002 Stock Incentive Plan, for restricted stock units of the Company’s common stock, and in certain cases, cash payments. Restricted stock units issued under the Tender Offer will vest ratably over a three-year period. The offer period closed on July 17, 2003, and employees holding 1,163,668 options participated in the Tender Offer. The Company made cash payments totaling $586,000 in July 2003 representing the cash consideration portion of the Tender Offer and will issue up to 246,000 shares of stock under the 2002 Stock Incentive Plan over the next three years as the restricted stock units vest. The Company recorded an expense of $519,000 and $2,215,000 for the three and nine months ended March 31, 2004, respectively, for cash payments made and the vesting of restricted stock units.

5. Earnings Per Share

     The following table reconciles the differences in income and shares outstanding between basic and diluted for the periods indicated (in thousands except per share data):

     Anti-dilution provisions of SFAS 128, “Earnings Per Share,” require consistency between diluted per-common-share amounts and basic per-common-share amounts in loss periods. Had the Company recognized net

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income for the nine months ended March 31, 2004, an additional 5,354,000 of in-the-money options and warrants would have been included in the diluted earnings per share calculation. Had the company recognized net income for the three and nine months ended March 31, 2003, an additional 3,973,000 and 1,923,000 of in-the-money options and warrants would have been included in the diluted earnings per share calculation, respectively. Using the treasury stock purchase method prescribed by SFAS 128, this would have increased diluted shares outstanding by 1,933,000 for the nine months ended March 31, 2004, and 1,082,000 and 342,000 for the three and nine months ended March 31, 2003, respectively.

     The weighted average diluted common shares outstanding for the three and nine months ended March 31, 2004 and 2003, exclude the effect of approximately 2,961,000, 3,255,000, 6,481,000 and 8,030,000 of out-of-the-money options and warrants, respectively. In addition, the weighted average diluted common shares outstanding for all periods exclude the 2,357,000 share effect for the assumed conversion of the convertible subordinated notes, as their effect would be anti-dilutive. The after-tax effect of interest expense on the convertible subordinated notes for all periods has not been added back to the numerator, as its effect would be anti-dilutive. The convertible subordinated notes were redeemed in December 2003.

6. Reorganization Charges

     During the year ended June 30, 2002, the Company announced it would streamline operations in its Electronic Commerce division, refine its strategy for the i-Solutions business unit of its Software division, and discontinue certain product lines associated with its Investment Services division. As a result of these actions, the Company closed or consolidated operations in several locations and eliminated certain other positions in the Company. The consolidation of three legacy transaction processing platforms into the Genesis platform in the Electronic Commerce division resulted in the closing of its San Francisco, California location on April 30, 2002; its Houston, Texas location on June 30, 2002; and its Austin, Texas location on September 30, 2002. The refinement in strategy for the i-Solutions business resulted in the closing of its Ann Arbor, Michigan and Singapore locations on March 19, 2002.

     As a result of these actions, during the year ended June 30, 2002, the Company recorded $16,365,000 of reorganization charges for the year ended June 30, 2002, which included $1,640,000 of non-cash impairment charges, $10,962,000 of severance and related benefits costs for the termination of 707 employees, and $3,763,000 of other exit costs, including lease termination fees and other closure, employee and professional costs. For the year ended June 30, 2003, the Company reviewed its estimated remaining liabilities under this reorganization plan and recorded an additional charge of $1,405,000, which included $165,000 of severance and related benefits and $1,240,000 of other exit costs, including lease termination fees and other closure, employee and professional costs. The Company expects the reorganization to be completed by October 2005 and anticipates no additional charges. A summary of activity related to the reorganization reserve is as follows (in thousands):

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7. Supplemental Disclosure of Cash Flow Information (in thousands)

8. Related Parties

     On September 1, 2000, the Company acquired MSFDC, L.L.C. (“TransPoint”) from Microsoft Corporation (“Microsoft”), First Data Corporation (“First Data”), and Citibank, N.A. in exchange for 17 million shares of common stock. As part of the TransPoint acquisition, Microsoft received 8,567,250 shares of common stock and Microsoft continues to own those shares as of March 31, 2004. Pursuant to the terms of the TransPoint acquisition, Microsoft is entitled to nominate one director to the Company’s board for such time as they own at least 6,425,438 shares of common stock. Therefore, Microsoft is considered a related party.

     In addition, the Company entered into a commercial alliance agreement with Microsoft as part of the TransPoint acquisition. Under the terms of the commercial alliance agreement, Microsoft, among other things, agreed to use the Company for pay anyone and bill presentment services offered by Microsoft. The commercial alliance agreement also provided for a minimum fee and revenue guarantee to the Company of $120 million over the five year term of the agreement.

     Pursuant to the terms of the TransPoint acquisition, First Data is entitled to nominate one director to the Company’s board for such time as they own at least 4,925,438 shares of common stock. Although First Data owned less than 4,925,438 shares of common stock as of March 31, 2004, First Data owned in excess of 4,925,438 shares of common stock at the time of the director’s most recent re-election to the Board. The director’s term expires at the 2005 Annual Meeting of Stockholders, and First Data is considered a related party until such time.

     In addition, the Company entered into a marketing agreement with First Data as part of the TransPoint acquisition. Under the terms of the marketing agreement, the Company agreed to use certain First Data payment processing services if, in each case using reasonable judgment, substantially similar services are not then obtainable from a third party at an overall economic cost to the Company that is less than the overall economic cost of First Data’s services. The marketing agreement also provided for a minimum fee and revenue guarantee to the Company of $60 million over the five-year term of the agreement. On January 10, 2002, the Company entered into an agreement for check processing services with Integrated Payment Systems Inc., a subsidiary of First Data.

     Microsoft and First Data operate substantially below their minimum monthly commitments, and the Company does not expect these customers to increase their activity such that they would operate above the minimum commitments in the next twelve months.

9. Comprehensive Income (Loss)

     Comprehensive income (loss) represents net income (loss), plus certain other items that are recorded directly to stockholders’ equity, as follows (in thousands):

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10. Business Segments

     The Company operates in three business segments — Electronic Commerce, Software and Investment Services along with a Corporate services segment. These reportable segments are strategic business units that offer different products and services. The Company evaluates performance based on revenues and operating income (loss) of the respective segments. Segment operating income (loss) excludes acquisition related intangible asset amortization and significant one-time charges. There are no inter-segment sales.

     The following sets forth certain financial information attributable to the Company’s business segments for the three and nine months ended March 31, 2004 and 2003 (in thousands):

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11. Subsequent Events

     On April 2, 2004, the Company received a $25 million deposit from one of its customers in connection with a contract modification relating to the timing of transaction settlements. The agreement has an initial term of four years and automatically renews thereafter unless terminated with 180 days notice. During the term of the agreement, the Company will pay the customer a variable rate of interest on a monthly basis equal to the then current overnight repurchase agreement rate. The deposit will be reflected as a long-term liability in the Company’s financial statements. There are no restrictions on the deposit, and the funds will be available for general corporate use. The deposit will be refunded to the customer upon termination of the agreement.

     On April 23, 2004, the Company entered into three interest rate swap agreements. Each swap agreement has a notional amount of $25 million and an average life of 2.13 years.

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

Overview

     CheckFree was founded in 1981 as an electronic payment processing company and has become a leading provider of financial electronic commerce products and services. Our current business was developed through the expansion of our core electronic payments business and the acquisition of companies operating in similar or complementary businesses.

     We operate our business through three independent but inter-related divisions:

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Electronic Commerce;

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Investment Services; and

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Software.

     Through our Electronic Commerce division, we enable consumers to receive and pay bills electronically. For the year ended June 30, 2003, we processed approximately 434 million electronic transactions and delivered approximately 32 million electronic bills. For the quarter ended March 31, 2004, we processed over 152 million electronic payments and delivered approximately 22.5 million electronic bills. In the quarter ended March 31, 2004, there were about 13 million consumers initiating payments via CheckFree supported technology. The number of transactions we process each year continues to grow. Growth in the number of transactions processed exceeded 37% for the year ended June 30, 2003, and 36% for the quarter ended March 31, 2004, against the same periods in the prior year. The Electronic Commerce division accounted for approximately 74% of our revenue in the quarter ended March 31, 2004.

     Our Electronic Commerce division’s products allow consumers to:

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receive electronic bills through the Internet;

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pay any bill — whether it arrives over the Internet or through traditional mail — to anyone;

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make payments not related to bills — to anyone; and

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perform customary banking transactions, including balance inquiries, transfers between accounts and on-line statement reconciliations.

     Through our Investment Services division, we provide a range of outsourced portfolio management services to financial institutions, including broker dealers, money managers and investment advisors. As of March 31, 2004, our clients used the CheckFree APL Portfolio Accounting System to manage approximately 1.5 million portfolios totaling more than $900 billion in assets. The Investment Services division accounted for approximately 14% of our revenue in the quarter ended March 31, 2004.

     Our institutional client base includes investment advisors, brokerage firms, banks and insurance companies. Our fee-based money manager clients are typically sponsors or managers of “wrap” or separately managed accounts, money management products, or traditional money managers, managing investments of institutions and high net worth individuals. We also support a growing number of third party vendors providing quick-to-market turnkey solutions.

     Our portfolio management systems are marketed under the product name CheckFree APL and provide the following functions:

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account open and trading capabilities;

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graphical client reporting;

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performance measurement;

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decision support tools;

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account analytics;

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tax lot accounting;

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multiple strategy portfolios;

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straight through processing;

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Depository Trust Corporation interfacing;

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billing functions; and

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system and data security.

     In addition to our APL portfolio management products, our Investment Services division also offers proposal generation, investment performance, and reporting products and services. Marketed under M-Pact, M-Search and M-Watch, these products are a result of our acquisition of Mobius Group, Inc. in March 1999.

     Through our Software division, we deliver software, maintenance, support and professional services to large financial service providers and other companies across a range of industries. The Software division is comprised of three units, each with its own distinct set of software products. The ACH Solutions unit provides software and services that are used to process more than two-thirds of the nation’s nine billion annual Automated Clearing House (ACH) payments. The CheckFree Financial and Compliance Solutions (CFACS) unit enables organizations to handle their reconciliation and compliance requirements. On November 1, 2003, we acquired HelioGraph, Ltd., a UK based company that brings a financial transactions management solution with straight through processing expertise to our CFACS suite of products, in addition to international presence. The i-Solutions unit provides software and services that enable end-to-end e-billing and e-statement creation, delivery and payment. The Software division accounted for approximately 12% of our revenue in the quarter ended March 31, 2004.

Executive Summary

     For the quarter ended March 31, 2004, we generated net income of $7.7 million. While on a year to date basis we generated a net loss of $0.9 million, we expect to be profitable for our fiscal year ending June 30, 2004. Through continued efforts to improve quality and efficiency throughout the company, we have generated $100.3 million in free cash flow (which we define as GAAP net cash provided from operating activities less capital expenditures) through the nine months ended March 31, 2004, and are on track to generate approximately $150.0 million in free cash flow for the fiscal year ended June 30, 2004, compared to the $133.5 million of free cash flow we generated in our fiscal year ended June 30, 2003. See “Use of Non-GAAP Financial Information” below for a further discussion of this measure. Free cash flow in this fiscal year, combined with cash, cash equivalents, short term and long term investments of $400.6 million as of June 30, 2003, allowed us to call our $172.5 million of 6.5% convertible subordinated notes during the year. Additionally, we used internally generated cash to acquire HelioGraph, Ltd. for its net purchase price of approximately $16.2 million, and expect to fund the closing of our planned acquisition of American Payment Systems, Inc. (APS) with approximately $110.0 million in cash by the end of our fiscal year. Although we have experienced increasingly positive operating results, we continue to invest heavily in all of our businesses, to take full advantage of anticipated growth opportunities.

     We continue to experience significant growth in transactions processed in our Electronic Commerce business, as over 13 million consumers initiated payments through CheckFree managed systems in the quarter ended March 31, 2004, up from nine million at this time last year. We previously reported that four large banks were moving their bill payment transactions to in-house managed systems. Despite the completion of this migration early in fiscal 2004, we have generated total transaction growth exceeding 33% on a year over year basis. In the quarter ended December 31, 2003, we announced amended contract terms with our largest customer, Bank of America, that resulted in a dampening of revenue growth in the quarter ended March 31, 2004, as the bank converted to a transaction based pricing model with volume based discounts that are more predictable than in the past. Continued efforts to improve quality and efficiency in our operations, combined with a steadily improving electronic payment rate and our ability to leverage a significant fixed cost base, have resulted in lower cost per transaction, offsetting volume based pricing discounts. Additionally, quarterly e-bills delivered in the three months ended March 31, 2004, exceeded 22.5 million, compared to 8.8 million in the same period last year. We believe that added availability of electronic bills will make electronic payment offerings even more compelling to consumers. Finally, in an effort to penetrate a part of the electronic billing and payment market in which we have not materially participated previously, in December 2003, we announced plans to acquire APS, a leading provider of agent based bill payments to the 20% of U.S. consumers who do not typically rely on bank products and services. We expect the acquisition to close in the quarter ending June 30, 2004, and plan to explore opportunities to leverage the strengths of both companies to further grow our business.

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     After two years of slow growth due to the impact of a recessionary economy on the stock market, our Investment Services business is beginning to see growth in the number of portfolios managed and related revenue. To take full advantage of the emerging separately managed accounts market, we are investing heavily to upgrade our technology infrastructure in this business. While the near term investments will reduce our operating results in this segment over the next several quarters, we expect these investments to result in increased penetration and growth in this evolving market in the long-term.

     Our Software business generated higher license revenues in the quarter ended March 31, 2004, than we have seen in over two years. Some of this increased license revenue resulted from deals that were initially expected to close in the second quarter of 2004, while others closed earlier than expected. As we continue to fully integrate HelioGraph, which has added revenue to this business over the last two quarters, and continue to see new license sales, we expect improved operating results from the Software business.

     The following table sets forth as percentages of total operating revenues, certain consolidated statements of operations data:

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Results of Operations

     The following table sets forth total company revenue for the three- and nine-month periods ended March 31, 2004 and 2003, respectively.

     Quarter over quarter revenue growth was driven by 10% growth in our Electronic Commerce business, 5% percent growth in our Investment Services business, and a 13% increase in our Software business. Year over year revenue growth was driven by 12% growth in our Electronic Commerce business, 4% percent growth in our Investment Services business, and 5% percent growth in our Software business. The growth in our Electronic Commerce revenue was driven primarily by an increase in transactions processed from 111.9 million for the three months ended March 31, 2003, to 152.2 million for the three months ended March 31, 2004, and from 313.6 million for the nine months ended March 31, 2003, to 418.1 million for the nine months ended March 31, 2004. Transaction growth is offset by a decline in revenue per transaction caused primarily by a combination of tiered contractual pricing discounts and contract renewal pricing at lower than previous rates. Additionally, minimum revenue guarantees from Microsoft and First Data Corporation have increased by $2.3 million on a quarter over quarter basis, and by $6.8 million on a year over year basis. In the quarter ended December 31, 2003, we announced that we amended the contractual terms with our largest customer, Bank of America. The new contract converts Bank of America to transaction based versus subscriber based pricing and is expected to result in more predictable changes in quarterly revenue per transaction going forward.

     Growth in our Investment Services revenue was driven primarily by growth in the number of portfolios managed, from approximately 1.2 million as of March 31, 2003, to about 1.5 million as of March 31, 2004. Economic conditions throughout our fiscal year ending June 30, 2003, resulted in portfolios managed remaining essentially flat at about 1.2 million. As the stock market rebound progressed into our 2004 fiscal year, the number of portfolios we manage increased to approximately 1.3 million by September 30, 2003, to approximately 1.4 million as of December 31, 2003, and to about 1.5 million as of March 31, 2004. In some cases, new portfolios are being added to our APL system at a lower price point, where we have granted price reductions in connection with gaining long term revenue growth, and by a mix shift resulting from increased volume from broker dealers at a lower price. As investors continue to move back into equity investments, we expect growth rates of portfolios and revenue to improve.

     Our Software business executed well in the third quarter of 2004. Our sales pipeline remains strong, however, customers continue to take longer to evaluate discretionary software purchases. The 13% growth we experienced in total revenue on a quarter over quarter basis was driven primarily by our acquisition of HelioGraph in the quarter ended December 31, 2003. On a year over year basis, growth was driven primarily by the acquisition of HelioGraph. Strong execution in the quarter was the result of carryover software arrangements from the December 31, 2003 quarter and a few contracts closing sooner than we expected. As a result, while we believe we will experience similarly strong license revenue in the June 30, 2004 quarter, we do not expect the same seasonal spike in license revenue in the quarter as experienced in prior years.

     The following tables set forth comparative revenues, by type, for the three- and nine-month periods ended March 31, 2004 and 2003, respectively.

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     We earn processing and servicing revenue in both our Electronic Commerce and our Investment Services businesses. Growth in processing and servicing revenue has come primarily from the aforementioned growth in transactions processed in our Electronic Commerce business. While expected transaction volume diverted from CheckFree to in-house solutions by four large bank customers has dampened our growth during the transition, growth in the remainder of our Electronic Commerce business, including the addition of two large bank customers, has outpaced diverted transactions. We delivered approximately 55.7 million electronic bills in the nine months ended March 31, 2004, with a price point of approximately $0.20 per e-bill, representing an increase of almost 175% over the 20.4 million bills delivered during the nine months ended March 31, 2003. Our commercial agreements with Microsoft and First Data Corporation, resulting from our acquisition of TransPoint in September 2000, include monthly minimum revenue guarantees consistent with other consumer service providers. The minimums for Microsoft and First Data Corporation increase annually over the five-year term of the agreements. We continue to operate below the minimum revenue levels with both, and as a result of the increased minimum levels this quarter, revenue from Microsoft and First Data Corporation grew by approximately $2.3 million from the quarter ended March 31, 2003, to March 31, 2004, and by $6.8 million from the nine months ended March 31, 2003, to the nine months ended March 31, 2004. Somewhat offsetting this growth has been a reduction in market demand for our account balance transfer products. Also, one of our larger Health and Fitness customers migrated to an in-house solution over the past several months. Finally, as expected, our previously mentioned contract revisions with Bank of America late in the quarter ended December 31, 2003, caused a dampening of processing and servicing revenue growth, and we expect to return to more normal sequential growth rates in the quarter ending June 30, 2004.

     Our quarter ended March 31, 2004, was our strongest license revenue quarter in over two years. Although HelioGraph contributed somewhat in the quarter ended December 31, 2003, we carried some software deals into the March 31, 2004 quarter from the previous quarter and closed a few in advance of what we expected from future quarters. While we expect our June 30, 2004 quarter to be about as strong as our March 31, 2004 quarter, we do not expect to see the same seasonal spike in our fiscal fourth quarter we have experienced in previous years.

     Maintenance revenue, which represents annually renewable product support for our software customers, is isolated to our Software business, and tends to grow with incremental license sales from previous periods. Our maintenance base has grown as a result of recent license sales, customer retention rates exceeding 80%, moderate price increases across all business units, and five months of revenue from the acquisition of HelioGraph. Although we defer revenue recognition on maintenance billings until cash is collected, which can cause quarter-to-quarter fluctuations, we expect minimal growth in maintenance fee revenue without additional license sales growth.

     Other revenue consists mostly of consulting and implementation fees across all three of our businesses. In the nine months ended March 31, 2003, we had one custom software implementation project that generated a significant amount of consulting revenue in that period that has not recurred in the current year.

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     The following set of tables provides line-by-line expense comparisons with their relative percentages of total company revenue for the three- and nine-month periods ending March 31, 2004.

     In addition to leveraging a significant fixed-cost processing infrastructure, we continue to focus investment on additional efficiency and quality improvements within our customer care processes and our information technology infrastructure to drive cost per transaction improvement. Also, in Electronic Commerce, our electronic payment rate has increased from 74% as of March 31, 2003, to 78% as of March 31, 2004. Electronic payments carry a significantly lower variable cost per unit than paper-based payments and are far less likely to result in a costly customer care claim. Cost per transaction improvement continues to be one of our most important ongoing efforts as we take advantage of scale efficiency opportunities in this part of our business.

     Including capitalized development costs of $0.6 million for the three months ended March 31, 2004, and $1.8 million for the three months ended March 31, 2003, gross expenditures for research and development were $17.8 million, or 11.5% of total revenue, for the three months ended March 31, 2004, and were $15.4 million, or 10.9% of total revenue, for the three months ended March 31, 2003. Including capitalized development costs of $2.3 million for the nine months ended March 31, 2004, and $3.1 million for the nine months ended March 31, 2003, gross expenditures for research and development were $50.5 million, or 11.3% of total revenue, for the nine months ended March 31, 2004, and were $42.2 million, or 10.4% of total revenue, for the nine months ended March 31, 2003. We continue to invest heavily in product enhancement and productivity improvement initiatives in all of our business segments, and we added moderate levels of research and development spending with the acquisition of HelioGraph beginning in the December 31, 2003 quarter. While we have seen growth both in absolute dollars and as a percentage of revenue, quarter over quarter, we expect the level of quarterly spending to remain about the same or modestly higher in absolute dollars for the remainder of the fiscal year as we invest in our Investment Services business.

     The decrease in sales and marketing costs, as a percentage of revenue, is due primarily to the fact that the predominance of our revenue growth has taken place in our Electronic Commerce business, which has less associated variable sales commissions. On an absolute dollar basis, we have incurred less general awareness marketing program expense in the first nine months of fiscal 2004 than we had in the same period of the previous year. However, these expenses have historically fluctuated due to the nature and timing of various programs. As license revenues are expected to remain high for the fourth quarter of 2004, and we resume general awareness marketing programs, we expect the dollar value of spending in sales and marketing to approach historical levels as we close out the fiscal year.

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     The acquisition of HelioGraph in the quarter ended December 31, 2003, has added approximately $0.8 million of new quarterly general and administrative costs to our cost base. In the quarter ended March 31, 2004, we incurred approximately $0.5 million of costs associated with a closed facility in the Ann Arbor, Michigan area. Finally, our formula based calculation for allowance for doubtful account reserves resulted in a $0.8 million charge in the current quarter. We expect our general and administrative costs to increase year over year due primarily to regulatory compliance costs, and overall we expect that they will run between 7% and 8% of revenue in the coming quarters.

     Depreciation and amortization expense from operating fixed assets and internally capitalized product costs has decreased from $11.0 million for the three months ended March 31, 2003, to $10.3 million for the three months ended March 31, 2004, and from $32.7 million for the nine months ended March 31, 2003, to $30.7 million for the nine months ended March 31, 2004. The remainder of our depreciation and amortization costs represents acquisition related amortization. The decrease in non-acquisition related depreciation and amortization is the result of investments in replacement assets that carry lower costs than the assets they are replacing. The remaining reduction in depreciation and amortization is the result of lower acquisition related intangible amortization from intangible assets that have fully amortized since last year, or lower non-goodwill intangible assets balances resulting from impairment charges in the prior year.

In-Process Research and Development

     In the three month period ended December 31, 2003, we recorded immaterial in-process research and development costs of $0.3 million associated with our acquisition of HelioGraph.

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     Despite an increase in average cash and invested assets on a year over year basis, interest income has declined as a result of lower average yields.

     Our interest expense has decreased significantly for the respective three and nine month periods. We continued to carry our 61/2% Convertible Subordinated Notes due 2006 at a balance of $172.5 million throughout the nine-month period ending March 31, 2003. We redeemed the notes in full on December 12, 2003. However, we incurred a cash charge of $4.8 million for a 2.79% call premium to redeem the notes prior to their scheduled maturity date, and we incurred a non-cash charge of $2.4 million to write off the remaining unamortized note issuance costs.

Loss on Investments

     Due to a decline in the market value of our investment in Payment Data Systems, Inc. (formerly Billserv, Inc.), which had been below our book basis for over six months, we judged the decline in the investment to be “other than temporary” and, accordingly, in the quarter ended December 31, 2002, we recorded a charge of $1.9 million to reflect the loss. As of March 31, 2004, although our carrying value for this asset is $0, its current market value is approximately $0.4 million.

     Although we incurred a pre-tax loss for the first nine months of fiscal 2004, we achieved positive pre-tax earnings for the quarter ended March 31, 2004, and we expect to achieve positive pre-tax earnings on a full year basis for the fiscal year ending June 30, 2004. Our expected effective tax rate for the year will be approximately 17%. The research and experimentation tax credits we are earning will reduce our effective tax rate for the current fiscal year. Our effective rate will converge with the blended federal and state statutory rate of approximately 40% as pre-tax income turns positive and begins to grow. The increase in effective rate will have a significant impact on our profitability on a going forward basis.

Cumulative Effect of Accounting Change

     On July 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 changes the accounting for goodwill and other intangible assets. Goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. Upon adoption, we recorded a $2.9 million impairment charge.

Segment Information

     We evaluate the performance of our segments based on revenues and operating income (loss) of the respective segments. Segment operating income (loss) excludes acquisition related intangible asset amortization and significant one-time charges. The following table sets forth revenue and operating income by segment, for the periods noted:

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