UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-26802

CHECKFREE CORPORATION

     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 þ NO o

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 91,050,750 shares of Common Stock, $.01 par value, were outstanding at May 4, 2005.

FORM 10-Q

CHECKFREE CORPORATION

Table of Contents

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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

          Our unaudited condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”), are prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and include all of the information and disclosures required by generally accepted accounting principles in the United States of America for interim financial reporting. Our results of operations for the three and nine months ended March 31, 2005 and 2004, are not necessarily indicative of our projected results for the full year.

          Please read our condensed consolidated financial statements in this Form 10-Q in conjunction with our consolidated financial statements, our significant accounting policies and our notes to the consolidated financial statements included in our Annual Report on Form 10-K for our fiscal year ended June 30, 2004, which we filed with the SEC on September 3, 2004. In our opinion, our accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of our financial results for the presented interim periods.

          Stock-Based Compensation

          We account for stock-based compensation under the provisions and related interpretations of Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees.” Accordingly, we are not required to record compensation expense when stock options are granted to our employees as long as the exercise price is not less than the fair market value of the stock when the option is granted. Also, we are not required to record compensation expense when stock options are granted under 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 us to continue to follow the present APB Opinion 25 guidelines, but requires pro-forma disclosures of net income and earnings per share as if we 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. We continue to account for stock-based compensation under the provisions of APB Opinion 25 using the intrinsic value method.

          Had compensation cost for our 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, our net income (loss) and net income (loss) per share would have been as follows (in thousands, except per share data):

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          Recent Accounting Pronouncements

          In December 2004, the FASB issued a revision to SFAS 123. FASB Statement No. 123 (R), “Share-Based Payment” (“SFAS 123 (R)”), supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123 (R) requires all share-based payments to employees, including grants of employee stock options and shares purchased under an employee stock purchase plan (if certain parameters are not met), to be recognized in the financial statements based on their fair values. Under our Associate Stock Purchase Plan as currently defined, the shares purchased by our employees on June 30 and December 31 of each year would be required to be recorded at fair value within our financial statements under the guidance of SFAS 123 (R) as our Plan currently offers a look-back feature as well as a discount in excess of 5%.

          On April 14, 2005, the SEC announced the adoption of a new rule that amended the compliance date of SFAS 123(R). The new rule allows companies to implement SFAS 123(R) at the beginning of the next fiscal year, instead of the next reporting period, beginning after June 15, 2005. For us, the amended effective date did not delay our adoption date. As a result, we will adopt this Statement in the first quarter of our 2006 fiscal year (quarter ending September 30, 2005) using the modified prospective method and are currently evaluating the impact that the adoption of SFAS 123 (R) will have on our financial statements.

          Reclassifications

          Certain amounts in the prior years’ financial statements have been reclassified to conform to the fiscal year 2005 presentation.

2. Investments

          Our investments consist of the following (in thousands):

          We base the fair value of available-for-sale securities on quoted market values. In the three and nine months ended March 31, 2005, we sold available-for-sale investments in the amount of approximately $1,600,000,000 and $3,000,000,000, respectively. In the three and nine months ended March 31, 2004, we sold available-for-sale investments in the amount of $432,900,000 and $2,100,000,000, respectively. We recognized gross gains of $0 and $3,000 as well as gross losses of $0 and $5,000 on these sales during the three months ended March 31, 2005 and 2004, respectively. We recognized gross gains of $4,000 and $246,000 as well as gross losses of $40,000 and $479,000 on these sales during the nine months ended March 31, 2005, and 2004, respectively.

          In the quarter ended March 31, 2005, we recorded a $592,000 gain on the sale of stock. While we do not typically invest in equity securities, we received shares of stock from an insurance vendor that demutualized. We sold the shares shortly after we received them, and recorded the proceeds as a gain on investments.

          Starting with the current period, we are classifying all auction rate preferred and debt instruments as available-for-sale securities. Previously, such securities were classified as cash equivalents if the auction reset periods were three months or less. We did not have any auction rate securities as of June 30, 2004.

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3. Goodwill and Other Intangible Assets

          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. Our annual impairment test is performed on April 30^th of each year.

          In November 2003, we completed our acquisition of HelioGraph, Ltd. (“HelioGraph”) for approximately $18,756,000 in cash. Our acquisition added a financial transactions management solution with straight through processing and financial messaging expertise to our reconciliation suite of products, in addition to expanding our international presence. HelioGraph is part of our International Operations business unit within our Software division. During the six-month period ended December 31, 2004, we received a refund of an escrow deposit in the amount of $223,000.

          In June 2004, we completed our acquisition of American Payment Systems, Inc. (“APS”) from its parent corporation UIL Holdings Corporation, for approximately $109,013,000 in cash, subject to certain post-closing adjustments. We completed the acquisition in order to penetrate a part of the electronic billing and payment market in which we had not significantly previously participated. APS is part of our Electronic Commerce division and a leading provider of walk-in bill payments. We treated our acquisition of APS as a purchase for accounting purposes, and, accordingly, recorded purchased assets and liabilities based on their fair market values at the date of acquisition. Based on the preliminary purchase price allocation, we recorded goodwill of approximately $75,000,000. During the six-month period ended December 31, 2004, we made a final purchase price adjustment of $3,277,000. We recorded $733,000 of deferred tax assets related to our final purchase price adjustments.

          As of March 31, 2005, our only non-amortizing intangible asset is goodwill. The changes in the carrying value of goodwill by segment from June 30, 2003 to March 31, 2005, were as follows (in thousands):

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          The components of our various amortized intangible assets are as follows (in thousands):

          Amortization of intangible assets totaled $34,213,000 and $33,431,000 for the three months ended March 31, 2005 and 2004, respectively. Amortization of intangible assets totaled $103,274,000 and $108,768,000 for the nine months ended March 31, 2005 and 2004, respectively.

4. Common Stock

          In the nine months ended March 31, 2005, we issued stock for various employee benefit programs. We issued 108,484 shares of common stock to fund our 401(k) match, the cost of which we accrued during the year ended June 30, 2004, and 165,098 shares of common stock in conjunction with our Associate Stock Purchase Plan, which were funded through employee payroll deductions. We also issued 341,837 shares of restricted stock related to a Long-Term Incentive Compensation (“LTIC”) program under our 2002 Stock Incentive Plan and recorded unearned compensation of $8,721,000 within stockholders’ equity during the nine-month period ended March 31, 2005. The shares of restricted stock granted under the LTIC program have a five-year vesting period with an accelerated vesting provision of three years based on achievement of specific goals and objectives. We recorded an expense of approximately $2,063,000 for the nine months ended March 31, 2005 related to the LTIC program.

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          In June 2003, we made an offer (the “Tender Offer”) to certain of our employees to exchange options with exercise prices greater than or equal to $44.00 per share that were then outstanding under our 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 our common stock, and in certain cases, cash payments. Restricted stock units that we issued under the Tender Offer vest ratably over a three-year period. The offer period closed on July 17, 2003, and employees holding 1,165,035 options participated in the Tender Offer. We made cash payments totaling $586,000 in July 2003, representing the cash consideration portion of the Tender Offer. We issued 51,143 shares in the nine-month period ended March 31, 2005. Approximately 154,000 shares of restricted stock units are scheduled to vest under the 2002 Stock Incentive Plan over the next year and six months. We recorded an expense of approximately $1,533,000 for the nine-month period ended March 31, 2005 related to the vesting of restricted stock units and recorded an expense of $1,143,000 for the three months ended September 30, 2003, for cash payments incurred and the vesting of restricted stock units under the Tender Offer.

5. Earnings (Loss) Per Share

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

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          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 we recognized net income for the nine-month period ended March 31, 2004, we would have included an additional 5,354,000 of in-the-money options and warrants in the diluted earnings per share calculation. 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.

          The weighted average diluted common shares outstanding for the three and nine months ended March 31, 2005 excludes the effect of approximately 2,054,000 and 2,637,000 out-of-the-money options and warrants as their effect would be anti-dilutive. The weighted average diluted common shares outstanding for the three and nine months ended March 31, 2004, excludes the effect of approximately 2,961,000 and 3,255,000 out-of-the-money options and warrants, and the effect of 2,357,000 shares for the assumed conversion of the convertible subordinated notes, as their effect would be anti-dilutive. In addition, for the three and nine months ended March 31, 2004, the after-tax effect of interest expense on the convertible subordinated notes has not been added back to the numerator, as its effect would also be anti-dilutive.

6. Reorganization Charges

          We expect our previously announced reorganizations to be completed by October 2005. A summary of activity related to our reorganization reserve is as follows (in thousands):

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

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8. Related Parties

          On September 1, 2000, we 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 our common stock. As part of the TransPoint acquisition, Microsoft received 8,567,250 shares of our common stock and Microsoft continued to own those shares as of March 31, 2005. Pursuant to the terms of the TransPoint acquisition, Microsoft is entitled to nominate one director to our 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, we 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 us for pay anyone and bill presentment services offered by Microsoft. Our commercial alliance agreement also provides for a minimum fee and revenue guarantee to us of $120 million over the five year term of the agreement.

          Pursuant to the terms of the TransPoint acquisition, First Data was entitled to nominate one director to our 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, 2005, 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. On July 27, 2004, the director resigned from our board of directors. Since First Data did not maintain the required level of share ownership, they no longer have the right to appoint a member of our board of directors. Although First Data remains a customer of ours, First Data was not considered to be a related party beginning with our quarter ended September 30, 2004.

          In addition, we entered into a marketing agreement with First Data as part of the TransPoint acquisition. Under the terms of the marketing agreement, we 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 us that is less than the overall economic cost of First Data’s services. The marketing agreement also provides for a minimum fee and revenue guarantee to us of $60 million over the five-year term of the agreement. On January 10, 2002, we 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 we do 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)

          We record available-for-sale securities at fair value and we record changes in fair value as unrealized gains or losses and we accumulate these items in other comprehensive income (loss). As a result, we are required to report the components of our comprehensive income (loss), which are as follows (in thousands):

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10. Business Segments

          We operate in three business segments - Electronic Commerce, Investment Services, and Software, along with a Corporate segment. These reportable segments are strategic business units through which we offer different products and services. We evaluate the performance of our segments based on their respective revenues and operating income (loss). 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 our business segments for the three and nine months ended March 31, 2005 and 2004 (in thousands):

11. Subsequent Events

          On April 30, 2005, we completed the acquisition of Accurate Software Limited, a United Kingdom-based provider of reconciliation, exception management, workflow and business intelligence solutions for approximately $56 million in cash. Accurate Software Limited will become a part of our Software Division to further solidify our leadership in financial software and services, expand our global presence and client base, and drive continued product innovation in operational risk management solutions for banks, securities firms and corporations. The effect of this acquisition will not be material to us.

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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:

	•	Electronic Commerce;
	•	Investment Services; and
	•	Software.

          Through our Electronic Commerce division, we enable consumers to receive and pay bills electronically. For the year ended June 30, 2004, we processed approximately 583 million payment transactions and delivered approximately 82 million e-Bills. For the quarter ended March 31, 2005, we processed more than 234 million payment transactions and delivered almost 37 million e-Bills. The number of transactions we process each year continues to grow. Transaction growth exceeded 34% for the year ended June 30, 2004, and was 7% for the quarter ended March 31, 2005, compared to the quarter ended December 31, 2004. On June 22, 2004, we acquired American Payment Systems, Inc. (“APS”), a leading provider of walk-in bill payment services to consumers. As part of our Electronic Commerce division, these services enable us to reach an additional group of consumers we had not previously serviced and to provide an additional service to our biller clients. The Electronic Commerce division accounted for approximately 77% of our revenue in the quarter ended March 31, 2005.

          Electronic Commerce division products enable consumers to:

	•	receive e-Bills through the Internet;
	•	pay any bill – whether it arrives over the Internet or through traditional mail – to anyone; and
	•	make payments not related to bills – to anyone.

          Through our Investment Services division, we provide a range of portfolio management services to help financial institutions, including broker dealers, money managers and investment advisors, deliver portfolio management, performance measurement and reporting services to their clients, primarily for processing separately managed accounts (“SMA” or “SMAs”). Our 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 SMAs, money management products, or institutional money managers, managing investments of institutions and high net worth individuals. As of March 31, 2005, our clients used the CheckFree APL^SM portfolio accounting system to manage approximately 1.8 million portfolios, representing more than $1 trillion in assets. Our Investment Services division accounted for approximately 13% of our revenue in the quarter ended March 31, 2005.

          Our portfolio management products and services provide the following functions:

	•	proposal generation;
	•	account open and trading capabilities;
	•	performance measurement and reporting;
	•	tax lot accounting;
	•	multiple strategy portfolios;
	•	straight through processing; and
	•	Depository Trust Corporation interfacing.

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          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. Our Software division is comprised of two units, North American Operations and International Operations, together providing three sets of software products. ACH software and services are used to process more than two-thirds of the United States’ ten billion annual Automated Clearing House (“ACH”) payments. CheckFree Financial and Compliance Solutions (“CFACS”) software and services enable organizations to handle their reconciliation and compliance requirements and to provide a financial transactions management solution with straight through processing. Our i-Solutions software and services enable end-to-end e-billing and e-statement creation, delivery and payment. Our Software division accounted for approximately 10% of our revenue in the quarter ended March 31, 2005.

Executive Summary

          For the quarter ended March 31, 2005, we earned net income of $15.6 million compared to net income of $7.7 million for the same period last year, and we generated $49.9 million of free cash flow, an increase of $8.9 million, or 22%, over the same period last year. For the nine-month period ended March 31, 2005, we earned $34.9 million of net income compared to a net loss of $0.9 million for the same period last year and we generated $134.7 million of free cash flow, an increase of $34.4 million, or 34%, over the same period last year. See “Use of Non-GAAP Financial Information” for our definition and discussion of free cash flow. We became a cash basis tax payer in the current fiscal year. Our efforts to improve quality and efficiency throughout our operations have resulted in increasingly positive operating results, allowing us to continue to invest toward the future growth of our businesses. Because of better than expected results through the first half of fiscal 2005, we launched previously unplanned initiatives of between $4.0 million and $6.0 million for the second half of fiscal 2005, across all of our business segments that are geared toward future growth. We incurred about one third of these expenses in the quarter ended March 31, 2005.

          Beyond additional walk-in bill payment transaction volume and related revenue resulting from our acquisition of APS on June 22, 2004, we continued to experience solid revenue growth in our Electronic Commerce business. Transaction volume, including walk-in bill payments, exceeded 234 million, and transaction growth exceeded 54% in the quarter ended March 31, 2005, as compared to the same period last year. Additionally, we delivered almost 37 million e-Bills in the quarter ended March 31, 2005, an increase of 64% over the same period last year. We believe that the added availability of e-Bills make electronic payment offerings increasingly more compelling to consumers. Continued efforts to improve quality and efficiency in our operations, combined with an improving electronic versus paper payment rate and our ability to leverage a significant fixed cost base, have resulted in a steadily reducing cost per transaction, and have allowed us to provide customer focused volume-based pricing discounts in our Electronic Commerce business.

          Our Investment Services division achieved revenue growth of 12% in the quarter ended March 31, 2005, as compared to the same period last year. Portfolio growth, which is dependent primarily on the growth of the United States stock market, has started to resume. We are cautiously optimistic about continued near-term portfolio growth. We continue to invest heavily in our Investment Services operating process platform to position ourselves to take full advantage of the emerging SMA market. We expect our near-term operating margin to lag historical levels over the next 15 to 21 months, until this development effort is complete.

          Our Software division achieved revenue growth of 6% in the quarter ended March 31, 2005, as compared to the same period last year. Our March 31, 2005 quarter followed a strong December 31, 2004 quarter, and as a result, revenue growth was 15% for the nine-month period ended March 31, 2005, as compared to the same period last year. Growth in relatively high margin license revenue has resulted in improved operating margins. However, we remain uncertain as to whether this represents the beginning of a growth trend in software sales.

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          As part of our acquisition of TransPoint in September 2000, we entered into separate five-year agreements with Microsoft Corporation (“Microsoft”) and First Data Corporation (“FDC”), both of which include monthly minimum revenue guarantees that have increased annually over the term of the agreements. These contracts will expire in fiscal 2006, which we expect to result in a temporary decline in revenue growth, primarily in the quarter ending March 31, 2006. The following table represents the relevant annual minimum revenue guarantees with Microsoft and FDC (in thousands):

          Both agreements are operating substantially below their minimum levels. However, we believe we can manage investment levels and improved scale in electronic billing in order to maintain our total company targeted operating margin in the mid to upper 20% level on a full-year basis in fiscal 2006. Additionally, we plan to continue to pursue other opportunities for growth, as our recent electronic billing and payment (“EBP”) contract signings and our APS acquisition demonstrate.

          The following table sets forth as percentages of total 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, 2005, and 2004, respectively.

          Quarter-over-quarter revenue growth was driven by 28% growth in our Electronic Commerce business, 12% growth in our Investment Services business and 6% growth in our Software business. Year-over-year revenue growth was driven by 28% growth in our Electronic Commerce business, 12% growth in our Investment Services business and 15% growth in our Software business.

          Our walk-in bill payment business provided more than 10% of the quarter-over-quarter and year-over-year revenue growth in our Electronic Commerce business. Overall growth in Electronic Commerce, including walk-in bill payment, continues to be driven primarily by growth in transactions processed, from approximately 152 million for the quarter ended March 31, 2004, to more than 234 million for the quarter ended March 31, 2005, and from approximately 418 million for the nine-month period ended March 31, 2004, to more than 660 million for the nine-month period ended March 31, 2005. Additionally, we delivered almost 37 million e-Bills in the quarter ended March 31, 2005, an increase of 64% compared to the nearly 23 million e-Bills delivered in the quarter ended March 31, 2004, and we delivered more than 101 million e-Bills in the nine-month period ended March 31, 2005, representing 80% growth over the 56 million e-Bills delivered in the same period last year. Lastly, with interest rates increasing since this time last year, we are experiencing growth in our interest-sensitive products such as Account Balance Transfer (“ABT”). This combined growth in our Electronic Commerce division was offset somewhat by our pricing practices. We have established pricing models that provide volume-based discounts in order to share scale efficiencies with our customers. As a result of transaction growth, our average revenue per transaction has, therefore, declined over time with respect to our transaction-based revenue.

          Growth in Investment Services revenue was driven primarily by an increase in the number of portfolios managed, from about 1.5 million as of March 31, 2004, to approximately 1.8 million as of March 31, 2005. In some cases, we are adding new portfolios to our APL system at a lower price point, driven by the increased volume coming from lower priced broker dealers, and by conscious price reductions, where we trade off near-term revenue growth against long-term strategic advantage. We believe that more favorable market conditions have resulted in resumed growth in portfolios managed. We are cautiously optimistic about resulting growth opportunities.

          In our Software business, we achieved modest revenue growth of 6% for the three months ended March 31, 2005, compared to the same period last year. Our third quarter results follow a very strong December 2004 quarter. As a result, growth in revenue for the nine-month period ended March 31, 2005, was nearly 15% compared to the same period last year. In addition to new business resulting from our acquisition of HelioGraph, Ltd. (“HelioGraph”) in the quarter ended December 31, 2003, we achieved solid growth in our more mature ACH and reconciliation products. We believe this to be the result of improved execution within our Software division, combined with signs of recovery in the U.S. economy.

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     The following tables set forth comparative amounts, by type, for the three- and nine-month periods ended March 31, 2005 and 2004, respectively.

     We earn processing and servicing revenue in both our Electronic Commerce and our Investment Services businesses. While growth in portfolios managed in our Investment Services business contributed positively, our quarter-over-quarter and year-over-year increases in processing and servicing revenue resulted primarily from the aforementioned growth in transactions processed in our Electronic Commerce business. This growth in transactions was positively influenced by our new walk-in bill payment business. Our traditional electronic bill payment business continued to grow as well, with sequential transaction growth of 7% remaining within our historical growth range of 6% to 10%. We delivered almost 37 million e-Bills in the quarter ended March 31, 2005, representing an increase of 64% from the nearly 23 million e-Bills delivered in the quarter ended March 31, 2004, and we delivered more than 101 million e-Bills in the nine months ended March 31, 2005, representing growth of 80% over the nearly 56 million e-Bills delivered in the same period last year. Additionally, with rising interest rates over the past year, we have experienced growth in revenue from our interest-sensitive products such as ABT. Overall quarter-over-quarter and year-over-year growth in processing and servicing revenue was somewhat offset by tier-based volume pricing discounts within both our Electronic Commerce and Investment Services businesses.

     We derive license fee revenue from our Software division. Software license sales trends tend to be inconsistent from quarter to quarter. License revenue declined by almost $2.2 million from the three months ended March 31, 2004 to the three months ended March 31, 2005, due to the timing of stronger than expected sales in the quarter ended December 31, 2004. On a year-to-date basis, license revenue has grown by almost 10% from the nine month period ended March 31, 2004, to the nine-month period ended March 31, 2005. Growth in license revenue is impacted significantly by the addition of HelioGraph to our software portfolio in the December 2003 quarter. Despite moderate license revenue growth in fiscal 2005, we remain uncertain as to whether this represents the beginning of a general trend in continued software sales growth.

     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 increased as a result of recent license sales, customer retention rates exceeding 80%, and moderate price increases across all our software product lines. Additionally, year-over-year maintenance growth has been positively impacted by the acquisition of HelioGraph in the quarter ended December 31, 2003.

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     Other revenue consists mostly of consulting and implementation fees across all three of our businesses, and with the acquisition of APS we have added revenue associated with stored value cards to this category. Growth in other revenue, both on quarter-over-quarter and year-over-year bases, has been positively impacted by the acquisition of HelioGraph in the quarter ended December 31, 2003, and the acquisition of APS in the quarter ended June 30, 2004. License sales in our more traditional reconciliation and ACH businesses have generated growth in implementation services in fiscal 2005.

     Cost of processing, servicing and support, as a percentage of revenue, has improved by about one percent, both quarter-over-quarter and year-over-year. In Electronic Commerce, our electronic payment rate has improved from 78% as of March 31, 2004, to 83% as of March 31, 2005. Electronic payments carry a significantly lower variable cost per unit than paper-based payments and are far less likely to result in costly customer care claims. The acquisition of APS brought with it a significant number of exclusively electronic payment transactions, accounting for about three points of the five percentage point increase we experienced in our electronic payment rate, year-over-year. In addition to leveraging a significant fixed-cost processing infrastructure, we continue to focus investments on additional efficiency and quality improvements through Six-Sigma based improvements in our customer care processes and information technology infrastructure in order to drive improvement in our cost per transaction. These drivers of expense efficiency were offset somewhat by two factors over the past year. First, the gross margin of our walk-in bill payment business is less than the remainder of our electronic billing and payment business. Second, in the quarter ended September 30, 2004, we incurred a charge of approximately $2.6 million to provide for an anticipated loss in a services engagement with a large customer in our Software business. The charge was reduced by about $1.0 million in the quarter ended March 31, 2005, as we needed less time than originally expected to complete the work. The net charge was about $1.6 million during the nine month period ending March 31, 2005.

     On an absolute dollar basis, growth in cost of processing, servicing and support, both quarter-over-quarter and year-over-year, was driven by growth in transactions processed and e-Bills delivered in our Electronic Commerce business, increased portfolios managed in our Investment Services business and the previously mentioned contract loss in our Software business.

     Including capitalized development costs of $0.4 million for the quarter ended March 31, 2005, and $0.6 million for the quarter ended March 31, 2004, gross expenditures for research and development were $21.2 million, or 11.1% of total revenue, for the quarter ended March 31, 2005, and were $17.8 million, or 11.5% of total revenue, for the quarter ended March 31, 2004. Including capitalized development costs of $1.4 million for the nine-month period ended March 31, 2005, and $2.3 million for the nine-month period ended March 31, 2004, gross expenditures for research and development were $61.7 million, or 11.1% of total revenue, for the nine-month period ended March 31, 2005, and $50.5 million, or 11.3% of total revenue, for the nine-month period ended March 31, 2004.

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Our acquisitions of APS and HelioGraph have added a moderate level of research and development spending and we have had a particular emphasis on research and development in our Investment Services business as we are in the process of a rewrite of our processing system. We continue to invest heavily in product enhancement and productivity improvement initiatives across all of our businesses as evidenced by the relatively consistent levels of research and development costs as a percent of revenue both quarter-over-quarter and year-over-year.

     Sales and marketing costs, as a percentage of total revenue, have remained fairly consistent both quarter-over-quarter and year-over-year. The acquisitions of APS and HelioGraph during fiscal 2004 have provided added sales and marketing costs, driving the majority of the increases on an absolute dollar basis. Additionally, we are providing additional resources in support of all of our business segments.

     Incremental general and administrative costs, on an absolute dollar basis, have resulted primarily from facilities and other non-redundant expenses related to our acquisitions of APS and HelioGraph. Additionally, we are experiencing increasing quarterly Sarbanes-Oxley Section 404 compliance costs as we prepare for our first internal controls certification as of June 30, 2005. We continue to expect our general and administrative costs to run at about 8% of revenue and are managing these costs accordingly.

     Depreciation and amortization expense has increased by $1.2 million quarter-over-quarter primarily due to the amortization of intangible assets associated with the acquisitions of APS and HelioGraph, more than offsetting the drop in amortization associated with intangible assets that fully amortized since March 31, 2004. On a year-over-year basis, the drop in amortization associated with fully amortized intangible assets has more than offset the increase in amortization associated with intangible assets recorded as a result of the acquisitions of APS and HelioGraph. Depreciation expense associated with tangible assets remained essentially flat on quarter-over-quarter and year-over-year bases.

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     We recorded immaterial research and development costs totaling $0.3 million related to our acquisition of HelioGraph in the quarter ended December 31, 2003.

     In April 2004, we announced a joint venture, OneVu Limited (“OneVu”), with Voca Limited (“Voca”), designed to create an integrated electronic billing and payment network for billers and banks in the United Kingdom. We account for the joint venture on the equity basis of accounting and the equity in the net loss of the joint venture represents our portion of the loss incurred by the joint venture during the indicated periods. The joint venture is still in its formative stage and, therefore, we do not expect it to become profitable in the foreseeable future.

     On a quarter-over-quarter basis, strong free cash flow growth has resulted in a significant increase in average cash and invested assets. Combined with rising interest rates, our yield on investments has resulted in an increase in interest income from $1.2 million in the quarter ended March 31, 2004, to $2.4 million in the quarter ended March 31, 2005. Interest income in the quarter ended March 31, 2005, included approximately $0.3 million related to a sales tax rebate program from assets purchased in prior years, providing interest unrelated to invested assets. On a quarter-over-quarter basis, interest expense has increased by approximately $0.1 million due to an increase in leased assets over the past year.

     On a year-over-year basis, free cash flow growth was offset by the purchase of APS for $112.3 million in cash in the June 2004 quarter, resulting in a moderate decrease in average cash and invested assets. The impact of the decrease in average invested assets was offset by the positive impact of rising interest rates, resulting in greater investment yield. The net result of these two factors was an increase in interest income from $4.6 million for the nine months ended March 31, 2004, to $6.1 million for the nine months ended March 31, 2005.

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Additionally, through the nine months ended March 31, 2005, we received approximately $0.8 million of interest associated with a sales tax rebate program from assets purchased in prior years, providing interest unrelated to invested assets. Interest expense decreased significantly, from $5.8 million for the nine months ended March 31, 2004, to $0.8 million for the nine months ended March 31, 2005, due primarily to the reduced interest expense upon redemption of our $172.5 million 6.5% convertible notes on December 12, 2003. Additionally, as a result of the redemption, we incurred a charge of $4.8 million for a 2.79% call premium for early redemption of the notes, and an additional $2.4 million charge to write off the remaining unamortized note issuance cost.

     In the quarter ended March 31, 2005, we recorded a $0.6 million gain on the sale of stock. While we do not typically invest in equity securities, we received shares of stock from an insurance vendor that demutualized. We sold the shares shortly after we received them, and recorded the proceeds as a gain on investments.

     Our federal statutory tax rate is 35%, and our overall blended statutory tax rate (federal, state and foreign combined) approaches 39% without the benefit of tax planning strategies. For the nine-month period ended March 31, 2005, our effective tax rate was lower due to research and experimentation tax credits, tax free municipal interest income and foreign tax credits recorded in the fiscal year. The effective rate for the three months ended March 31, 2005 was even lower, as we recorded a cumulative catch up adjustment in the quarter to achieve the correct effective rate on a year to date basis to reflect tax planning strategies we implemented earlier in the fiscal year. For the three- and nine-month periods ended March 31, 2004, our effective tax benefit was offset by federal alternative minimum taxes and the temporary suspension of state-level net operating loss carryover credits.

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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 related to various business and asset acquisitions and significant one-time charges. The following table sets forth revenue and operating income by segment, for the periods noted: