Tier Technologies, Inc.

(in thousands)		March 31, 2006				September 30, 2005
Accounts receivable from:
Customers		$	14,820			$	18,017
Recipients of misposted payments			1,749				1,843
Payers of NSF child support			735				743
Total accounts receivable			17,304				20,603
Allowance for uncollectible accounts receivable:
Customer			(952	)			(632	)
Mispost			(1,407	)			(1,375	)
NSF			(736	)			(632	)
Total allowance for uncollectible accounts			(3,095	)			(2,639	)
Short-term accounts receivable retainer			1,518				3,045
Long-term accounts receivable			(1,314	)			(1,560	)
Accounts receivable, net		$	14,413			$	19,449

At March 31, 2006 and September 30, 2005, one customer accounted for 22.4% and 18.8%, respectively, of total client accounts receivable. In addition, at March 31, 2006, we also had $1.3 million of receivables from one customer that we expected to receive over one to three years, which we classified as Long-term accounts receivable on our Consolidated Balance Sheets.

Certain of our contracts allow customers to retain a portion of the amounts owed to us until predetermined milestones are achieved or until the project is completed. At March 31, 2006 and September 30, 2005, Accounts receivable, net included $1.5 million and $3.0 million, respectively, of retainers that we expected to receive in one year. In addition, there were $2.5 million and $0.3 million, respectively, of retainers that we expected to be outstanding more than one year, which are included in Other assets on our Consolidated Balance Sheets.

Unbilled Receivables. Unbilled receivables represent revenues that Tier has earned for the work that has been performed to-date that cannot be billed under the terms of the respective contract until we have completed specific project milestones or the client has accepted our work. At March 31, 2006 and September 30, 2005, unbilled receivables, which are all expected to become billable in one year, were $3.4 million and $3.1 million, respectively. At March 31, 2006, two clients accounted for 47.5% and 32.0%, of total unbilled receivables and at September 30, 2005, two clients accounted for 55.5% and 32.5% of unbilled receivables.

NOTE 4—INVESTMENTS

Investments are comprised of available-for-sale debt and equity securities as defined in SFAS No. 115—Accounting for Certain Investments in Debt and Equity Securities, or SFAS 115. Restricted investments totaling $5.1 million at March 31, 2006 and $3.3 million at September 30, 2005 were pledged in connection with performance bonds and real estate operating leases and will be restricted for the terms of the project performance periods and lease periods, the latest of which is estimated to end August 2007. These investments are reported as Restricted investments on the Consolidated Balance Sheets.

In accordance with SFAS No. 95—Statement of Cash Flows, unrestricted investments with remaining maturities of 90 days or less (as of the date that Tier purchased the securities) are classified as cash equivalents. We exclude from cash equivalents certain investments, such as mutual funds and auction rate securities. Securities such as these, and all other securities that would not otherwise be included in Restricted investments or Cash and cash equivalents, are classified on the Consolidated Balance Sheets as Investments in marketable securities. Except for our investment in CPAS and our restricted investments, all of our investments are categorized as available-for-sale under SFAS 115. As such, our securities are recorded at estimated fair value, based on quoted market prices. Increases and decreases in fair value are recorded as unrealized gains and losses in other comprehensive income.

The following table shows the balance sheet classification, amortized cost and estimated fair values of investments included in cash equivalents, investments in marketable securities and restricted investments:

		March 31, 2006												September 30, 2005
		Amortized				Unrealized				Estimated				Amortized				Unrealized				Estimated
(in thousands)		cost				loss				fair value				cost				loss				fair value
Cash equivalents:
Money market		$	5,221			$	—			$	5,221			$	11,272			$	—			$	11,272
Total investments included in cash and cash equivalents			5,221				—				5,221				11,272				—				11,272
Investments in marketable securities:
Debt securities:
Other loans			44,200				—				44,200				30,888				(13	)			30,875
U.S. government sponsored enterprise obligations			—				—				—				1,629				(7	)			1,622
Equity securities			1,000				—				1,000				1,000				—				1,000
Commercial paper			—				—				—				2,996				—				2,996
Total short-term investments			45,200				—				45,200				36,513				(20	)			36,493
Restricted investments:
U.S. government sponsored enterprise obligations			3,199				(1	)			3,198				3,370				(35	)			3,335
Certificate of deposit			1,878				—				1,878				—				—				—
Total investments available-for-sale			5,077				(1	)			5,076				3,370				(35	)			3,335
Total investments available-for-sale		$	55,498			$	(1	)		$	55,497			$	51,155			$	(55	)		$	51,100

The fair value of contractual maturities of debt securities classified Investments in marketable securities at March 31, 2006 and September 30, 2005 are:

(in thousands)		March 31, 2006				September 30, 2005
Within one year		$	—			$	5,647
Greater than ten years			44,200				26,850
Total		$	44,200			$	32,497

We evaluate certain available-for-sale investments for other-than-temporary impairment when the fair value of the investment is lower than its book value. Factors that management considers when evaluating for other-than-temporary impairment include: the length of time and the extent to which market value has been less than cost; the financial condition and near-term prospects of the issuer; interest rates; credit risk; the value of any underlying portfolios or investments and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. We do not adjust the recorded book value for declines in fair value that we believe are temporary if we have the intent and ability to hold the associated investments for the foreseeable future and we have not made the decision to dispose of the securities as of the reported date.

If we determine impairment is other-than-temporary, we reduce the recorded book value of the investment by the amount of the impairment and recognize a realized loss on the investment. At March 31, 2006 and September 30, 2005, we do not believe that any of our investments are other-than-temporarily impaired.

NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS

We did not incur any changes to the carrying amount of goodwill during the six months ended March 31, 2006. The balance of goodwill at both March 31, 2006 and September 30, 2005 was $37.6 million.

We test goodwill for impairment during the fourth quarter of each fiscal year at the reporting unit level using a fair value approach, in accordance with SFAS No. 142—Goodwill and Other Intangible Assets. This annual testing identified no impairment to goodwill in fiscal year 2005. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, we would evaluate goodwill for impairment between annual tests. No such events occurred during the six months ended March 31, 2006.

 

Tier Technologies, Inc.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. In light of the risks, uncertainties and assumptions discussed under “Risk Factors” of this Quarterly Report on Form 10-Q and other factors discussed in this section, there are risks that our actual experience will differ materially from the expectations and beliefs reflected in the forward-looking statements in this section and throughout this report. For more information regarding what constitutes a forward-looking statement refer to the “Risk Factors” section.

OVERVIEW

We provide transaction processing services and software and systems integration services primarily to federal, state and local government and other public sector clients. We target industry sectors where we believe that demand for our services is less discretionary and is likely to provide us with recurring revenue streams through long-term contracts. The forces driving the need for our services tend to involve federal- or state-mandated services, such as child support payments, collections and disbursements, as well as a fundamental shift in consumer transaction preferences toward electronic payment methods instead of cash or paper checks.

We have derived, and expect to continue to derive, a significant portion of our revenues from a small number of large clients or their constituents. For example, during the six months ended March 31, 2006 and 2005, contracts with our three largest clients and their constituents generated 27% and 22%, respectively, of our total revenues. Approximately 11% of our total revenues during the six months ended March 31, 2006 were produced by our contract with the State of Michigan, while 10% of our total revenues during the six months ended March 31, 2005 was produced by our contract with the State of Missouri. Substantially all of our contracts are terminable by the client following limited notice and without significant penalty to the client. Thus, unsatisfactory performance or unanticipated difficulties in completing projects may result in client dissatisfaction, contractual or adjudicated monetary penalties or contract terminations—all of which could have a material adverse effect upon our business, financial condition and results of operations.

Our clients outsource portions of their business processes to us and rely on us for our industry-specific information technology expertise and solutions. Approximately 66% of our revenues are generated by our transaction-based services including: 1) child support payment processing and related services for state government clients; and 2) electronic payment processing services for federal, state and local government clients, which allow our clients to offer their constituents the ability to use credit cards, debit cards or electronic checks to pay taxes and other governmental obligations. We believe that we will continue to earn a significant portion of our revenues from these transactional-based services for the foreseeable future. While many of these transactions occur on a monthly basis, there are seasonal and annual fluctuations in the volume of some transactions that we process, such as tax payments. For example, each year the IRS rotates the order in which it lists the names of the two companies that provide payment processing services, because taxpayers often opt to use the first listed payment processing provider more frequently than the second listed payment processing provider. Since Tier is the second payment provider listed by the IRS in fiscal 2006, we expect that the proportion of our total revenues attributable to our IRS arrangement may be higher in fiscal 2007 than in 2006. We recognize revenues for transaction-based services at the time the services are performed.

Our software and systems integration segment primarily integrates our proprietary software products and licensed third-party software products into our clients’ business operations. During fiscal year 2005, we shifted our systems integration strategy from custom-developed solutions toward implementation and modification of packaged software—a strategy that we believe could increase profitability with a lower risk than building systems based on non-scalable functional requirements. We recognize these revenues on a time and materials basis, percentage-of-completion basis or at the time delivery is made, depending upon the terms of the contract and the requirements of associated accounting standards.

Tier Technologies, Inc.

RECENT EVENTS

The following events occurred recently related to our previously announced restatement of our financial statements for fiscal years 2002 through 2004 and for the first three quarters of fiscal 2005, as well as the resulting delay in the filing of our Annual Report on Form 10-K for fiscal year 2005 and our Quarterly Reports on Form 10-Q for the quarters ended December 31, 2005, March 31, 2006 and June 30, 2006. For additional information regarding this restatement, see Amendment 3 to our Annual Report on 10-K/A for the fiscal year ended September 30, 2004, which was filed on October 25, 2006 and our Annual Report on Form 10-K for the fiscal year ended September 30, 2005, which was filed on October 27, 2006. Subsequently, we also filed our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2005 on November 13, 2006.

Fiscal 2005 Filing Delay Announced. While preparing our financial statements for the fiscal year ended September 30, 2005, senior management discovered a number of errors in our historical financial statements, including the accounting for: 1) accounts receivable, net relating to a payment processing operation; 2) certain accruals and reserves; and 3) certain notes receivable. Because of these errors, senior management recommended to the Audit Committee that we delay the filing of our Annual Report on Form 10-K and restate our previously issued financial statements. On December 12, 2005, the Audit Committee of our Board of Directors agreed with senior management’s recommendations and concluded that our previously issued financial statements for fiscal years 2002, 2003 and 2004 (and for the associated fiscal quarters) would likely be restated and, accordingly, should no longer be relied upon. On December 14, 2005, we announced that our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 would not be timely filed. Subsequently, we did not file timely reports on Form 10-Q for the quarters ended December 31, 2005, March 31, 2006 and June 30, 2006. In December 2005, the Audit Committee also initiated an independent investigation of the qualitative and quantitative financial reporting issues giving rise to the restatement.

Stockholder Rights Plan. On January 10, 2006, our Board of Directors adopted a Stockholder Rights Plan, pursuant to which all of our shareholders received rights to purchase shares of a new series of preferred stock. This plan was designed to enable all of our shareholders to realize the full value of their investment in our company and to ensure that all of our shareholders receive fair and equal treatment in the event that an unsolicited attempt is made to acquire Tier. This plan is intended as a means to guard against abusive takeover tactics and was not adopted in response to any proposal to acquire Tier. We believe this plan would discourage efforts to acquire more than 10% of our common stock without first negotiating with the Board of Directors.

Audit Committee Investigation. On May 12, 2006, we announced the completion of an independent investigation conducted on behalf of the Audit Committee of our Board of Directors. The scope of the independent investigation included an examination of the qualitative and financial reporting issues giving rise to the restatement. Among other things, the investigation found earnings management at Tier, particularly during the close of fiscal 2004.

Delisting by Nasdaq. On May 23, 2006, we received a notification from the Nasdaq Listing Qualifications Hearings Panel, or the Panel, informing us of the Panel’s determination to delist our securities, effective at the open of business on Thursday, May 25, 2006. In reaching its determination, the Panel cited: 1) concerns about the quality and timing of our communications with the Panel and the public regarding an independent investigation performed by the Audit Committee of our Board of Directors; and 2) our failure to file our Annual Report on Form 10-K for fiscal year 2005 or our Quarterly Reports on Form 10-Q for the first two quarters of fiscal year 2006. We appealed the Panel’s decision to the Nasdaq Listing and Hearing Review Council, or the Listing Council. However, on July 26, 2006, the Listing Council affirmed the Panel’s decision to delist our common stock. We intend to apply for re-listing once we have filed all required reports with the Securities and Exchange Commission.

Management Changes. On May 31, 2006, we announced the resignation of James Weaver, our Chief Executive Officer, President and Chairman following a recommendation by the Audit Committee of our Board of Directors that his employment with Tier be terminated. Ronald Rossetti, a member of our Board of Directors and the Audit Committee, agreed to serve as our Chief Executive Officer and Chairman. Because

Tier Technologies, Inc.

he is no longer independent under SEC and Nasdaq rules, Mr. Rossetti was replaced on the Audit Committee by Samuel Cabot III, another independent director.

Unasserted Claim. On November 10, 2006, a law firm issued a press release stating that a class action suit had been filed on behalf of purchasers of our common stock from November 29, 2001 to October 25, 2006. According to the press release, the suit alleges that Tier and certain of our former and/or current officers violated Sections 10(b) and 20(a) of the Securities Exchange Act, but did not identify the level of damages being sought. The press release states that the case is pending in the United States District Court for the Eastern District of Virginia. We have not been served with the complaint and are not able to estimate the probability or level of exposure associated with this purported complaint.

SEC Subpoena. On May 31, 2006, we received a subpoena from the Philadelphia District Office of the Securities and Exchange Commission requesting documents relating to financial reporting and personnel issues. We intend to cooperate fully in this investigation.

RESULTS OF OPERATIONS

During the three and six months ended March 31, 2006, our revenues grew 6% and 15%, respectively, to $37.5 million and $77.4 million, respectively. However, due to an increase in costs and expenses, as a result of our reconciliation project at one of our payment processing centers, as well accounting and legal fees incurred in our restatement process, we incurred a net loss of $5.0 million and $3.2 million, respectively, for the three and six months ended March 31, 2006, a decline of $6.8 million and $4.3 million, respectively, from the net income reported in the same periods last year. Increased revenues resulted primarily from the contract with the State of Michigan, signed in December 2004, and the State of Indiana, signed in August 2005. These two contracts also resulted in an increase in direct costs as a direct correlation with increased revenues. Increased volume of tax payment transactions also contributed to the revenue growth as well as increased product and materials cost. The effect of this increase in revenues was offset in part by costs that we incurred to reconcile certain accounts for one of our payment processing centers; compensation costs associated with our implementation of Statement of Accounting Standards No. 123R—Stock-Based Payment, or SFAS 123R; and costs associated with an independent investigation initiated by the Audit Committee of our Board of Directors. In March 31, 2006, we also accrued $2.8 million to reflect losses that we expect to incur on one of our long-term contracts over the term of the contract, which ends in fiscal year 2009. A complete discussion of the variances in revenues and costs and expenses follows the table below, which provides an overview of changes in our results of operations for the three and six months ended March 31, 2006 from the same periods last year.

		Three months ended																Six months ended
		March 31,								Variance								March 31,								Variance
(in thousands, except percentages)		2006				2005				$ Amount				%				2006				2005				$ Amount				%
Revenues		$	37,474			$	35,396			$	2,078				6	%		$	77,356			$	67,156			$	10,200				15	%
Costs and expenses			43,620				33,784				9,836				29	%			82,338				66,464				15,874				24	%
(Loss) income before other income, income taxes			(6,146	)			1,612				(7,758	)			*				(4,982	)			692				(5,674	)			*
Other income			1,145				232				913				*				1,795				432				1,363				*
(Loss) income before income taxes			(5,001	)			1,844				(6,845	)			*				(3,187	)			1,124				(4,311	)			*
Provision for income taxes			—				39				(39	)			*				5				39				(34	)			(87	)%
Net (loss) income		$	(5,001	)		$	1,805			$	(6,806	)			*			$	(3,192	)		$	1,085			$	(4,277	)			*

*Not meaningful

Additional detail about our period-over-period changes in our revenues and expenses is described in the following sections.

Revenues

During the three and six months ended March 31, 2006, revenues increased $2.1 million or 6% and $10.2 million or 15%, respectively, over the same periods last year. These increases primarily reflect period-over-period increases of 45% and 39%, respectively, earned by our Electronic Payment Processing, or EPP,

Tier Technologies, Inc.

segment, which resulted from an increase in the volume of transactions processed under new and pre-existing contracts. We believe the continued shift of consumer preference to paying government obligations electronically will result in additional revenue-producing opportunities for the EPP segment. The positive performance of the EPP segment during the three and six months ended March 31, 2006 was partially offset by period-over-period decreases of 22% and 4%, respectively, in the revenues earned by our PSSI segment, which has completed or is nearing completion of a number of contracts. The following table presents an analysis of the changes in the revenues earned by each of our reportable segments for the three and six months ended March 31, 2006 and 2005. Immediately following this table is a detailed discussion of the reasons for the increases and decreases in revenues earned by each of these operating segments.

		Three months ended																Six months ended
		March 31,								Variance								March 31,								Variance
(in thousands, except percentages)		2006				2005				$ Amount				%				2006				2005				$ Amount				%
Revenue, by segment:
EPP		$	15,464			$	10,631			$	4,833				45	%		$	30,515			$	22,016			$	8,499				39	%
GBPO			11,778				11,636				142				1	%			23,854				21,128				2,726				13	%
PSSI*			10,232				13,129				(2,897	)			(22	)%			22,987				24,012				(1,025	)			(4	)%
Total revenues		$	37,474			$	35,396			$	2,078				6	%		$	77,356			$	67,156			$	10,200				15	%

*Excludes revenues that are eliminated during the consolidation of our accounting results of $0.4 million and $4.5 million, respectively, for the three and six months ended March 31, 2005. To date, there have been no intercompany revenues generated during fiscal 2006 which would require elimination.

Electronic Payment Processing Segment, or EPP. Our EPP segment provides electronic payment processing options, including payment of taxes, fees and other obligations owed to government entities, educational institutions and other public sector clients. The revenues reported by our EPP segment reflect the number of contracts with clients, as well as the volume of transactions processed under each contract and the rates that we charge for each transaction that we process.

During the three and six months ended March 31, 2006, the revenues generated by our EPP segment rose to $15.5 million and $30.5 million, respectively, which represents a $4.8 million or 45% increase and a $8.5 million or 39% increase, respectively, over the same periods last year. New contracts have contributed over $0.5 million and $1.3 million, respectively, of additional EPP revenues for the three and six months ended March 31, 2006 over the same periods last year. A net increase in the volume of transactions processed by our EPP segment has resulted in period-over-period revenue increases of $4.4 million and $7.3 million, respectively, during the three and six months ended March 31, 2006. We believe that these increases are largely attributable to changing consumer preference toward using electronic methods to pay federal, state, and local government obligations.

Government Business Processing Segment, or GBPO. Our GBPO segment provides governmental clients child support payment processing, child support financial institution data match services, health and human services consulting and other related systems integration services. Because of the importance that these clients place on receiving consistent and reliable service, the contracts with our GBPO customers are typically three to five years in duration and we may receive contract extensions or renewals based on our clients’ past experiences with our company.

During the three and six months ended March 31, 2006, our GBPO segment generated $11.8 million and $23.9 million, respectively, in revenues, which represents a $0.1 million or 1% increase and $2.7 million or 13% increase, respectively, over the same periods last year. The increase is primarily attributable to $2.0 million and $6.3 million, respectively, of revenue generated during the three and six months ended March 31, 2006 from a five-year contract for child support processing services commenced in the second quarter of fiscal year 2005. This increase was offset by a $1.5 million and $3.2 million revenue decrease, respectively, for the three and six months ended March 31, 2006, due to the completion of several projects. In addition, lower rates and transaction volume resulted in a $0.4 million decrease in revenues for the three and six months ended March 31, 2006.

Packaged Software and Systems Integration Segment, or PSSI. Our PSSI segment provides software and systems implementation services through practice areas in financial management systems, public pension administration systems, unemployment insurance administration systems, electronic government services, computer telephony and call centers and systems integration services. Since the services provided by our

Tier Technologies, Inc.

PSSI segment are generally project-oriented, the contracts with our clients typically have a 1-3 year contract term, and may have subsequent maintenance and support phases. The revenue reported by our PSSI segment in any given period reflect the size and volume of active contracts, as well as our current phase in the project life cycle of individual contracts.

During the three and six months ended March 31, 2006, the revenues generated by our PSSI segment declined to $10.2 million and $23.0 million, respectively, which represents decreases of $2.9 million or 22% and $1.0 million or 4%, respectively, over the same periods last year. These decreases primarily resulted from $5.3 million and $5.5 million, respectively, of decreased revenues from contracts that were completed, nearing completion or entering the maintenance phase of the project during the three and six months ended March 31, 2006. In addition, decreases of $0.6 million and $1.0 million, respectively, for the three and six months ended March 31, 2006, in time and materials-based contracts also contributed to the overall decline in revenues. These decreases were partially offset by revenue increases from new contracts of $3.0 million and $5.1 million, for the three and six month periods ended March 31, 2006.

Costs and Expenses

During the three and six months ended March 31, 2006, costs and expenses totaled $43.6 million and $82.3 million, respectively, an increase of $9.8 million or 29% and $15.9 million or 24%, respectively, from the same periods last year. These increases are due primarily to increased direct costs as a result of the contract with the State of Michigan for a payment processing center that was signed in December 2004. We also incurred additional costs associated with the reconciliation of the accounts of one of our payment processing centers and additional costs associated with the restatement of our historical financial statements, including a special investigation undertaken by our Audit Committee. We will incur additional costs to complete these reconciliation and restatement initiatives in 2006; however, we do not expect these costs to recur in fiscal 2007. Finally, we also incurred first-time costs associated with our implementation of SFAS 123R. The following table provides an overview of operating costs and expenses for the three and six months ended March 31, 2006 and 2005:

		Three months ended																Six months ended
		March 31,								Variance								March 31,								Variance
(in thousands, except percentages)		2006				2005				$ Amount				%				2006				2005				$ Amount				%
Direct costs		$	30,696			$	22,888			$	7,808				34	%		$	58,592			$	44,810			$	13,782				31	%
General and administrative			8,859				6,639				2,220				33	%			15,782				13,181				2,601				20	%
Selling and marketing			2,740				2,689				51				2	%			5,320				5,357				(37	)			(1	)%
Depreciation and amortization			1,325				1,568				(243	)			(15	)%			2,644				3,116				(472	)			(15	)%
Total costs and expenses		$	43,620			$	33,784			$	9,836				29	%		$	82,338			$	66,464			$	15,874				24	%

Direct costs. Direct costs, which represent costs directly attributable to providing services to clients, include: payroll and payroll-related costs; independent contractor/subcontractor costs; travel-related expenditures; credit card interchange fees and assessments; amortization of intellectual property; amortization and depreciation of project-related equipment, hardware and software purchases; and the cost of hardware, software and equipment sold to clients. Direct costs for the three and six months ended March 31, 2006 increased $7.8 million or 34% and $13.8 million or 31%, respectively, over the same period last year. For the three and six months ended March 31, 2006, these increases reflect $0.8 million and $2.6 million, respectively, of costs incurred to support a new contract in our GBPO segment; $0.3 million and $1.4 million, respectively, of consulting services related to the reconciliation of accounts at one of our payment processing centers; and $1.1 million and $1.5 million, respectively, of costs incurred to support a new contract in our PSSI segment. In addition, direct costs for the three and six months ended March 31, 2006 include a $2.8 million accrual for expected losses on a contract in our GBPO segment. The remaining increases for both periods resulted from an increase in rates and the number of transactions processed.

General and administrative. General and administrative expenses consist primarily of payroll and payroll-related costs for general management, administrative, accounting, investor relations, compliance and legal functions, engineering, and information systems. General and administrative expenses for the three and six months ended March 31, 2006 increased $2.2 million or 33% and $2.6 million or 20%, respectively, from the same periods last year. This increase reflects $0.8 million and $1.5 million of additional employee-related expenses incurred during the three and six months ended March 31, 2006, respectively, including

Tier Technologies, Inc.

$0.2 million and $0.5 million, respectively, of stock-based compensation expenses resulting from our implementation of SFAS 123R on October 1, 2005. During the three and six months ended March 31, 2006 we also incurred $1.5 million and $1.7 million, respectively, of additional legal and consulting services primarily related to the restatement of our financial statements. The year-to-date increases were partially offset by $0.6 million in reduced outside services, primarily attributable to reduced consulting cost relating to the implementation of the Sarbanes-Oxley Act of 2002 during fiscal year 2005.

Selling and marketing. Selling and marketing expenses consist primarily of payroll and payroll-related costs, commissions, advertising and marketing expenditures, and travel-related expenditures. We expect selling and marketing expenses to fluctuate from quarter to quarter due to a variety of factors, such as increased advertising and marketing expenses incurred in anticipation of the April 15^th federal tax season. Selling and marketing expenses increased 2% and decreased 1%, respectively, to $2.7 million and $5.3 million, respectively, for the three and six months ended March 31, 2006, over the same periods last year. Selling and marketing expenses for the three months ended March 31, 2006 increased $0.1 million over the same period last year primarily due to the first-time inclusion of share-based payment compensation expense resulting from the implementation of SFAS 123R.

Depreciation and amortization. Depreciation and amortization consists primarily of expenses associated with depreciation of equipment, software and leasehold improvements and amortization of intangible assets resulting from acquisitions and other intellectual property not directly attributable to client projects. Project-related depreciation and amortization is included in direct costs. During the three and six months ended March 31, 2006, depreciation and amortization expenses decreased by $0.2 million or 15% and $0.5 million or 15%, respectively, from prior year results. This decrease was due to the absence of depreciation on assets, not directly attributed to projects, which became fully depreciated in previous periods.

Other Income (Loss)

Equity in net income (loss) of unconsolidated affiliate. During the three and six months ended March 31, 2006 we reported income of $0.5 million and $0.5 million, respectively, and during the three and six months ended March 31, 2005 we incurred losses of $0.1 million and $0.2 million, respectively, which represents our 47.37% share in the net income and losses incurred by investment in CPAS. The $0.6 million and $0.7 million improvement in CPAS’ performance for the three and six months ended March 31, 2006, respectively, over the same periods last year resulted primarily from CPAS’ successful contracting efforts in the current fiscal year.

Interest income, net. During the three and six months ended March 31, 2006, net interest income rose $0.3 million and $0.6 million, respectively, over the same periods last year. This increase reflects higher interest rates and an increase in the average daily balance of our investment portfolio.

Provision for income taxes. During the six months ended March 31, 2006 we reported $5,000 income tax expense, which represented expected minimum state tax payments. No income tax expense was recorded during the three months ended March 31, 2006. In accordance with Statement of Financial Accounting Standards No. 109—Accounting for Income Taxes, or SFAS 109, we established a valuation allowance for the full amount of our deferred tax assets because of cumulative net losses incurred in recent years. As a result, no net provisions for federal income taxes are reflected on our Consolidated Statements of Operations at March 31, 2006.

LIQUIDITY AND CAPITAL RESOURCES

Our principal capital requirement is to fund working capital to support our organic growth, including potential future acquisitions and potential contingent payments due to prior acquisitions. We maintain a $15.0 million revolving credit facility that expires on March 31, 2007, of which $15.0 million may be used for letters of credit and additional borrowing. The credit facility bears interest at the adjusted LIBOR rate plus 2.25% or the lender’s announced prime rate at our option. At March 31, 2006, there was approximately $1.9 million of standby letters of credit outstanding under this facility. The credit facility is collateralized by first priority liens and security interests in our assets. The credit facility contained certain restrictive covenants, including, but not limited to, limitations on the amount of loans we may extend to officers and employees, the payment of dividends, the

Tier Technologies, Inc.

repurchase of common stock and the incurrence of additional debt. As of March 31, 2006, there were no outstanding borrowings under this facility. However, the delayed availability of our financial statements for the fiscal year ended September 30, 2005, and the loss for the quarter ended September 30, 2005, constituted events of default under the revolving credit agreement between Tier and our lender. In addition, we incurred similar events of default for the quarter ended December 31, 2005. To address these events of default, we entered into an Amended and Restated Credit and Security Agreement with the lender on March 6, 2006. The agreement, which amends and restates the original agreement signed by Tier and the lender on January 29, 2003, made a number of significant changes, including the termination of the $15.0 million revolving credit facility, the reduction of financial reporting covenants and the elimination of financial ratio covenants. The March 6, 2006 agreement, which expires on March 31, 2007, provides that Tier may obtain up to $15.0 million of letters of credit and also grants the lender a perfected security interest in cash collateral in an amount equal to all issued and to be issued letters of credit.

In addition to the letters of credit issued under the credit facility mentioned above, during the six months ended March 31, 2006 we had a $3.0 million letter of credit outstanding that was issued to secure performance bonds. This letter of credit was collateralized by certain securities in our investment portfolio at March 31, 2006.

Net Cash from Operating Activities. During the six months ended March 31, 2006, our operating activities provided $5.7 million of cash, including $3.2 million from net income and $8.1 million of non-cash items included in net income. During the six months ended March 31, 2006, $4.4 million of cash was also generated by a decrease in the balance of accounts receivable, due to successful collection efforts. These increases were partially offset by our use of $1.2 million of cash to support prepaid expenses and other assets and $2.1 million decrease in deferred revenues.

During the six months ended March 31, 2005, the operating activities of our continuing operations provided $2.3 million of cash, including $1.1 million of cash from net income and $4.5 million of non-cash items included in net income. In addition, during the six months ended March 31, 2005, $2.3 million of cash was generated by an increase in accounts payable and other accrued liabilities. These increases were partially offset by our use of $5.5 million of cash to support higher accounts receivable levels from increased sales.

Net Cash from Investing Activities. During the six months ended March 31, 2006, our investing activities used $12.8 million, of which $42.1 million was used to purchase available-for-sale investments and $32.2 million was generated by sales and maturities of available-for-sale investments. During the six months ended March 31, 2006, $2.4 million was generated when restricted securities matured, while $2.9 million was used to purchase restricted investments. In addition, $2.4 million was used to purchase equipment and software during the six months ended March 31, 2006.

During the six months ended March 31, 2005, we generated $1.6 million for investing activities, of which $17.0 million was provided by the sales and maturities of available-for-sale investments and $3.7 million and $0.8 million, respectively, was used to purchase available-for-sale investments and restricted investments. The overall increase in cash from investments was offset primarily by $4.0 million used to purchase CPAS and $6.8 million used to purchase equipment and software, which primarily was attributable to our Michigan operations.

Net Cash from Financing Activities. During the six months ended March 31, 2006, $38,000 of cash was provided by our financing activities. The increase represents $69,000 from issuance of our Class B common stock, partially offset by $31,000 of cash used in capital lease obligations.

During the six months ended March 31, 2005, our financing activities provided $388,000 of cash from the issuance of our Class B common stock, offset by $44,000 cash used in capital lease obligations.

We expect to generate cash flows from operating activities over the long-term; however, we may experience significant fluctuations from quarter to quarter resulting from the timing of the billing and collection of large project milestones. We anticipate that our existing capital resources, including our cash balances, cash that we anticipate will be provided by operating activities and our available credit facilities will be adequate to fund our operations for at least the next 12 months. There can be no assurance that changes will not occur that would consume available capital resources before such time. Our capital requirements and capital resources depend

Tier Technologies, Inc.

on numerous factors, including potential acquisitions; initiation of large child support payment processing contracts that typically require large cash outlays for capital expenditures and staff-up costs; contingent payments earned; new and existing contract requirements; the timing of the receipt of accounts receivable, including unbilled receivables; the timing and ability to sell investment securities held in our portfolio without a loss of principle; our ability to draw on our bank facility and employee growth. To the extent that our existing capital resources are insufficient to meet our capital requirements, we will have to raise additional funds. There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. The raising of additional capital may dilute our shareholders’ ownership in us.

Due to the current economic climate, the performance bond market has substantially changed, resulting in reduced availability of bonds, increased cash collateral requirements and increased premiums. Some of our government contracts require a performance bond and future requests for proposal may also require a performance bond. Our inability to obtain performance bonds, increased costs to obtain such bonds or a requirement to pledge significant cash collateral in order to obtain such bonds would adversely affect our business and our capacity to obtain additional contracts. Increased premiums or a claim made against a performance bond could adversely affect our earnings and cash flow and impair our ability to bid for future contracts.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

We have contractual obligations to make future payments on lease agreements, none of which currently have remaining terms that extend beyond five years. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Purchase obligations are legally binding arrangements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed minimum or variable price over a specified period of time. The most significant purchase obligation is for contracts with our subcontractors. The following table presents our expected payments for contractual obligations that were outstanding at March 31, 2006:

						Due in				Due after				Due after
						1 year				1 year through				3 years through
(in thousands)		Total				or less				3 years				5 years
Capital leases (equipment)		$	116			$	68			$	46			$	2
Operating lease obligations:
Facilities leases			10,856				3,387				7,371				98
Equipment leases			208				102				106				—
Purchase obligations(1)
Subcontractor			698				587				111				—
Purchase order			298				298				—				—
Total contractual obligations		$	12,176			$	4,442			$	7,634			$	100

(1) Obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations.

None of our purchase obligations extend beyond five years.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial results of operations and financial position requires us to make judgments and estimates that may have a significant impact upon our financial results. We believe that of our accounting policies, the following require estimates and assumptions that require complex subjective judgments by management, which can materially impact reported results: estimates of project costs and percentage of completion; estimates of effective tax rates, deferred taxes and associated valuation allowances; valuation of goodwill and intangibles; and estimated share-based compensation. Actual results could differ materially from management’s estimates.

For a full discussion of our critical accounting policies and estimates, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

Tier Technologies, Inc.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We maintain a portfolio of cash equivalents and investments in a variety of securities including certificates of deposit, money market funds and government and non-government debt securities. These available-for-sale securities are subject to interest rate risk and may decline in value if market interest rates increase. If market interest rates increase immediately and uniformly by ten percentage points from levels at March 31, 2006, the fair value of the portfolio would decline by about $0.2 million.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding requirements not limited to financial disclosure.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of March 31, 2006. Based on the evaluation of our disclosure controls and procedures as of March 31, 2006, which included consideration of certain material weaknesses disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and our inability to file this Quarterly Report on Form 10-Q within the required time period, our Chief Executive Officer and the Chief Financial Officer concluded that, as of March 31, 2006, our disclosure controls and procedures were not effective. In light of the material weaknesses, in fiscal 2005, we implemented additional analyses and procedures we believe are necessary to ensure that financial statements we issue are prepared in accordance with GAAP and are fairly presented in all material respects. We have performed these additional analyses and procedures with respect to this Quarterly Report on Form 10-Q. Accordingly, we believe that the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting during the fiscal period ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The changes described below occurred subsequent to the second quarter of fiscal 2006.

To address the material weaknesses in our internal control over financial reporting described above, we instituted a number of measures after September 30, 2005 that are expected to continue to improve the effectiveness of our internal controls, including the following:

	•		The Board of Directors appointed a new Chairman and Chief Executive Officer during the third quarter of fiscal 2006;
	•		We established and communicated an atmosphere of zero-tolerance for improper behavior;
	•		We increased the formality and rigor around the operation of key accounting and financial disclosure controls, including the documentation and testing of key financial accounting controls and the implementation of appropriate policies and procedures to provide reasonable assurance of:

	•		timely account reconciliations;
	•		reasonable and accurate accounting estimates and accrued liabilities;
	•		accurate reporting of notes receivable and related interest receivable;
	•		accurate calculation and review of the revenues recognized using percentage-of-completion models;

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	•		documentation of management’s review and approval of transactions; and
	•		preparation and maintenance of appropriate support for accounting transactions.

Many of these remediation efforts were underway during the quarter ended March 31, 2006, and all were fully implemented after March 31, 2006. We believe that these remediation efforts remediated the material weaknesses that existed at March 31, 2006.

While our internal control over financial reporting has improved significantly as a result of the changes made during fiscal 2006, we have identified certain areas that we will continue to enhance, including the following:

•

we will automate certain controls that are currently performed manually;

•

we will complete our written documentation of all key financial procedures; and

•

we will consolidate and simplify our back office operations.

Tier Technologies, Inc.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In May 2003, we received a subpoena from a grand jury in the Southern District of New York to produce certain documents pursuant to an investigation by the Antitrust Division of the DOJ, involving the child support payment processing industry. We have fully cooperated, and intend to continue to cooperate fully, with the subpoena and with the DOJ’s investigation. On November 20, 2003, the DOJ granted us conditional amnesty pursuant to the Antitrust Division’s Corporate Leniency Policy. Consequently, the DOJ will not bring any criminal charges against us or our officers, directors and employees, as long as we continue to comply with the Corporate Leniency Policy, which requires, among other things, our full cooperation in the investigation and restitution payments if it is determined that parties were injured as a result of impermissible anticompetitive conduct.

In May 2006, we received a subpoena from the Philadelphia District Office of the SEC requesting documents relating to financial reporting and personnel issues. If the SEC were to conclude that further investigative activities are merited or to take formal action against us, our reputation could be impaired. We intend to cooperate fully with this investigation.

On November 10, 2006, a law firm issued a press release stating that a class action suit had been filed on behalf of purchasers of our common stock from November 29, 2001 to October 25, 2006. According to the press release, the suit alleges that Tier and certain of our former and/or current officers violated Sections 10(b) and 20(a) of the Securities Exchange Act, but did not identify the level of damages being sought. The press release states that the case is pending in the United States District Court for the Eastern District of Virginia. We have not been served with the complaint and are not able to estimate the probability or level of exposure associated with this purported complaint.

ITEM 1A. RISK FACTORS

The following factors and other risk factors could cause our actual results to differ materially from those contained in forward-looking statements in this Form 10-Q.

If we fail to regain our listing status on the Nasdaq, the value of our stock may continue to be depressed, we may have difficulties attracting and retaining customers and employees and our Company may be susceptible to takeover attempts. Effective at the open of business on May 25, 2006, our common stock was delisted from the Nasdaq National Market (now the Nasdaq Global Market). Although we intend to reapply for re-listing at the appropriate time after we have filled all required reports with the Securities and Exchange Commission, there is no assurance that we will be successful in having our common stock listed on the Nasdaq Global Market.

We have incurred losses in the past and we cannot ensure that we will be profitable. We have incurred losses in the past and we may do so in the future. While we reported net income from continuing operations in fiscal year 2005, we reported losses from continuing operations of a $63,000 (restated) in fiscal year 2004 and $5.4 million (restated) in fiscal year 2003.

Our revenues and operating margins may decline and may be difficult to forecast, which could result in a decline in our stock price. Our revenues, operating margins and cash flows are subject to significant variation from quarter to quarter due to a number of factors, many of which are outside our control. These factors include:

	•		economic conditions in the marketplace;
	•		our customers’ budgets and demand for our services;
	•		seasonality of business;
	•		timing of service and product implementations;

Tier Technologies, Inc.

	•		unplanned increase in costs;
	•		delay in completion of projects;
	•		intense competition;
	•		variability of software license revenues; and
	•		integration and costs of acquisitions.

The occurrence of any of these factors may cause the market price of our stock to decline or fluctuate significantly, which may result in substantial losses to investors. We believe that period-to-period comparisons of our operating results are not necessarily meaningful and/or indicative of future performance. From time-to-time our operating results may fail to meet analysts’ and investors’ expectations, which could cause a significant decline in the market price of our stock. Price fluctuations and trading volume of our stock may be rapid and severe and may leave investors little time to react. Other factors that affect the market price of our stock include announcements of technological innovations or new products or services by competitors, and general economic or political conditions such as recession, acts of war or terrorism. Fluctuations in the price of our stock could cause investors to lose all or part of their investment.

We rely on small numbers of projects, customers and target markets for significant portions of our revenues and our cash flow may decline significantly if we are unable to retain or replace these projects or clients. We depend on a small number of clients to generate a significant portion of our revenues. The completion or cancellation of a large project or a significant reduction in project scope could significantly reduce our revenues and cash flows. Many of our contracts allow our clients to terminate the contract for convenience upon notice and without penalty. If any of our large clients or prime contractors terminates its relationship with us, we will lose a significant portion of our revenues and cash flows. Because of our specific market focus, adverse economic conditions affecting government agencies in these markets could also result in a reduction in our revenues and cash flows. During the six months ended March 31, 2006, our ten largest clients represented approximately half of our total revenues, including one contract that generated over 10% of our total revenues. Our operating results and cash flows could decline significantly if we cannot keep these clients, or replace them if lost.

Our markets are highly competitive. If we do not compete effectively, we could face price reductions, reduced profitability and loss of market share. Our business is focused on transaction processing and software systems solutions, which are highly competitive markets and are served by numerous international, national and local firms. Many competitors have significantly greater financial, technical and marketing resources and name recognition than we do. In addition, there are relatively low barriers to entry into these markets and we expect to continue to face additional competition from new entrants into our markets. Parts of our business are subject to increasing pricing pressures from competitors, as well as from clients facing pressure to control costs. Some competitors are able to operate at significant losses for extended periods of time, which increases pricing pressure on our products and services. If we do not compete effectively, the demand for our products and services and our revenue growth and operating margins could decline, resulting in reduced profitability and loss of market share.

Changes in accounting standards could significantly change our reported results. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.

Material weaknesses in our internal controls over financial reporting may result in adverse impact on our business. Our future success will depend in large part upon the timely remediation of the material weaknesses described in Item 4—Control and Procedures, beginning on page 27. Failure to address these weaknesses could delay or prevent our company from being re-listed on the Nasdaq Global Market and could impair our ability to retain and attract customers and employees.

Tier Technologies, Inc.

Changes in laws and government and regulatory compliance requirements may result in additional compliance costs and may adversely impact our reported earnings. Our business is subject to numerous federal, state and local laws, government regulations, corporate governance standards, industry association rules and public disclosure requirements, which are subject to change. Changing laws, regulations and standards relating to corporate governance, accounting standards, and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and NASDAQ Stock Market rules are creating uncertainty for companies and increasing the cost of compliance. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards. This investment may result in increased general and administrative expenses for outside services and a diversion of management time and attention from revenue-generating activities. New laws, regulations or industry standards may be enacted, or existing ones changed, which could negatively impact our services and revenues. Taxes or fees may be imposed or we could be subject to additional requirements in regard to privacy, security or qualification for doing business. For our transaction processing services, we are subject to the rules of the National Automated Clearing House Association and the applicable credit/debit card association rules. A change in such rules and regulations could restrict or eliminate our ability to provide services or accept certain types of transactions, and could increase costs, impair growth and make our services unprofitable.

The revenues provided by our EPP segment from electronic payment processing may fluctuate and the ability to maintain profitability is uncertain. Our EPP segment primarily provides credit and debit card and electronic check payment options for the payment of federal and state personal income taxes, real estate and personal property taxes, business taxes, fines for traffic violations and parking citations and educational and utility obligations. The revenues earned by our EPP segment depend on consumers’ continued willingness to pay a convenience fee and our relationships with clients such as government taxing authorities, educational institutions, public utilities and their respective constituents. If consumers are not receptive to paying a convenience fee; if card associations change their rules or if laws are passed which do not allow us to charge the convenience fees; or if credit or debit card issuers or marketing partners eliminate or reduce the value of rewards to consumers under their respective rewards programs, demand for electronic payment processing services could decline. The processing fees charged by credit/debit card associations and financial institutions can be increased with little or no notice, which could reduce margins and harm our profitability. Demand for electronic payment processing services would also be affected adversely by a decline in the use of the Internet or consumer migration to a new or different technology or payment method. The use of credit and debit cards and electronic checks to make payments to government agencies is subject to increasing competition and rapid technology change. If we are not able to develop, market and deliver competitive technologies, our market share will decline and our operating results and financial condition could suffer.

Our ability to grow depends largely on our ability to attract, integrate and retain qualified personnel. The success of our business is based largely on our ability to attract and retain talented and qualified employees and contractors. The market for skilled workers in our industry is extremely competitive. In particular, qualified project managers and senior technical and professional staff are in great demand worldwide. If we are not successful in our recruiting efforts, or are unable to retain key employees our ability to staff projects and deliver products and services may be adversely affected. We believe our success also depends upon the continued services of senior management and a number of key employees whose employment may terminate at any time. If one or more key employees resigns to join a competitor or to form a competing company, the loss of such personnel and any resulting loss of existing or potential clients could harm our competitive position.

We depend on third parties for our products and services. Failure by these third parties to perform their obligations satisfactorily could hurt our reputation, operating results and competitiveness. Our business is highly dependent on working with other companies and organizations to bid on and perform complex multi-party projects. We may act as a prime contractor and engage subcontractors, or we may act as a subcontractor to the prime contractor. We use third-party software, hardware and support service providers to perform joint engagements. We depend on licensed software and other technology from a small number of primary vendors. We also rely on a third-party co-location facility for our primary data center, use third-party processors to complete payment transactions and use third-party software providers for system solutions, security and infrastructure. The failure of any of these third parties to meet their contractual obligations, our inability to obtain favorable contract terms, failures or defects attributable to these third parties or their products, or the discontinuation of the services of a key subcontractor or vendor could result in significant cost and liability, diminished profitability and damage to our reputation and competitive position.

Tier Technologies, Inc.

Our fixed-price and transaction-based contracts require accurate estimates of resources and transaction volumes and failure to estimate these factors accurately could cause us to lose money on these contracts. Our business relies on accurate estimates. If we underestimate the resources, cost or time required for a project or overestimate the expected volume of transactions or transaction dollars processed, our costs could be greater than expected or our revenues could be less than expected. Under fixed-price contracts, we generally receive our fee if we meet specified deliverables, such as completing certain components of a system installation. For transaction-based contracts, we receive our fee on a per-transaction basis or as a percentage of dollars processed, such as the number of child support payments processed or tax dollars processed. If we fail to prepare accurate estimates on factors used to develop contract pricing, such as labor costs, technology requirements or transaction volumes, we may incur losses on those contracts and our operating margins could decline.

Our revenues are highly dependent on government funding and the loss or decline of existing or future government funding could cause our revenues and cash flows to decline. A significant portion of our revenues is derived from federal and state mandated projects. A large portion of these projects may be subject to a reduction or discontinuation of funding which may cause early termination of projects, diversion of funds away from our projects or delays in implementation. The occurrence of any of these conditions could adversely affect our projected revenues, cash flows and profitability.

Our business is subject to increasing performance requirements, which could result in reduced revenues and increased liability. Our business involves projects that are critical to the operations of our clients’ businesses. The failure to meet client expectations could damage our reputation and compromise our ability to attract new business. On certain projects we make performance guaranties, based upon defined operating specifications, service levels and delivery dates, which are sometimes backed by contractual guarantees and performance bonds. Unsatisfactory performance or unanticipated difficulties or delays in starting or completing such projects may result in termination of the contract, a reduction in payment, liability for penalties and damages, or claims against a performance bond. Client performance expectations or unanticipated delays could necessitate the use of more resources than we initially budgeted for a particular project, which could increase our project costs and make us less profitable.

If we are not able to obtain adequate or affordable insurance coverage or bonds, we could face significant liability claims and increased premium costs and our ability to compete for business could be compromised. We maintain insurance to cover various risks in connection with our business. Additionally, our business includes projects that require us to obtain performance and bid bonds from a licensed surety. There is no guarantee that such insurance coverage or bonds will continue to be available on reasonable terms, or at all. If we are unable to successfully maintain adequate insurance and bonding coverage, potential liabilities associated with the risks discussed in this report could exceed our coverage, and we may not be able to obtain new contracts, which could result in decreased business opportunities and declining revenues.

Unauthorized data access and other security breaches could have an adverse impact on our business and our reputation. Security breaches or improper access to data in our facilities, computer networks, or databases, or those of our suppliers, may cause harm to our business and result in liability and systems interruptions. Despite security measures we have taken, our systems may be vulnerable to physical break-ins, computer viruses, attacks by hackers and similar problems causing interruption in service and loss or theft of data and information. Our third-party suppliers also may experience security breaches involving the unauthorized access of proprietary information. A security breach could result in theft, publication, deletion or modification of confidential information, cause harm to our business and reputation and result in loss of clients and revenue.

We could suffer material losses if our operations fail to perform effectively. The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and key executives in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, ineffectiveness or exposure due to interruption in third-party support as expected, as well as, the loss of key individuals or failure on the part of the key individuals to perform properly. Our insurance may not be adequate to compensate us for all losses that may occur as a result of any such event, or any system, security or operational failure or disruption.

Tier Technologies, Inc.

Our business may be harmed by claims, lawsuits or investigations which could result in adverse outcomes. At any given time, we are subject to a variety of claims and lawsuits. Adverse outcomes in any particular claim, lawsuit, government investigation, tax determination, or other liability matter may result in significant monetary damages, substantial costs, or injunctive relief against us that could adversely affect our ability to conduct our business. We cannot guarantee that the disclaimers, limitations of warranty, limitations of liability and other provisions set forth in our contracts will be enforceable or will otherwise protect us from liability for damages. The successful assertion of one or more claims against us may not be covered by, or may exceed our available insurance coverage.

In May 2003, we received a subpoena from a grand jury in the Southern District of New York to produce certain documents pursuant to an investigation by the Antitrust Division of the U.S. Department of Justice, or the DOJ, involving the child support payment processing industry. We have fully cooperated, and intend to continue to cooperate fully, with the subpoena and with the DOJ’s investigation. On November 20, 2003, the DOJ granted us conditional amnesty pursuant to the Antitrust Division’s Corporate Leniency Policy. Consequently, the DOJ will not bring any criminal charges against us or our officers, directors and employees, as long as we continue to comply with the Corporate Leniency Policy, which requires, among other things, our full cooperation in the investigation and restitution payments if it is determined that parties were injured as a result of impermissible anticompetitive conduct. We anticipate that we will incur additional expenses as we continue to cooperate with the investigation. Such expenses and any restitution payments could negatively impact our reputation, compromise our ability to compete and win new projects and result in financial losses.

In May 2006, we received a subpoena from the Philadelphia District Office of the SEC requesting documents relating to financial reporting and personnel issues. If the SEC were to conclude that further investigative activities are merited or to take formal action against Tier, our reputation could be impaired. We intend to cooperate fully with this investigation. We anticipate that we will incur additional legal and administrative expenses as we continue to cooperate with the SEC’s investigation.

If we are not able to protect our intellectual property we could suffer serious harm to our business. We protect our intellectual property rights through a variety of methods, such as use of nondisclosure and license agreements, and use of trade secret, copyright and trademark laws. Ownership of developed software and customizations to software are the subject of negotiation with individual clients. Despite our efforts to safeguard and protect our intellectual property and proprietary rights, there is no assurance that these steps will be adequate to avoid the loss or misappropriation of our rights or that we will be able to detect unauthorized use of our intellectual property rights. If we are unable to protect our intellectual property, competitors could market services or products similar to ours, and demand for our offerings could decline, resulting in an adverse impact on revenues.

We may be subject to infringement claims of third parties, resulting in increased costs and loss of business. From time to time we receive notices from others claiming we are infringing on their intellectual property rights. Defending a claim of infringement against us could prevent or delay our providing products and services, cause us to pay substantial costs and damages, or force us to redesign products or enter into royalty or licensing agreements on less favorable terms. If we are required to enter into such agreements or take such actions, our operating margins could decline.

Our markets are rapidly changing and if we are not able to continue to adapt to changing conditions, we may lose market share and be unable to compete effectively. The markets for our products are characterized by rapid changes in technology, client expectations and evolving industry standards. Our future success depends on our ability to innovate, develop, acquire and introduce successful new products and services for our target markets and to respond quickly to changes in the market. If we are unable to address these requirements, or if our products do not achieve market acceptance, we may lose market share and our revenues could decline.

We may not be successful in identifying acquisition candidates and, if we undertake acquisitions, they could be expensive, increase our costs or liabilities or disrupt our business. One of our strategies is to pursue growth through acquisitions. We may not be able to identify suitable acquisition candidates at prices that we consider appropriate or to finance acquisitions at favorable terms. If we do identify an appropriate acquisition candidate, we may be unsuccessful in negotiating the terms of the acquisition, finance the acquisition or, if the

Tier Technologies, Inc.

acquisition occurs we may be unsuccessful in integrating the acquired business into our existing business. Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management attention away from day-to-day operations. Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in leverage or dilution of ownership. We also may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. In addition, we may need to record write-downs from future impairments of identified intangible assets and goodwill, which could reduce our future reported earnings. Acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. Any costs, liabilities or disruptions associated with any future acquisitions we may pursue could harm our operating results.

ITEM 6. EXHIBITS

Exhibit
Number				Description
	3.1			Certificate of Designations of Series A Junior Participating Preferred Stock(1)
	3.2			Amendment to the Company’s Amended and Restated Bylaws(1)
	4.1			Rights Agreement, dated as of January 10, 2006, by and between Tier Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent(1)
	4.2			Form of Rights Certificate(1)
	10.1			Assumption Agreement as of January 6, 2006 by and between the Registrant, Official Payments Corporation, EPOS Corporation and City National Bank(2)
	10.2			Security Agreement as of January 6, 2006 by and between EPOS Corporation and City National Bank(2)
	10.3			Amended and Restated Credit and Security Agreement dated March 6, 2006 between the Registrant, Official Payments Corporation, EPOS Corporation and City National Bank(3)
	31.1			Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.†
	31.2			Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.†
	32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
	32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†