10-Q

United States
Securities and Exchange Commission

Washington, D.C.  20549

FORM 10-Q

ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Period Ended October 31, 2005.
	o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from                             to                             .

Commission file number  0-24201

Carreker Corporation

(Exact name of registrant as specified in its charter)

Delaware	75-1622836
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
4055 Valley View Lane, #1000 Dallas, Texas	75244
(Address of principal executive office)	(Zip Code)

(972) 458-1981

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý    No  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $.01 par value — 24,697,793 shares as of November 30, 2005.

CARREKER CORPORATION

Index

PART 1:	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets at October 31, 2005 and January 31, 2005
	Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2005 and 2004
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended October 31, 2005
	Condensed Consolidated Statements of Cash Flows for the three and nine months ended October 31, 2005 and 2004
	Notes to Condensed Consolidated Unaudited Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II:	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURES

2

PART I:  FINANCIAL INFORMATION

Item 1.  Financial Statements

CARREKER CORPORATION

Condensed Consolidated Balance Sheets
(Unaudited)

(In thousands)

ASSETS

	October 31, 2005			January 31, 2005
Current assets
Cash and cash equivalents	$	24,162		$	34,516
Marketable securities	4,500			—
Accounts receivable, net of allowance of $569 and $529 at October 31, 2005 and January 31, 2005, respectively	13,284			11,144
Prepaid expenses and other current assets	3,060			2,595
Total current assets	45,006			48,255
Property and equipment, net of accumulated depreciation of $22,297 and $20,194 at October 31, 2005 and January 31, 2005, respectively	6,022			6,604
Capitalized software costs, net of accumulated amortization of $13,313 and $12,426 at October 31, 2005 and January 31, 2005, respectively	3,049			3,245
Acquired developed technology, net of accumulated amortization of $19,238 and $15,773 at October 31, 2005 and January 31, 2005, respectively	6,462			9,927
Goodwill, net of accumulated amortization of $3,405 at October 31, 2005 and January 31, 2005	20,765			20,765
Customer relationships, net of accumulated amortization of $6,183 and $5,133 at October 31, 2005 and January 31, 2005, respectively	2,217			3,267
Deferred loan costs, net of accumulated amortization of $1,503 and $1,300 at October 31, 2005 and January 31, 2005, respectively	204			407
Other assets	804			835
Total assets	$	84,529		$	93,305
Current liabilities
Accounts payable	$	1,061		$	992
Accrued compensation and benefits	5,986			7,818
Other accrued expenses	3,928			3,609
Income tax payable	182			339
Deferred revenue	16,960			22,181
Accrued merger and restructuring costs	629			1,004
Total current liabilities	28,746			35,943
Commitments and Contingencies
Stockholders’ equity
Preferred stock, $.01 par value: 2,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $.01 par value: 100,000 shares authorized; 25,338 and 24,852 shares issued at October 31, 2005 and January 31, 2005, respectively	254			249
Additional paid-in capital	112,034			110,992
Accumulated deficit	(53,274		)	(53,876		)
Less treasury stock, at cost	(3,231		)	(3		)
Total stockholders’ equity	55,783			57,362
Total liabilities and stockholders’ equity	$	84,529		$	93,305

See accompanying notes.

3

CARREKER CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended October 31,						Nine Months Ended October 31,
	2005			2004			2005			2004
Revenues:
Consulting	$	6,720		$	7,930		$	24,540		$	27,501
Software license	5,322			5,701			12,463			16,134
Software maintenance	10,822			11,491			32,710			32,807
Software implementation and other services	4,585			4,622			13,611			11,143
Outsourcing service	220			50			718			60
Out-of-pocket expense reimbursements	701			813			2,446			2,365
Total revenues	28,370			30,607			86,488			90,010
Cost of revenues:
Consulting	4,369			4,555			12,887			14,166
Software license	2,155			2,503			5,519			5,771
Software maintenance	3,588			3,765			10,999			10,949
Software implementation and other services	3,562			4,002			10,217			11,181
Outsourcing service	424			222			1,437			236
Out-of-pocket expenses	701			738			2,299			2,333
Total cost of revenues	14,799			15,785			43,358			44,636
Gross profit	13,571			14,822			43,130			45,374
Operating costs and expenses:
Selling, general and administrative	11,191			11,320			33,688			35,483
Research and development	2,444			2,520			7,481			6,102
Amortization of customer relationships	350			350			1,050			1,050
Restructuring and other charges	780			266			903			2,978
Total operating costs and expenses	14,765			14,456			43,122			45,613
Income (loss) from operations	(1,194		)	366			8			(239		)
Other income (expense):
Interest income	185			92			495			207
Interest expense	(122		)	(106		)	(334		)	(336		)
Other income	283			275			718			732
Total other income, net	346			261			879			603
Income (loss) before provision for income taxes	(848		)	627			887			364
Provision for income taxes	102			114			285			464
Net income (loss)	$	(950	)	$	513		$	602		$	(100	)
Basic earnings (loss) per share	$	(0.04	)	$	0.02		$	0.03		$	0.00
Diluted earnings (loss) per share	$	(0.04	)	$	0.02		$	0.03		$	0.00
Shares used in computing basic earnings (loss) per share	23,906			24,821			24,152			24,623
Shares used in computing diluted earnings (loss) per share	23,906			25,589			24,553			24,623

See accompanying notes.

4

CARREKER CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands)

					Additional										Total
	Common Stock				Paid-In			Accumulated			Treasury Stock				Stockholders’
	Shares		Amount		Capital			Deficit			Shares	Amount			Equity
Balance at January 31, 2005	24,852		$	249	$	110,992		$	(53,876	)	1	$	(3	)	$	57,362
Cancellation of restricted stock	(5	)	—		(12		)	—			—	—			(12		)
Compensation expense related to issuance of restricted stock	—		—		140			—			—	—			140
Issuance of shares of common stock upon exercises of stock options	10		—		52			—			—	—			52
Common stock repurchases	—		—		—			—			70	(349		)	(349		)
Net income	—		—		—			498			—	—			498
Balance at April 30, 2005	24,857		249		111,172			(53,378		)	71	(352		)	57,691
Cancellation of restricted stock	(30	)	—		(56		)	—			—	—			(56		)
Compensation expense related to issuance of restricted stock	424		4		182			—			—	—			186
Issuance of shares of common stock upon exercises of stock options	43		—		214			—			—	—			214
Restricted shares withheld for payroll taxes	—		—		—			—			8	(49		)	(49		)
Common stock repurchases	—		—		—			—			560	(2,824		)	(2,824		)
Net income	—		—		—			1,054			—	—			1,054
Balance at July 31, 2005	25,294		253		111,512			(52,324		)	639	(3,225		)	56,216
Cancellation of restricted stock	(13	)	—		(7		)	—			—	—			(7		)
Compensation expense related to issuance of restricted stock	—		—		254			—			—	—			254
Issuance of shares of common stock upon exercises of stock options	57		1		275			—			—	—			276
Common stock repurchases	—		—		—			—			1	(6		)	(6		)
Net loss	—		—		—			(950		)	—	—			(950		)
Balance at October 31, 2005	25,338		$	254	$	112,034		$	(53,274	)	640	$	(3,231	)	$	55,783

See accompanying notes.

5

CARREKER CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended October 31,						Nine Months Ended October 31,
	2005			2004			2005			2004
Operating Activities:
Net income (loss)	$	(950	)	$	513		602			(100		)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property and equipment	793			826			2,391			2,483
Amortization of capitalized software costs	419			668			887			1,146
Amortization of acquired developed technology	1,155			1,155			3,465			3,465
Amortization of customer relationships	350			350			1,050			1,050
Amortization of deferred loan costs	68			67			203			204
Compensation earned under restricted stock plan	247			148			505			324
Minority share of loss in Carretek LLC	(269		)	(234		)	(799		)	(454		)
Non-cash charge for merger costs	—			—			(32		)	(1,215		)
Allowance for doubtful accounts	95			(275		)	54			(667		)
Gain on sale of Cash Services Australia Pty. Limited	—			—			—			(539		)
Changes in operating assets and liabilities:
Accounts receivable	3,011			3,571			(2,194		)	10,468
Prepaid expenses and other assets	(147		)	525			(456		)	1,462
Accounts payable and accrued expenses	708			(451		)	(1,898		)	(2,729		)
Income taxes payable/receivable	107			87			(157		)	41
Deferred revenue	(3,401		)	(7,159		)	(5,221		)	(7,665		)
Net cash provided by (used in) operating activities	2,186			(209		)	(1,600		)	7,274
Investing Activities:
Purchases of property and equipment	(523		)	(1,346		)	(1,809		)	(2,711		)
Purchases of marketable securities	—			—			(4,600		)	—
Sales of marketable securities	100			—			100			—
Computer software costs capitalized	—			(593		)	(690		)	(2,201		)
Net cash used in investing activities	(423		)	(1,939		)	(6,999		)	(4,912		)
Financing Activities:
Payments on long-term debt	—			—			—			(6,250		)
Proceeds from exercises of stock options	276			314			542			1,638
Purchase of treasury stock	(6		)	—			(3,228		)	—
Proceeds from minority shareholder equity contributions to Carretek LLC	380			172			931			432
Net cash provided by (used in) financing activities	650			486			(1,755		)	(4,180		)
Net increase (decrease) in cash and cash equivalents	2,413			(1,662		)	(10,354		)	(1,818		)
Cash and cash equivalents at beginning of period	21,749			28,449			34,516			28,605
Cash and cash equivalents at end of period	$	24,162		$	26,787		$	24,162		$	26,787
Supplemental disclosures of cash flow information:
Cash paid for interest	$	39		$	38		$	115		$	147
Cash paid for income taxes, net	$	16		$	11		$	443		$	393

See accompanying notes.

6

Carreker Corporation

Notes to Condensed Consolidated Unaudited Financial Statements
For the Three and Nine Months Ended October 31, 2005 and 2004

1.Description of Business

Carreker Corporation (“the Company,” “Carreker,” “our,” “we”) provides payments-related software, consulting and business process outsourcing solutions to financial institutions and financial service providers.  These solutions help the Company’s customers set winning strategies in their payments businesses; improve operational efficiency in how payments are processed; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; and/or improve the alignment of product offerings with customer needs.

2.Summary of Significant Accounting Procedures

Principles of Consolidation and Presentation

The condensed consolidated unaudited financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial statements also reflect the operations of Carretek LLC, which is a 51% owned subsidiary.  The minority interest and minority share of net loss of Carretek LLC represent the 49% minority stockholder’s investment and share of the loss of this consolidated subsidiary.

The accompanying condensed consolidated unaudited financial statements and notes have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim financial reporting.  The accompanying financial statements reflect all adjustments (consisting of normal recurring entries) which in the opinion of management are necessary for a fair presentation of the results for the interim periods presented.  The results of operations for the three and nine months ended October 31, 2005 are not necessarily indicative of full-year results.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  As discussed below, the Company makes significant estimates and assumptions in the areas of accounts receivable, impairment of intangibles and revenue recognition.  Although the Company believes that the estimates and assumptions are reasonable, actual results may differ, and such differences could be significant to the Company’s financial results.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.  Cash and cash equivalents consist primarily of demand deposit accounts and demand money market accounts with nationally recognized financial institutions, along with domestic commercial paper.

Marketable Securities

We classify our investments in marketable securities as “available-for-sale” in accordance with the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”).  We currently have no investments that we intend to hold for more than one year and therefore all investments are classified as short term investments.

Available-for-sale securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income.  Held-to-maturity securities are recorded at amortized cost.  Unrealized losses considered to be “other-than-temporary” are recognized currently in earnings.  The cost of securities sold is based on the specific identification method.  The fair value of most investment securities is determined by currently available market prices.  Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value.

7

The cost, gross unrealized gains (losses) and fair value of our available-for-sale securities by major security type at October 31, 2005 is as follows (in thousands):

	Cost			Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale:
Corporate debt securities	$		700	$	—	$	—	$	700
Guaranteed student loan backed debt securities	3,800			—		—		3,800
Total available for sale	$	4,500		$	—	$	—	$	4,500

Currently all original maturities of debt securities classified as available for sale at October 31, 2005 were due after 10 years.  All the debt securities are auction rate notes and the interest rate for these investments will adjust to current market rates at each interest reset date, which is typically on at least a monthly basis.

Comprehensive Income

The Company has no other comprehensive income; accordingly, comprehensive income is the same as net income for all periods presented.

Foreign Currency Translation

The Company considers the U.S. Dollar to be the functional currency for its international subsidiaries.  All remeasurement adjustments are recorded in the consolidated statements of operations.

Accounts Receivable and Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments such as short term commercial paper and marketable debt securities along with accounts receivable.  The Company places temporary cash investments with major banks and limits its exposure with any one financial institution, or commercial or municipal issuer.  The Company has not experienced any material credit losses on these investments.

A significant portion of the Company’s business consists of providing consulting services and licensing software to major domestic and international banks, which gives rise to a concentration of credit risk in receivables.  Because the Company’s accounts receivable are typically unsecured, the Company periodically evaluates the collectibility of its accounts based on a combination of factors, including a particular customer’s ability to pay as well as the age of receivables.  In cases where the evidence suggests a customer may not be able to satisfy its obligation to the Company or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of the Company’s products and services, the Company sets up a reserve in an amount determined appropriate for the perceived risk.  Most of the Company’s contracts include multiple payment milestones, some of which occur in advance of revenue recognition, which mitigates the risk both in terms of collectibility and adjustments to recorded revenue.  The Company had a recovery of a receivable previously written off of $28,000 during the three months ended October 31, 2005.  Write-offs of receivables during the three months ended October 31, 2004 were $45,000.  Write-offs of receivables during the nine months ended October 31, 2005 and 2004 were $14,000 and $179,000, respectively.

The fair value of accounts receivable approximates the carrying amount of accounts receivable.

8

Gross accounts receivable includes both amounts billed to customers and unbilled customer accounts receivable.  Accounts receivable, net of related deferred revenue and allowances, consist of the following (in thousands):

	October 31, 2005			January 31, 2005
Gross accounts receivable	$	34,191		$	47,000
Less related deferred revenue	(20,338		)	(35,327		)
Less allowance for doubtful accounts	(569		)	(529		)
Net accounts receivable	$	13,284		$	11,144

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally from two to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the terms of the related leases or the respective useful lives of the assets.

The Company accounts for the costs of computer software developed or obtained for internal use in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.  The Company capitalizes costs of consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software.  These costs are included in “Equipment and Software”.  Costs incurred during preliminary project and post-implementation stages are charged to expense.

The components of property and equipment are as follows (in thousands):

	October 31, 2005			January 31, 2005
Furniture	$	5,070		$	5,069
Equipment and software	21,965			20,446
Leasehold improvements	1,284			1,283
Total cost	28,319			26,798
Less accumulated depreciation and amortization	(22,297		)	(20,194		)
Net property and equipment	$	6,022		$	6,604

Long Lived Assets

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”).  Under the provisions of SFAS 142, an annual assessment of goodwill impairment is performed.  This assessment involves the use of estimates related to fair market values of the Company’s reporting units with which the goodwill is associated.  The assessment of goodwill impairment in the future will be impacted if future operating cash flows of the Company’s reporting units decline significantly, which could result in decreases in the related estimate of fair market value.  The Company performs its annual impairment analysis as of November 1^st of each year and whenever facts and circumstances indicate impairment may exist.

The Company accounts for long lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  Under the provisions of SFAS 144, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the asset.

9

Deferred Loan Costs

Deferred loan costs consist of loan closing costs and other administrative expenses associated with the Revolving Credit Agreement.  These costs are being amortized to interest expense over the 36 month life of the Revolving Credit Agreement.

Capitalized Software Costs and Acquired Developed Technology

The Company capitalizes the development costs of software, other than internal-use software, in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”).  The Company’s policy is to capitalize software development costs incurred in developing a product once technological feasibility of the product has been established. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detail program design, technological feasibility is determined only after completion of a working model. All capitalized software development costs are amortized using an amount determined as the greater of: (1) the ratio that current gross revenues for a capitalized software project bears to the total of current and estimated future gross revenues for that project or (2) the straight-line method over the estimated remaining economic life of the product (generally three to five years). The Company capitalized $0 and $593,000 in the three months ended October 31, 2005 and 2004, respectively.  The Company capitalized $690,000 and $2.2 million in the nine months ended October 31, 2005 and 2004, respectively.  The Company developed software for sending and receiving check images, and has developed software for distributed capture of checks and check images and extending the functionality of its anti-money laundering software and other Risk solutions.  The Company has also recently completed the development of a product to verify cash logistic invoices with automated precision and an internet-based track and trace system that streamlines the cash delivery management process.

The Company recorded amortization relating to software development costs capitalized of $420,000 and $668,000 in the three months ended October 31, 2005 and 2004, respectively.  The Company recorded amortization relating to software development costs capitalized of $888,000 and $1.1 million in the nine months ended October 31, 2005 and 2004, respectively.  Amortization expense is recorded as a component of cost of software license fees in the accompanying consolidated statements of operations.

Acquired developed technology includes purchased technology intangible assets associated with acquisitions.  These purchased technology intangibles are initially recorded based on the fair value ascribed at the time of acquisition.

Acquired developed technology with a useful life of 3-6 years is amortized on a straight-line basis, resulting in amortization expense of $1.2 million for the three months ended October 31, 2005 and 2004, respectively, and $3.5 million for the nine months ended October 31, 2005 and 2004.  Amortization expense is recorded as a component of cost of software license fees in the accompanying consolidated statements of operations.

The following table sets forth the estimated amortization expense of capitalized software costs and acquired developed technology for the indicated fiscal years ending January 31 (in thousands):

Year	Capitalized Software Costs		Acquired Developed Technology
Remainder of 2006	$	306	$	1,155
2007	1,223		4,107
2008	885		1,200
2009	327		—

The table does not include the estimated amortization expense for $308,000 of capitalized software products that are currently being developed, and for which amortization has not commenced.

10

The Company continually monitors the net realizable value of software capitalized and acquired developed technology for factors that would indicate impairment such as a decline in demand or a loss of a significant customer.  During the quarterly period ended January 31, 2005, the Company performed its annual formal evaluation for impairment and determined that the carrying amount of these assets was not impaired and has subsequently noted no factors that would indicate impairment.

Revenue Recognition

The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” and Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.”  In the case of software arrangements that require significant production, modification, or customization of software, or the license agreement requires the Company to provide implementation services that are determined to be essential to other elements of the arrangement, the Company follows the guidance in SOP 81-1, “Accounting for Performance of Construction–Type and Certain Production–Type Contracts.”

In the case of non-software arrangements, we apply EITF No. 00-21 and revenues related to arrangements with multiple elements are allocated to each element based on the element’s relative fair value.  Revenue allocated to separate elements is recognized for each element in accordance with our accounting policies described below.  If we cannot account for items included in a multiple-element arrangement as separate units of accounting, they are combined and accounted for as a single unit of accounting and generally recognized as the undelivered items or services are provided to the customer.

Consulting.  The Company employs three primary pricing methods in connection with its delivery of consulting services. First, the Company may price its delivery of consulting services on the basis of time and materials, in which case the customer is charged agreed-upon daily rates for services performed and out-of-pocket expenses. In this case, the Company is generally paid fees and related amounts usually on a monthly basis, and the Company recognizes revenues as the services are performed. Second, the Company may deliver consulting services on a fixed-price basis. In this case, the Company is paid on a monthly basis or pursuant to an agreed upon payment schedule, and the Company recognizes revenues on a proportionate performance basis.  The Company believes that this method is appropriate because of its ability to determine performance milestones and determine dependable estimates of its costs applicable to each phase of a contract.  Because financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, costs are subject to revisions as the contract progresses.  Anticipated losses on fixed-price contracts are recognized when estimable.  Third, the Company may deliver consulting services pursuant to a value-priced contract with the customer. In this case, the Company is paid, on an agreed upon basis with the customer, either a specified percentage of (1) the projected increased revenues and/or decreased costs that are expected to be derived by the customer generally over a period of up to twelve months following implementation of its solution or (2) the actual increased revenues and/or decreased costs experienced by the customer generally over a period of up to twelve months following implementation of its solution, subject in either case to a maximum, if any is agreed to, on the total amount of payments to be made to the Company.  The Company must first commit time and resources to develop projections associated with value-pricing contracts before a customer will commit to purchase its solutions, and the Company therefore assumes the risk of making these commitments with no assurance that the customer will purchase the solution.  Costs associated with these value-pricing contracts are expensed as incurred.  These contracts typically include payments to be made to the Company pursuant to an agreed upon schedule ranging from one to twelve months in length.  The Company recognizes revenues generated from consulting services in connection with value-priced contracts based upon projected results only upon completion of all services and agreement upon the actual fee to be paid (even though billings for these services may be delayed by mutual agreement for periods not to exceed twelve months). In an effort to allow customers to more closely match expected benefits from services with payments to the Company, the Company on occasion, may offer payment terms which extend beyond 12 months.  When the Company enters into an agreement which has a significant component of the total amount payable under the agreement due beyond 12 months or if it is determined payments are not fixed and determinable at the date the agreement was entered into, revenue under the arrangement will be recognized as payments become due and payable.  When fees are to be paid based on a percentage of actual revenues and/or savings to customers, the Company recognizes revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer with a fixed payment date.

Costs associated with time and materials, fixed-priced and value-priced consulting fee arrangements are expensed as incurred and are included as a component of the cost of consulting fees.

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The Company expects that value-pricing contracts will continue to account for a significant portion of its revenues in the future. As a consequence of the use of value-pricing contracts and due to the revenue recognition policy associated with those contracts, the Company’s results of operations will likely fluctuate significantly from period to period.

Regardless of the pricing method employed by the Company in a given contract, the Company is typically reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf of its customers.

Software License.  A perpetual software license is sold either together with implementation services or on a stand-alone basis.  The Company is usually paid software license fees in one or more installments, as provided in the customer’s contract but not to exceed twelve months.  The Company recognizes software license revenue upon execution of a contract and delivery of the software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management.  When the software license arrangement requires the Company to provide implementation services that are essential to the functionality of the software or significant production, customization or modification of the software is required, both the product license revenue and implementation fees are recognized as services are performed.  A term software license is sold either together with implementation services and/or with maintenance services.  These term licenses are usually paid in annual installments over the term of the license.  If the term software license is sold without essential implementation services, the revenue is recognized ratably over the non-cancelable license term.  If the term license is sold with essential implementation services, the license revenue is recognized as the lesser of the amount of license revenue recognized as services are performed or on a ratable basis.

In certain instances, especially with recently developed software, the Company defers software license revenue recognition until the earlier of the product being determined to be generally available and subject to revenue recognition or when the services are completed and the project is accepted by the customer.  This practice is followed for the first two installations of a recently developed software product.  After two successful implementations, the product is considered generally available (“GA”).

Software licenses are often sold as part of a multiple element arrangement that may include maintenance, implementation or consulting.  The Company determines whether there is vendor specific objective evidence of fair value (“VSOEFV”) for each element identified in the arrangement to determine whether the total arrangement fees can be allocated to each element.  If VSOEFV exists for each element, the total arrangement fee is allocated based on the relative fair value of each element.  In cases where there is not VSOEFV for each element, or if it is determined services are essential to the functionality of the software being delivered, or if significant production, modification or customization of the software is required, the Company initially defers revenue recognition of the software license fees until VSOEFV is established or the services are performed.  However, if VSOEFV is determinable for all of the undelivered elements, and assuming the undelivered elements are not essential to the delivered elements, the Company will defer recognition of the full fair value related to the undelivered elements and recognize the remaining portion of the arrangement value through application of the residual method.  Where VSOEFV has not been established for certain undelivered elements, revenue for all elements is deferred until those elements have been delivered or their fair values have been determined.  Evidence of VSOEFV is determined for software products based on actual sales prices for the product sold to a similar class of customer and based on pricing strategies set forth in the Company’s price book.  Evidence of VSOEFV for services (implementation and consulting) is based upon standard billing rates and the estimated level of effort for individuals expected to perform the related services.  The Company establishes VSOEFV for maintenance agreements using the percentage method such that VSOEFV for maintenance is a percentage of the license fee charged annually for a specific software product, which in most instances is 20% of the portion of arrangement fees allocated to the software license element.

Although substantially all of the Company’s current software licenses provide for a fixed price license fee, some licenses instead provide for the customer to pay a monthly license fee based on actual use of the software product.  The level of license fees earned by the Company under these arrangements will vary based on the actual amount of use by the customer.  Revenue under these arrangements is recognized on a monthly basis as the usage becomes determinable.

Software Maintenance.  In connection with the sale of a software license, a customer may elect to purchase software maintenance services. Most of the customers that purchase software licenses from the Company also purchase software maintenance services, which typically are renewed annually.  The Company charges an annual maintenance fee, which is typically a percentage of the initial software license fee. The annual maintenance fee generally is paid to the Company at the beginning of the maintenance period, and the Company recognizes these revenues ratably over the term of the related contract.  If the annual maintenance fee is not paid at the beginning of the maintenance period, the Company defers revenue recognition until the time that the maintenance fee is paid by the customer.  The Company normally continues to provide maintenance service while awaiting payment from customers.  When the payment is received, revenue is recognized for the period that revenue was previously deferred.  This may result in volatility in software maintenance revenue from period to period.

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Software Implementation and Other Services.  In connection with the sale of a software license, a customer may elect to purchase software implementation services, including software enhancements and other software services. Most of the customers that purchase software licenses from the Company also purchase software implementation services.  The Company prices its implementation services on a time-and-materials or on a fixed-price basis, and the Company recognizes the related revenues as services are performed.  Costs associated with these engagements are expensed as incurred.

Outsourcing Services.  While outsourcing revenue has been minimal to date, we currently recognize revenue based on the number of items processed.  These services are billed currently on a monthly basis.

Return Provisions.  The Company’s contracts typically do not include right of return clauses, and as a result, the Company does not record a provision for returns.

Royalties

In connection with software license, maintenance, and consulting agreements, entered into with certain banks and purchase agreements with vendors under which the Company acquired software technology used in products sold to its customers, the Company is required to pay royalties on sales of certain software products.  Under these arrangements, the Company recognizes royalty expense when the associated revenue is recognized.  For current product offerings, the royalty percentages generally range from 20% to 50% of the associated revenues.  Approximately $665,000 and $685,000 of royalty expense was recorded under these agreements in the three months ended October 31, 2005 and 2004, respectively, and $1.4 million of royalty expense was recorded under these agreements in the nine months ended October 31, 2005 and 2004.  Royalty expense is included as a component of the cost of consulting fees, cost of software license fees and cost of software maintenance fees in the accompanying consolidated statements of operations.

Deferred Revenue

Deferred revenue represents amounts paid by customers under terms specified in consulting, software licensing, and maintenance contracts for which completion of contractual terms or delivery of the software has not occurred.

Deferred revenue consists of the following (in thousands):

	October 31, 2005			January 31, 2005
Deferred software maintenance fees	$	20,585		$	33,850
Deferred software implementation and license fees	16,713			23,658
	37,298			57,508
Less amounts not yet collected	(20,338		)	(35,327		)
Net deferred revenue	$	16,960		$	22,181

Research and Development Costs

Research and development costs which are not subject to capitalization under Statement of Financial Accounting Standards No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS 86”), are expensed as incurred and relate mainly to the development of new products, new applications, new features or enhancements for existing products or applications.  Sustaining maintenance activities are expensed as incurred and charged to cost of revenues — software maintenance fees.

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Other income (expense)

Other income (expense) is comprised of the following (in thousands):

	Three Months Ended October 31,					Nine Months Ended October 31,
	2005		2004			2005			2004
Gain on sale of Cash Services Australia Pty. Limited	$	—	$	—		$	—		$	539
Equity in loss of Cash Services Australia Pty. Limited	—		—			—			(17		)
Minority share of net loss of Carretek LLC	269		234			799			454
Foreign exchange (losses) / gains	12		43			(89		)	(245		)
Other	2		(2		)	8			1
Total	$	283	$	275		$	718		$	732

In April 2004, the Company sold its 25% interest in Cash Services Australia Pty. Limited.  The carrying value of this investment was approximately $383,000 and the Company received $922,000 in proceeds collected in May 2004.  As a result of this transaction, the Company recorded a $539,000 gain.

The Company owns a 51% interest in Carretek LLC (“Carretek”), which offers financial institutions offshore-centric outsourcing of their business processes.  The minority interest in this loss was recorded in other income (expense) and was $269,000 and $234,000 for the three months ended October 31, 2005 and 2004, respectively, and $799,000 and $454,000 for the nine months ended October 31, 2005 and 2004.

Income Taxes

The Company accounts for income taxes using the liability method, whereby deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse.  The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize the extent to which, based on available evidence, it is more likely than not that the future tax benefits will not be realized.

Earnings Per Share

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed using the weighted average number of shares of common stock outstanding during each period and common equivalent shares consisting of stock options and unvested restricted stock (using the treasury stock method), if such stock options and unvested restricted stock have a dilutive effect.

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Stock-Based Compensation

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its employee and director stock options.  Under APB 25, if the exercise price of a stock option equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.  In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation.”  SFAS 123 allows the Company to continue to follow the present APB Opinion 25 guidelines, but requires pro-forma disclosures of net income and earnings per share as if the Company had adopted the provisions of the Statement.  In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure - an Amendment of FASB Statement No.123,” which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation.  The Company continues to account for stock-based compensation under the provisions of APB Opinion 25 using the intrinsic value method.

The stock compensation expense recorded under the intrinsic value method is primarily the result of restricted common stock issued to employees and officers.  The Company is amortizing the compensation expense on a straight line basis over the period that the restrictions on the common stock lapse.

The Company recorded $247,000 and $148,000 of compensation expense during the three months ended October 31, 2005 and 2004, respectively, and $505,000 and $324,000 during the nine months ended October 31, 2005 and 2004, respectively.  As of October 31, 2005, 754,168 unvested restricted common shares remain outstanding.

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

	Three Months Ended October 31,						Nine Months Ended October 31,
	2005			2004			2005			2004
Net income (loss), as reported	$	(950	)	$	513		$	602		$	(100	)
Stock compensation expense recorded under the intrinsic value method	247			148			505			324
Pro forma stock compensation expense computed under the fair value method	(1,097		)	(1,493		)	(2,891		)	(3,914		)
Pro forma net loss	$	(1,800	)	$	(832	)	$	(1,784	)	$	(3,690	)
Basic earnings (loss) per common share, as reported	$	(0.04	)	$	0.02		$	0.03		$	0.00
Diluted earnings (loss) per common share, as reported	$	(0.04	)	$	0.02		$	0.03		$	0.00
Pro forma basic loss per common share	$	(0.08	)	$	(0.03	)	$	(0.07	)	$	(0.15	)
Pro forma diluted loss per common share	$	(0.08	)	$	(0.03	)	$	(0.07	)	$	(0.15	)

The Company calculated the estimated fair value of each stock option using the Black-Scholes option-pricing model and utilized the following assumptions:

	Three Months Ended October 31,						Nine Months Ended October 31,
	2005			2004			2005			2004
Volatility	0.904			0.746			0.857			0.794
Weighted-average expected lives	5.000			4.500			4.300			4.500
Expected dividend yields	—			—			—			—
Weighted-average risk-free interest rates	4.00		%	4.25		%	3.94		%	3.93		%
Weighted-average fair value of options granted	$	4.63		$	5.62		$	3.93		$	5.93

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Risks and Uncertainties

The Company’s future results of operations and financial condition could be impacted by the following factors, among others: dependence on the banking industry, decline in check volumes, fluctuations in operating results, lack of long-term agreements, dependence on key personnel, rapid technological change and dependence on new products, focus on providing business process outsourcing with significant offshore component, ability to attract and retain qualified personnel, customer concentration, competition, proprietary rights, infringement claims, dependence on third parties for technology licenses, liability claims, our ability to protect our information technology infrastructure, international operations, changing government and tax regulations, stock price fluctuations, impairment of goodwill or intangible assets, realization of revenue from contracted sales, potential sales and backlog, changes in the accounting treatment of stock options and other share-based compensation and pending class action and shareholder derivative lawsuits.

Financial Guarantees

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee or indemnification.  FIN 45 also requires additional disclosure by a guarantor in its interim and annual consolidated financial statements about its obligations under certain guarantees and indemnifications.  The following is a summary of the agreements that the Company has determined are within the scope of FIN 45:

Under the terms of the majority of the Company’s software license agreements with its customers, the Company agrees that in the event the software sold infringes upon any patent, copyright, trademark, or any other proprietary right of a third party, it will indemnify its customer licensee against any loss, expense, or liability from any damages that may be awarded against its customer.  The Company includes this infringement indemnification in most of its software license agreements.  In the event the customer cannot use the software or service due to infringement and the Company cannot obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it no longer infringes, then the Company may generally terminate the license and provide the customer a pro-rata refund of the fees paid by the customer for the infringing license or service.  The Company has recorded no liability associated with this indemnification, as it is not aware of any pending or threatened infringement actions that are probable losses.  The Company believes the estimated fair value of these intellectual property indemnification clauses is minimal.

The Company has agreed to indemnify members of the board of directors, officers and certain key employees of the Company if they are made a party or are threatened to be made a party to any proceeding by reason of the fact that they are acting in their capacities on behalf of the Company, or by reason of anything done or not done by them in any such capacities.  The indemnity is for any and all expenses and liabilities of any type whatsoever (including but not limited to, judgments, fines and amounts paid in settlement) actually and reasonably incurred by the directors, officers and key employees in connection with the investigation, defense, settlement or appeal of such proceeding, provided they acted in good faith.  The Company maintains insurance coverage for directors and officers liability (“D&O insurance”).  No maximum liability is stipulated in these agreements that include indemnifications of members of the board of directors, officers and certain key employees of the Company.  The Company has recorded no liability associated with these indemnifications as it is not aware of any pending or threatened actions or claims against the members of its board of directors or officers that are probable losses in excess of amounts covered by its D&O insurance.  As a result of the insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

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Recently Issued Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123.  SFAS No. 123 (R) supersedes APB No. 25, and amends SFAS No. 95, “Statement of Cash Flows.”  Generally, the approach in SFAS No. 123 (R) is similar to the approach described in SFAS No. 123.  However, SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values.  Pro forma disclosure is no longer an alternative.  The Company expects to adopt SFAS No. 123 (R) in the first quarter of fiscal 2006.  SFAS No. 123 (R) permits companies to adopt its requirements using one of two methods:

•A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123 (R) that remain unvested on the effective date.

•A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company expects to implement the modified prospective method as described above.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the APB No. 25 intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options.  Accordingly, the adoption of SFAS No. 123 (R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position and cash flows.  Had we adopted SFAS No. 123 (R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share contained in Note 2 above under the caption Stock Based Compensation.  Statement No. 123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow.  This requirement currently does not have an effect on the Company as all of our deferred tax benefits are fully reserved with a valuation allowance.

As of October 31, 2005, the expense related to unvested options granted to date is as follows for the indicated fiscal years ending January 31, (in thousands):

Year	Amount
2007	$	2,138
2008	999
2009	404
2010	85

The Company is considering accelerating the vesting of a portion of the outstanding options in the year ending January 31, 2006 to reduce the stock option related expense in future years.

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3.Goodwill and Intangible Assets

Goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests.  Other intangible assets, which include acquired developed technology and customer relationships, are amortized over their estimated useful lives.

Customer relationships with finite useful lives are amortized on a straight-line basis, which resulted in amortization expense of $350,000 during the three months ended October 31, 2005 and 2004 and $1.1 million during the nine months ended October 31, 2005 and 2004.

The following table sets forth the estimated amortization expense of customer relationships for the indicated fiscal years ending January 31 (in thousands):

Year	Amount
Remainder of 2006	$	350
2007	1,400
2008	467

4.Revolving Credit Agreement

The Company is a party to a revolving credit agreement with a group of banks providing for a commitment amount of $30.0 million and a maturity date of July 31, 2006.  The Company did not have any borrowings outstanding under the revolving credit agreement at October 31, 2005.  Borrowings under the credit agreement currently bear interest equal to either the greater of prime or federal funds rate plus a margin ranging from 1.25% to 2.25% depending on the Company’s ratio of funded debt to Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), or LIBOR plus a margin equal to 2.75% to 3.75% depending on the Company’s ratio of funded debt to EBITDA.  Interest payments are due quarterly.  The Company is required to pay an annual commitment fee equal to 0.50% on the unused amount of the revolving credit agreement.  The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified interest coverage, ratio of EBITDA to funded debt, and ratio of 80% of accounts receivable, cash and short term investments to funded debt.  Additionally, the payment of dividends is precluded except upon approval of the banks.  Substantially all of the Company’s assets collateralize the revolving credit agreement.  As of October 31, 2005, the Company is in compliance with the covenants of the revolving credit agreement.

Interest expense, including the commitment fee and exclusive of the amortization of deferred loan costs on the credit agreement was $54,000 and $38,000 for the three months ended October 31, 2005 and 2004, respectively, and $130,000 and $132,000 for the nine months ended October 31, 2005 and 2004.

5.Provision for Income Taxes

The Company has established a valuation allowance to reserve its net deferred tax assets at October 31, 2005 because the more likely than not criteria for future realization of the Company’s net deferred tax assets specified in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”) were not met.

The foreign tax provision was $102,000 and $114,000 for the three months ended October 31, 2005 and 2004, respectively, and $270,000 and $464,000 for the nine months ended October 31, 2005 and 2004.  Additionally, the Company recorded $15,000 of U.S. Federal and State tax expense in the nine months ended October 31, 2005 for alternative minimum tax purposes due to the availability of net operating losses from prior years.  No U.S. Federal tax benefit was recorded during the three months ended October 31, 2005 or during the nine months ended October 31, 2004 due to the uncertainty regarding the Company’s ability to generate taxable income, and resulting uncertainty relative to the recoverability of deferred tax assets.

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6.Benefit Plans

401(k) Plan

The Company has adopted a plan pursuant to Section 401(k) of the Internal Revenue Code (“the Code”) whereby participants may contribute a percentage of compensation not in excess of the maximum allowed under the Code. The plan provides for a matching contribution by the Company which was reinstated as of January 31, 2004.  Employer matching contributions amounted to $215,000 and $102,000 for the three months ended October 31, 2005 and 2004, respectively, and $820,000 and $431,000 for the nine months ended October 31, 2005 and 2004. The Company may make additional contributions at the discretion of the Board of Directors.  No discretionary contributions were made during the three and nine months ended October 31, 2005 and 2004.

Incentive Compensation Plans

The Carreker Incentive Bonus Plan (“CIBP”) awards employees bonuses based on the Company’s or the applicable business unit’s operating results.  Substantially all employees are eligible to receive cash awards under the CIBP.  Awards from this plan are paid to employees subsequent to the end of the fiscal year.  The Company’s Compensation Committee of the Board of Directors has the authority to determine the final amount of the bonus that is ultimately paid to the officers of the Company.  In the three months ended October 31, 2005 and 2004, the Company recorded expense under this plan of approximately $364,000 and $484,000, respectively.  In the nine months ended October 31, 2005 and 2004, the Company recorded expense under this plan of approximately $627,000 and $1.0 million, respectively.

The Company pays discretionary bonuses to key employees based primarily on the extent to which individuals meet agreed-upon objectives for the year. The Company recorded discretionary bonus expense of approximately $67,000 and $703,000 for the three months ended October 31, 2005 and 2004, respectively, and $791,000 and $1.1 million for the nine months ended October 31, 2005 and 2004.

7.Earnings Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):

	Three Months Ended October 31,					Nine Months Ended October 31,
	2005			2004		2005		2004
Basic earnings (loss) per share:
Net income (loss)	$	(950	)	$	513	$	602	$	(100	)
Weighted average shares outstanding	23,906			24,821		24,152		24,623
Basic earnings (loss) per share	$	(0.04	)	$	0.02	$	0.03	$	0.00
Diluted earnings (loss) per share:
Net income (loss)	$	(950	)	$	513	$	602	$	(100	)
Weighted average shares outstanding	23,906			24,821		24,152		24,623
Assumed conversion of employee stock options and unvested restricted stock	—			768		401		—
Shares used in diluted earnings per share calculation	23,906			25,589		24,553		24,623
Diluted earnings (loss) per share	$	(0.04	)	$	0.02	$	0.03	$	0.00

Options for 3,870,944 shares and 1,955,533 shares for the three months ended October 31, 2005 and 2004, respectively, and 2,608,263 shares and 4,234,319 shares for the nine months ended October 31, 2005 and 2004, respectively, have been excluded from the diluted earnings per share computation as the options were anti-dilutive.

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8.Contingencies

On June 15, 2004, by mutual agreement between the parties, Smith v. Carreker Corporation, et. al, Civil Action No. 303CV1211-M was reinstated in the United States District Court for the Northern District of Texas, Dallas Division. This action was originally filed on May 29, 2003, in the United States District Court for the Northern District of Texas, Dallas Division as Civil Action no. 303CV1211-D. On January 15, 2004, the Court, acting upon the joint motion of the parties, dismissed the action without prejudice. This action was brought as a shareholders’ derivative action pursuant to Rule 23.1, Fed.R.Civ.P. for the benefit of Nominal Defendant Carreker Corporation against certain of its current and former officers and directors, i.e., John D. Carreker, Jr., James D. Carreker, Richard R. Lee, Jr., James L. Fischer, Donald L. House, David K. Sias, Terry L. Gage, James R. Erwin, Ronald G. Steinhart and Ronald Antinori, seeking to remedy their individual breaches of fiduciary duty, including their knowing violations of Generally Accepted Accounting Principles (“GAAP”), knowing violations of federal and state securities laws, acts of bad faith and other breaches of fiduciary duty. The plaintiff seeks redress (the form of which includes, among others, unspecified amounts of compensatory damages, interest and costs, including legal fees) for injuries to the Company and its shareholders caused by Defendants’ misfeasance and/or malfeasance during the period from May 20, 1998 through December 10, 2002.  The Company has filed a motion to dismiss and is awaiting a ruling from the judge.

On April 16, 2003 the United States District Court for the Northern District of Texas, Dallas Division, issued an order consolidating a number of purported class action lawsuits into a Consolidated Action styled In re Carreker Corporation Securities Litigation, Civil Action No. 303CV0250-M. On October 14, 2003 the plaintiffs filed their Consolidated Class Action Complaint. The complaint, filed on behalf of purchasers of the Company’s common stock between May 20, 1998 and December 10, 2002, inclusive, alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants (the Company, John D. Carreker Jr., Ronald Antinori, Terry L. Gage and Ernst & Young, the Company’s auditors), violations of Section 20(a) of the Exchange Act against the individual defendants, and violation of Section 20A of the Securities Exchange Act against defendants John D. Carreker, Jr. and Ronald Antinori.  The complaint also alleges, among other things, that defendants artificially inflated the value of Carreker stock by knowingly or recklessly misrepresenting the Company’s financial results during the purported class period.  On March 22, 2005 the Court dismissed the action without prejudice and allowed the plaintiffs 60 days in which to file an amended complaint. Also the Court dismissed, with prejudice, all claims by shareholders relating to periods prior to July 31, 1999.

On May 31, 2005, the plaintiffs filed an Amended Consolidated Class Action Complaint on behalf of purchasers of the Company’s common stock between July 30, 1999 and December 10, 2002, inclusive, which reiterates the allegations in the first complaint, and alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants (the Company, John D. Carreker Jr., Ronald Antinori and Terry L. Gage) except Ernst & Young LLP, violations of Section 20(a) of the Exchange Act against the individual defendants, and violations of Section 20A of the Securities Exchange Act against defendants John D. Carreker, Jr. and Ronald Antinori.  The plaintiffs are seeking unspecified amounts of compensatory damages, interest and costs, including legal fees.

On July 29, 2005, the Company filed a motion to dismiss the Amended Consolidated Class Action Complaint, primarily based on various provisions of the Private Securities Litigation Reform Act of 1995.  The court has not yet ruled on this motion.

The parties conducted a mediation on November 23, 2005 for both the shareholder’s derivative action and the shareholder class action.  Although the mediation session did not result in a settlement, the parties have agreed to continue settlement discussions and have asked the court to postpone a ruling on the motion to dismiss the shareholder class action until January 15, 2006.

The Company and individual defendants deny the allegations in these complaints and intend to defend themselves vigorously.  It is not possible at this time to predict whether the Company will incur any liability or to estimate the damages, or the range of damages, if any, that the Company might incur in connection with these lawsuits.  The ultimate resolution of these lawsuits could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

The Company is periodically involved in various other legal actions and claims which arise in the normal course of business.  In the opinion of management, the final disposition of these matters is not expected to have a material adverse effect on the Company’s financial position or results of operations.

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9.Business Segments and Revenue Concentration

The tables below show revenues and income (loss) from operations for the periods indicated for our three reportable business segments: Revenue Enhancement, Global Payments Technologies and Global Payments Consulting.  Our customer projects are sold on a solution basis, so it is necessary to break them down by segment and allocate accordingly.  Included in “Corporate Unallocated” are costs related to selling and marketing and unallocated corporate overhead expense.  Business segment results, which include costs for research and development as well as product royalty expense, the amortization and impairment of goodwill and intangible assets, the write-off of capitalized software costs and restructuring and other charges, were as follows (in thousands):

	Three Months ended October 31, 2005
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting	$	6,371	$	—	$	349		$	—		$	6,720
Software license	235		5,056		31			—			5,322
Software maintenance	286		10,325		211			—			10,822
Software implementation and other services	811		3,370		404			—			4,585
Outsourcing services	—		—		—			220			220
Out-of-pocket expense reimbursements	326		297		78			—			701
Total revenues	$	8,029	$	19,048	$	1,073		$	220		$	28,370
Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	2,197	$	3,514	$	(208	)	$	(5,567	)	$	(64	)
Amortization of customer relationships	—		350		—			—			350
Restructuring and other charges	—		752		—			28			780
Income (loss) from operations	$	2,197	$	2,412	$	(208	)	$	(5,595	)	$	(1,194	)

	Three Months ended October 31, 2004
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting	$	7,141	$	—	$	789		$	—		$	7,930
Software license	25		5,676		—			—			5,701
Software maintenance	371		10,956		164			—			11,491
Software implementation and other services	161		4,393		68			—			4,622
Outsourcing services	—		—		—			50			50
Out-of-pocket expense reimbursements	289		369		155			—			813
Total revenues	$	7,987	$	21,394	$	1,176		$	50		$	30,607
Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	3,350	$	4,754	$	(588	)	$	(6,534	)	$	982
Amortization of customer relationships	—		350		—			—			350
Restructuring and other charges (credits)	—		—		199			67			266
Income (loss) from operations	$	3,350	$	4,404	$	(787	)	$	(6,601	)	$	366

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	Nine Months ended October 31, 2005
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting	$	22,925	$	53	$	1,562		$	—		$	24,540
Software license	788		11,528		147			—			12,463
Software maintenance	551		31,506		653			—			32,710
Software implementation and other services	2,463		10,442		706			—			13,611
Outsourcing services	—		—		—			718			718
Out-of-pocket expense reimbursements	1,198		968		280			—			2,446
Total revenues	$	27,925	$	54,497	$	3,348		$	718		$	86,488
Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	11,605	$	8,131	$	(524	)	$	(17,251	)	$	1,961
Amortization of customer relationships	—		1,050		—			—			1,050
Restructuring and other charges (credits)	—		906		(24		)	21			903
Income (loss) from operations	$	11,605	$	6,175	$	(500	)	$	(17,272	)	$	8

	Nine Months ended October 31, 2004
	Revenue Enhancement		Global Payments Technologies			Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting	$	24,979	$	350		$	2,172		$	—		$	27,501
Software license	217		15,884			33			—			16,134
Software maintenance	755		31,426			626			—			32,807
Software implementation and other services	476		10,234			433			—			11,143
Outsourcing services	—		—			—			60			60
Out-of-pocket expense reimbursements	1,083		936			346			—			2,365
Total revenues	$	27,510	$	58,830		$	3,610		$	60		$	90,010
Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	12,959	$	12,302		$	(1,417	)	$	(20,055	)	$	3,789
Amortization of customer relationships	—		1,050			—			—			1,050
Restructuring and other charges (credits)	1,747		(639		)	199			1,671			2,978
Income (loss) from operations	$	11,212	$	11,891		$	(1,616	)	$	(21,726	)	$	(239	)

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During the three months ended July 31, 2003, the Company formed Carretek LLC (“Carretek”), in which the Company owns a 51% interest, to offer financial institutions offshore-centric outsourcing of their business processes.  During July 2004, Carretek signed its first contract to perform outsourced services with a customer.  As this outsourcing business continues to be in the development phase and its operations are immaterial, the financial results for the three and nine months ended October 31, 2005 and 2004 are contained in the Corporate-Unallocated business segment in the tables above.

For the three months ended October 31, 2005 and October 31, 2004, Carretek recorded revenue of $220,000 and $50,000, respectively, and recorded expense of $769,000 and $530,000, respectively.  For the nine months ended October 31, 2005 and October 31, 2004, Carretek recorded revenue of $718,000 and $60,000, respectively, and recorded expense of $2.3 million and $986,000, respectively.  Accordingly, the 49% share relating to the minority interest in these losses, which was $269,000 and $234,000 for the three months ended October 31, 2005 and 2004, respectively, and $799,000 and $454,000 for the nine months ended October 31, 2005 and 2004, respectively, was recorded in other income in the accompanying consolidated statements of operations.  The Company and its partner have funded Carretek to date in the aggregate amount of $4.0 million of equity.

The following table summarizes revenues, exclusive of out-of-pocket expense reimbursements, derived from the Company’s largest customer and top five customers during the periods indicated.

	Three Months Ended October 31,				Nine Months Ended October 31,
	2005		2004		2005		2004
Single customer	13.0	%	19.3	%	12.4	%	13.1	%
Top five customers	41.3	%	40.7	%	35.1	%	32.6	%

Wells Fargo was the Company’s largest customer in each of the periods presented.

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The Company markets its solutions in several foreign countries.  Revenues, exclusive of out-of-pocket expense reimbursements, for the periods indicated is attributed to countries based on the location of the customers, and were as follows (in thousands):

	Three Months Ended October 31, 2005				Three Months Ended October 31, 2004
	Amount		Percent of total revenues		Amount		Percent of total revenues
United States	$	19,993	72	%	$	24,712	83	%
Europe	3,646		13		1,966		7
Canada	1,800		7		1,348		4
Asia Pacific	1,428		5		946		3
South Africa	142		1		631		2
Other	660		2		191		1
Total revenues	$	27,669	100	%	$	29,794	100	%

	Nine Months Ended October 31, 2005				Nine Months Ended October 31, 2004
	Amount		Percent of total revenues		Amount		Percent of total revenues
United States	$	60,838	72	%	$	67,916	78	%
Europe	7,113		9		6,511		7
Canada	5,223		6		4,690		5
Asia Pacific	4,227		5		3,261		4
South Africa	4,563		6		4,628		5
Other	2,078		2		639		1
Total revenues	$	84,042	100	%	$	87,645	100	%

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10.Restructuring and Other Charges

The Company recorded various restructuring and other charges and (credits) during the nine months ended October 31, 2005 and 2004, respectively, as follows (in thousands):

	Workforce Reductions		EPG Litigation Settlement		Legal and Professional Fees		Other			Total
YTD 2004:
Quarterly period ended April 30, 2004	308		1,686		521		—			2,515
Quarterly period ended July 31, 2004	192		14		1,206		(1,215		)	197
Quarterly period ended October 31, 2004	246		—		20		—			266
Total YTD 2004	$	746	$	1,700	$	1,747	$	(1,215	)	$	2,978
YTD 2005:
Quarterly period ended April 30, 2005	127		—		—		(32		)	95
Quarterly period ended July 31, 2005	28		—		—		—			28
Quarterly period ended October 31, 2005	780		—		—		—			780
Total YTD 2005	$	935	$	—	$	—	$	(32	)	903

Quarter Ended April 30, 2004

The Company recorded $308,000 in restructuring and other charges during the three month period ended April 30, 2004, principally associated with the separation of 10 employees.  The Company expensed $1.686 million for compensatory damages to EPG after the jury returned a verdict in favor of EPG on one claim and Carreker on three claims.  This litigation ultimately settled in June 2004 for $1.7 million.  The Company recorded a charge of $521,000 relating to legal and professional fees relating to these legal actions.

Quarter Ended July 31, 2004

The Company recorded $192,000 in restructuring and other charges during the three month period ended July 31, 2004, principally associated with the separation of 8 employees.  During the quarter ended July 31, 2004, the Company recorded a charge of $36,000 relating to legal and professional fees relating to the Company’s shareholder legal actions described in Note 8.

On July 8, 2004, the Company settled with EPG for $1.7 million.  An additional $14,000 was expensed and the settlement paid to the plaintiff.  Additionally, the Company recorded a charge for the litigation costs related to this legal action totaling $1.2 million.

Finally, the Company received a final payment of $455,000 from a customer in the final settlement with one of its original CheckFlow Suite customers.  This payment was recorded directly to this reserve.  Concurrently, based on revised cost estimates, the Company lowered its estimate of the cost to develop and install any additional software, or software modifications, with these customers and reversed approximately $1.2 million of this reserve.

Quarter Ended October 31, 2004

The Company recorded $246,000 in restructuring and other charges during the three month period ended October 31, 2004, principally associated with the separation of 6 employees.  During the quarter ended October 31, 2004, the Company recorded a charge of $20,000 relating to legal and professional fees relating to the Company’s shareholder and other legal actions described in Note 8.

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Quarter Ended April 30, 2005

The Company recorded $127,000 in restructuring and other charges during the three month period ended April 30, 2005, principally associated with the separation of 6 employees.  The Company also lowered its estimate by $32,000 for the costs associated with the discontinuance of one of its software offerings originally recorded in January 2004.

Quarter Ended July 31, 2005

The Company recorded $28,000 in restructuring and other charges during the three month period ended July 31, 2005, principally associated with the separation of 2 employees.

Quarter Ended October 31, 2005

The Company recorded $780,000 in restructuring and other charges during the three month period ended October 31, 2005, principally associated with the separation of 29 employees primarily within the GPT business segment.

The activity related to the accrued merger and restructuring costs during the nine months ended October 31, 2005 is as follows (in thousands):

	Workforce Reductions			Charges relating to CheckFlow Suite		Facility Closures			Other			Total
Balance at January 31, 2005	$	652		$	200	$	49		$	103		$	1,004
Additions to reserve balance:
Severance charges	127			—		—			—			127
Reductions to reserve balances:
Cash paid	(494		)	—		(44		)	—			(538		)
Change in estimate	—			—		—			(32		)	(32		)
Balance at April 30, 2005	$	285		$	200	$	5		$	71		$	561
Additions to reserve balance:
Severance charges	28			—		—			—			28
Reductions to reserve balances:
Cash paid	(285		)	—		(5		)	(24		)	(314		)
Balance at July 31, 2005	$	28		$	200	$	—		$	47		$	275
Additions to reserve balance:
Severance charges	780			—		—			—			780
Reductions to reserve balances:
Cash paid	(426		)	—		—			—			(426		)
Balance at October 31, 2005	$	382		$	200	$	—		$	47		$	629

The Company anticipates the remaining reserve accruals at October 31, 2005 will be paid or remaining customer obligations completed within the next 9 months.

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

All statements other than statements of historical fact contained in this report, including statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” concerning our financial position and liquidity, results of operations, prospects for future growth, and other matters, are forward-looking statements.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct.  Factors that could cause our results to differ materially from the results discussed in, or contemplated by, such forward-looking statements include the risks described under “Business – Forward Looking Statements and Risk Factors” contained in our Form 10-K for the year ended January 31, 2005, as filed with the Securities and Exchange Commission (“SEC”).  Such risks include, without limitation: dependence on the banking industry, decline in check volumes, fluctuations in operating results, lack of long-term agreements, dependence on key personnel, product liability, rapid technological change and dependence on new products, focus on providing business process outsourcing with significant offshore components, ability to attract and retain qualified personnel, customer concentration, competition, proprietary rights, infringement claims, dependence on third parties for technology licenses, liability claims, our ability to protect our information technology infrastructure, international operations, changing government and tax regulations, stock price fluctuations, impairment of goodwill or intangible assets, realization of revenue from contracted sales, potential sales and backlog, changes in accounting treatment of share-based compensation and the resolution of pending class action and shareholder derivative lawsuits.  All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in this paragraph, in the “risk factors” included in our SEC filings and elsewhere in this report.

Overview

For the last 27 years Carreker Corporation has designed, developed, sold and delivered payments-related software and consulting solutions to financial institutions and financial service providers.  Our products and services address a broad spectrum of payment activities and are designed to help our clients enhance the performance of their payments businesses; improve operational efficiency in payments processing; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; facilitate compliance with risk-related laws and regulations; and/or maximize clients’ customer income streams by aligning their customer interactions and products with customer needs.  Carreker employed a total of 501 employees at October 31, 2005.

We are organized into three primary operating divisions: Global Payments Technologies (“GPT”), Revenue Enhancement (“RevE”) and Global Payments Consulting (“GPC”).  These operating divisions are operated in distinct yet synergistic ways to bring value to our clients.  In addition we have established a majority-owned subsidiary named Carretek LLC to address the payments outsourcing arena.

Global Payments Technologies.  This division is responsible for design, development, sales, and support of our technology solutions.   Revenue is primarily derived from license fees, implementation fees and maintenance fees.  As of October 31, 2005, GPT had 287 employees.

Revenue Enhancement.  This highly specialized practice group provides consulting and software solutions focused on increasing clients’ revenue streams.  Areas of expertise include fee income, market segmentation, management of customer price structures, account retention, acquisitions and profitability.  A majority of the revenue generated by this division is through benefit-sharing agreements with our customers, recorded as consulting revenue along with license fees, maintenance fees and implementation fees from our CVE software offering.  As of October 31, 2005, RevE had 87 employees.

Global Payments Consulting.  The objective of this professional services division is to provide our clients with “applied thought leadership” related to the business of payments.  Revenue in the GPC division is primarily derived through the delivery of consulting services offered primarily on a time and materials basis to our clients, along with the license fees, maintenance fees and services fees associated with our Float Pricing System software offering and Payments Clearing Model product offering.  As of October 31, 2005, GPC had 24 employees.

In addition to these three divisions, in fiscal 2003 we formed Carretek LLC.  Carretek is a transformational business outsourcer for payment and transaction processing jointly owned by Carreker Corporation and Majesco Software, Inc., the U.S. subsidiary of Mastek Limited, a leading Indian outsourcing company with global operations.  As of October 31, 2005, Carretek had 3 U.S. based employees and 109 offshore personnel of Mastek Limited which perform services for Carretek on a contract basis.

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Cost of Revenues and Gross Margins.  We strive to control our cost of revenues and thereby maintain or improve our gross margins.  The major items impacting cost of consulting, cost of software maintenance and cost of software implementation are personnel, overhead and related expenses.  The major items impacting cost of software licenses are amortization of both capitalized and acquired software and also software royalties for software from third parties.  While the amortization expense is relatively fixed, the third party royalty expense can vary significantly based on the relative product mix.

Operating Expenses.  Operating expenses, including selling, general and administrative and research and development, are substantially driven by personnel and overhead expenses.  Other significant operating expenses that we monitor include professional fees, use of contractors, travel, insurance and office services expenses.  Additionally in the first two quarters of fiscal 2004, the settlement of the EPG legal action along with associated legal fees was recorded on the Restructuring and Other Charges financial statement caption on the Consolidated Statement of Operations.  As of October 31, 2005, the Corporate Sales and Marketing staff had 20 employees and the Corporate staff which includes Executive Management, Legal, Finance and Accounting, Human Resources, Facilities and IT had 80 employees.

Liquidity and Cash Flows.  Cash and cash equivalents at October 31, 2005 and January 31, 2005 totaled $24.2 million and $34.5 million, respectively.  In addition to our growth in accounts receivable, our primary utilization of cash in fiscal 2005 was to invest in $4.5 million of marketable debt securities and $3.2 million of treasury stock purchases.

Products and Services

The products and services of our three primary operating divisions are described below in this sequence: Global Payments Technologies (“GPT”), Revenue Enhancement (“RevE”) and Global Payments Consulting (“GPC”)

Global Payments Technologies Solutions.  Carreker’s technology solutions help financial institutions address the needs of some critical payment services and delivery functions that impact overall operating revenues and costs and risk management.  These functions include presentment of checks in paper and electronic form, identification and mitigation of fraudulent payments, handling irregular items such as checks returned unpaid (exceptions), maintaining a record of past transactions (archiving), responding to related customer inquiries (research), and correcting any errors that are discovered (adjustments).  Global Payments Technologies (“GPT”) solutions address these and other key functions in the context of improving operational efficiency and a gradual transition from paper to electronic-based payment systems.  In addition, we offer technology solutions that optimize the inventory management of a bank’s cash stock levels and logistical service requirements, including managing how much is needed, when it is needed and where it is needed.  Our solutions reduce the amount of cash banks need to hold in reserve accounts and as cash-on-hand while ensuring a high level of customer service through timely replenishment of ATM cash supplies at minimal logistical services cost.

Specific solutions in the GPT group include:

Solution	Description	Products Offered
Risk Solutions:
Fraud Mitigation and Anti-Money Laundering Compliance	Automated fraud detection and prevention solutions that reduce incidents of check fraud, deposit fraud, check kiting, and electronic fraud. Anti-money laundering solutions screen names and related data against industry blacklists, local high-risk lists and other customized databases. The solution automatically alerts appropriate bank personnel for timely and decisive action and reporting. Scalable solutions are offered for community banks.	FraudLink On-Us, FraudLink Deposit, FraudLink Deposit – Branch Access Option, Kite, FraudLink Positive Pay, FraudLink eTracker, FraudLink ACHeCK, FraudLink PC, CORE Workflow Manager, CORE AML Filter, eFraudLink.com, Fraud Solutions Consulting
Payment Solutions:
Exception Management	Products that bring new efficiencies to back-office operations through leading-edge image, workflow, and RECO (character recognition) technologies.	Adjustments/Express, Exceptions/Express, Express Capture, Express Decision, Input/Express, Inbound Returns/Express, and All Transactions File

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Solution	Description	Products Offered
Remittance and Payments Processing	Both host and client/server-based platforms for improved productivity in processing retail and wholesale remittance transactions for financial institutions and payments processing for a wide variety of cross-industry applications.	NeXGen Remittance
Conventional Check Capture	An extensive array of enhancement products that add flexibility and usability to IBM’s Check Processing Control System (CPCS) and the IBM 3890/XP series of Document Processors.	Conventional Capture Products, CPCS Enhancements Products, XP/Productivity Tools, Platform Emulation, NeXGen Settlement, NeXGen Balancing, and LTA (Large Table Access)
Check Image Capture	Products and services related to the centralized and distributed capture, quality and inspection assurance, storage and delivery of check images.	ALS & CIMS Products (MVS, AIX, Windows), NeXGen Image Processor, Image Enhancement Products, Reject Repair, RECO Technology, Image POD, Image Delivery Products, Delivery Express QAS Image Inspector, NeXGen Capture, Source Capture Corporate and Source Capture Branch
Check Image Archive Management	Comprehensive array of check image archive management products that may be tailored to a bank’s unique requirements based on their operational environments and volumes. Carreker offers archive technology for both in-house solutions and shared outsource providers.	Check Image Archive-AIX, Check Image Archive-MVS, Check Image Archive Load
Other Check Image Applications	An array of solutions that address revenue enhancement, risk reduction, and expense reduction issues through the application of image, workflow and RECO technologies.	Image Statements, CDRom Delivery, Input/Express, Express Capture, Payee Name Verification, and Amount Encoding Verification
Global Tracking	A complete bar code tracking system eliminates manual log sheets, automates data gathering and maximizes workflow by tracking accountable mail, branch bags, item volumes, currency bags, incoming domestic and international deposits, outgoing cash letters, exceptions and much more.	Receive Sentry
eMetrics	Performance-measurement software suite that uses historical data to generate key performance indicators, item processing volume data, productivity statistics and quality control benchmarks.	Lumen, ProModel, eiMICR, eiStats, eiQuality, eiPerform
Electronic Check Presentment and Image Exchange	Enables banks to transition from paper-based to electronic payment systems by automating key elements of the processing stream, creation of image replacement documents (“IRD”) and image quality and usability checking. Aided by Check 21 legislation, these solutions are designed to reduce and eventually eliminate the movement of paper payments through the system, improving productivity, reducing errors, increasing customer satisfaction and reducing fraud.	ExchgLink , IRD Create, IRD Author, Image Inspector, CheckLink, CheckLink PC, Deposit Manager, Branch Truncation Manager and Cnotes

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Solution	Description	Products Offered
Cash & Cash Logistic Solutions:
ATM Solutions	Advanced ATM monitoring and management, improving ATM availability and ensuring service levels are met. These solutions include an automated ATM monitoring and dispatching system for maximizing network availability; and a real-time Internet-based system for efficient handling of ATM service requests and responses.	eiManager, eiGateway
Cash Solutions	A product suite, now optimized through Web-based software solutions, that dramatically reduces the amount of cash banks, financial institutions and companies need to hold as cash-on-hand throughout vault, branch and ATM networks. These solutions also enable automation and standardization of the cash ordering process and optimization of transportation. Consulting solutions can drive further efficiency and automation in vault, branch and ATM operations.	iCom, ReserveLink, ReserveLink Plus, Cash Supply Chain Consulting

Revenue Enhancement.  The Revenue Enhancement division includes two business units:  RevE and Customer Value Enhancement (“CVE”). RevE is a highly specialized division that provides consulting services focused on tactical methods of increasing banks’ fee income. The scope and depth of this practice has expanded throughout its 14 year history and now includes retail, small business, and commercial deposits, treasury management, consumer and commercial lending, credit card lending and trust and investment services. Our solutions involve developing strategies that enable our clients to take advantage of electronification trends, often gaining first mover advantages for our clients. In addition to developing strategies, our business model ensures that we continue to translate those strategies into tactical implementations with measurable revenue streams. Our client base has continued to expand with very high penetration rates in the markets in which we operate. Thus, we have experienced a trend of becoming longer term strategic partners with our clients.

Another component of our Revenue Enhancement offering is our CVE solutions that includes EnAct software, proprietary sales management methodologies and sales training programs. Our CVE solutions assist financial institutions in leveraging central intelligence with local insight, translating strategy into specific actions to achieve sustained organizational performance. This enables our clients to improve their identification of those customers and prospects representing the greatest value or potential, while aligning internal processes and behaviors with management’s focus. Our approach is unique and complementary to many CRM investments that banks have made in recent years and is designed to focus their activities such that they can attain increased returns on these CRM investments.

Global Payments Consulting.  Our Global Payments Consulting (“GPC”) division helps financial institutions proactively plan, prepare and optimize for the regulatory, competitive and technological impacts affecting the financial payments environment.  The division provides strategic planning, program management, specialized tools, business applications and implementation advisory services for financial institutions and specialized payments clients.  The focus areas for these services include:

•Enterprise payment rationalization (strategy through performance optimization)

•Payment research services

•Predictive financial and operational modeling of the implications of payment trends and strategies

•Transaction clearing optimization solutions (transportation, float, clearing form, clearing partners and funds availability optimization)

•Electronic payment infrastructure planning (image enablement through converged payment environments)

•Consolidation and merger/integration planning

•Enterprise Risk support for payments related functions

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The GPC division also contains the license, maintenance and services revenue for two product areas:

•Float Management software products – Float Analysis System and Float Management System - for managing a bank’s float through float analysis and pricing to improve profitability, reporting, workflow and check clearing operations.  These products also provide critical activity summaries, aid in creating multiple availability and pricing schedules, and pinpoint the cost/profitability of transactions or relationships.

•Payments Clearing Modeling product – Payments Financial Modeling application that allows a bank to create an enterprise virtual profit and loss statement for the payments business as well as model business scenarios around product and service pricing and transactional volume trends.

Outsourcing.  Carretek LLC is a transformational business outsourcer for payment and transaction processing jointly owned by Carreker Corporation (51%) and Majesco Software Inc. (49%), the U.S. subsidiary of Mastek Limited, a leading Indian outsourcing company with global operations.  Carretek was formed in fiscal 2003.  While the venture has signed its first client, it is still in the developmental phase and its results are contained in the Corporate-Unallocated business segment.

Carretek’s mission is to enable financial institutions and their processors to realize the benefits of transformational offshore-centric outsourcing (“offshoring”) of their business processes.  The benefits to clients could include reduction in operating costs, improvements in productivity, and enhancement of quality.

Initially, Carretek is focused on offshoring payments-related business processes.  Through Carretek, financial institutions can leverage the global work force at this critical period when Check 21 and other payment electronification trends are pressuring financial institutions to reduce their payment per item costs beyond the power of traditional cost management practices.  Carretek has designed and built specific product offerings targeted at payment and transaction processing functions for this express purpose.  Within this area of expertise, the Carretek offering includes a flexible array of offshore outsourcing services to financial institutions.

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Executive Summary

Comparison of Three Months Ended October 31, 2005 (“Q3 2005”) to Three Months Ended October 31, 2004 (“Q3 2004”) and Nine Months Ended October 31, 2005 (“YTD 2005”) to Nine Months Ended October 31, 2004 (“YTD 2004”)

In Q3 2005, we generated revenue of $28.4 million and a net loss of $950,000.  These results compare to revenue of $30.6 million and net income of $513,000 in Q3 2004.  In YTD 2005, we generated revenue of $86.5 million and net income of $602,000.  These results compare to revenue of $90.0 million and a net loss of $100,000 in YTD 2004.

Our revenue decline is primarily associated with our GPT business segment.  Revenue within this segment declined $2.3 million or 11.0% on a quarterly basis and $4.3 million or 7.4% on a YTD basis.  The decline is primarily in software license revenue within the Payments group.  The Payments group includes such products as Image Archive and Exception Management Applications as well as Source Capture, ExchgLink and Image replacement document solutions.  The decline, especially on a quarterly basis, was primarily the result of our two initial ExchgLink engagements reaching acceptance by our customers in Q3 2004 and $1.6 million of software and $826,000 of previously deferred services being recognized.  Additionally, in YTD 2004, the Payments group of GPT derived $3.4 million from a software license sale to a single customer of our legacy Check Image Archive product, while YTD 2005 periods did not include any large single sales of this magnitude.  The GPT revenue trend was positive in Q3 2005, as compared to Q2 2005, as GPT revenue increased $1.6 million or 9%.

Our margins within our RevE business segment have decreased as our traditional, high-margin RevE consulting revenues have declined 10.8% on a quarterly basis and 8.2% on a YTD basis.  While RevE consulting revenues have declined, this decline has been completely offset by growth in lower margin Customer Value Enhancement (“CVE”) software and services revenue.

We continue to focus on increasing research and development to enhance our existing product offerings, and more importantly, develop new product offerings, particularly within GPT.  The reductions within selling, general and administrative were primarily related to cost savings from reductions in personnel in our corporate sales function, D&O insurance costs, our new health care plan and provider, and reductions within office services and facilities.  These reductions have been partially offset by increased contract labor and professional fees associated with our ERP system upgrade and business process reengineering project, which began in Q1 2005.

In Q3 2005, we recorded a $780,000 restructuring charge associated with the severance and other personnel costs for 29 employees terminated on August 31, 2005, primarily within the GPT business segment.  The reductions were implemented in an effort to position GPT for increased flexibility and improved long-term profitability.  On an on-going basis, we expect an annual benefit of approximately $2.4 million from this action.  YTD 2005 restructuring and other charges is approximately $903,000 and is mostly related to severance costs.  YTD 2004 restructuring and other charges were $3.0 million and included a $1.7 million EPG litigation settlement, approximately $1.7 million of legal costs and $746,000 of severance, which was partially offset by a $1.2 million reduction in our CheckFlow customer settlement reserve.

In Q3 2005, we generated $2.2 million of cash from operating activities and increased total cash by $2.4 million, as compared to $209,000 of cash used in operating activities and a decrease in total cash of $1.6 million in Q3 2004.  On a YTD basis, we used $1.6 million of cash from operating activities and decreased total cash by $10.3 million in 2005, as compared to $7.3 million of cash provided by operating activities and a decrease of total cash of $1.8 million in 2004.  In fiscal 2005, we increased marketable debt securities by $4.5 million and purchased $3.2 million of treasury stock pursuant to a publicly announced stock repurchase program which concluded on October 14, 2005.  These two programs were the primary reasons for our decreased cash and cash equivalent balance at October 31, 2005.

We expect revenue for Q4 2005 to be the highest quarter of fiscal year 2005 due primarily to stronger consulting revenues and continued strength in license revenues.  Q4 2005 operating income is expected to increase over all other quarters in fiscal 2005, primarily as a function of revenue growth and decreased costs associated with expense reduction initiatives.

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Results of Operations

Comparison of Three Months Ended October 31, 2005 (“Q3 2005”) to Three Months Ended October 31, 2004 (“Q3 2004”) and Nine Months Ended October 31, 2005 (“YTD 2005”) to Nine Months Ended October 31, 2004 (“YTD 2004”)

Revenues

Revenues by Segment ($ in thousands):

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2005		2004		$			%		2005		2004		$			%
Revenue Enhancement	$	8,029	$	7,987	$	42		1.0	%	$	27,925	$	27,510	$	415		1.5	%
Global Payments Technologies	19,048		21,394		(2,346		)	(11.0	)	54,497		58,830		(4,333		)	(7.4	)
Global Payments Consulting	1,073		1,176		(103		)	(8.7	)	3,348		3,610		(262		)	(7.2	)
Corporate (Outsourcing) Revenue	220		50		170			—		718		60		658			—
Total Revenues	$	28,370	$	30,607	$	(2,237	)	7.3	%	$	86,488	$	90,010	$	(3,522	)	(3.9	)%

Our RevE business segment increased revenue $42,000, or 1.0%, in Q3 2005 as compared to Q3 2004 and $415,000, or 1.5%, for YTD 2005 as compared to YTD 2004.  A decline in traditional RevE consulting revenues on both a quarterly and YTD basis was offset by increased CVE software and services revenue.  CVE is our proprietary sales management methodologies and sales training programs.  In the last nine months this group has entered into two large multi-year term CVE license engagements to provide software, services and maintenance.  Additionally in Q2 2005, this group was engaged by another large international bank to provide CVE related services over a multi-year period.  The future period growth was partially offset on November 2, 2005 when one CVE customer gave notice that they will not renew their term CVE license and maintenance contract for fiscal 2006 that would have otherwise provided $800,000 in annual revenue.

Our GPT business segment revenue declined $2.3 million, or 11.0%, in Q3 2005 as compared to Q3 2004 and declined $4.3 million, or 7.4%, for YTD 2005 as compared to YTD 2004.  These declines are both centered within software license revenue, particularly within our Payments product group.  In response to Check 21 legislation in 2003, we began to develop several software products that enabled banks to transition from paper-based to electronic payments systems.  These products include Image Exchange, Image-replacement document creation software, along with a suite of Source Capture products designed to capture these check images earlier in the payment processing stream.  In Q1 and Q2 2004, $3.4 million was recognized from a single customer of our legacy Check Image Archive product, and in Q3 2004 two first-time ExchgLink engagements reached acceptance and $1.6 million of software license and $826,000 of previously deferred services revenue was recognized.  We have not experienced any large single sales of this magnitude in YTD 2005, although the sales opportunities for these new Payments products have recently shown some momentum.  The majority of software license revenue recognized in Q3 2005 was related to legacy Payments, Cash and Risk software solutions.  Revenue from new products is expected to increase in Q4 2005 as compared to Q3 2005, as we anticipate a large Source Capture installation will be complete and accepted by the customer.

The slight decline in the GPC business segment revenue, on a quarterly and YTD basis, was primarily the result of decreased consulting services.  The decline, particularly in Q3 2005, was primarily the result of the negative impact of the hurricanes with three customers.  These declines in consulting were partially offset by increases in software and services derived from our Float product group.  With recent increases in interest rates, we expect to have future increased customer demand for our Float product offerings.

Finally, Carretek is our 51% owned business outsourcer for payment and transaction processing.  Carretek signed its first agreement in Q2 2004.  In Q4 2004 and Q1 2005, we expanded the scope of our outsourcing engagement with our first customer.  One outsourced process for this customer has reached its target potential while the remaining two outsourced processes are still in a pilot stage.  Revenue has increased to $220,000 in Q3 2005 and $718,000 on a YTD basis.  We expect the financial results for this business to improve as we expand the scope of our initial engagement and to the extent we achieve success in adding additional customers.

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Consulting ($ in thousands):

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2005		2004		$			%		2005		2004		$			%
Consulting	$	6,720	$	7,930	$	(1,210	)	(15.3	)%	$	24,540	$	27,501	$	(2,961	)	(10.8	)%

Most of our consulting revenue is derived from our RevE business segment.  Consulting revenue in the RevE segment decreased $771,000, or 10.8%, to $6.4 million in Q3 2005 from $7.2 million in Q3 2004.  Domestically, consulting revenue for RevE decreased $2.7 million on a quarterly comparison basis, and there were 13 domestic revenue producing engagements in Q3 2005, as compared to 14 in Q3 2004.  International RevE consulting revenue increased $1.9 million in Q3 2005, when compared to Q3 2004.  There was 1 non-U.S. revenue producing engagement in both Q3 2005 and Q3 2004.

Consulting revenue in the RevE segment decreased $2.1 million, or 8.2%, to $22.9 million in YTD 2005 from $25.0 million in YTD 2004.  Domestically, consulting revenue decreased by $2.5 million, or 12.9%, to $16.7 million in YTD 2005 from $19.2 million in YTD 2004.  There were 20 domestic revenue producing engagements in both YTD 2005 and YTD 2004.  International RevE consulting revenue increased $410,000 in YTD 2005 to $6.2 million, when compared to $5.8 million in YTD 2004.  In YTD 2005, there were 3 revenue producing international engagements, as compared to 4 in YTD 2004.

Consulting revenue in our GPC segment decreased $440,000, or 55.9%, to $349,000 in Q3 2005 from $789,000 in Q3 2004, and decreased $610,000, or 28.1%, to $1.6 million in YTD 2005 as compared to $2.2 million in YTD 2004.  The decline, particularly in Q3 2005, was primarily the result of delays caused by the hurricanes with three of our customers.

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Software License ($ in thousands):

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2005		2004		$			%		2005		2004		$			%
Software License	$	5,322	$	5,701	$	(379	)	(6.7	)%	$	12,463	$	16,134	$	(3,671	)	(22.8	)%

Most of our software license fees are derived from our GPT business segment.  GPT software license revenue decreased $620,000, or 10.9%, to $5.1 million in Q3 2005 from $5.7 million in Q3 2004.  Additionally, GPT software license revenue decreased $4.4 million, or 27.4%, to $11.5 million in YTD 2005 as compared to $15.9 million in YTD 2004.  These declines are both centered within software license revenue, particularly within our Payments product group, as described above under “Revenues by Segment.”

The software revenue derived from our CVE product offering, which is contained in our RevE business segment, increased $210,000 to $235,000 in Q3 2005, as compared to $25,000 in Q3 2004, and increased $571,000 to $788,000 in YTD 2005 as compared to $217,000 in YTD 2004.  This increase is the result of reformulating our sales strategy to position our CVE product as an enhancement to an existing CRM customer installation, as opposed to a replacement for an existing CRM customer installation.  Additionally, we began marketing a multi-year term software license as opposed to a traditional perpetual software license, which reduces the up-front investment for our customers, but results in recognition of the related revenue over a longer period of time.  In the last twelve months, the CVE group has entered into three large multi-year term license engagements to provide varying combinations of software, maintenance and services under this new strategy.  However, as discussed above under “Revenues by Segment”, one of these customers recently gave us notice of their intent to cancel their term software and maintenance license totaling approximately $800,000 for fiscal 2006.

Software Maintenance ($ in thousands):

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2005		2004		$			%		2005		2004		$			%
Software Maintenance	$	10,822	$	11,491	$	(669	)	(5.8	)%	$	32,710	$	32,807	$	(97	)	—	%

Most of our maintenance revenue is derived from our GPT business segment.  Software maintenance fees are invoiced and collected pursuant to annually renewable product and telephone support agreements with our software customers.  The annual maintenance fee is generally paid by the customer at the beginning of the maintenance period and revenue is recognized ratably over the term of the related contract.  If the annual maintenance fee is not paid at the beginning of the maintenance period, we defer revenue recognition until the time that the maintenance fee is paid by the customer.  When the payment is received, maintenance revenue is recognized for the period that maintenance revenue was previously deferred.  Maintenance contracts usually carry annual maintenance fee escalation clauses generally based on an index, such as the consumer price index.  Because of our revenue recognition policy, maintenance revenue can vary from quarter-to-quarter based upon actual cash receipts.

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Software Implementation and Other Services ($ in thousands):

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2005		2004		$			%		2005		2004		$		%
Software Implementation and Other Services	$	4,585	$	4,622	$	(37	)	(1.0	)%	$	13,611	$	11,143	$	2,468	22.1	%

The majority of our software implementation fees are derived from our GPT business segment; however, the CVE product group within the RevE business segment has increased their service revenues in YTD 2005.

GPT software services decreased $1.0 million, or 23.3%, to $3.4 million in Q3 2005 as compared to $4.4 million in Q3 2004, and they increased $208,000, or 2.0%, to $10.4 million in YTD 2005 as compared to $10.2 million in YTD 2004.  The quarterly decrease in software implementation and other services within GPT is primarily the result of the recognition of $826,000 of ExchgLink software services in Q3 2004 when acceptance was achieved with our development partner.

Within the CVE product group, services have increased $650,000 to $811,000 in Q3 2005, as compared to $161,000 in Q3 2004, and have increased $2.0 million to $2.5 million in YTD 2005 as compared to $476,000 in YTD 2004.  In the last nine months this group has entered into two large multi-year engagements to provide software, services and maintenance.  In Q2 2005, this group was also engaged by another large international bank to provide CVE related services over a multi-year period.

Outsourcing Services ($ in thousands):

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2005		2004		$		%		2005		2004		$		%
Outsourcing Services	$	220	$	50	$	170	—	%	$	718	$	60	$	658	—	%

Our outsourcing service revenue is derived through Carretek, our 51% owned business which outsources payment and transaction processing.  Carretek was formed in fiscal 2003 and signed its first agreement in Q2 2004.  The fiscal 2004 revenues were minimal; however in late Q4 2004, we expanded our scope of business with our initial customer to include a second set of transaction processing functions, and in Q1 2005 we added a third set of transaction processing functions and since that time have continued to increase the number of business process outsourcing transactions processed.

Out-of-Pocket Expense Reimbursements ($ in thousands):

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2005		2004		$			%		2005		2004		$		%
Out-of-Pocket Expense Reimbursements	$	701	$	813	$	(112	)	(13.8	)%	$	2,446	$	2,365	$	81	3.4	%

The decrease in these reimbursements on a quarterly basis occurred primarily due to a $76,000 decline within the GPC business segment, and corresponds with the decrease in consulting revenue noted above.  Most of our software services and consulting engagements require our employees to be at the customer location for extended periods of time, which gives rise to out-of-pocket expense reimbursements.  These reimbursements are recognized as revenue when they are billable to the customer and can fluctuate from period to period.

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Cost of Revenues

Cost of Revenues by Segment ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$			%
Revenue Enhancement	$	5,185		$	4,139		$	1,046		25.3	%	$	14,566		$	13,114		$	1,452		11.1	%
% of revenue	64.6		%	51.8		%						52.2		%	47.7		%
Global Payments Technologies	$	8,303		$	10,138		$	(1,835	)	(18.1	)%	$	24,694		$	27,315		$	(2,621	)	(10.0	)%
% of revenue	43.6		%	47.4		%						45.3		%	46.4		%
Global Payments Consulting	$	887		$	1,285		$	(398	)	(31.0	)%	$	2,661		$	3,971		$	(1,310	)	(33.0	)%
% of revenue	82.7		%	109.3		%						79.5		%	110.0		%
Corporate (Outsourcing Services)	$	424		$	223		$	201		90.1	%	$	1,437		$	236		$	1,201		—	%
% of revenue	192.7		%	446.0		%						200.1		%	393.3		%
Total Cost of Revenues	$	14,799		$	15,785		$	(986	)	(6.2	)%	$	43,358		$	44,636		$	(1,278	)	(2.9	)%
% of revenue	52.2		%	51.6		%						50.1		%	49.6		%

The increase in the cost of revenues on an absolute dollar basis in the RevE business segment, on both a quarterly and YTD basis, was primarily the result of increases in the cost of services within the CVE product group as they managed and staffed three new large engagements.  The significant increases in the cost of revenues as a percentage of total RevE revenue on a quarterly and YTD basis was primarily the result of a decline in higher margin RevE consulting revenue being replaced by lower margin CVE services and software license revenue.

The decrease in the cost of revenues on an absolute basis within the GPT business segment, on both a quarterly and YTD basis, was the result of personnel reductions in the last half of fiscal 2004 and more recently in August 2005.  We have also increased cross-utilization of services personnel on maintenance and research and development projects.  The YTD improvements in the software services margins within GPT have been partially offset by declines in software license revenue margins due primarily to declines in software license revenue and the relatively fixed nature of the amortization of software license costs, which is included in the cost of software licenses.

The absolute dollar cost reductions, on both a quarterly and YTD basis, within GPC were primarily attributable to personnel reductions achieved during the latter half of fiscal 2004 to bring our costs in line with expected consulting revenues.  With total revenue for GPC basically flat, on both a quarterly and YTD basis, cost of revenues as a percentage of total GPC revenue decreased dramatically.

The direct cost increase related to Carretek, our 51% owned business which outsources payment and transaction processing, is related to the direct costs attributable to our single customer which began in Q2 2004.  We expect the financial results for this business to improve as we expand the scope of our initial engagement and to the extent we achieve success in adding additional customers.

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Cost of Consulting ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$			%
Cost of Consulting	$	4,369		$	4,555		$	(186	)	(4.1	)%	$	12,887		$	14,166		$	(1,279	)	(9.0	)%
% of consulting revenue	65.0		%	57.4		%						52.5		%	51.5		%

The cost of consulting within the GPC business segment decreased $375,000, or 38.7%, to $593,000 in Q3 2005 as compared to $968,000 in Q3 2004 and decreased $1.1 million, or 37.7%, to $1.9 million for YTD 2005 as compared to $3.0 million for YTD 2004.  The decline in costs, on both a quarterly and YTD basis, was achieved through personnel reductions made in the latter half of fiscal year 2004 to bring costs in line with expected GPC consulting revenues.

The cost of consulting within the RevE business segment increased $225,000, or 6.4%, to $3.7 million in Q3 2005 as compared to $3.5 million in Q3 2004 and decreased $56,000, or 1.0%, to $10.9 million in YTD 2005 as compared to $10.9 million in Q3 2004.  The increase in Q3 2005 can be attributed to higher personnel costs, contractor costs and non-billable travel.

Cost of Software Licenses ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$			%
Cost of Software Licenses	$	2,155		$	2,503		$	(348	)	(13.9	)%	$	5,519		$	5,771		$	(252	)	(4.4	)%
% of software license revenue	40.5		%	43.9		%						44.3		%	35.8		%

The cost of software licenses consists primarily of amortization of capitalized and acquired software costs along with royalties payable to third parties recorded in the GPT business segment.  The amortization of capitalized software was $419,000 and $668,000 in Q3 2005 and Q3 2004, respectively, and was $887,000 and $1.1 million in YTD 2005 and YTD 2004, respectively.  The amortization of acquired developed technology is $1.2 million in both Q3 2005 and Q3 2004, and $3.5 million in both YTD 2005 and YTD 2004.  The acquired developed technology will be fully amortized in Q2 2007.  The decrease in the cost of software license revenue, on a quarterly and YTD basis, is primarily the result of lower capitalized software amortization and slightly lower royalty expense in both periods.  The decline in software revenue on a YTD basis, along with slightly decreased costs, resulted in a significant increase in the cost of software license revenue as a percentage of software license revenue on a YTD basis.

In connection with software license and maintenance agreements entered into with certain banks and purchase agreements entered into with vendors under which we acquired software technology used in products sold to our customers, we are required to pay royalties on sales of certain software products.  Under these arrangements, we accrue royalty expense when the associated revenue is recognized.  The royalty percentages generally range from 20% to 50% of the associated revenue.  In Q3 2005, we recorded $569,000 of software royalty expense compared to $658,000 of software royalty expense recorded in Q3 2004.  In YTD 2005, we recorded $1.1 million of software royalty expense, the same amount recorded in YTD 2004.  Depending on our future product mix, our margins from software license fees may be positively or negatively impacted by fluctuations in software royalty expense.

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Cost of Software Maintenance ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$		%
Cost of Software Maintenance	$	3,588		$	3,765		$	(177	)	(4.7	)%	$	10,999		$	10,949		$	50	0.5	%
% of software maintenance revenue	33.2		%	32.8		%						33.6		%	33.4		%

Cost of software maintenance consists primarily of personnel and facility costs to provide telephone support, product defect support and other enhancements to our existing products, which are not significant enough to extend the product’s life cycle or substantially increase its marketability. The cost of maintenance decreased $177,000 or 4.7% for Q3 2005, as compared to Q3 2004, and increased $50,000, or 1.0%, on a YTD basis.

The cost of software maintenance as a percentage of related maintenance revenue is consistent on both a quarterly and YTD basis.  As discussed above, the annual maintenance fee is generally paid by the customer at the beginning of the maintenance period and revenue is recognized ratably over the term of the related contract.  If the annual maintenance fee is not paid at the beginning of the maintenance period, we defer the revenue recognition until the time that the maintenance fee is paid by the customer.  When the payment is received, maintenance revenue is recognized for the period that maintenance revenue was previously deferred.  As a result, our cost of software maintenance as a percentage of related maintenance revenue may fluctuate.

Cost of Software Implementation and Other Services ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$			%
Cost of Software Implementation and Other Services	$	3,562		$	4,002		$	(440	)	(11.0	)%	$	10,217		$	11,181		$	(964	)	(8.6	)%
% of software implementation and other services revenue	77.7		%	86.6		%						75.1		%	100.3		%

Costs of software implementation and other services consist primarily of personnel and facility costs to provide software implementation and project management support to customer software implementations within our GPT business segment and the CVE software product within our RevE segment.  The cost of software implementation and other services in our GPT segment decreased $1.1 million, or 31.1%, to $2.5 million in Q3 2005 as compared to $3.6 million in Q3 2004, and decreased $2.2 million, or 22.1%, to $7.9 million in YTD 2005 as compared to $10.1 million in YTD 2004.  The decline in costs of software implementation reflect decreased personnel costs within our GPT business segment.  These headcount reductions were achieved in the latter half of fiscal 2004 and more recently in August 2005 to improve utilization.  These declines were partially offset by increases within the CVE group of our RevE segment.  The cost of software implementation and other services within CVE increased $686,000, or 333.6%, to $892,000 in Q3 2005 as compared to $206,000 in Q3 2004, and increased by $1.3 million, or 175.8%, to $2.0 million in YTD 2005 as compared to $700,000 in YTD 2004.  The increase in costs is primarily related to third party contract labor costs used to manage and staff the three large CVE engagements.  The decline in the costs of software implementation and other services, as a percentage of software implementation revenue and other services, was the result of improved efficiency and utilization particularly within the Payments group of the GPT business segment, along with an increased volume of active service engagements within the CVE group of the RevE business segment.

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Cost of Outsourcing Service ($ in thousands):

	Three Months Ended October 31,						Variance				Nine Months Ended October 31,						Variance
	2005			2004			$		%		2005			2004			$		%
Cost of Outsourcing Service	$	424		$	222		$	202	91.0	%	$	1,437		$	236		$	1,201	—	%
% of outsourcing services revenue	192.7		%	444.0		%					200.1		%	393.3		%

The increase in the cost of outsourcing service fees is due to the creation of Carretek, our 51% owned business outsourcer for payment and transaction processing.  In Q2 2004, this business retained its first customer.  We expect the margins for this business to improve as we expand the scope of our initial engagement and to the extent we achieve success in adding additional customers.

Out-of-Pocket Expenses ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$			%
Cost of Out-of-Pocket Expenses	$	701		$	738		$	(37	)	(5.0	)%	$	2,299		$	2,333		$	(34	)	(1.5	)%
% of out-of-pocket expense reimbursements	100.0		%	90.8		%						94.0		%	98.6		%

These costs represent travel, meals and other sundry expenses incurred by our employees.  These costs are invoiced to the customer, without mark-up, usually on a monthly basis.  The absolute costs have increased on a quarterly basis due to increased CVE and GPT service engagements.  In addition, certain customer contracts contain expense maximums, so in certain cases not all expenses incurred can be passed along to the customer without contractual revisions or the customer’s express written approval, which can increase the volatility of the cost of out-of-pocket expenses as a percentage of out-of-pocket expense reimbursements.

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Operating Costs and Expenses:

Selling, General and Administrative Expenses ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$			%
Selling, General and Administrative Expenses	$	11,191		$	11,320		$	(129	)	(1.1	)%	$	33,688		$	35,483		$	(1,795	)	(5.1	)%
% of total revenue	39.4		%	37.0		%						39.0		%	39.4		%

Selling, general and administrative expenses generally consist of personnel costs such as salaries, commissions, incentive compensation and non-reimbursable travel. Additionally, the provision for doubtful accounts, insurance, including directors and officers insurance, as well as professional services such as legal and accounting expense and other related costs are classified within selling, general and administrative expense.

We continue to focus on decreasing costs throughout the organization.  SG&A costs were essentially flat on a quarterly basis; however, some of the primary drivers of the overall decrease in SG&A costs in YTD 2005 as compared to YTD 2004, were as follows:

•Decreased corporate selling and marketing costs and business unit software sales and product management costs of $1.8 million in YTD 2005 as compared to YTD 2004 due primarily to personnel reductions within our corporate sales function.

•Due to competitive realignment of our employee benefit costs we have decreased employee benefits costs of $579,000 in YTD 2005 as compared to YTD 2004 due primarily to savings achieved through the selection of a new, lower cost health care plan and provider and passing a higher percentage of the health care costs to our employees.  These declines in health care costs have been partially offset by increases in other employee benefits such as the reinstatement of the employer matching contribution in our 401(k) plan.

•Increased general and administrative costs of $886,000 in YTD 2005, as compared to YTD 2004, were primarily driven by increased contract labor and third party consulting costs related to an ERP system upgrade and business process reengineering project begun in late Q1 2005.  This effort, which is supposed to be largely completed in Q2 2006, is expected to enhance management information systems and produce operating cost efficiencies.  Additionally because of a significant reduction in our delinquent accounts receivable in 2004, our allowance for doubtful accounts was reduced $275,000 in Q3 2004 and $667,000 in YTD 2004 as compared to an increase of $95,000 in Q3 2005 and $54,000 in YTD 2005.  These YTD increases in general and administrative costs were partially offset by decreased Directors and Officers’ liability insurance and telecommunication expense.

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Research and Development ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2005			2004			$			%		2005			2004			$		%
Research and Development Expenses	$	2,444		$	2,520		$	(76	)	(3.0	)%	$	7,481		$	6,102		$	1,379	22.6	%
% of total revenue	8.6		%	8.2		%						8.6		%	6.8		%

Research and development expenses consist primarily of personnel, contract labor, travel and facilities expenses incurred by our research and development organization primarily within the GPT business segment.  Research and development costs have remained relatively flat on a quarterly basis and have increased $1.4 million or 22.6% in YTD 2005, as compared to YTD 2004, as a result of less software costs capitalized in the 2005 YTD period.  Beginning in the latter half of fiscal 2003 and carrying through fiscal 2004 and fiscal 2005, we have developed or are currently developing 9 new software offerings within the GPT segment and 2 within our GPC segment.  Research and development costs are typically limited to development of new software products, or enhancements to existing software products, which extend the product’s life cycle and/or substantially increase its marketability.  Specific customer funded software development costs are contained in “Cost of Software Implementation and Other Services.”

In accordance with SFAS No. 86, “Accounting for Costs of Computer Equipment to be Sold, Leased or Otherwise Marketed,” we capitalized $0 in Q3 2005, as compared to $593,000 in Q3 2004, and we capitalized $690,000 in YTD 2005 as compared to $2.2 million in YTD 2004.  In Q1 2005, we began to develop two new Cash solutions and the costs associated with these two products represented 98% of the amount capitalized in YTD 2005.  The first product verifies cash logistic invoices with automated precision and the second product is an internet-based track and trace system that streamlines the cash delivery management process.  In YTD 2004, 100% of the capitalization was related to the development of payments products, primarily ExchgLink, our product offering to send and receive check images, and Source Capture, a suite of products which enables bank customers to capture check images at bank branches, ATMs and corporate sites and to extend the functionality of our anti-money laundering software and other risk solutions.  These product development projects in YTD 2004 were of a larger scale and effort and therefore the amount of costs capitalized was larger in 2004 as compared to 2005 on both a quarterly and YTD basis.  Based on our current software development plan, we do not expect to capitalize a material amount of software development costs in Q4 2005.

Software development costs of a product are capitalized from the time technological feasibility is reached until the general release of the product.  We establish technological feasibility either through the process of creating a detailed program design and reviewing the detailed program design for any high risk development issues or the creation of a working model.  Capitalization only occurs if we believe costs capitalized are recoverable through future sales of the software product under development.

Amortization of Intangible Assets:

Amortization of intangible assets was $350,000 for Q3 2005 and Q3 2004, and $1.1 million for YTD 2005 and YTD 2004.  The amortization results from the periodic recognition of amortization expense, through the second quarter of fiscal 2007, of intangible customer relationships acquired in the Check Solutions acquisition in 2001.  These intangible assets will be fully amortized in Q2 2007.

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Restructuring and Other Charges:  We recorded various restructuring and other charges and credits, as follows ($ in thousands):

	Workforce Reductions		EPG Litigation Settlement		Legal and Professional Fees		Other			Total
YTD 2004:
Quarterly period ended April 30, 2004	308		1,686		521		—			2,515
Quarterly period ended July 31, 2004	192		14		1,206		(1,215		)	197
Quarterly period ended October 31, 2004	246		—		20		—			266
Total YTD 2004	$	746	$	1,700	$	1,747	$	(1,215	)	$	2,978
YTD 2005:
Quarterly period ended April 30, 2005	127		—		—		(32		)	95
Quarterly period ended July 31, 2005	28		—		—		—			28
Quarterly period ended October 31, 2005	780		—		—		—			780
Total YTD 2005	$	935	$	—	$	—	$	(32	)	903

Quarter Ended April 30, 2004

We recorded $308,000 in restructuring and other charges during the three month period ended April 30, 2004, principally associated with the separation of 10 employees.  We expensed approximately $1.686 million for compensatory damages to EPG after the jury returned a verdict in favor of EPG on one claim and Carreker on three claims.  This litigation was ultimately settled in June 2004 for $1.7 million.  We recorded a charge of $521,000 relating to legal and professional fees relating to these legal actions.

Quarter Ended July 31, 2004

We recorded $192,000 in restructuring and other charges during the three month period ended July 31, 2004, principally associated with the separation of 8 employees.  During the quarter ended July 31, 2004, we recorded a charge of $36,000 relating to legal and professional fees relating to our shareholder legal actions described in Note 8 to Condensed Consolidated Unaudited Financial Statements.

On July 8, 2004, we settled with EPG for $1.7 million.  An additional $14,000 was expensed and the settlement paid to the plaintiff.  Additionally, we recorded a charge for the litigation costs related to this legal action totaling $1.2 million.

Finally, we received a final payment of $455,000 from a customer in the final settlement with one of our original CheckFlow Suite customers.  This payment was recorded directly to this reserve.  Concurrently, based on revised cost estimates, we lowered our estimate of the cost to develop and install any additional software, or software modifications, with these customers and reversed approximately $1.2 million of this reserve.

Quarter Ended October 31, 2004

We recorded $246,000 in restructuring and other charges during the three month period ended October 31, 2004, principally associated with the separation of 6 employees.  During the quarter ended October 31, 2004, we recorded a charge of $20,000 relating to legal and professional fees relating to the Company’s shareholder legal actions described in Note 8.

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Quarter Ended April 30, 2005

We recorded $127,000 in restructuring and other charges during the three month period ended April 30, 2005, principally associated with the separation of 6 employees.  We also lowered our estimate by $32,000 for the costs associated with the discontinuance of one of our software offerings, originally recorded in January 2004.

Quarter Ended July 31, 2005

We recorded $28,000 in restructuring and other charges during the three month period ended July 31, 2005, principally associated with the separation of 2 employees.

Quarter Ended October 31, 2005

We recorded $780,000 in restructuring and other charges during the three month period ended October 31, 2005, principally associated with the separation of 29 employees primarily within the GPT business segment.

The activity related to the accrued merger and restructuring costs during the three months ended October 31, 2005 is as follows (in thousands):

	Workforce Reductions			Charges relating to CheckFlow Suite		Facility Closures			Other			Total
Balance at January 31, 2005	$	652		$	200	$	49		$	103		$	1,004
Additions to reserve balance:
Severance charges	127			—		—			—			127
Reductions to reserve balances:
Cash paid	(494		)	—		(44		)	—			(538		)
Change in estimate	—			—		—			(32		)	(32		)
Balance at April 30, 2005	$	285		$	200	$	5		$	71		$	561
Additions to reserve balance:
Severance charges	28			—		—			—			28
Reductions to reserve balances:
Cash paid	(285		)	—		(5		)	(24		)	(314		)
Balance at July 31, 2005	$	28		$	200	$	—		$	47		$	275
Additions to reserve balance:
Severance charges	780			—		—			—			780
Reductions to reserve balances:
Cash paid	(426		)	—		—			—			(426		)
Balance at October 31, 2005	$	382		$	200	$	—		$	47		$	629

We anticipate the remaining reserve accruals at October 31, 2005 will be paid or remaining customer obligations completed within the next 9 months.

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Other Income (Expense):

Interest Income ($ in thousands):

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2005		2004		$		%		2005		2004		$		%
Interest Income	$	185	$	92	$	93	101.1	%	$	495	$	207	$	288	139.1	%

Interest income consists of interest earned on cash and cash equivalents and marketable securities.  The increases on both a quarterly and YTD basis are primarily the result of higher average invested balances during Q3 2005 as compared to Q3 2004, and YTD 2005 as compared to YTD 2004, and higher yields on these investments.

Interest Expense ($ in thousands):

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2005		2004		$		%		2005		2004		$			%
Interest Expense	$	122	$	106	$	16	15.1	%	$	334	$	336	$	(2	)	(1	)%

Interest expense is primarily the result of the commitment fees associated with the maintenance of our $30.0 million revolving credit agreement.  Additionally, the amortization of the deferred loan costs is also included in interest expense.  There have been no borrowings outstanding under this credit agreement since Q1 2004.

Other income ($ in thousands):

	Three Months Ended October 31,					Variance					Nine Months Ended October 31,						Variance
	2005		2004			$			%		2005			2004			$			%
Gain on sale of Cash Services Australia Pty. Limited	$	—	$	—		$	—		—	%	$	—		$	539		(539		)	(100.0	)%
Equity in earnings of Cash Services Australia Pty. Limited	—		—			—			—	%	—			(17		)	17			100.0	%
Minority share of net loss of Carretek LLC	269		234			35			15.0	%	799			454			345			76.0	%
Foreign exchange (losses) / gains	12		43			(31		)	(72.1	)%	(89		)	(245		)	156			63.7	%
Other	2		(2		)	4			200.0	%	8			1			7			700.0	%
Total	$	283	$	275		$	8		2.9	%	$	718		$	732		$	(14	)	(1.9	)%

In April 2004, we sold our 25% interest in Cash Services Australia Pty. Limited.  The carrying value of our investment was approximately $383,000 and we received $922,000 in proceeds collected in May 2004.  As a result of this transaction, we recorded a $539,000 gain.

We own a 51% interest in Carretek LLC (“Carretek”), through which we offer financial institutions offshore-centric outsourcing of their business processes.  Carretek has generated approximately $549,000 and $480,000 in losses for Q3 2005 and Q3 2004, respectively, and $1.6 million and $926,000 in losses for YTD 2005 and YTD 2004, respectively.  Accordingly, the 49% share relating to the minority interest in these losses, or $269,000 and $234,000 on a quarterly basis and $799,000 and $454,000 on a YTD basis, was recorded in other income (expense).

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Provision for Income Taxes:

The Company has established a valuation allowance to reserve its net deferred tax assets at October 31, 2005 because the more likely than not criteria for future realization of the Company’s net deferred tax assets specified in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”) were not met.

The foreign tax provision was $102,000 and $270,000 for the three and nine months ended October 31, 2005 and consists primarily of a provision for foreign taxes.  Additionally, we recorded $15,000 of U.S. Federal tax expense has been recorded in the nine months ended October 31, 2005 for alternative minimum tax purposes due to the availability of net operating losses from prior years.  No U.S. Federal income tax benefit was recorded at October 31, 2005 due to the uncertainty regarding the Company’s ability to generate taxable income, and resulting uncertainty relative to the recoverability of deferred tax assets.

In May 2004, the federal tax law changed to allow software license revenue to be deferred for tax purposes similar to the percent-complete revenue recognition model we use for financial statement purposes.  The impact of this change in the tax law increased the amount of the net operating loss carryforwards by $8.6 million.

Liquidity and Capital Resources

Historically, we have funded our operations and cash expenditures primarily with cash generated from operating activities.  At October 31, 2005, we had working capital of $16.3 million compared to $12.3 million at January 31, 2005.  We had $24.2 million in cash and cash equivalents at October 31, 2005, a decrease of $10.3 million from $34.5 million in cash and cash equivalents at January 31, 2005.  However, we also had $4.5 million of “available for sale” marketable securities at October 31, 2005, compared to no marketable securities at January 31, 2005.  At October 31, 2005 and January 31, 2005, we did not have any borrowings outstanding under our revolving line of credit.  We expect that existing cash, marketable securities and cash generated from operating activities will be sufficient to meet our presently anticipated requirements for the foreseeable future.

Cash provided by operating activities was $2.2 million for the three months ended October 31, 2005 compared to cash used in operating activities of $209,000 in the three months ended October 31, 2004.  Cash used in operating activities was $1.6 million for the nine months ended October 31, 2005 compared to cash provided by operating activities of $7.3 million for the nine months ended October 31, 2004.  This decline in YTD 2005 was primarily the result of the timing of the collection of 2005 calendar year maintenance billings as compared to the prior year.  An increased percentage of these 2005 maintenance renewals was collected in Q4 2004 and therefore the cash was received in fiscal 2004 as opposed to fiscal 2005.

Average days’ sales outstanding fluctuate for a variety of reasons, including the timing of billings specified by contractual agreement, and receivables for expense reimbursements.  The following table contains the quarterly days’ sales outstanding (“DSO”):

Quarter ended	DSO
October 31, 2005	42
July 31, 2005	49
April 30, 2005	35
January 31, 2005	35
October 31, 2004	35
July 31, 2004	46
April 30, 2004	46

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Cash used in investing activities decreased to $423,000 during the three months ended October 31, 2005 as compared to $1.9 million during the three months ended October 31, 2004.  The cash used in investing activities increased to $7.0 million during the nine months ended October 31, 2005 as compared to $4.9 million during the nine months ended October 31, 2004.  This decline on a quarterly basis can be attributed to less computer software costs capitalized and less purchases of property and equipment.  Based on our current software development plan, we do not expect to capitalize a material amount of software development costs in Q4 2005.  In 2004, our capital expenditure level had increased primarily as the result of replacing certain development hardware and software within our technology group in Charlotte, North Carolina.  The increase on a YTD 2005 basis was primarily the result of the purchase of $4.6 million of marketable securities during the three months ended July 31, 2005, partially offset by a decline in both capital expenditures and capitalized software development.

Financing activities provided cash of $650,000 in the three months ended October 31, 2005 as compared to $486,000 in the three months ended October 31, 2004.  The sources of cash in both quarterly periods were primarily the proceeds from the exercise of stock options along with equity contributions to Carretek LLC from our minority shareholder.

Financing activities used cash of $1.8 million for the nine months ended October 31, 2005 as compared to a use of cash of $4.2 million during the nine months ended October 31, 2004.  During the nine months ended October 31, 2005, we purchased a total of $3.2 million of treasury stock under the program described above.  These treasury stock purchases were offset by $931,000 of equity contributions by the minority shareholder of Carretek LLC and $542,000 related to the proceeds from the exercise of stock options.  During the nine months ended October 31, 2004, we made a $6.3 million debt payment, which was offset by $1.6 million of proceeds related to stock options and $432,000 equity contributions by the minority shareholder of Carretek LLC.

We are a party to a revolving credit agreement with a group of banks providing for a commitment amount of $30.0 million and a maturity date of July 31, 2006.  At October 31, 2005 and October 31, 2004, the Company did not have any borrowings outstanding.  Borrowings under the credit agreement currently bear interest equal to either the greater of prime or federal funds rate plus a margin ranging from 1.25% to 2.25% depending on our ratio of funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”); or London Interbank Offered Rate (“LIBOR”) plus a margin equal to 2.75% to 3.75% depending on our ratio of funded debt to EBITDA.  Interest payments are due quarterly.  We are required to pay an annual commitment fee equal to 0.50% on the unused amount of the revolving credit agreement.  The revolving credit agreement contains customary affirmative and negative covenants, some of which have been amended, including financial covenants requiring the maintenance of specified interest coverage, ratio of EBITDA to funded debt, and ratio of 80% of accounts receivable, cash and short term investments to funded debt.  Additionally, the payment of dividends and the purchase of treasury stock is precluded subject to the approval of the banks.  We obtained a written waiver to this covenant in April 2005 when we announced our stock repurchase program.  Substantially all of our assets collateralize this revolving credit agreement.  As of October 31, 2005, we are in compliance with the covenants of the revolving credit agreement, as amended.

The following summarizes our contractual obligations at October 31, 2005 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

	Payments Due by Period
	Total		1 Year or Less		Years 2-3		Years 4-5		After 5 Years
Operating leases	$	12,806	$	3,401	$	5,766	$	3,639	$	—

We believe that current cash balances and marketable securities and expected future cash flows will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities during fiscal 2005 and fiscal 2006.  However, if current sources are not sufficient to meet our needs, we may seek additional equity or debt financing.  There can be no assurance that additional financing would be available on acceptable terms, if at all.

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We expect to adopt SFAS No. 123(R) which requires all share-based payments to employees including grants for stock options to be recognized in the Statement of Operations based on their fair values on February 1, 2006.  As of October 31, 2005, the expense related to unvested options granted to date is as follows for the indicated fiscal years ending January 31, (in thousands):

Year	Amount
2007	$	2,138
2008	999
2009	404
2010	85

We are considering accelerating the vesting of a portion of the outstanding options in Q4 2005, principally to reduce the stock option related expense in future years.

We are presently involved in a number of lawsuits.  While we do not expect any negative outcomes, the final resolutions of the lawsuits are unknown, and could include judgments against us, or settlements that could require additional substantial payments by us.  See Note 8 in our Notes to Condensed Consolidated Unaudited Financial Statements.  The timing of the final resolution of these matters is uncertain.  We believe that a material adverse outcome or outcomes with respect to the lawsuits could have a material adverse effect on our financial results, our business or our management including but not limited to, significantly impacting our liquidity in a negative manner as well as causing covenant violations under our revolving credit agreement, possibly resulting in a default thereunder.  Further, we may in the future pursue acquisitions of businesses, products or technologies that could complement or expand our business and product offerings, and change our financing needs.  Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward looking statement that involves risks and uncertainties, and actual results could vary.  The failure to secure additional financing when needed could have a material adverse effect on our business, financial condition and results of operations.

Critical Accounting Policies

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use certain estimates and assumptions that affect the reported amounts and related disclosures and our estimates may vary from actual results.  We consider the following seven accounting policies the most important to the portrayal of our financial condition and those that require the most subjective judgment.  Although we believe that our estimates and assumptions are reasonable, actual results may differ, and such differences could be significant to our financial results.

Revenue Recognition

Our revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” and Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” and Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.”  In the case of software arrangements that require significant production, modification, or customization of software, or the license agreement requires us to provide implementation services that are determined to be essential to other elements of the arrangement, we follow the guidance in SOP 81-1, “Accounting for Performance of Construction – Type and Certain Production – Type Contracts.”

In the case of non-software arrangements, we apply EITF No. 00-21 and revenues related to arrangements with multiple elements are allocated to each element based on the element’s relative fair value.  Revenue allocated to separate elements is recognized for each element in accordance with our accounting policies described below.  If we cannot account for items included in a multiple-element arrangement as separate units of accounting, they are combined and accounted for as a single unit of accounting and generally recognized as the undelivered items or services are provided to the customer.

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Consulting.  We employ three primary pricing methods in connection with our delivery of consulting services. First, we may price our delivery of consulting services on the basis of time and materials, in which case the customer is charged agreed-upon daily rates for services performed and out-of-pocket expenses. In this case, we are generally paid fees and related amounts usually on a monthly basis, and we recognize revenues as the services are performed. Second, we may deliver consulting services on a fixed-price basis. In this case, we are generally paid on a monthly basis or pursuant to an agreed upon payment schedule, and we recognize revenues on a proportionate performance basis. We believe that this method is appropriate because of our ability to determine performance milestones and determine dependable estimates of our costs applicable to each phase of a contract.  Because financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, costs are subject to revisions as the contract progresses.  Anticipated losses on fixed-priced contracts are recognized when estimable.  Third, we may deliver consulting services pursuant to a value-priced contract with the customer. In this case, we are paid, on an agreed upon basis with the customer, either a specified percentage of (1) the projected increased revenues and/or decreased costs that are expected to be derived by the customer generally over a period of up to twelve months following implementation of our solution or (2) the actual increased revenues and/or decreased costs experienced by the customer generally over a period of up to twelve months following implementation of our solution, subject in either case to a maximum, if any is agreed to, on the total amount of payments to be made to us.  We must first commit time and resources to develop projections associated with value-pricing contracts before a bank will commit to purchase our solutions, and we therefore assume the risk of making these commitments with no assurance that the customer will purchase the solution.  Costs associated with these value-pricing contracts are expensed as incurred.  These contracts typically include payments to be made to us pursuant to an agreed upon schedule ranging from one to twelve months in length. We recognize revenues generated from consulting services in connection with value-priced contracts based upon projected results only upon completion of all services and agreement upon the actual fee to be paid (even though billings for these services may be delayed by mutual agreement for periods not to exceed twelve months). In an effort to allow customers to more closely match expected benefits from our services with payments to us, we may on occasion, offer payment terms which extend beyond 12 months.  When we enter into an agreement that has a significant component of the total amount payable under the agreement due beyond 12 months or if it is determined payments are not fixed and determinable at the date the agreement is entered into, revenue under the arrangement will be recognized as payments become due and payable.  When fees are to be paid based on a percentage of actual revenues and/or savings to our customers, we recognize revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer with a fixed payment date.

Costs associated with time and materials, fixed-priced and value-priced consulting fee arrangements are expensed as incurred and are included as a component of the cost of consulting fees.

We expect that value-priced contracts will continue to account for a significant portion of our revenues in the future. As a consequence of the use of value-priced contracts and due to the revenue recognition policy associated with those contracts, our results of operations will likely fluctuate significantly from period to period.

Regardless of the pricing method employed by us in a given contract, we are typically reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf of our customers.

Software License.  A perpetual software license is sold either together with implementation services or on a stand-alone basis.  We are usually paid software license fees in one or more installments, as provided in the customer’s contract but not to exceed 12 months.  We recognize software license revenue upon execution of a contract and delivery of the software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management.  When the software license arrangement requires us to provide implementation services that are essential to the functionality of the software or significant production, customization or modification of the software is required, both the product license revenue and implementation fees are recognized as services are performed.  A term software license is sold either together with implementation services and/or with maintenance services.  These term licenses are usually paid in annual installments over the term of the license.  If the term software license is sold without essential implementation services, the revenue is recognized ratably over the non-cancelable license term.  If the term license is sold with essential implementation services, the license revenue is recognized as the lesser of the amount of license revenue recognized as services are performed or on a ratable basis.

In certain instances, especially with recently developed software, we defer software license revenue recognition until the earlier of the product being determined to be generally available and subject to revenue recognition or when the services are completed and the project is accepted by the customer.  This practice is followed for the first two installations of a recently developed software product.  After two successful implementations, the product is considered generally available (“GA”).

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Software licenses are often sold as part of a multiple element arrangement that may include maintenance, implementation or consulting.  We determine whether there is vendor specific objective evidence of fair value (“VSOEFV”) for each element identified in the arrangement to determine whether the total arrangement fees can be allocated to each element.  If VSOEFV exists for each element, the total arrangement fee is allocated based on the relative fair value of each element.  In cases where there is not VSOEFV for each element, or if it is determined services are essential to the functionality of the software being delivered, or if significant production, modification or customization of the software is required, we initially defer revenue recognition of the software license fees until VSOEFV is established or the services are performed.  However, if VSOEFV is determinable for all of the undelivered elements, and assuming the undelivered elements are not essential to the delivered elements, we will defer recognition of the full fair value related to the undelivered elements and recognize the remaining portion of the arrangement value through application of the residual method.  Where VSOEFV has not been established for certain undelivered elements, revenue for all elements is deferred until those elements have been delivered or their fair values have been determined.  Evidence of VSOEFV is determined for software products based on actual sales prices for the product sold to a similar class of customer and based on pricing strategies set forth in our price book.  Evidence of VSOEFV for services (installation, implementation and consulting) is based upon standard billing rates and the estimated level of effort for individuals expected to perform the related services.  We establish VSOEFV for maintenance agreements using the percentage method such that VSOEFV for maintenance is a percentage of the license fee charged annually for specific software product, which in most instances is 20% of the portion of arrangement fees allocated to the software license element.

Although substantially all of our current software licenses provide for a fixed-price license fee, some licenses provide for the customer to pay a monthly license fee based on the actual use of the software product.  The level of license fees earned by us under this arrangement will vary based on the actual amount of use by the customer.  Revenue under these arrangements is recognized on a monthly basis as the usage becomes determinable.

Software Maintenance.  In connection with our sale of a software license, a customer may elect to purchase software maintenance services. Most of the customers that purchase software licenses from us also purchase software maintenance services, which typically are renewed annually. We charge an annual maintenance fee, which is typically a percentage of the initial software license fee. The annual maintenance fee generally is paid to us at the beginning of the maintenance period, and we recognize these revenues ratably over the term of the related contract.  If the annual maintenance fee is not paid at the beginning of the maintenance period, we defer revenue recognition until the time that the maintenance fee is paid by the customer.  We normally continue to provide maintenance service while awaiting payment from customers.  When the payment is received, revenue is recognized for the period that revenue was previously deferred.  This may result in volatility in software maintenance revenue from period-to-period.

Software Implementation and Other Services.  In connection with the sale of a software license, a customer may elect to purchase software implementation services, including software enhancements and other software services.  Most of the customers that purchase software licenses from us also purchase software implementation services.  We price our implementation services on a time-and-material or on a fixed-price basis, and we recognize the related revenues as services are performed.  Costs associated with these engagements are expensed as incurred.

Outsourcing Services.  While outsourcing revenue has been minimal to date, we currently recognize revenue based on the number of items processed.  These services are currently billed on a monthly basis.

Return Provisions.  Our contracts typically do not include right of return clauses, and as a result, we do not record a provision for returns.

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Royalties

In connection with software license and maintenance agreements entered into with certain banks and purchase agreements with vendors under which we acquired software technology used in products sold to our customers, we are required to pay royalties on sales of certain software products.  Under these arrangements, we accrue royalty expense when the associated revenue is recognized.  For current product offerings, the royalty percentages generally range from 20%-50% of the associated revenues.  Royalty expense is included as a component of the cost of software license fees and cost of software maintenance fees in the accompanying condensed consolidated statements of operations.

Allowance for Doubtful Accounts

A large proportion of our revenues and receivables are attributable to our customers in the banking industry.  Our trade accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers.  Because our accounts receivable are typically unsecured, we periodically evaluate the collectibility of our accounts based on a combination of factors, including a particular customer’s ability to pay as well as the age of receivables.  In cases where the evidence suggests a customer may not be able to satisfy its obligation to us or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of our products and services, we set up a specific reserve in an amount we determine appropriate for the perceived risk.  If circumstances change, such as higher than expected defaults or an unexpected material adverse change in a customer’s ability to meet their financial obligations to us, our estimates of recoverability of amounts due us could be reduced by a material amount.

Software Costs Capitalized, Acquired Developed Technology, Goodwill, Other Intangible Assets and Other Long-Lived Assets

Software costs capitalized include developed technology acquired in acquisitions and costs incurred by us in developing our products that qualify for capitalization.  We capitalize our software development costs, other than costs for internal-use software, in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”).  Our policy is to capitalize software development costs incurred in developing a product once technological feasibility of the product has been established.  Software development costs capitalized also include amounts paid for purchased software on products that have reached technological feasibility. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detailed program design, technological feasibility is determined only after completion of a working model. All capitalized software development costs are amortized using an amount determined as the greater of: (1) the ratio that current gross revenues for a capitalized software project bears to the total of current and future projected gross revenues for that project or (2) the straight-line method over the estimated remaining economic life of the product (generally three to six years).  We continually monitor the net realizable value of the software capitalized and acquired developed technology for factors that would indicate impairment, such as a decline in the demand or loss of a significant customer.  During the quarterly period ended January 31, 2005, we performed our annual formal evaluation for impairment and determined that the carrying amount of these assets was not impaired and have noted no subsequent factors that would indicate impairment.

Goodwill is assessed on an annual basis for impairment at the reporting unit level by applying a fair value based test.  We performed the initial impairment test of goodwill at February 1, 2002 and a follow up test at November 1, 2002 to determine if an impairment charge should be recognized under SFAS 142.  The initial impairment analysis did not result in any write-down of capitalized costs.  We perform an annual impairment assessment on November 1^st of each year or when factors indicate that other long-lived assets should be evaluated for possible impairment.  We use an estimate of undiscounted future net cash flows over the remaining life of the asset to determine if impairment has occurred.  Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent from other asset groups.  An impairment in the carrying value of an asset is assessed when the undiscounted, expected future operating cash flows derived from the asset are less than its carrying value.  Management believes that assumptions used to determine cash flows are reasonable, but actual future cash flows may differ from those estimated.  If we determine an asset has been impaired, the impairment is recorded based on the estimated fair value of the impaired asset.  During the quarterly period ended January 31, 2005, we performed our annual evaluation for goodwill impairment and determined that the carrying amount of goodwill was not impaired and have not noted any factors subsequent that would indicate impairment.  Goodwill at October 31, 2005 totaled $20.8 million.  Any deterioration in market conditions, increases in interest rates and changes in our projections with respect to the Global Payments Technologies reporting unit to which goodwill is allocated would result in additional impairment charges in the future.

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Restructuring and Other Charges

During fiscal year 2001, we recorded reserves in connection with our acquisition of Check Solutions and subsequent operational restructurings.  Additional reserves were recorded during each of the succeeding fiscal years.  These reserves contain significant estimates pertaining to work force reductions, and the settlement of contractual obligations resulting from our actions.  Although we do not anticipate any significant changes in the future, the actual costs may differ from these estimates.

Contingencies

We are subject to proceedings, lawsuits and other claims.  We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses.  A determination of the amount or reserves required, if any, for these contingencies is made after careful analysis of each individual issue.  The required reserves may change in the future due to new developments in each matter or changes in insurance coverage or approach such as change in settlement strategy.

Income Taxes

We recognize deferred tax assets or liabilities for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities.  We review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences.  As a result of our cumulative net losses we have provided a full valuation allowance against our net deferred tax assets.  In addition, we expect to provide a full valuation allowance of any future tax benefits until we can sustain a level of profitability that demonstrates our ability to utilize these assets.

Recently Issued Accounting Standards

See “Recently Issued Accounting Standards” in Note 2 of the Notes to Condensed Consolidated Unaudited Financial Statements.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We invest our cash in a variety of financial instruments.  The vast majority of these investments are denominated in U.S. dollars and maintained with nationally recognized financial institutions.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk.  Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.  Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates.  At October 31, 2005, we held $4.5 million of auction rate notes.  The interest rate for these notes will adjust to the current market interest rate at each interest reset date, which is typically on at least a monthly basis.

We had no outstanding borrowings under our revolving credit agreement at October 31, 2005.  As described in Note 4 of our Notes to Condensed Consolidated Unaudited Financial Statements, the interest rate under the revolving credit agreement is variable.

Foreign Currency Risk

We currently have sales and marketing operations in several international locations including Canada, United Kingdom, South Africa and Australia.  As a result, we have assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates.  Due to the nature of these operations, we currently utilize the U.S. Dollar as the functional currency for all international operations.  Within Carretek LLC, our 51% owned subsidiary which offers financial institutions offshore-centric outsourcing of their business processes, the majority of the labor costs is denominated in Indian Rupees while the revenues from this operation are denominated in U.S. Dollars.  As our operations increase, fluctuating labor costs may increase our foreign currency risk.

An insignificant portion of our accounts receivable balance at October 31, 2005 was denominated in a foreign currency.  Our exposure to adverse movements in foreign exchange rates is typically not significant.  Therefore, we do not currently hedge our foreign currency exposure; however, we do try to limit our foreign currency exposure by negotiating these foreign contracts in U.S. Dollars.  In the future we may change this practice.  We will continue to evaluate the need to adopt a hedge strategy in the future and may implement a formal strategy in future periods.

Foreign exchange gains were $12,000 and $43,000 in the three months ended October 31, 2005 and 2004, respectively, and $89,000 and $245,000 losses in the nine months ended October 31, 2005 and 2004, respectively.

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Item 4.  Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file under the Securities Exchange Act of 1934 (“Exchange Act”), and to process, summarize and disclose this information within the time periods specified in the rules under the Exchange Act.

Our management, under the supervision and with the participation of our Chief Executive and Chief Financial Officers, is responsible for evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act).  As of October 31, 2005, they carried out an evaluation of our disclosure controls and procedures, and the Chief Executive and Chief Financial Officers believe that these disclosurecontrols and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II:   OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

The information with respect to certain legal proceedings set forth under “Contingencies” in Note 8 of the Notes to Condensed Consolidated Unaudited Financial Statements, is hereby incorporated by reference.  Reference is also made to the information contained in Part I, Item 3. Legal Proceedings in our Form 10-K for the period ended January 31, 2005 and in Part II, Item 1. Legal Proceedings in our Forms 10-Q for the periods ended April 30, 2005 and July 31, 2005.

The parties conducted a mediation on November 23, 2005 for both the shareholder’s derivative action and the shareholder class action.  Although the mediation session did not result in a settlement, the parties have agreed to continue settlement discussions and have asked the court to postpone a ruling on the motion to dismiss the shareholder class action until January 15, 2006.

The Company and individual defendants deny the allegations in the complaints referenced in the information incorporated herein by reference and intend to defend themselves vigorously.  It is not possible at this time to predict whether we will incur any liability or to estimate the damages, or the range of damages, if any, that we might incur in connection with such lawsuits.  The ultimate resolution of such lawsuits could have a material adverse effect on our business, results of operations, financial condition and cash flows.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about the Company’s purchases of shares of its common stock in the open market during the nine months ended October 31, 2005:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased under the Plans or Programs
4/1/2005 – 4/30/2005	70,000	$	4.98	70,000		(1)
5/1/2005 – 7/31/2005	560,511	5.04		560,511		(1)
8/1/2005 – 10/14/2005	900	6.02		900		(1)
Total	631,411	$	5.03	631,411		(1)

(1)Under a share repurchase program approved by the Board of Directors of Carreker Corporation on April 18, 2005, the Company was authorized to repurchase up to $5.0 million of its common stock through October 14, 2005.  The repurchase program was designed to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934 under which an agent appointed by the Company determined the time, amount, and price at which purchases of common stock would be made, subject to certain parameters established in advance by the Company.  The program expired on October 14, 2005.

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ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

Number	Exhibit Description
10.1	Form of Stock Option Agreement for Executive Officers
10.2	Form of Restricted Stock Agreement for Executive Officers
31.1	Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			CARREKER CORPORATION
By:		/s/ John D. Carreker, Jr.		Date:	December 7, 2005
		John D. Carreker, Jr.
		Chairman of the Board and
		Chief Executive Officer
By:	/s/ Lisa K. Peterson			Date:	December 7, 2005
	Lisa K. Peterson
	Chief Financial Officer

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EX-10.1

Exhibit 10.1

CARREKER CORPORATION
EXECUTIVE
NON-QUALIFIED STOCK OPTION AGREEMENT

The following are the terms and conditions of the Non-Qualified Stock Option Agreement (the “Agreement”), which are incorporated by reference into the Notice of Grant of Stock Options and Option Agreement (the “Notice of Grant”), signed by the Company and agreed and accepted by the Optionee.

Pursuant to the Carreker Corporation (the “Company”) Third Amended and Restated 1994 Long Term Incentive Plan (the “Plan”), the Compensation Committee of the Board of Directors of the Company (the “Committee”) has granted to you a non-qualified stock option (the “Option”) to purchase, on the terms and conditions set forth herein, shares (the “Option Shares”) of the Company’s Common Stock, $.01 par value (the “Stock”). The terms and conditions of the Option are set forth below:

1.Date of Grant. The Option is granted to you on the date shown in the Notice of Grant.

2.Exercise of Option. The Option, to the extent vested, may be exercised as follows:

(a)The Optionee may exercise the Option with respect to all or any part of the Option Shares then vested in the manner specified from time to time by the Company (the “Exercise Date”).

(b)On the Exercise Date or as soon thereafter as practicable, the Company shall cause to be delivered to the Optionee or brokerage firm the Option Shares then being purchased upon full payment for such Option Shares.

(c)The Company’s obligation to deliver Option Shares is subject to applicable federal (including FICA), state and local tax withholding requirements. The Company may require the Optionee or other person receiving such Option Shares to pay to the Company the amount of any such taxes that the Company is required to withhold with respect to such Option Shares, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Option Shares.

3.Termination of Option.  The Option, and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void on the earliest to occur of the following dates:

(a)the expiration date shown on the Notice of Grant;

(b)in the event Optionee’s employment with the Company or any subsidiary is terminated, other than by reason of death or isability (as defined below) or terminated for Cause (as defined below), then this Option may be exercised, to the extent vested, at any time within ninety (90) calendar days after the date of termination of employment, but not later than the Expiration Date. Following the expiration of such ninety (90) calendar day period, this Option shall terminate;

(c)in the event Optionee’s employment with the Company or any subsidiary is terminated for Cause, then this Option shall terminate and no longer be exercisable immediately upon the date of termination. “Cause” means (a) any act by the Optionee that is materially adverse to the best interests of the Company and which, if the subject of a criminal proceeding, could result in a criminal conviction for a felony or (b) the failure by the Optionee to substantially perform his/her duties hereunder, which duties

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are within the control of the Optionee (other than the failure resulting from the Optionee’s incapacity due to physical or mental illness); provided, however, that the Optionee shall not be deemed to be terminated for Cause under this subsection (b) unless and until (1) after the Optionee receives written notice from the Company specifying with reasonable particularity the actions of Optionee which constitute a violation of this subsection (b) and (2) within a period of thirty (30) days after receipt of such notice (and during which the violation is within the control of the Optionee), Optionee fails to reasonably and prospectively cure such violation.

(d)in the event Optionee dies while employed with the Company or any subsidiary, this Option may be exercised, to the extent then vested, by the Optionee’s executor, estate, personal representative or beneficiary, as the case may be, and to whom this Option is transferred by operation of law, at any time within one (1) year after the date of death, but not later than the Expiration Date. Following the expiration of such one-year period, this Option shall terminate;

(e)in the event Optionee’s employment with the Company or any subsidiary is terminated by reason of his disability (which shall mean “permanent and total disability” as defined in Section 22(e)(3) of the Code, or any successor statute), this Option may be exercised, to the extent then vested, at any time within one (1) year after the date of such disability, but not later than the Expiration Date. Following the expiration of such one-year period, this Option shall terminate..

4.Adjustment of and Changes in Stock of the Company.  In the event of a reorganization, re-capitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of capital stock of the Company, the Committee shall make such adjustment as it deems appropriate in the number and kind of shares of Stock subject to the Option or in the Exercise Price; provided, however, that no such adjustment shall give the Optionee any additional benefits under the Option.

5.Capital Transactions.  In the event that, following the date of this Agreement, during the term hereof and prior to the termination of the Option in accordance with Section 3 hereof, there shall occur (a) a merger or consolidation of the Company with or into another corporation in which the Company shall not be the surviving corporation (other than such a merger or consolidation undertaken to reincorporate in another jurisdiction) (for purposes of this Section 5, the Company shall not be deemed the surviving corporation in any such transaction if, as the result thereof, it becomes a wholly-owned subsidiary of another corporation), (b) a dissolution of the Company, or (c) a transfer of all or substantially all of the assets or shares of Stock of the Company in one transaction or a series of related transactions to one or more other persons or entities (any such transaction being referred to herein as a “Capital Transaction”), and, either (i) the Optionee’s employment with the Company was terminated ninety (90) days prior to a Capital Transaction without Cause, or (ii) the Optionee’s employment with the Company or any subsidiary is terminated without Cause or the Optionee terminates his employment with the Company or any subsidiary for “Good Reason” (as that term is defined below) on or within two (2) years followingthe closing date of any Capital Transaction, then any or all Option Shares, unvested at the time of termination of employment,  shall become fully vested and exercisable and the Optionee, without the necessity of any further action by the Committee, shall be entitled to purchase, prior to the expiration of a sixty (60) day period following the later of (i) the date of termination of Optionee’s employment or (ii) the occurrence of a Capital Transaction, the number of Option Shares which are then vested and exercisable.

“Good Reason” means the occurrence of a Capital Transaction (as defined above) and (a) without his/her prior concurrence, the Optionee is assigned any duties or responsibilities that are inconsistent with his/her position, duties, responsibilities or status at the commencement of the term of this

2

Agreement, or his/her reporting responsibilities or titles in effect at such time are changed, (b) the Optionee’s total compensation is reduced, (c) any change in any Optionee benefit plans or arrangements in effect on the date hereof in which the Optionee participates (including without limitation any pension and retirement plan, savings and profit sharing plan, stock ownership or purchase plan, stock option plan, or life, medical or disability insurance plan), which would adversely affect the Optionee’s rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Company and does not result in a proportionately greater reduction in the rights of or benefits to the Optionee as compared to any other executive officer of the Company, or (d) without his/her prior concurrence, the Optionee is required to engage in an increased amount of travel on the Company’s business.

6.Rights of Shareholder.  Neither the Optionee nor any heir, personal representative or other person shall be, or shall have any of the rights and privileges of, a shareholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option.

7.Guidelines for Stock Ownership by Executive Officers.  If Optionee is a senior executive officer of the Company at the time of exercise of any Option, and has not yet achieved the ownership levels contained in the Company’s guidelines for executive officers, the Optionee hereby agrees to retain at least 25% of the Option Shares remaining after satisfaction of applicable tax liabilities.

8.Transferability of Option.  During Optionee’s lifetime, the Option hereunder shall be exercisable only by the Optionee or any guardian or legal representative of the Optionee, and the Option shall not be transferable except, in case of the death of the Optionee, by will or the laws of descent and distribution, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by Optionee to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Optionee and it shall thereupon become null and void.

9.Employment Not Affected.  Neither the granting of the Option nor its exercise shall be construed as granting to the Optionee any right with respect to continuance of employment. Except as may otherwise be limited by a written agreement between the Company or one of its subsidiaries, as the case may be, and the Optionee, the right of the Company (or one of its subsidiaries) to terminate the Optionee’s employment at any time is specifically reserved.

10.Amendment of Option.  The Option and this Agreement may be amended by the Board or the Committee at any time without the consent of Optionee (i) if the Board or the Committee determines, in its sole discretion, that the amendment is necessary or advisable in the light of any addition to or change in the Code or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the date hereof and by its terms applies to the Option or (ii) in order to make the adjustments set forth in Section 5 hereof. Other than the matters set forth in the preceding sentence, the consent of Optionee shall be required in order to amend any other provision of this Agreement. Notwithstanding the foregoing, the Committee may, in its sole discretion, accelerate the exercisability of the Option at any time.

11.Notices.  Any notice to the Company provided for in this Agreement shall be addressed to it in care of its Corporate Secretary at the Company’s executive offices. Any notice to the Optionee shall be addressed to Optionee at the current address shown on the payroll records of the Company or by email. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid or by email.

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12.Incorporation of Plan by Reference.  The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Committee shall interpret and construe the Plan and this Agreement, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. In the event any of the terms and conditions set forth in this Agreement are in conflict or are inconsistent with the terms of the Plan, the terms of the Plan shall control.

13.Governing Law.  The validity, construction, interpretation and effect of this instrument shall exclusively be governed by and determined in accordance with the law of the State of Delaware.

14.Capitalized Terms.  Unless otherwise defined herein, each capitalized term appearing in this Agreement shall have the same meaning as the corresponding term in the Plan.

15.Binding Effect.  This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns.

16.Entire Agreement.  This Agreement and the Notice of Grant embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof.

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EX-10.2

Exhibit 10.2

CARREKER CORPORATION
EXECUTIVE
RESTRICTED STOCK AGREEMENT

The following are the terms and conditions of the Restricted Stock Agreement (the “Agreement”), which are incorporated by reference into the Notice of Grant of Award and Award Agreement (the “Notice of Award”), signed by the Company and agreed and accepted by the Award Recipient.

Pursuant to the Carreker Corporation (the “Company”) Third Amended and Restated 1994 Long Term Incentive Plan (the “Plan”), the Compensation Committee of the Board of Directors of the Company (the “Committee”) has awarded to you a restricted stock award (the “Award”), on the terms and conditions set forth herein, of shares of the Company’s Common Stock, $.01 par value (the “Stock”). The terms and conditions of the Award are set forth below:

1.Award of Shares.  Under the terms of the Plan, the Committee has awarded to the Award Recipient a restricted stock award on the date shown in the Notice of Award.

2.Award Restrictions.  Upon the vesting of the Award by virtue of the lapse of the restriction period set forth in the Notice of Award or under Paragraphs 4 or 7 of this Agreement, the Company shall cause the requisite number of shares to be delivered to the Award Recipient or beneficiary(ies) within thirty (30) days after vesting. During the restriction period, the shares covered by the Award are not transferable by the Award Recipient by means of sale, assignment, exchange, pledge or otherwise. However, during the restriction period, the Award Recipient does have the right to tender for sale or exchange with the Company’s written consent any such shares in the event of any tender offer within the meaning of Section 14(d) of the Securities Exchange Act of 1934.

3.Shares.  The shares representing the Award shall be registered on the Company’s books in the name of the Award Recipient as of the Award Date. The Company shall instruct its transfer agent that shares representing the Award are not transferable by the Award Recipient by means of sale, assignment, exchange, pledge or otherwise, until such time as the shares are vested (i.e., the restriction period lapses).

4.Accelerated Vesting.  At the end of fiscal years 2007 and 2008, the Company’s Pre-tax Profit Margin will be determined based on the Company’s audited financial results. In the event the Committee determines that the Company’s Pre-tax Profit Margin for the relevant fiscal year is equal to or greater than the “Performance Target”, then on the anniversary date of the Award following the end of the fiscal year in which the Company achieves the Performance Target, 50% of the Award shall vest and be freely transferable by the Award Recipient. For purposes of this Agreement, the “Performance Target” shall mean the Pre-tax Profit Margin goal communicated to the Award Recipient in a separate notice on or about the commencement date of the applicable fiscal year.

“Pre-tax Profit Margin” means the percentage calculated by dividing the Company’s Pre-tax Profit by the Total Revenues, as each is reported in the Company’s consolidated audited financial statements included in its annual report on Form 10-K, for the applicable fiscal year.

5.Termination of Employment.  If the Award Recipient terminates employment with the Company due to death or disability during the restriction period, the Award shall vest in full as of the date of such termination. If the Award Recipient’s employment with the Company terminates under special circumstances determined by the Committee, the Award may be forfeited (or may be vested in full or in part) as determined by the Committee. Except as set forth in Section 7, hereof, termination of the Award Recipient’s

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employment with the Company for any other reason during the restriction period shall result in forfeiture of the Award on the date of termination. The Award Recipient may designate a beneficiary(ies) to receive the shares representing any restricted stock award automatically vested upon death. The Award Recipient has the right to change such beneficiary designation at will.

6.Withholding Taxes.  The Company shall have the right to retain and withhold from any payment to an Award Recipient the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to the Award. At its discretion, the Company may require an Award Recipient receiving shares of stock under a restricted stock award to reimburse the Company for any such taxes required to be withheld by the Company and withhold any distribution in whole or in part until the Company is so reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due or to become due from the Company to the Award Recipient an amount equal to such taxes required to be withheld by the Company to reimburse the Company for any such taxes or retain and withhold a number of shares having a market value not less than the amount of such taxes and cancel (in whole or in part) any such shares so withheld in order to reimburse the Company for any such taxes.

7.Capital Transactions.  In the event that, following the date of this Agreement, during the term hereof and prior to the termination of the Award in accordance with Section 5 hereof, there shall occur (a) a merger or consolidation of the Company with or into another corporation in which the Company shall not be the surviving corporation (other than such a merger or consolidation undertaken to reincorporate in another jurisdiction) (for purposes of this Section 7, the Company shall not be deemed the surviving corporation in any such transaction if, as the result thereof, it becomes a wholly-owned subsidiary of another corporation), (b) a dissolution of the Company, or (c) a transfer of all or substantially all of the assets or shares of Stock of the Company in one transaction or a series of related transactions to one or more other persons or entities (any such transaction being referred to herein as a “Capital Transaction”), and, either (i) the Award Recipient’s employment with the Company was terminated ninety (90) days prior to a Capital Transaction without Cause or (ii) the Award Recipient’s employment with the Company or any subsidiary is terminated without Cause or the Award Recipient terminates his employment with the Company or any subsidiary for “Good Reason” (as that term is defined below) on or within two (2) years following the closing date of any Capital Transaction, then upon the occurrence of such events, any or all Award Shares unvested at the time of termination of employment shall become fully vested and the Award Recipient, without the necessity of any further action by the Committee, shall be entitled to receive the number of Award Shares which are then vested.

“Good Reason” means the occurrence of a Capital Transaction (as defined above) and (a) without his/her prior concurrence, the Award Recipient is assigned any duties or responsibilities that are inconsistent with his/her position, duties, responsibilities or status at the commencement of the term of this Agreement, or his/her reporting responsibilities or titles in effect at such time are changed, (b) the Award Recipient’s total compensation is reduced, (c) any change in any Award Recipient benefit plans or arrangements in effect on the date hereof in which the Award Recipient participates (including without limitation any pension and retirement plan, savings and profit sharing plan, stock ownership or purchase plan, stock option plan, or life, medical or disability insurance plan), which would adversely affect the Award Recipient’s rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Company and does not result in a proportionately greater reduction in the rights of or benefits to the Award Recipient as compared to any other executive officer of the Company, or (d) without his/her prior concurrence, the Award Recipient is required to engage in an increased amount of travel on the Company’s business.

 “Cause” means (a) any act by the Award Recipient that is materially adverse to the best interests of the Company and which, if the subject of a criminal proceeding, could result in a criminal conviction for a felony or (b) the failure by the Award Recipient to substantially perform his/her duties hereunder, which duties are

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within the control of the Award Recipient (other than the failure resulting from the Award Recipient’s incapacity due to physical or mental illness); provided, however, that the Award Recipient shall not be deemed to be terminated for Cause under this subsection (b) unless and until (1) after the Award Recipient receives written notice from the Company specifying with reasonable particularity the actions of Award Recipient which constitute a violation of this subsection (b) and (2) within a period of thirty (30) days after receipt of such notice (and during which the violation is within the control of the Award Recipient), Award Recipient fails to reasonably and prospectively cure such violation.

8.Guidelines for Stock Ownership by Executive Officers.  If the Award Recipient is a senior executive officer of the Company at the time any of the shares of Stock vest and has not yet achieved the ownership levels contained in the Company’s guidelines for executive officers, the Award Recipient hereby agrees to retain at least 25% of the shares remaining after satisfaction of applicable tax liabilities

9.Administration.  The Committee shall have full authority and discretion (subject only to the express provisions of the Plan) to decide all matters relating to the administration and interpretation of the Plan and this Agreement. All such Committee determinations shall be final, conclusive, and binding upon the Company, the Award Recipient, and any and all interested parties.

10.Notices.  Any notice to the Company provided for in this Agreement shall be addressed to it in care of its Corporate Secretary at the Company’s executive offices. Any notice to the Award Recipient shall be addressed to Award Recipient at the current address shown on the payroll records of the Company or by email. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid or by email.

11.Incorporation of Plan by Reference.  The Award is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Award shall in all respects be interpreted in accordance with the Plan. The Committee shall interpret and construe the Plan and this Agreement, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. In the event any of the terms and conditions set forth in this Agreement are in conflict or are inconsistent with the terms of the Plan, the terms of the Plan shall control.

12.Capitalized Terms.  Unless otherwise defined herein, each capitalized term appearing in this Agreement shall have the same meaning as the corresponding term in the Plan.

13.Right to Continued Employment.  Nothing in the Plan or this Agreement shall confer on an Award Recipient any right to continue in the employ of the Company or in any way affect the Company’s right to terminate the Award Recipient’s employment without prior notice at any time.

14.Amendment(s).  This Agreement shall be subject to the terms of the Plan as amended except that the Award that is the subject of this Agreement may not in any way be restricted or limited by any Plan amendment or termination approved after the date of the Award without the Award Recipient’s written consent.

15.Force and Effect.  The various provisions of this Agreement are severable in their entirety. Any determination of invalidity or unenforceability of any one provision shall have no effect on the continuing force and effect of the remaining provisions.

16.Governing Law.  This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware.

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17.Successors.  This Agreement shall be binding upon and inure to the benefit of the successors, assigns and heirs of the respective parties.

18.Entire Agreement.  This Agreement and the Notice of Award contain the entire understanding of the parties and shall not be modified or amended except in writing and duly signed by the parties. No waiver by either party of any default under this Agreement shall be deemed a waiver of any later default.

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EX-31.1

Exhibit 31.1

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, John D. Carreker, Jr.,certify that:

1.I have reviewed this quarterlyreport on Form 10-Q of Carreker Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:		December 7, 2005
By:	/s/ John D. Carreker, Jr.
	John D. Carreker, Jr.
	Chairman of the Board and
	Chief Executive Officer

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EX-31.2

Exhibit 31.2

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Lisa K. Peterson,certify that:

1.I have reviewed this quarterlyreport on Form 10-Q of Carreker Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:		December 7, 2005
By:	/s/ Lisa K. Peterson
	Lisa K. Peterson
	Chief Financial Officer

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Carreker Corporation (the Company) on Form 10-Q for the quarter ending October 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John D. Carreker, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/	JOHN D. CARREKER, JR.
	John D. Carreker, Jr., Chief Executive Officer
Date:		December 7, 2005

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EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Carreker Corporation (the Company) on Form 10-Q for the quarter ending October 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lisa K. Peterson, Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/	LISA K. PETERSON
Lisa K. Peterson, Chief Financial Officer
Date:		December 7, 2005

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