ONLINE RESOURCES CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 0-26123

ONLINE RESOURCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 52-1623052
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)

7600 COLSHIRE DRIVE
MCLEAN, VIRGINIA 22102
(Address of principal executive offices) (Zip code)

(703) 394-5100
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

TITLE OF EACH CLASS

Common Stock, $0.0001 par value per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the common stock of the registrant held by
non-affiliates as of March 22, 2002 was $33,282,203. There were 13,281,298
shares of common stock outstanding as of March 22, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement for its 2002
Annual Meeting of Stockholders pursuant to Regulation 14A within 120 days of the
end of the fiscal year ended December 31, 2001. Portions of such proxy statement
are incorporated by reference into Part III of this Form 10-K.
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ONLINE RESOURCES CORPORATION
FORM 10-K

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

OVERVIEW

Online Resources Corporation, a Delaware corporation incorporated in 1989,
is a leading outsourcer of e-financial services with over 500 bank and credit
union clients. Our comprehensive Quotien(SM) product suite provides Internet
banking, electronic bill presentment and payment, commercial cash management,
and other consumer and business e-financial applications. We support our
products with 24x7 customer care, targeted consumer marketing services, training
services and other network and technical professional services.

Although we serve seven of the largest 100 banks, we primarily target
regional and community financial institutions with assets of $10 billion or
less. Regional and community financial institutions serve approximately
two-thirds of the nation's retail checking accounts, and often lack the internal
resources to build, operate, market and support new Internet-based delivery
technology, related products and services, and supporting infrastructure.

Through our integrated Quotien(SM) product line, retail customers of our
clients may access our proprietary banking service, which allows them to view
account statements and balances of accounts maintained with our clients, and
perform funds transfers and certain other funds management functions. Retail
customers may also use our bill payment services, allowing them to pay nearly
any bill automatically. Our transaction services are complemented by our call
center, database, consumer marketing, Web site design and hosting, and other
support services giving our clients the benefit of a single, integrated
solution, backed by a unique end-to-end service guarantee and real-time banking
transaction capabilities.

Our client financial institutions generally pay us a one-time
implementation fee to link our respective computer systems, allowing their
retail and commercial customers to connect to us through the Internet. In
addition, we are typically paid a recurring monthly fee based on the number of
billable customers of the client financial institution who use our services and
in some cases on a per transaction basis. As of December 31, 2001, we provided
our services to approximately 449,000 billable customers of our client financial
institutions. Our 517 financial institution clients collectively serve an
aggregate of approximately 9 million retail checking accounts.

INDUSTRY BACKGROUND

The Internet has emerged as the fastest growing global communications
medium, enabling millions to connect to a world wide network to conduct business
and share information electronically and is changing the way individuals and
businesses communicate and conduct commerce.

GROWTH OF FINANCIAL ELECTRONIC COMMERCE

Consumer acceptance of easy-to-use electronic media has had a significant
impact on the financial services industry. Since most financial transactions
require transferring only information, rather than tangible goods, the financial
services industry is particularly well suited for electronic commerce. The
combination of the following trends is driving the adoption of financial
electronic commerce:

- Expanding PC Ownership. Declining prices for personal computers and rapid
growth in the number of computer-literate consumers are driving increased
penetration of PCs in U.S. homes.

- Increasing Internet Accessibility. Reduced communications costs, improved
Web browsers, and faster connection speeds have made the Internet
increasingly accessible to consumers and to businesses offering products
and services online. According to a Commerce Department report, about
half of the population has access to the Internet.

- Increasing Acceptance of Electronic Commerce. Consumers have grown
increasingly comfortable with the security of electronic commerce and
many are willing to conduct large transactions online.

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EMERGENCE OF ONLINE FINANCIAL SERVICES

Financial institutions well recognize the advantages offered by online
delivery systems. Financial electronic commerce provides these institutions the
opportunity to offer their services to targeted audiences. Additionally, these
solutions provide financial institutions with the opportunity to reduce or
eliminate workload, paper and other back office expenses associated with
traditional distribution channels.

Banks, thrifts and credit unions have responded by offering customers
convenient at-home or at-work access to a range of financial services. Retail
customers now have the capability to execute a wide array of online
transactions, including funds transfers, bill payment and presentment, and
consumer and residential loan processing. The American Bankers Association and
Dove Consulting predict online bill payment will see significant growth as
one-third of consumer respondents nationwide expect to begin using or increase
usage of this option by 2003. In contrast, usage of paper-based payments is
expected to decrease.

With the rapid growth of the Internet banking market, financial
institutions can no longer rely exclusively on traditional retail delivery
methods. We believe that financial institutions that are unable to offer
competitive electronic banking as part of their overall services will find it
increasingly difficult to attract and retain customers.

CHALLENGES FOR REGIONAL AND COMMUNITY FINANCIAL INSTITUTIONS

Thomson Financial estimates that of 20,800 depository financial
institutions in the U.S., all but approximately 100 are regional and community
institutions with assets of less than $10 billion. While the online banking
trend has historically been driven primarily by very large financial
institutions, regional and community financial institutions are being compelled
to offer comparable services to remain competitive.

These financial institutions face many obstacles in making electronic
commerce services available to their customers. In particular, they often lack
the capital and human resources to:

- develop the substantial technology infrastructure necessary to provide
their customers with Internet and other online banking services;

- develop the operating and technical expertise to deliver online services
and manage rapidly changing technologies;

- design and execute consumer marketing campaigns necessary to promote the
use of online banking services; and

- provide integrated customer support for their online banking services.

We believe that these limitations and the resulting inability to offer
competitive Internet banking services present a significant impediment to
retaining and attracting customers and put these financial institutions at a
distinct disadvantage.

THE ONLINE RESOURCES SOLUTION

We provide a single source, fully integrated solution through our
Quotien(SM) e-financial suite of services, which we believe, enables financial
institutions to offer the breadth of financial services needed to remain
competitive. We bring economies of scale and technical expertise to our clients,
many of whom, in our opinion, would otherwise lack the resources to compete in
the rapidly changing, complex financial services industry. We differentiate
ourselves by internally developing, integrating and controlling many critical
services, such as bill payment and call center support, rather than relying
primarily on third-party providers for these services. As a single source
vendor, we believe our clients benefit from having one point of accountability
and control. We believe our solution to the obstacles faced by our clients in
connection with electronic commerce provides them with a cost-effective means to
retain and expand their customer base, deliver their services more efficiently
and strengthen their customer relationships.

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We provide our services through:

- our technology infrastructure,

- our operating and technical expertise,

- our marketing services, and

- our support services.

Our Technology Infrastructure. We provide our services through our
Quotien(SM) e-financial suite by connecting our financial institution clients,
their retail customers and other financial service providers through our
integrated communications, systems, processing and support capabilities. Our
middleware component enables us to integrate customer and financial data in
order to coordinate customer authorization, transactions, settlement, security,
user profiles, data warehousing, registration, fulfillment, administrative
support and our customer call center services. These functions operate
substantially in real-time and provide an integrated application for our clients
and their retail customers.

Our proprietary solution includes three gateways and critical unifying
middleware:

The Access Gateway: A dynamic web server platform that allows retail
customers of our client financial institutions to access and execute
transactions.

The Services Gateway: A set of high quality, Internet-based financial
products, such as our proprietary retail and commercial banking and bill
payment services, as well as other value-added e-financial services.

The Electronic Funds Transfer (EFT) Gateway: Our patented EFT gateway
for real time electronic funds transfer between substantially all U.S.
depository financial institutions.

Middleware: An integrated support infrastructure, including software and
systems to unify data and processes, a 24 hours a day, seven days a week
consumer and client support call center, and electronic customer
relationship management (eCRM), a targeted marketing system, that
simplifies effective cross-selling of products and services based on
known consumer information and activities.

Our Operating and Technical Expertise. We provide regional and community
financial institutions with our operating and technical expertise. We believe
that our industry focus and outsourcing capabilities add value for our clients
by simplifying complex processes and technologies. After ten years of operating
experience, we have established the processes, procedures, controls and staff
necessary to keep our systems running reliably and securely. At the same time,
we have developed the organizational flexibility and inter-disciplinary staff
skills necessary to adjust to a rapidly changing environment.

Our Consumer Marketing Services. We actively conduct retail customer
marketing programs for our clients, and support marketing programs by our
clients. Marketing costs are shared by our clients and us. The marketing
programs include Web-based marketing, direct marketing, telemarketing, statement
stuffers and branch incentives. The marketing programs are privately branded by
the financial institutions so that they may take advantage of their existing
relationships.

Our Support Services. We provide a comprehensive set of support services
to complement our banking and bill presentment and payment services. These
support services include our customer service center, Web site design and
hosting, training, professional services and administrative services. We provide
each of these services on an optional basis and have fully integrated them into
our Quotien(SM) product platform.

STRATEGY

Our goal is to become the vendor of choice for regional and community-based
banks, thrifts and credit unions who outsource remote delivery of consumer and
small business e-financial services. We position ourselves as a single,
outsourced solution to our financial institution clients, providing them our
proprietary Internet banking and bill payment services, and other complementary
e-financial services. Our consumer and small business services and content are
further supported by proprietary infrastructure and support services,
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such as our customer care center, real-time payments processing, consumer
marketing, customization and other professional services.

We believe our offering gives our clients the advantage of a single
point-of-contact, an end-to-end service level guarantee, relatively seamless
customer care, packaging and pricing advantages, and integrated data for eCRM
and service enhancement. While most of our clients use our full suite of
services, some clients use our bill payment services, where they enjoy the
benefit of our real-time debit capabilities, integrated customer care, and
relatively high percentage of electronic remittances. Our business strategy is
straightforward: Since our founding in 1989, we have grown our business
organically and developed a base of 517 financial institution clients, who have
typically entered into two to five year service contracts where we are paid by
the volume of billable users and transactions, and the number of products and
services used. Our near-term strategy, therefore, is to focus on our substantial
existing client base, and to promote Internet banking usage and the
cross-selling of our proprietary bill payment services. Over the longer term,
our goal is to retain and expand our client base, providing a substantial
distribution channel for an integrated suite of e-financial transaction,
cultivation and communication services. The following outlines some of our
near-term priorities and tactics:

Continued Focus on Profitability. We believe that our shareholders,
clients, employees and partners place a high premium on achieving near-term
profitability. Our foremost priority, therefore, is to achieve profitability
without compromising our long-term strategy and objectives. Our business model
is driven by financial and operating leverage derived from earning our largely
recurring user and transaction fees spread over our relatively fixed cost base.
Therefore, our tactics center on:

- increasing adoption of our Internet banking services to the approximately
18 million potential customers (representing 9 million checking accounts)
of our current 517 financial institution clients;

- cross-selling our proprietary bill payment services to those Internet
banking users, in order to increase revenue earned per user;

- improving our operating efficiencies through automation and better
quality of service, and

- keeping our overhead costs relatively constant.

While achieving cost efficiencies is more controllable and critical to
achieving short-term profitability, we believe that sustainable, long-term
profitability depends upon revenue growth through increased usage and cross-sell
of our suite of e-financial services to the customers and members of our bank,
thrift and credit union clients.

Increase Retail Customer Usage. We have invested heavily in a variety of
consumer marketing capabilities where we materially supplement the marketing
efforts of our client institutions. These programs are co-funded by our clients,
with the goal of increasing customer adoption and converting the Internet into a
cost-effective means to promote and deliver a profitable set of financial
services. Our programs use a variety of capabilities, including our eCRM
software, various consumer touch-points, and confidential data derived from our
banking and bill payment applications. Our eCRM capabilities include data
mining, analysis, campaign management and data integration. Our consumer
touch-points include real-time personalizing and targeting messages within our
banking application, use of our customer care center, targeted emails, and
offline media. Using our patented methods, our integrated consumer marketing
capabilities use confidential banking and bill payment data, fully
self-contained and compliant with privacy laws, to target market and package
services to existing and potential new users.

Enhance Our Services. We believe our large business base, currently 517
financial institutions, with its potential of approximately 18 million consumer
relationships represents an attractive distribution channel for the additional
financial services and content provided by us and by our third-party partners.
In bolstering efforts to cross-sell new products, such as commercial cash
management, to clients, we will shift some of our sales and marketing resources
towards existing customers.

Leverage Our Database For Cultivation and Communication Services. We
believe that we provide real-time financial transaction processing on the
Internet. By the end of 2001, we were processing approximately 70 million annual
transactions and our bill payment service was processing over $3.5 billion of
payments per year.
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The increased volume and efficiency of these transactions not only is critical
to our business, but also will generate potentially valuable data using our
patented method for confidential messaging without compromising consumer
privacy. This data can be extracted using various data mining and aggregation
tools and techniques, and packaged for new personalized products and services.

Provide Superior Service Quality and Support Services. We believe that
providing superior quality service is important in attracting and retaining
financial institutions and their retail customers, particularly since our online
banking services and customer call center are branded in their names. We believe
our quality of service is currently among the highest in the industry. Our
system availability now exceeds 99.8%. Approximately 60% of our bill payments
are made electronically and our bill payment error rate is approximately .01%.
With more than 100 employees in our customer care center, we have invested
substantially in specialized call center systems, software and management. In
addition, we have engaged a third-party contractor to augment our in-house call
center.

Strengthen Integration of Financial Data. We believe we help our clients
remain competitive in electronic banking and commerce by allowing them to
effectively integrate and offer multiple services and products to their
customers. These products and services are designed to allow our clients' retail
customers to conduct and control all of their financial affairs conveniently. We
expect that this will further strengthen the relationships between our clients
and their retail customers. We recently upgraded our proprietary middleware and
have made substantial investments in software tools and technical staff to
further enhance our integration capabilities.

OUR SERVICES AND PRODUCTS

We offer a single source solution to the electronic commerce challenges of
our financial institution clients. Typically, we contract with our clients to
provide a fully integrated set of Internet and other Internet banking and
e-financial services and related products.

SERVICE PRODUCTS

Our Quotien(SM) suite of e-financial services allow a financial institution
to offer to its retail customers and business customers account access and
transaction capabilities 24 hours a day, seven days a week. Customers are able
to access their accounts anytime and anywhere through the Internet.

Our Quotien(SM) Internet Banking and Bill Payment service offers retail
customers the following features:

- viewing transaction histories and real-time account balances;

- transferring funds within and between financial institutions either
immediately or in the future;

- initiating immediate and future bill payments or transfers; and

- viewing projected balances based upon bill payment and account
activities.

Using our bill payment service, Internet banking customers may pay any
merchant biller or individual. Approximately 60% of our bill payments are
currently made electronically to merchants. We guarantee the payee will receive
electronic bill payments within two business days of initiation by the retail
customer. We guarantee paper check payments will be received by the payee within
five business days. Paper and electronic payments are drawn on an escrow account
into which we transfer funds derived from the accounts of the Internet banking
customers. As of February 28, 2002, we had a bill payment database of
approximately 343,000 discrete merchant billers.

We believe our real-time debit process, described under "Systems and
Technology" below, offers substantial cost and quality advantages in our bill
payment services. Under alternative batch-oriented debit systems, the bill
payment processor cannot immediately verify the availability of sufficient funds
to cover the bill payment. This may result in potential collections issues, the
need to assess credit risk and increased use of paper versus electronic
payments. We therefore believe that real-time debit capability results in a
higher percentage of electronic payments, lower operating costs and a higher
quality of service.

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Our Quotien(SM) Bill Payment Service is an unbundled version of the bill
payment service featured in our Internet banking service. It is unique in the
industry because it leverages our existing architecture to access real-time
balance information during a user's online bill payment session. The service
works through our EFT Gateway which links our systems to financial institutions
through ATM networks, data processors, and other financial technology companies.
This enables us to take advantage of existing and trusted system, security,
clearing, settlement, regulations and procedures that the ATM networks, data
processors and other technology companies have adopted. Users of the Quotien(SM)
Bill Payment Service benefit from a secure, reliable real-time direct link to
their accounts. Users schedule transactions and view balances via our intuitive
Web user interface, which is branded for the financial institution. Account
balance inquiries and payment debits are accomplished via standard ISO 8583
transaction processing codes, and we remit payments to designated merchants on
the appropriate date. We provide users of this service with complete user
support and payment inquiry processing through our customer care call center.

Our Quotien(SM) Remittance Service is an attractive add-on service for
financial institutions of all sizes that run their own in-house online banking
system and process their own bill payment debits. It provides their systems with
the extra functionality of bill payment processing, and is backed by complete
funds settlement, payment research, inquiry resolution, and merchant services.
Users provide bill payment instructions via the financial institution's existing
online banking interface, which validates the availability of funds on the date
bills are to be paid. If funds are available, the user's account is debited and
a designated clearing account is credited. On a daily basis, financial
institutions send us a file of all bill payment requests and we respond
immediately, processing bill payment requests and remitting payments to
designated merchants. We provide our financial institutions with a return file
of transaction confirmations, error descriptions, and data updates, and
financial institution employees have instant access to comprehensive payment
processing and status information through our Web-based Payment IQ feature.

Our Quotien(SM) Cash Management service is a key component of our business
banking service offering. This sophisticated solution developed by Magnet
Communications, Inc. provides added value in a number of ways. Quotien(SM) Cash
Management's comprehensive application platform provides financial institutions
with additional leverage to attract a greater spectrum of business customers. In
doing so, it is capable of building their earnings potential, as online business
customers typically have larger demand deposits, higher loan balances, and more
accounts than offline customers. And, as it helps them build their business
base, Quotien(SM) Cash Management can help them retain that base with a highly
flexible selection of applications, compelling support features, 24 hours a day,
seven days a week online accessibility, and a secure environment. Just as
important, Quotien(SM) Cash Management provides additional revenue opportunities
through fee-based transactions such as ACH, balance reporting, wire transfers,
book transfers, and stop payments.

Our services generate revenue from recurring monthly fees charged to
financial institution clients, typically based on the number of billable
customers. Services are priced on a monthly per billable customer basis, and in
some cases, on a transaction basis. Pricing ranges from $1.51 to $7.80 per month
per billable customer depending upon the level of services we provide to the
financial institution. The pricing of these services to retail customers is at
the discretion of each financial institution. Because our clients generally
derive internal cost savings, account retention and other marketing benefits by
offering our services, the majority of our clients do not pass all of these
charges through to their retail customers, and most of our clients offer the
banking portion of our services free-of-charge. We offer Internet banking
pricing to financial institution clients at a fixed fee. Internet banking
relates to our services that allow consumers to view statements and balances and
transfer funds among accounts.

We complement our suite of Quotien(SM) banking, bill payment, and
e-financial services with the following comprehensive services:

- Quotien(SM) Customer Care. We maintain a customer service center for
financial institution clients that choose to outsource this service to
us. Retail customers can access the customer service operation by phone
or e-mail 24 hours a day, seven days a week. As of December 31, 2001, our
customer service center had over 100 employees available to respond to
retail customers' questions relating to enrollment, transactions or
technical support. We also have engaged a third-party contractor to
support

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our in-house call center. Customer services generate revenues from
recurring monthly fees charged to financial institution clients,
typically based on the number of enrolled retail customers. For those
clients that choose not to use our customer service bureau, we license to
them our proprietary software for use in their in house customer service
operations.

- Quotien(SM) Web Design and Hosting. We offer Web site design and hosting
services to our financial institution clients. We charge an upfront fee
for design and a recurring monthly maintenance fee for hosting the Web
site.

- Quotien(SM) Professional Services. We offer a variety of ways that a
financial institution client may upgrade or enhance their online banking
and bill payment product offering. At the most basic, these enhancements
typically include simple upgrades to allow a consumer access to a wider
range of accounts, more timely history information or a higher level of
custom branding. At a more complex level, a totally custom software
application can be built and installed specifically for the client to
allow direct access to their host computer system, to allow real-time
enrollment of consumers, or to provide other enhancements as requested.
These services are evaluated and quoted to the financial institution
clients on a time and cost basis, and performed on approval from the
client.

- Quotien(SM) Training Services. We offer training services that fit the
needs of our clients, ranging from operational training to
service-oriented sales workshops. Our training services team develops and
delivers effective and professional programs in banking, operations, call
centers, sales and communications for our clients.

- Consumer Marketing Support for Financial Institution Clients. Our
consumer marketing focus is to create cost-effective programs to increase
the percentage of our clients' retail customers using our services.
Building on a decade of remote banking experience, we create and produce
programs that are capable of operating successfully across a range of
integrated media, including:

- Web-based marketing

- data mining

- telemarketing

- solo direct mail

- statement inserts

- Internet advertising

- e-mail

- in-branch employee programs

- statement envelop teasers

These programs are designed around the effective principles of
activation-based marketing, a two-step process that first attracts customers to
the financial institution's Internet banking services and then converts them to
bill payment usage. Our programs employ one of the two following formats:

- Acquisition Campaigns, targeting our clients' customers who are not
signed up currently for Internet banking services to encourage them to
become new users.

- Conversion Campaigns, targeting current Internet banking customers to
encourage their adoption of bill payment services.

The marketing programs are privately branded by the financial institutions
so they may take advantage of their existing relationships. We intend to conduct
these programs in a matching fund environment, as opposed to fully funding the
programs ourselves.

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- Administrative Services. We provide administrative support services to
our financial institution clients including the compilation of customized
reports regarding their retail customers' account activity. We generally
charge our clients on an hourly basis for these services.

IMPLEMENTATION AND OTHER RELATED PRODUCTS

Initially, we contract with a financial institution to provide services and
products tailored to meet its specific needs. At the time of entering into a
contract, a financial institution client pays a one-time fee, which generally
ranges from $2,500 to $25,000 based on certain factors, including the size of
the financial institution and the scope of services rendered.

Implementation consists of systems integration and a pilot testing period.
A project management team is assembled to integrate our hub with a financial
institution client's legacy host system, typically via an ATM network or a
direct communications interface. A financial institution's legacy host system
houses its transaction accounts. Upon completion of systems integration, we
conduct a pilot testing period using selected customers and employees. Following
the pilot, the financial institution client is fully launched and services are
made available to its retail customers. Generally, at this point, the financial
institution client begins to pay at least the minimum service fees. For clients
who are linked to any one of approximately 60 core processors and ATM networks
with whom we are certified, implementation typically takes 90 to 180 days
between signing and launch.

Third-Party Services. We facilitate retail customers' linking to
additional Quotien(SM) e-financial services beyond our Quotien(SM) Internet
Banking, Bill Payment and Remittance Service. We provide our clients' retail
customers with a comprehensive suite of financial services through our Services
Gateway, which currently supports Internet-based delivery of:

- Quicken(R) (Intuit);

- cash management (Magnet);

- bill presentment (MasterCard RPPS);

- investment tools and access to major online investment brokerage services
(Trade.com and U.S. Clearing);

- loans (InfiLink(TM));

- insurance (InsWeb);

- credit management (Consumerinfo.com); and

- financial planning tools for home buying, college education and
retirement.

In addition, we offer "small office/home office" capabilities and have
partnered with Intuit to support Quicken, QuickBooks(R) and other popular small
business services. We have also developed business arrangements and links to
third parties for expanded retail customer access. We currently have such
arrangements with third-party access providers, typically banking and credit
union software providers such as Ultradata (a service of John H. Harland
Company), Aftech (a subsidiary of Fiserv), Symitar, and Users Incorporated.

By aggregating the retail customers of our financial institution clients
into a large online community, we believe we have begun to assemble an
attractive audience for third parties to market their products and services. In
cooperation with our financial institution clients, we believe that over time
this aggregated community will generate significant buying power and could
attract many additional third-party providers.

Related Products. We also derive revenue from sales of related enabling
products and software at fixed prices, including customer service software.
These have not been a significant source of revenue.

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SALES AND MARKETING

We have adopted a multiple channel institutional sales strategy, covering
both direct and indirect sales.

Direct Marketing to Financial Institutions. We utilize a direct sales
force located throughout the United States. The sales force is responsible for
prospecting and acquiring new accounts. Our account management staff manages
current accounts and cross-sells additional products into those accounts. Sales
representatives and account managers earn a base salary plus commission.

Indirect Sales to Financial Institutions. We support an indirect sales
channel by partnering with third parties who sell complementary services or
products to financial institutions. These alliances leverage the established
vending relationships of our marketing partners and reduce marketing costs by
replacing the need for a larger direct sales force. Our marketing partners
include ATM networks such as MAC and Honor (now known as Star), software
providers such as Intuit, core banking processors such as Connecticut Online
Computer Center and Users, Inc., and credit union software providers such as
Ultradata and Symitar. Fee arrangements for our marketing partners vary and are
based on the value-added and scope of responsibilities assumed by the marketing
partner. Typically, marketing partners earn commission based on our
implementation fee. If the marketing partner performs additional on-going
account management and other support services, then the marketing partner may
earn a small portion of our on-going operating fees. Additionally, marketing
partners may benefit from the direct sales of their products and services, such
as transaction fees for ATM networks and processors.

Consumer Marketing Support for Financial Institution Clients. A key focus
of our marketing department is creating cost-effective programs to increase the
percentage of our clients' retail customers using our services. The marketing
programs include Web-based marketing, direct marketing, telemarketing, statement
stuffers and branch incentives.

SYSTEMS AND TECHNOLOGY

Overview. We designed our systems and technology around real-time
communications and processing, which optimizes quality, scalability and cost.
Our systems are based on a multi-tiered architecture consisting of:

- Enabling technology -- commercial software and hardware enabling retail
customers to easily access our hub;

- Front-end servers -- proprietary and commercial communications software
and hardware providing Internet and private communications access to our
hub for retail customers;

- Middleware -- proprietary and commercial software and hardware used to
integrate customer and financial data and to process financial
transactions;

- Back-end systems -- databases and proprietary software which support our
banking and bill payment services; and

- Support systems -- proprietary and commercial systems supporting our
customer service and other support services.

Our systems architecture is designed to provide retail customer access into
a common database integrated with our banking and bill payment services and our
proprietary support services software. Third-party financial services are linked
to our systems through the Internet, which we plan to more fully integrate into
our retail customer application and transaction processing. Incorporating such
third-party capabilities into our system, enables us to focus our technical
resources on our proprietary middleware and integrating capabilities.

Real-Time ATM Network-Based Process. We typically link to financial
institution clients through an ATM network or core processor using ATM
specifications. By using an ATM network or processor to link into a financial
institution client's primary database for retail customer accounts, we take
advantage of established electronic funds transfer infrastructure. This includes
all telecommunications and software links, security, settlements and other
critical operating rules and processes. Using this ATM architecture, financial
institution
9

clients avoid the substantial additional costs necessary to expand their
existing infrastructure. The net result of using this architecture is that high
quality remote financial electronic commerce services can be provided, enabling
retail customers to access their financial account information and pay bills by
debiting funds from their accounts.

In addition to quality and cost benefits associated with bill payment, we
believe that our real-time architecture is more scalable than traditional batch
systems, which warehouse and store duplicate data. Instead of duplicating each
financial institution's host system by daily batch transmittal of customer
balance information, we communicate in real-time through online ATM networks and
processors to retrieve account balances as needed. We are therefore working with
ATM networks and processors to expand their transaction support to include
retail customer account histories, access to additional information and
interest-related security standards.

We have an architecture called Direct Connect, whereby we go directly to
the client's host system for information retrieval, such as for balances and
other account information, using Internet protocols or other specifications.
However, for the authentication and payments portion of our service, we will
continue to use the established ATM network infrastructure, with its established
settlements, security and other payment capabilities.

Security and Systems Integrity. Our services and related products are
designed to provide security and system integrity, based on Internet and other
communications standards, ATM network transaction processing procedures and
banking industry standards for control and data processing. Prevailing security
standards for Internet-based transactions are incorporated into our Internet
services, including but not limited to, Secure Socket Layer 128K encryption,
using public-private key algorithms developed by RSA, along with firewall
technology for secure transactions. In the case of payment and transaction
processing, we meet security transaction processing and other operating
standards for each ATM network or core processor through which we route
transactions. Our interactive voice response system performs transactions only
if the retail customer is first verified through the financial institution
client's interactive voice response security system. Finally, in conformance
with industry standards promulgated by applicable financial institution
regulatory bodies, we adhere to SAS 70 types I and II requirements for control,
data processing and disaster recovery.

PROPRIETARY RIGHTS

Patents are important to our business; no particular patent is so
important, however, that its loss would significantly adversely affect our
operations as a whole.

In June 1993, we were awarded U.S. patent number 5,220,501 covering our
real-time ATM network-based payments process. This patent covers bill payment
and other online payments made from the home using any enabling device where the
transaction is routed in real-time through an ATM network. We have licensed this
patent to other parties for limited use. In March 1995 we cross-licensed this
patent to Citibank for their internal use in settlement of litigation.

On February 9, 1999, we were awarded U.S. patent number 5,870,724 for
targeting advertising in a home retail banking delivery service. This patent
provides for the targeting of advertising or messaging to home banking users,
using their confidential bill payment and other financial information, while
preserving consumer privacy. Acting in cooperation and on behalf of a financial
institution client, we first analyze their bill payment and other financial data
to determine an advertising profile or purchasing power. The patent provides for
the targeted advertisement or other message to the selected person or group
based on their profile. No third parties gain access to the retail customers'
sensitive financial data. Through interactive messaging, selected retail
customers of our financial institutions receiving the advertisement or message
then have the choice of releasing their names to the advertiser or messenger.
The confidentiality of their sensitive financial information is thereby
preserved and released only with the approval of the financial institution
client and their retail customers.

On March 13, 2001, we were awarded U.S. patent number 6,202,054 which is a
continuation of U.S. patent number 5,220,501 and expands and clarified the
claims in that patent.

10

In addition to our patents we have registered trademarks. A significant
portion of our systems, software and processes are proprietary. Accordingly, as
a matter of policy, all management and technical employees execute
non-disclosure agreements as a condition of employment.

COMPETITION

We believe that the principal competitive factors in our market are
industry trust, technical capabilities, operating effectiveness, cost and
scalability, customer service, security, speed to market, and capital. Many of
our competitors have the financial, technical and marketing resources, plus
established industry relationships, to better compete based on these factors.
Competitive pressures we face may have a materially adverse effect on our
business, financial condition or operating results.

We are not aware of any other company that offers a similar financial
electronic commerce hub that in-sources banking and bill payment services, fully
integrates support services and links to other financial service providers.
However, many of our current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources. Further,
some of our competitors, namely CheckFree, while currently targeting bill
payment and presentment services to large financial institutions, do provide or
have the ability to provide the same range of services we offer and could
determine to direct their marketing initiatives towards our targeted smaller
financial institution client base.

Other competitors such as Metavante, EDS, Fiserv and other core banking
processors have broad distribution channels that bundle competing products
directly to financial institutions. These competitors also have developed or
acquired extensive Internet banking capabilities of their own, including a bill
payment service in the case of Metavante, which may be further expanded to
exceed or meet our capabilities.

In addition, a significant number of companies offer portions of the
services provided by us and compete directly with us to provide such services.
For example, the Web servers of companies such as Digital Insight, FundsXpress
and Q-Up (a subsidiary of Security First Technologies), compete with our
front-end Internet access capabilities. These companies may in turn use bill
payment providers, such as CheckFree, Princeton eCom, and Metavante, who often
team with access providers. There are also other software providers such as
Sanchez Computer, Intelidata, Security First Technologies, Corillian and
Financial Fusion that market their software to large financial institutions,
that may seek to penetrate our regional and community banking market. Finally,
certain services such as Intuit's Quicken.com, Yahoo! Finance and Yodlee may be
available to retail customers independent of financial institutions through
their own offerings, as aggregate or consumer accounts from various financial
institutions.

GOVERNMENT REGULATION

We are not licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, the Office of Thrift Supervision or other Federal or
state agencies that regulate or monitor banks or other types of providers of
financial electronic commerce services. Federal, state or foreign agencies may
attempt to regulate our activities. Congress could enact legislation that would
require us to comply with consumer privacy, data, record keeping, processing and
other requirements. We may be subject to additional regulations as the market
for our business continues to evolve. For example, Regulation E, promulgated by
the Federal Reserve Board, governs certain electronic funds transfers made by
regulated financial institutions and providers of access devices and electronic
fund transfer services, including many aspects of our services. Under Regulation
E, we are required, among other things, to provide certain disclosure to retail
customers, to comply with certain notification periods regarding changes in the
terms of service provided and to follow certain procedures for dispute
resolutions. The Federal Reserve Board may adopt new rules and regulations for
electronic funds transfers that could lead to increased operating costs and
could also reduce the convenience and functionality of our services, possibly
resulting in reduced market acceptance. Because of the growth in the electronic
commerce market, Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market, and Federal or
state authorities could enact laws, rules or regulations affecting our business
operations. We also may be subject to Federal, state and foreign money
transmitter

11

laws, encryption and security export laws and regulations and state and foreign
sales and use tax laws. If enacted or deemed applicable to us, such laws, rules
or regulations could be imposed on our activities or our business thereby
rendering our business or operations more costly, burdensome, less efficient or
impossible, any of which could have a material adverse effect on our business,
financial condition and operating results.

The market we currently target, the financial services industry, is subject
to extensive and complex Federal and state regulation. Our current and
prospective clients, which consist of financial institutions such as commercial
banks, thrifts, credit unions, brokerage firms, credit card issuers, consumer
finance companies, other loan originators, insurers and other providers of
retail financial services, operate in markets that are subject to extensive and
complex Federal and state regulations and oversight. While we are not generally
subject to such regulations, our services and related products must be designed
to work within the extensive and evolving regulatory constraints in which our
clients operate. These constraints include Federal and state truth-in-lending
disclosure rules, state usury laws, the Equal Credit Opportunity Act, the
Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy
Act, the Community Reinvestment Act, the Financial Services Modernization Act,
the Bank Service Company Act, the Electronic Signatures in Global and National
Commerce Act, privacy and information security regulations, laws against unfair
or deceptive practices, the USA Patriot Act of 2001 and other state and local
laws and regulations. Because many of these regulations were promulgated before
the development of our system, the application of such regulations to our system
must be determined on a case-by-case basis. We do not make representations to
clients regarding the applicable regulatory requirements, but instead rely on
each such client making its own assessment of the applicable regulatory
provisions in deciding whether to become a client. Furthermore, some consumer
groups have expressed concern regarding the privacy, security and interchange
pricing of financial electronic commerce services. It is possible that one or
more states or the Federal government may adopt laws or regulations applicable
to the delivery of financial electronic commerce services in order to address
these or other privacy concerns. We cannot predict the impact that any such
regulations could have on our business.

We currently offer services on the Internet. Due to the increasing
popularity of the Internet, it is possible that laws and regulations may be
enacted with respect to the Internet, covering issues such as user privacy,
pricing, content, characteristics and quality of services and products. The
adoption of any such laws or regulations may limit the growth of the Internet,
which could affect our ability to utilize the Internet to deliver financial
electronic commerce services.

DEPENDENCY ON A SINGLE CUSTOMER

One of our financial institution clients, California Federal Bank,
accounted for 13%, 14% and 14% of our revenue for the years ended December 31,
2001, 2000 and 1999, respectively. On January 9, 2002, we announced that we have
extended and restructured our service contract with California Federal Bank for
another four years. Under the new agreement, effective September 2002, we will
provide only the electronic bill presentment and payment services through 2005.
Had the new agreement been effective January 1, 2001, the approximate effect of
the new agreement would have been to reduce our 2001 revenue by 8% and gross
profit by 3% based on reported 2001 results adjusted for the new agreement.

FINANCIAL INFORMATION ABOUT SEGMENTS

We operate in one business segment. Financial information about the segment
in which we operate is contained in our financial statements and related notes
thereto.

NEW PRODUCTS: RESEARCH AND DEVELOPMENT

Our business includes the maintenance of existing technology and products
and the development and introduction of new products and may include entry into
new business sectors. During the years ended December 31, 2001, 2000 and 1999,
we spent $5,854,866, $6,246,174 and $3,998,936, respectively, on systems and
development, which includes amounts relating to research and development
activities.

12

SEASONAL INFLUENCES

There are no material seasonal influences on sales of our products and
services.

WORKING CAPITAL REQUIREMENTS

There are no special inventory requirements or credit terms extended to our
customers that would have a material adverse effect on our working capital. We
currently believe that cash on hand and investments will be sufficient to meet
our current anticipated cash requirements for the next twelve months. However,
there can be no assurance that additional capital beyond the amounts currently
forecasted by us will not be required or that any such required additional
capital will be available on reasonable time, if at all, at such time as
required.

EMPLOYEES

At December 31, 2001, we had 319 employees. None of our employees are
represented by a collective bargaining arrangement. We believe our relationship
with our employees is good.

RISK FACTORS

We may make forward-looking statements, as defined in Section 21E of the
Securities Exchange Act of 1934, throughout this Annual Report on Form 10-K. Any
statements in this document that are not statements of historical fact may be
considered forward-looking. As you read this document, the words "believes,"
"anticipates," "plans," "expects," "seeks," "estimates," and other similar
expressions are intended to identify forward-looking statements. A number of
important factors could cause the company's results to differ materially from
those indicated by such forward-looking statements, including those detailed
below. In addition to the other information provided in this report, the
following risk factors should be considered carefully in evaluating our
business.

WE HAVE A HISTORY OF LOSSES AND COULD CONTINUE TO LOSE MONEY.

We have not yet had an operating profit for any quarterly or annual period
and are unsure when we will become profitable, if ever. We may not be able to
attract and retain enough financial institutions and retail customers to reach
profitable levels. We were established in 1989 and a significant portion of our
existence has been devoted to developing the proprietary systems and
infrastructure needed to implement our business. Increases in operating costs
may exceed our anticipated levels. Profitability in the future will depend upon
a number of factors, including our ability to continue to contract with new
financial institution clients and to develop and retain a larger retail customer
base that uses our services on a regular basis. If growth in our revenues does
not significantly outpace the increase in expenses, we may not achieve or
sustain profitability.

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

Our quarterly revenues, expenses and operating results may vary
significantly from quarter to quarter in the future. As a result, our operating
results may fall below market analysts' expectations in some future quarters,
which could have a material adverse effect on the market price of our stock.

WE MAY NEED TO RAISE CAPITAL TO STAY IN BUSINESS.

We may not achieve cash flow break-even and may require additional
infusions of capital to sustain operations. This capital may not be available on
favorable terms, or at all. We may need to raise additional funds sooner than we
expect if we incur unforeseen required capital expenditures or substantial
operating losses. If adequate funds are not available or are not available on
acceptable terms, we may not be able to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures, which
could have a material adverse effect on our business.

13

WE RELY ON THIRD PARTIES FOR THE SUCCESS OF OUR MARKETING EFFORTS.

We depend in part upon the assistance of marketing partners who include
some or all of our services and related products as a part of their offerings to
financial institutions. Failure by these marketing partners to continue to offer
our services and related products could have a material adverse effect on our
business.

WE DEPEND UPON OUR FINANCIAL INSTITUTION CLIENTS TO MARKET OUR SERVICES.

To market our services to retail customers, we depend upon our financial
institution clients. We generally charge our clients fees based on the number of
their retail customers who have enrolled with our clients for online bill
payment services and, in some cases, online banking services. Therefore, retail
customer enrollment affects our revenue and is important to us. Because our
clients offer our services under their name, we must depend on those clients to
get their customers to use our services. Although we conduct extensive marketing
programs for our clients, our clients may decide not to participate in our
programs or our financial institution clients may not effectively market our
services to their retail customers. Any failure of our clients to effectively
market our services could have a material adverse effect on our business.

OUR CO-MARKETING EFFORTS MAY NOT BE SUCCESSFUL.

We have recently spent substantial financial and human resources to
co-market our services and related products with our financial institution
clients to their retail customers. These marketing efforts may not result in an
increase in acceptance by retail customers necessary for the development of our
business.

WE MAY NOT BE ABLE TO EXPAND TO MEET INCREASED DEMAND.

We may not be able to expand or adapt our services and related products to
meet the demands of our financial institution clients and their retail customers
quickly or at a reasonable cost. The type and volume of transactions processed
through our system and the number of financial institution clients connected to
it have been relatively limited to date. We will need to continue to expand and
adapt our infrastructure, services and related products to accommodate
additional financial institution clients and their retail customers, increased
transaction volumes and changing customer requirements. This will require
substantial financial, operational and management resources. In the past as we
have developed our infrastructure, clients have experienced periods when they
were unable to utilize our services. If we are unable to scale our system and
processes to support the variety and number of transactions and retail customers
who ultimately use our services, our business may be materially adversely
affected.

IF WE LOSE A MATERIAL CLIENT OR RESTRUCTURE OUR AGREEMENT WITH A MATERIAL
CUSTOMER, OUR BUSINESS MAY BE ADVERSELY IMPACTED.

Throughout our history of operations, our financial performance has been
heavily dependent on one or several key financial institutions. For example, one
of our financial institution clients, California Federal Bank, accounted for
13%, 14% and 14% of our revenue for the years ended December 31, 2001, 2000 and
1999, respectively. On January 9, 2002, we announced that we have extended and
restructured our Internet financial services contract with California Federal
Bank for another four years. Under the new agreement, effective September 2002,
we will provide only the electronic bill presentment and payment services
through 2005. Had the new agreement been effective at the beginning of 2001, the
approximate effect of the new agreement would have been to reduce our 2001
revenue by 8% and gross profit by 3% based on reported 2001 results adjusted for
the new agreement. Loss of any other material financial institution contract or
the restructuring of an agreement with a material customer in the future could
also negatively impact our financial performance and our ability to attract and
retain other financial institution clients.

WE MAY NOT BE ABLE TO COMPETE WITH LARGER, MORE ESTABLISHED BUSINESSES OFFERING
SIMILAR PRODUCTS OR SERVICES.

We may not be able to compete with current and potential competitors, many
of whom have longer operating histories, greater name recognition, larger, more
established customer bases and significantly greater
14

financial, technical and marketing resources. Further, some of our competitors
provide or have the ability to provide the same range of services we offer. They
could market to our targeted regional and community financial institution client
base. Other competitors, such as core banking processors, have broad
distribution channels that bundle competing products directly to financial
institutions. Also, competitors may compete directly with us by adopting a
similar business model or through the acquisition of companies, such as
resellers, who provide complimentary products or services.

A significant number of companies offer portions of the services we provide
and compete directly with us. For example, the Web servers of some companies
compete with our front-end Internet access capabilities. Other software
providers have created units to provide on an outsourced basis a portion of
services like ours. These companies may use bill payers who team with access
providers. Also, certain services may be available to retail customers
independent of financial institutions such as Intuit's Quicken.com and Yahoo!
Finance. Finally, there are some ATM and other networks that provide similar
services in addition to connecting to financial institutions.

Many of our competitors may be able to afford more extensive marketing
campaigns and more aggressive pricing policies in order to attract financial
institutions. Our failure to compete effectively in our markets would have a
material adverse effect on our business.

FAILURE TO SUCCESSFULLY IMPLEMENT A SYSTEMS UPGRADE OR CONVERSION MAY ADVERSELY
AFFECT OUR REPUTATION AND OUR BUSINESS.

A failure to implement a systems upgrade or conversion would delay
implementation of some of our financial institution clients. Disruption in our
services to current clients could cause us to divert significant resources and
could negatively impact our reputation in the banking industry. We may be unable
to successfully complete any future systems upgrades or conversions.

WE DEPEND ON OUR OFFICERS AND SKILLED EMPLOYEES DUE TO OUR COMPLEX BUSINESS.

If we fail to attract, assimilate or retain highly qualified managerial and
technical personnel, our business could be materially adversely affected. Our
performance is substantially dependent on the performance of our executive
officers and key employees who must be knowledgeable and experienced in both
banking and technology. We are also dependent on our ability to retain and
motivate high quality personnel, especially management and highly skilled
technical teams. The loss of the services of any executive officers or key
employees could have a material adverse effect on our business. Our future
success also depends on the continuing ability to identify, hire, train and
retain other highly qualified managerial and technical personnel. Competition
for such personnel is intense. If our managerial and key personnel fail to
effectively manage our business, our results of operations and reputation could
be harmed.

SYSTEM FAILURES COULD HURT OUR BUSINESS AND WE COULD BE LIABLE FOR SOME TYPES OF
FAILURES.

Like other system operators, our operations are dependent on our ability to
protect our system from interruption caused by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond our control. Although we have an agreement with an offsite disaster
recovery facility in the event of major disasters, both locations could be
equally impacted. We do not currently have sufficient backup facilities to
provide full Internet services, if the facility is not functioning. We could
also experience system interruptions due to the failure of our systems to
function as intended or the failure of the systems we rely upon to deliver our
services such as ATM networks, the Internet, or the systems of financial
institutions, processors that integrate with our systems and other networks and
systems of third parties. Loss of all or part of our systems for a period of
time could have a material adverse effect on our business. We may be liable to
our clients for breach of contract for interruptions in service. Due to the
numerous variables surrounding system disruptions, we cannot predict the extent
or amount of any potential liability.

15

SECURITY BREACHES COULD DISRUPT OUR BUSINESS.

Like other system operators, our computer systems may also be vulnerable to
computer viruses, hackers, and other disruptive problems caused by unauthorized
parties entering our system. Computer attacks or disruptions may jeopardize the
security of information stored in and transmitted through the computer systems
of our financial institution clients and their retail customers using our
services, which may result in significant losses or liability. This, or the
perception and concern that our systems may be vulnerable to such attacks or
disruptions, also may deter retail customers from using our services.

Data networks are also vulnerable to attacks, unauthorized access and
disruptions. For example, in a number of public networks, hackers have bypassed
firewalls and misappropriated confidential information. It is possible, that
despite existing safeguards, an employee could divert retail customer funds
while these funds are in our control, exposing us to a risk of loss or
litigation and possible liability. In dealing with numerous consumers, it is
possible that some level of fraud or error will occur, which may result in
erroneous external payments. Losses or liabilities that we incur as a result of
any of the foregoing could have a material adverse effect on our business.

OUR SERVICES MAY NOT BE BROADLY USED AND ACCEPTED BY CONSUMERS AND OUR NEWLY
DEVELOPED PRODUCTS MAY CONTAIN UNDETECTED OR UNRESOLVED DEFECTS.

There is no established history of broad acceptance by retail customers of
services like ours and those services may not be accepted in the future. Because
our fee structure is designed to establish recurring revenues through monthly
usage by retail customers of our financial institution clients, our recurring
revenues are dependent on the acceptance of our services by retail customers and
their continued use of online banking, bill payment and other financial
services. Failing to retain the existing customers and the change in spending
patterns and budgetary resources of financial institutions and their retail
customers will affect our operating results.

Our future success depends heavily on the Internet being widely accepted
and used for commerce. If Internet commerce does not continue to grow or grows
more slowly than expected, our business would suffer.

Any new or enhanced products we introduce may contain undetected or
unresolved software or hardware defects when they are first introduced or as new
version are released. These defects could result in a loss of sales and
additional costs as well as damage to our reputation and the loss of
relationship with our customers.

THE POTENTIAL OBSOLESCENCE OF OUR TECHNOLOGY OR THE OFFERING OF NEW, MORE
EFFICIENT MEANS OF CONDUCTING INTERNET BANKING AND BILL PAYMENT COULD NEGATIVELY
IMPACT OUR BUSINESS.

The industry for Internet banking services is evolving and may be subject
to rapid change. Due to our limited resources, we may not be able to keep up
with the rapid technological change in the market. Failing to offer new and more
efficient products and services that respond to new technologies and the needs
of the Internet banking services market could adversely affect our market
acceptance, revenue and business.

CONSUMER DEMAND FOR LOW-COST OR FREE ONLINE FINANCIAL SERVICES MAY FORCE US TO
REDUCE OR ELIMINATE THE FEES WE CHARGE FOR SOME SERVICES.

Consumers of many of the online services we offer, including home-banking,
bill payment and bill presentment, may demand that these services be offered for
lower cost or even for free. Consumers may therefore reject our services in
favor of companies that can offer more competitive prices. Thus, consumer demand
and competition may place significant pressure on our pricing structure and
revenues, and may have an adverse effect on our financial condition.

CONSOLIDATION OF THE BANKING AND FINANCIAL SERVICES INDUSTRY COULD NEGATIVELY
IMPACT OUR BUSINESS.

The continuing consolidation of the banking and financial services industry
could result in a smaller market for our services. Consolidation frequently
results in a complete change in the electronic infrastructure of the combined
entity. This could result in the termination of our services and related
products if the
16

acquiring institution has its own in-house system or outsources to competitive
vendors. This would also result in the loss of revenue from actual or potential
retail customers of the acquired financial institution.

GOVERNMENT REGULATION COULD INTERFERE WITH OUR BUSINESS.

Federal or state agencies may attempt to regulate our activities. In
addition, Congress could enact legislation that would require us to comply with
data, record keeping, processing and other requirements. We may be subject to
additional regulation as the market for our business continues to evolve. The
Federal Reserve Board or other Federal or state agencies may adopt new rules and
regulations for electronic funds transfers that could lead to increased
operating costs and could also reduce the convenience and functionality of our
services, possibly resulting in reduced market acceptance.

POTENTIAL LITIGATION AND LIABILITY CLAIMS MAY HAVE A MATERIAL ADVERSE EFFECT ON
THE OPERATIONS, FINANCIAL PERFORMANCE AND CASH FLOWS.

Our industry in general is susceptible to litigation, liability claims and
risks. Any negative outcome in any significant legal proceeding or prolonged
litigation may result in material losses to us. Any errors, defects or other
performance problems in our products and services could result in financial or
other damages to our financial institutions for which we may be liable.
Moreover, we may be liable for transactions executed using Internet services
based on our products and services even if the errors, defects or other problems
are unrelated to our products and services.

MANAGEMENT AND DIRECTORS MAY CONTROL OUR MANAGEMENT AND AFFAIRS.

As of February 28, 2002, management and directors beneficially owned
approximately 20% of our outstanding common stock. As a result, they may have
the ability to have a material impact on our affairs and business, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying, deferring or
preventing a change in control, and make some transactions more difficult or
impossible without the support of such stockholders, including proxy contests,
mergers, tender offers, open-market purchase programs or other purchases of
common stock that could give our stockholders the opportunity to realize a
premium over the then-prevailing market price for shares of common stock.

OUR STOCK PRICE IS VOLATILE.

The trading price of our common stock has been subject to significant
fluctuations and may continue to be volatile in response to:

- actual or anticipated variations in quarterly operating results;

- announcements of technological innovations;

- new products or services offered by us or our competitors;

- changes in financial estimates by securities analysts;

- conditions or trends in the Internet and online commerce industries;

- changes in the economic performance and/or market valuations of other
Internet, online service industries;

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

- additions or departures of key personnel;

- sales of common stock; and

- other events or factors, many of which are beyond our control.

The stock market has experienced extreme price and volume fluctuations and
volatility that has particularly affected the market prices of many technology,
emerging growth and developmental stage companies. Such fluctuations and
volatility have often been unrelated or disproportionate to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's

17

securities, securities class action litigation has often been instituted against
a company. Litigation, if instituted, whether or not successful, could result in
substantial costs and a diversion of management's attention and resources, which
would have a material adverse effect on our business.

WE HAVE A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK THAT MAY BE SOLD, WHICH
COULD AFFECT THE TRADING PRICES OF OUR COMMON STOCK AND THE CONVERTIBLE NOTES.

We have a substantial number of shares of common stock issuable under
outstanding stock options, warrants and convertible notes. We cannot predict the
effect, if any, that future sales of shares of common stock or convertible
notes, or the availability of shares of common stock or convertible notes for
future sale, will have on the market price of our common stock or convertible
notes. Sales of substantial amounts of common stock (including shares issued
upon the exercise of stock options or warrants or the conversion of the
convertible notes), or the perception that such sales could occur, may adversely
affect prevailing market prices for our common stock and convertible notes.

THERE IS POSSIBILITY THAT WE FAIL TO MEET LISTING STANDARDS FOR CONTINUED
LISTING ON THE NASDAQ NATIONAL MARKET.

We need to meet the continued inclusion financial requirements for our
common stock to be listed on The Nasdaq National Market. Failing to meet the
requirements will adversely affect the interests of our shareholders.

OUR STOCKHOLDER RIGHTS PLAN CONTAINS PROVISIONS WHICH COULD DISCOURAGE A
TAKEOVER.

On January 15, 2002, we announced that our Board of Directors has adopted a
stockholder rights plan. This plan along with provisions contained in our
Certificate of Incorporation may discourage or prevent a change of control
through the issuance of additional equity securities that can substantially
dilute the interests of a third party seeking to gain control over our company
in the absence of the approval of our board of directors.

TERRORISM AND THE POSSIBILITY OF FURTHER ACTS OF VIOLENCE MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR OPERATIONS.

Terrorist attacks, such as the attacks that occurred on September 11, 2001,
the response by the United States and further acts of violence or war may affect
the market on which our common stock will trade, the markets in which we
operate, and our operations and profitability. Further terrorist attacks against
the United States may occur. The potential near-term and long-term effect of
these attacks on our business, the market for our common stock and the economy
is uncertain. The consequences of any terrorist attacks, or any armed conflicts
that may result, are unpredictable, and we may not be able to foresee events
that could have an adverse material effect on our business or the trading price
of our common stock.

ITEM 2. PROPERTIES

We are headquartered in McLean, Virginia where we lease approximately
54,000 square feet of office space. The lease has a two-year term and expires
July 31, 2004. We believe that all of our facilities are in good condition and
are suitable and adequate to meet our operations.

ITEM 3. LEGAL PROCEEDINGS

From time to time we may be involved in litigation arising in the normal
course of our business. We are not a party to any litigation, individually or in
the aggregate, that we believe would have a material adverse effect on our
financial condition or results of operations.

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

No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

MARKET INFORMATION

Our common stock began trading on the Nasdaq National Market on June 4,
1999 under the symbol "ORCC". The following table sets forth the range of high
and low closing sales prices of our common stock for the periods indicated, as
reported by Nasdaq:

The market price of our common stock is highly volatile and fluctuates in
response to a wide variety of factors. See "Business -- Risk Factors -- Our
Stock Price is Volatile."

HOLDERS

On March 14, 2002, we had approximately 181 holders of record of common
stock. This does not reflect persons or entities that hold their stock in
nominee or "street" name through various brokerage firms.

DIVIDENDS

We have not paid any cash dividends on our common stock. We expect to
invest any future earnings to finance growth, and therefore do not intend to pay
dividends in the foreseeable future. Our board of directors will determine if we
pay any future dividends.

19

ITEM 6. SELECTED FINANCIAL DATA

The following balance sheet data and statements of operations were derived
from our financial statements. You should read the following selected financial
information in conjunction with our financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.

- ---------------
(1) On June 10, 1999, we used $9.4 million of the net proceeds from our initial
public offering to pay off corporate debt, which payment resulted in a
one-time charge of $885,407. In May 2001, we used $2.2 million of the net
proceeds from our debt offering to pay off $3.5 million of the 8%
convertible subordinated notes, which payments resulted in a one-time gain
of $1,083,153.

(2) In the fourth quarter of 2000, we adopted a change in accounting principle
for implementation fees, retroactive to January 1, 2000, as newly pronounced
by Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition in
Financial Statements, on a cumulative effect basis.

20

(3) We recorded a deemed beneficial return on the Series C preferred stock
issued during the first three months of 1999, due to these shares being
convertible into common stock at a discount from fair value at the date of
issuance.

(4) Pro forma (as if) amounts, assuming retroactive application of SAB 101 for
period of change and all prior periods presented.

SUPPLEMENTARY FINANCIAL INFORMATION

The following is a summary of unaudited quarterly results of operations for
the year ended December 31, 2001 and 2000.

- ---------------
(1) During the quarter ended December 31, 2000, effective January 1, 2000, we
adopted SAB 101 and changed our method of accounting for implementation fees
for all contracts to recognize such fees over the contract term. We have
restated the results of the first three quarters of 2000 filed in Form 10-Q
for the cumulative effect of the change in accounting principle. The effect
of the restatement was to increase net loss by $44,000 ($0.00 per share),
$119,000 ($0.01 per share), $9,000 ($0.00 per share) for the first, second,
and third quarters of 2000, respectively, and to increase fourth quarter net
loss by $128,000 ($0.01 per share). The cumulative effect of the change in
accounting principle of $217,000 ($0.02 per share) was reported as a
cumulative effect of a change in accounting principle, retroactively to
January 1, 2000.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this report. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of factors including, but not limited to,
those under "Business--Risk Factors" and elsewhere in this report.

OVERVIEW

We are a leading outsourcer of e-financial services for Internet banking,
electronic bill presentment and payment, commercial cash management, and other
consumer and business e-financial applications for financial institutions. We
provide our clients cost-effective services, branded in their name, by
seamlessly integrating services into a single-vendor, end-to-end solution. We
support our products with 24x7 customer care, targeted consumer marketing
services, training services and other network and technical professional
services.

We derive revenue from long-term service contracts with our financial
institution clients, who pay us recurring fees based primarily on the number of
their billable customers enrolled and transaction volumes, as well as an
up-front implementation fee. Our financial institution clients typically
subsidize some or all of our fees when reselling our services to their retail
customers, as they derive significant potential benefits including account
retention, delivery and paper cost savings, account consolidation and
cross-selling of other products. As a network-based service provider, we have
made substantial up-front investments in infrastructure. We believe our
financial performance and operating leverage will be based primarily on
increasing retail customer subscriptions and transaction volumes over a
relatively fixed cost base.

Our current sources of revenue are from service fees, implementation and
other revenues. We expect that our primary source of revenue growth will come
from service fees as a result of continued growth of customers.

- Service fees. Our primary source of revenues is derived from recurring
monthly fees by providing services which include banking and bill
payment, customer service, consumer marketing, information reporting, and
administrative services, to financial institution clients, typically
based on the number of billable customers. These services are priced on a
monthly per retail customer basis, and in some cases, on a transaction
basis. We recognize these revenues from services as provided.

- Implementation and other revenues. We generate revenue from
implementation of our fully integrated services to our financial
institution clients. Implementation fees are paid on a one-time basis at
signing. We previously recognized nonrefundable implementation fees as
revenue under the percentage of completion method as certain milestone
output measures were completed. During the year ended December 31, 2000,
effective January 1, 2000, we adopted SEC Staff Accounting Bulletin No.
101 -- Revenue Recognition in Financial Statements ("SAB 101") and
changed our method of accounting for nonrefundable implementation fees
for all contracts to recognize such fees over the contract term as the
services are provided, which typically range from one to five years. We
also derive revenue from sales of related products and software,
including cash management, Quicken, PC software and customer service
software.

Historically, the majority of our resources have been directed to creating
our proprietary system. Our proprietary system enables us to provide a broad
range of services to our financial institution clients including Internet
banking, bill paying, and access to complementary financial services supported
by our customer care center, targeted consumer marketing services and other
support services. While investment to date has been significant, we believe the
infrastructure we have built will enable us to support our anticipated growth
over the next several years with only nominal incremental cost for additional
retail customers.

CRITICAL ACCOUNTING POLICIES

The policies discussed below are considered by management to be critical to
an understanding of our financial statements because their application places
the most significant demands on management's
22

judgment, with financial reporting results relying on estimation about the
effect of matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following paragraphs. For all
of these policies, management cautions that future events rarely develop exactly
as forecast, and the best estimates routinely require adjustment.

Bad debt expense for accounts receivable and allowance for doubtful
accounts are recognized based on our estimate, which considers our historical
loss experience, including the need to adjust for current conditions, and
judgments about the probable effects of relevant observable data and financial
health of specific customers. Our bad debt expense during the year ended
December 31, 2001 was approximately $240,000 on revenue of $24.6 million. At
December 31, 2001, the allowance for doubtful accounts was $35,000, which
represents management's estimates of probable losses in the accounts receivable
balance at December 31, 2001. While the expense depends to a large degree on
future conditions, management does not forecast significant adverse development
in 2002.

Property and equipment, including leasehold improvements, are recorded at
cost. Software and hardware consisting of central processing systems and
terminals represent the majority of the property and equipment and is
potentially subject to technological changes and obsolescence. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets, which is generally five years. Equipment recorded under capital
leases is amortized over the estimated useful life of the asset. We periodically
evaluate the assets for recoverability when events or circumstances indicate a
potential impairment.

We generate revenue from service fees, implementation fees, and other
revenues. Revenues from service fees and other revenues are recognized over the
term of the contract as the services are provided. We previously recognized
nonrefundable implementation fees as revenue under the percentage of completion
method as certain milestone output measures were completed. During the year
ended December 31, 2000, we adopted SEC Staff Accounting Bulletin No.
101 -- Revenue Recognition in Financial Statements ("SAB 101"), effective
January 1, 2000, and changed its method of accounting for nonrefundable
implementation fees for all contracts to recognize such fees and the related
incremental direct costs of implementation activities over the contract term as
the services are provided, which typically range from one to five years
(generally three years). We believe the change in accounting principle was
preferable based on guidance provided in SAB 101. We periodically assess the
recoverability of the deferred implementation costs and believe that the future
cash flows are sufficient to cover the carrying amount of the deferred
implementation costs.

Also see Note 2, Summary of Significant Accounting Policies, which
discusses accounting policies.

FINANCIAL CONDITION

Since our founding, we have incurred high costs to create our
infrastructure, while generating low revenues. As a result we have historically
experienced large operating losses and negative cash flow. At December 31, 2001
we had an accumulated deficit of $85.3 million, cash and investments of $7.7
million and net property and equipment of $6.8 million. We have funded our
operations primarily through the issuance of equity and debt securities. Ongoing
working capital requirements will primarily consist of personnel costs related
to enhancing and maintaining our system. We expect to continue to incur losses
at least for part of the year 2002.

Cash and investments in available for sale securities were $7.7 million and
$21.5 million as of December 31, 2001 and 2000, respectively. The decrease in
cash and investments results primarily from $9.8 million cash used for working
capital, $1.8 million for capital expenditures and $2.2 million for the
repurchase of $3.5 million of 8% convertible subordinated notes ("Convertible
Notes"). On December 31, 2001, notes payable decreased to $13.0 million as
compared to $20.0 as of December 31, 2000 as a result of the $3.5 million
repurchase and $3.5 million conversion of Convertible Notes.

23

Even though our financial trends have been favorable and indicate the
potential for our operations becoming profitable, we have not yet attained
profitable operations. Therefore, until we reach profitability our prospects for
success remain unproven.

RESULTS OF OPERATIONS

The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

Revenues. We derive revenues from service fees, implementation and other
revenues. Revenues increased $9.0 million, or 57.5%, to $24.6 million for the
year ended December 31, 2001 as compared to $15.6 million for the same period in
2000. This improvement was primarily attributable to a 66.1% increase in service
fees which were largely recurring and driven by an increase of 59.2% in the
number of billable customers and an increase of 100.1% in the number of
transactions measured at December 31, 2001 and December 31, 2000. Billable
customers increased from approximately 282,000 at December 31, 2000 to
approximately 449,000 at December 31, 2001. In January 2002, we restructured our
service contract with California Federal Bank, our major customer, for another
four years. Under the new agreement, effective September 2002, we will provide
only our electronic bill presentment and payment services through 2005. Had the
new agreement been effective January 1, 2001, the approximate effect of the new
agreement would have been to reduce our 2001 revenue by 8% of 2001 results
adjusted for the new agreement. Additionally, implementation and other revenues
increased 8.3% to $2.5 million mainly due to an increase in professional service
revenue resulting from growth in the number of financial institutions with whom
we have contracted and enabled on our services. We signed 50 and enabled 66
financial institutions for the twelve months ended December 31, 2001, increasing
the total number of financial institutions under contract to 517 as of December
31, 2001.

Cost of Revenues. Cost of revenues primarily includes telecommunications,
payment processing, systems operations, customer service, implementation and
related products. Cost of revenues increased $1.1 million, or 8.7%, to $14.3
million for the year ended December 31, 2001 as compared to $13.2 million for
the same period in 2000. This increase was primarily attributable to a $0.7
million increase in bill payment processing costs and a $0.3 million increase in
customer service costs. These increases resulted from the increased number of
billable customers and transactions.
24

Gross Profit. Gross profit increased from $2.5 million to $10.3 million
for the years ended December 31, 2000 and 2001, respectively. Gross margin as a
percentage of revenue improved from 16% to 42% primarily due to increased
service fees and implementation revenue leveraged over our relatively fixed cost
of revenue. Gross margin for service fees also improved as a result of improved
efficiency from technology development and cost control initiatives. As we
discussed earlier, due to the restructure of our service contract with
California Federal Bank, if in effect January 1, 2001, the approximate effect of
the new agreement would have been to reduce our 2001 gross profit by 3% based on
reported 2001 results adjusted for the new agreement.

General and Administrative. General and administrative expenses primarily
consist of salaries for executive, administrative and financial personnel,
consulting expenses and facilities costs such as office leases, insurance, and
depreciation. General and administrative expenses increased $0.5 million, or
8.8%, to $6.9 million in 2001 as compared to $6.4 million in 2000. The increase
in general and administrative expenses is attributable to higher director and
officer insurance premium and depreciation expenses resulting from additional
capital expenditures of $1.8 million. General and administrative expenses as a
percentage of revenue decreased to 28.1% as compared to 40.7% for the twelve
months ended December 31, 2001 and 2000, respectively, primarily due to an
increase in revenues without a corresponding increase in general and
administrative expenses.

Sales and Marketing. Sales and marketing expenses include salaries and
commissions paid to sales and marketing personnel, consumer marketing costs,
public relations costs, and other costs incurred in marketing our services and
products. Sales and marketing expenses decreased $3.1 million, or 33.9%, to $5.9
million in 2001 as compared to $9.0 million in 2000. The principal reasons for
the decrease in sales and marketing expenses were a decline in marketing,
commission and advertising expenses and a reduction in staffs as a result of
consolidating certain client service responsibilities.

Systems and Development. Systems and development expenses include salaries
of personnel in the systems and development department, consulting fees and all
other expenses incurred in supporting the research and development of new
services and products, and new technology to enhance existing products. Systems
and development expenses decreased $391,000, or 6.3%, to $5.9 million in 2001 as
compared to $6.2 million in 2000. The decrease in our systems and development
expenses was primarily due to the reduction in consulting fees associated with
our efforts to control costs.

Non-Recurring Charges. As a result of the reduction in staffs of
approximately 9% on January 3, 2001, we incurred and paid a one-time charge of
$209,000 including severance costs and benefit payments for the twelve months
ended December 31, 2001. The estimated benefit of the reduction in staffs was
approximately $1.7 million for the twelve months ended December 31, 2001.

Loss from Operations. Loss from operations decreased $10.5 million, or
55%, to $8.6 million as compared to $19.1 million for the twelve months ended
December 31, 2001 and 2000, respectively. Loss from operations significantly
decreased between the two periods primarily as a result of increase in services
fees and gross profit driven by growth in our customer base, decreases in
various expenditures and costs derived from our cost-cutting initiatives, as
well as the other factors described above.

Other Income and Expenses. Interest income decreased $471,000, or 43.4%,
to $0.6 million in 2001 as compared to $1.1 million in 2000. The decrease was
due to the lower average cash and investment balances and lower interest rate
for the twelve months ended December 31, 2001. Interest and other expense
increased $1.2 million, or 207.2%, to $1.8 million in 2001 as compared to $0.6
million in 2000 as the result of the interest expense and amortization of debt
issuance costs in connection with the issuance of Convertible Notes. Going
forward, until at least September 2005, unless the Convertible Notes are earlier
converted or repurchased, we will continue to incur interest expenses due to the
Convertible Notes. The conversion of $2.5 million and $1.0 million Convertible
Notes in September and November 2001 resulted in a non-cash debt conversion
expense of $1.1 million that was attributable to the issuance of 702,869
incremental shares of common stock issued to holders in accordance with
accounting rules for induced conversions of convertible debt.

Net Loss and Loss Per Share. Net loss was $9.8 million, including a $1.1
million gain from repurchase of debt, compared to a loss of $18.8 million for
the years ended December 31, 2001 and 2000, respectively.

25

The basic and diluted loss per share were $(0.82) and $(1.64) for the years
ended December 31, 2001 and 2000, respectively, as a result of the various
factors noted above.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

Revenues. Revenues increased $7.2 million, or 85.2%, to $15.6 million for
the year ended December 31, 2000 as compared to $8.4 million for the same period
in 1999. This increase was primarily attributable to a 108.7% increase in
service fees which were largely recurring and driven by an increase of 160.7% in
the number of retail customers and an increase of 155.5% in the number of
transactions offset by lower service fees per user measured at December 31, 2000
and December 31, 1999. Additionally, implementation and other revenues increased
12.8% to $2.3 million as a result of increases in the number of financial
institutions with whom we have contracted and enabled on our services. We signed
and enabled 169 financial institutions for the twelve months ended December 31,
2000, increasing the total number of financial institutions under contract to
508 as of December 31, 2000.

Cost of Revenues. Cost of revenues increased $4.1 million, or 45%, to
$13.2 million for the year ended December 31, 2000 as compared to $9.1 million
for the same period in 1999. This increase was primarily attributable to
increases of $2.0 million in customer service costs and $1.8 million in bill
payment processing costs. These higher costs resulted from increases in the
number of retail customers, number of transactions and staff to support the
growth of our operations.

Gross Profit. Gross profit increased from a gross loss of $0.6 million to
a gross profit of $2.5 million for the twelve months ended December 31, 1999 and
2000, respectively. Gross margin improved from a loss of 7.5% to a positive
margin of 15.8% primarily due to increased service fees and implementation
revenue leveraged over our relatively fixed cost of revenue. Gross margin for
service fees improved as a result of increased end user growth without a
corresponding incremental increase in costs.

General and Administrative. General and administrative expenses increased
$2.5 million, or 63.6%, to $6.4 million in 2000 as compared to $3.9 million in
1999. The increase in general and administrative expenses is attributable to the
increase in staffing for finance and accounting, which was required after our
company went public in June 1999 and increased rent and depreciation expenses
associated with the expansion of the corporate facilities.

Sales and Marketing. Sales and marketing expenses increased $3.7 million,
or 70.4%, to $9.0 million in 2000 as compared to $5.3 million in 1999. The
principal reasons for the escalation in sales and marketing expenses were
increases in personnel costs, consumer marketing expenditures, commissions as a
result of higher revenue levels and additional travel costs. The increase in
consumer marketing expenses is attributable to promoting the adoption of our
services by the retail customers of the growing number of launched financial
institution clients.

Systems and Development. Systems and development expenses increased $2.2
million, or 56.2%, to $6.2 million in 2000 as compared to $4.0 million in 1999.
This was primarily attributable to costs associated with a technical staff
expansion and the use of third party consultants to support the enhancement of
our system. Headcount in the systems and development groups increased 45% from
December 31, 1999 to December 31, 2000.

Loss from Operations. Loss from operations increased $5.3 million, or
38.6%, to $19.1 million as compared to $13.8 million for the years ended
December 31, 2000 and 1999, respectively. Loss from operations increased between
the two periods primarily as a result of increase in operating expenses offset
by an increase in gross profit, as well as factors described above.

Other Income and Expenses. Interest income increased $95,000, or 9.6%, to
$1.1 million in 2000 as compared to $990,000 in 1999. The increase was due to
the higher average cash and investment balances for the twelve months ended
December 31, 2000. Interest and other expense decreased $441,000, or 43.1%, to
$583,000 in 2000 as compared to $1.0 million in 1999 as the result of the higher
interest rates on debts extinguished in June 1999.

26

Net Loss and Loss Per Share. Net loss available for common shareholders
was $18.8 million compared to a loss of $19.6 million for the years ended
December 31, 2000 and 1999, respectively. For the years ended December 31, 2000
and 1999 the basic and diluted loss per share were $(1.64) and $(2.45),
respectively, as a result of the various factors noted above.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily financed our operations through private
placements of our common and preferred stock and the issuance of debts. We have
also entered into various capital lease financing agreements. On September 28,
2000, we issued convertible subordinated notes in the amount of $20 million. Net
of debt issuance costs, we received proceeds of $18.7 million. As of December
31, 2001, we had used $2.2 million of the proceeds to repurchase debt, and $8.8
million for working capital resulting in $7.7 million in cash and investments at
December 31, 2001.

Net cash used in operating activities was $9.6 million for the year ended
December 31, 2001 as compared to $16.7 million in the year ended December 31,
2000. Cash used in operating activities in the year ended December 31, 2001 and
2000 resulted primarily from the net loss of $9.8 million and $18.8 million,
respectively.

Net cash provided by investing activities for the year ended December 31,
2001 was $12.3 million, of which approximately $14.1 million was provided from
the sale of available for sale securities net of $1.8 million used to purchase
fixed assets. For the year ended December 31, 2000, net cash used in investing
activities was $3.0 million, of which $3.5 was used for capital expenditures and
approximately $527,000 was provided by sales of available for sale securities
net of the purchase.

Net cash used in financing activities was $2.4 million in the year ended
December 31, 2001 as compared to net cash provided by financing activities of
$19.8 million in the year ended December 31, 2000. Cash used in financing
activities for