UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from            to           

Commission file number: 000-24931

Registrant’s telephone number, including area code: (404) 923-3500

Securities registered pursuant to Section 12(b) of the Act:
Not Applicable

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Title of Class

     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 o

     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 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. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

     Aggregate market value of the common stock held by non-affiliates of the Registrant, computed using the closing price on the for the Registrant’s common stock on June 30, 2003, was $263,512,388.

     Shares of common stock outstanding as of March 5, 2004: 70,893,561

Documents Incorporated by Reference

     List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

     Portions of the definitive proxy statement for the annual meeting of shareholders to be held May 14, 2004, which the registrant intends to file no later than 120 days after December 31, 2003, are incorporated by reference in Part III.

Table of Contents

S1 CORPORATION AND SUBSIDIARIES

FOR THE YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

PART I

Item 1. Business.

         This annual report on Form 10-K and the documents incorporated into this annual report on Form 10-K by reference contain forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act. These statements include statements with respect to our financial condition, results of operations and business. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on our beliefs as well as assumptions made using information currently available to us. Because these statements reflect our current views concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. The risk factors described below provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as provided by law, we undertake no obligation to update any forward-looking statement.

Business Overview

         We operate and manage S1 in two business segments: financial institutions, our core business segment, and the Edify business. We sell our solutions to small, mid-sized and large financial organizations in two geographic areas: (i) the Americas region, and (ii) the International region, consisting of Europe, Middle East and Africa (EMEA) and Asia-Pacific and Japan (APJ). Additional information about our operating segments, geographic disclosures and major customers is presented in note 17 to our consolidated financial statements contained elsewhere in this report.

     Financial Institutions Segment

         Through our financial institutions segment, we provide enterprise software solutions for financial services organizations, including banks, credit unions and insurance companies around the world. Our solutions help financial institutions to automate and integrate their customer interaction channels and market segments. These interaction channels include:

•		Branch and call center channels, which banks primarily use to provide personalized service and relationship selling through the teller, agent desktop and call center;
•		Internet channel, which financial institutions use as a low-cost way to enable customers to conduct transactions in a self-service manner anytime, anywhere; and
•		Voice channel, which enables financial institutions to efficiently interact with their customers for simple transactions, like balance inquiries and payment information.

         Our applications, which can be sold as standalone applications or as an integrated suite across the enterprise, help financial institutions better service and sell financial products to all of their market segments, ranging from retail consumers and small businesses to global corporations. Our applications also help financial institutions lower the costs associated with supporting their infrastructure and servicing their customers and employees by providing a single platform on which all of their front-office applications and customer information can reside. Our customer relationship management (CRM) software enables institutions to better understand their customers, segment their needs, and more effectively cross-sell services and improve customer satisfaction.

         Our products are designed to run on-premise at a financial institution location, or hosted in a data center. The products can be branded and extended to meet the individual specifications of the financial institution. We provide professional services for the installation and integration of our products, product training, consulting and product enhancement services, all of which are focused on enabling our customers to maximize the value of our applications and meet their particular business needs and strategies. We also provide hosting applications for customers who elect to run S1 solutions in our data center.

         We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring data center revenues by charging our data center customers a monthly fixed fee or a fee based on the number of their end users who use the solutions we provide, subject to a minimum charge. We also generate recurring revenue by charging customers who license our products a periodic fee for software maintenance.

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     Edify Segment

         Through our Edify business segment, we deliver voice and speech solutions for companies across a range of industries. Edify’s products help companies automate their customer service facilities, improve customer satisfaction and create new revenue generating opportunities, while reducing operational costs. Edify’s voice and speech applications are scalable, multilingual and flexible, allowing companies to easily integrate multiple back-end systems with a variety of contact interfaces. Edify’s voice and speech solutions combine speech recognition, speaker verification, text-to-speech, fax, and touch-tone automation with a powerful application development environment and natural language capabilities to help organizations optimize customer service while lowering costs. Revenues from the Edify business segment accounted for approximately 12% of our total revenues in 2003.

General Background

         We created the world’s first bank on the Internet in May of 1996 with the launch of Security First Network Bank. In 1998, we sold the banking operations to Royal Bank of Canada so that we could focus on software development, implementation and services. While our core business was Internet banking for several years, our management team had a broader vision of helping financial institutions consolidate their systems and line-of-business applications to reduce costs, increase revenue and deliver a more consistent experience across their delivery channels and market segments. We make this possible through an integrated suite of applications that address virtually every customer channel of today’s financial institutions.

         Over the past three years, we have invested over $100 million in product development activities to build out our vision, which has now taken the form of our flagship suite of products - S1 Enterprise. S1 is headquartered in Atlanta, Georgia and is a global software and services organization that has more than 4,000 financial institution customers, ranging from some of the world’s largest financial services providers to community and regional banks in the United States. While we primarily operate in the global financial services industry, we also have our Edify division which provides voice and speech solutions to a wide range of industries around the world.

         We have 24 offices in 13 countries around the world, including development centers of excellence located in Atlanta, Georgia; Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; West Hills, California; Pune, India; and Dublin, Ireland.

Financial Industry Background

         Financial institutions interact with their customers through a variety of channels, including but not limited to the branch, call center, phone, ATM and the Internet. As each of these channels was introduced and proliferated, financial institutions took a tactical approach in expanding their offerings, incrementally adding these new channels as they fit in with their evolving business plans. By and large, each channel functioned independently, with limited, if any, interactions and knowledge of the activities occurring in each channel. This siloed infrastructure over time became cumbersome and expensive for institutions to support and painful for consumers and businesses to try to interact with their financial institution.

         Today’s consumers demand a more compelling, personal relationship with a financial provider, who understands their needs and can offer relevant, value-added services. They require their information to be available through any channel at any time. In addition, consumers have more options for their financial services than ever before, including brokerage firms and even retailers. This increased competition and the ever-changing demands from consumers, along with tough economic conditions, is driving financial institutions to consider new ways of implementing their customer interaction applications for a better customer experience, lower operating costs, and a higher return on their technology investments.

         This new way of approaching technology centers around an integrated multi-channel strategy, one in which the financial institution implements a single platform on which all of their customer interaction and market segment applications reside. The strategy employs a single data model that captures all of the transaction information no matter which channel the customer chooses to use with the financial institution as well as all of the pertinent customer information and preferences. These two elements, along with the reuse of business components, were the basis in the design of the S1 Enterprise Platform and all of the applications that operate on it.

         We believe that financial institutions that provide a unified experience for their customers across multiple points of interaction, delivered at the lowest possible price will have a key competitive advantage. Financial institutions will need to deliver a consistent and compelling experience to their customers and provide them with products and services that better

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meet their needs and are relevant to their stage in life. We believe it is very challenging for financial institutions to deal with multiple channels, using different technologies, all of which must be integrated with a variety of legacy applications. Financial institutions are driven by technology and must attempt to keep up with the rapid pace of change. They must determine how to leverage their existing solutions while moving to new technologies that will protect their investments and better position them for the future. Continuing economic pressures and cost and resource cutting have forced them to try and do more with less. In addition, many financial institutions are struggling to absorb acquired businesses and rationalize the technologies and systems involved.

         We believe these factors will drive financial institutions to pursue an enterprise solution that helps them reduce their costs, increase their revenue opportunities and improve customer loyalty. With a single platform and common data model, institutions can reduce their costs by using single points of integration to the legacy applications, decreasing operational complexity and eliminating multi-vendor coordination, as well as drive revenue by enhancing cross-selling opportunities, and improving the relationships they have with their customers. We are in the process of delivering a fully integrated solution that automates and integrates all of the front-office applications, while providing a technology platform to simplify integration and operations as well as speed implementation and time to market. Our activities during 2001, 2002 and 2003 were focused on execution of our strategy around the delivery and implementation of this type of enterprise application and getting financial institutions in production on this new platform.

The S1 Solution

         In mid-2003, we delivered the second major release of our flagship suite of products – S1 Enterprise. This release included the delivery of our retail Internet banking, small business Internet banking, corporate cash management and insurance applications on a single platform – the S1 Enterprise Platform. Later in the year, we released a version of our branch automation applications that integrate with the S1 Enterprise Platform through the common data model. To date, more than 100 financial institutions have purchased an S1 Enterprise application - over forty of these institutions are in live production with an S1 Enterprise application, realizing tangible business benefits from our software with the remainder in some stage of implementation and deployment.

         Our direction for the S1 Enterprise is to take a holistic approach to unifying a financial institution’s multiple channels, applications, and customer segments. By taking a customer-centric view, we expect that the S1 Enterprise will enable financial institutions to deliver a personalized, compelling experience to their retail, small business and corporate customers. By supporting all customer interaction channels — including full-service channels such as branches, agents and call centers; self-service channels such as voice and the Web; and automated interactions such as ACH and wire transfers — we believe that S1 Enterprise will enable financial institutions to deliver a consistent customer experience while helping them rapidly deploy new products and services. S1 Enterprise offers banking, investment, insurance and CRM applications that can be used by both financial institution customers and internal users, such as tellers, agents, brokers, and customer service representatives. We provide flexible, customizable solutions with a modular approach so financial institutions can innovate their enterprise at their own pace, while increasing revenue, lowering costs and building stronger customer loyalty.

         We believe that the S1 Enterprise, when fully implemented, will offer a number of important benefits to our customers, including the following:

•

S1 Enterprise Turns Static Financial Institution Data into Actionable Information to help financial institutions grow their revenues — Financial institutions have a wealth of valuable customer information stored throughout their organizations. Their customers also have multiple financial relationships with other providers. S1 Enterprise will help financial institutions collect the data from internal and external systems, giving greater insight into customers and the ability to deliver more personalized service. S1 Enterprise will feature fully integrated CRM capabilities so that our financial institution customers can leverage customer information and marketing programs across all customer touch points, helping them create profitable and satisfying customer interactions. Our CRM approach goes beyond the traditional approach by turning information such as alerts, awards and promotions into actionable information at the delivery channel of choice for the financial institution’s customer. This includes multiple delivery channels — not just the call center.

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S1 Enterprise Delivers Compelling, Personalized Products and Services that help increase customer retention — In order to build customer loyalty, financial institutions need to deliver personalized products and services that are timely, relevant and accurate. S1 Enterprise will help them understand their customer’s buying behaviors, attitudes toward technology and short and long-term financial goals. S1 Enterprise will help financial institutions create more cross-selling opportunities, while maximizing the existing relationships they have established to up-sell additional

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products and services and to reduce customer turn-over. We believe such personalized service will increase opportunities for cross sell and create more effective push marketing.

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S1 Enterprise Provides Integration of Multiple Applications and Channels to lower a financial institution’s costs — The S1 Enterprise will deliver integrated solutions across all of an institution’s customer-interaction channels and market segments. Delivering all of these services from a common platform will enable financial institutions to achieve significant cost savings over time. With the deployment of one application, they get the most comprehensive functionality on an open, flexible, and operable industry platform. With multiple applications, they begin to see true economies of scale with the single platform. This not only reduces integration, maintenance and implementation costs, it can also leverage the cross-channel CRM capabilities for more effective personalization and sales opportunities. All of this capability will be delivered while leveraging existing investments in back-office system interfaces.

S1 Vision and Strategy

         Our objective is to be the leading global provider of integrated enterprise solutions that enable financial institutions to improve the way they service their customers by integrating all delivery channels, expanding the total financial relationship and increasing profits. To achieve this objective, we intend to pursue the following initiatives:

Achieve Financial and Operational Stability through a Combination of Enterprise Revenue Growth and Continued Cost Control

         Within our financial institutions business, we generated approximately 39% of our revenues from a subscription license and services provided to our two major customers (Zurich Insurance Company and State Farm Mutual Automobile Insurance Company) in 2003. The remainder of the revenue was generated from the sale of licenses and services in the global financial services market. In the fourth quarter of 2003, we substantially completed the transition from our legacy Internet-only business to an Enterprise software and services business. During the transition, we experienced a decrease of revenue from legacy Internet-only customers. Zurich, which accounted for approximately $43 million in revenue in both 2002 and 2003 will not generate any revenue for S1 in 2004. Revenue from State Farm of approximately $65 million and $46 million in 2002 and 2003, respectively, is expected to be approximately $40 million in 2004. In addition to these two customers, we had a number of other legacy Internet-only customers that have cancelled their hosting contracts or moved to “in house” implementations contributing to a decrease in data center revenue of approximately $5 million in 2004. We believe the majority of these data center revenue transitions were substantially completed during the third quarter of 2003. We believe the financial institutions segment revenue, excluding Zurich, of $42.4 million for the quarter ended September 30, 2003, represents a stable base from which we expect to grow revenues through the sale of single channel and Enterprise solutions to the marketplace and our existing customer base of over 4,000 financial institutions.

         In 2004, we will continue to sell Enterprise solutions to financial institutions. We expect to generate license revenues and implementation fees from these sales. Once these financial institutions have gone live on one of our solutions, we earn recurring maintenance revenues from these customers. In addition, we believe these Enterprise customers will purchase additional Enterprise applications from us.

         In preparation for the revenue transition discussed above, we made a number of changes to our operating structure which reduced total operating expenses, before restructuring charges, from $310 million in 2002 to $271 million in 2003. These cost savings, achieved through a combination of office consolidation, headcount reduction and other cost control initiatives, helped us generate $22 million of cash from operations, increasing our cash and short-term investments from $143 million at December 31, 2002 to $164 million at December 31, 2003. We believe that the combination of new Enterprise revenue and our continuing focus on cost control will result in the generation of continued positive cash flow from operations and profits in 2004.

Increase Revenues by Cross-Selling our Products and Services to Existing Customers

         We intend to generate revenues by selling additional S1 products and services to our existing customer base of over 4,000 financial institutions. We believe that opportunities for cross-selling our products and services will increase as we deliver more of our applications on the S1 Enterprise Platform, and as we continue to add and enhance products through acquisition and internal development. In addition to the sale of new products, the migration of our customer base from single-channel solutions to the integrated Enterprise applications will offer further revenue growth opportunities.

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S1 Products

         We have products that address both the community bank and credit union marketplace, as well as those that address the needs of mid and large-size financial services providers.

         We generate revenues from the following principal product groups: Banking Solutions, Insurance Solutions, CRM Solutions, Website Solutions, Financial Reporting Solutions and Account Aggregation.

     S1 Banking Solutions

         In mid-2003, we delivered the second major release of S1 Enterprise, which included S1 Personal Banking, S1 Business Banking, and S1 Corporate Banking products running on the new S1 Enterprise Platform. These products are primarily focused on meeting the needs of the mid and large-size financial institution. We also delivered a new release of our branch banking applications that integrated with the S1 Enterprise Platform at the core data model level. Going forward, we intend to deliver applications across the entire front-office that are native to the S1 Enterprise Platform. In addition, we will continue to deliver and support more turnkey, packaged applications for Internet and voice banking, which primarily are used by the community bank market and credit unions.

         In the retail and small business banking markets, we offer the following products:

•		S1 Personal Banking gives individual consumers anytime, anywhere access to all of their banking accounts, including deposit, credit card and loan accounts. Functions include the ability to view statements, account activity, and cleared and pending transactions online, to transfer funds between accounts and to pay bills electronically.
•		S1 Business Banking is a comprehensive banking product geared to the unique needs of small business owner-operators. Available services include daily account balance and transaction reporting, disbursement services, payroll, account transfers, wires, and electronic tax payments. Personalization options simplify cash management tasks for easy organization and management of company funds.
•		S1 Internet Banking System (IBS) Retail Banking is designed specifically with the unique needs of the community banking market in mind. This turn-key, more packaged application includes functions such as the ability to view statements, account activity, and cleared and pending transactions online, to transfer funds between accounts and to pay bills electronically.
•		S1 IBS Cash Management System is designed to help community banks deliver services to small businesses in the markets that they serve. Functions include integrated front and back office systems, multiple payment vehicles such as domestic and SWIFT wires, ACH, and EFTPS, integration with the IBS retail Internet banking application and EDI data display.
		In the commercial banking area, we offer the following Internet-based applications:

•

S1 Corporate Banking is a comprehensive Internet-based cash management solution that helps financial institutions better serve large corporations on a global basis. This application offers multi-lingual, multi-currency and multi-delivery channel capability to perform such functions as information reporting, global payments, check services, file services and customer administration on a global basis.

•

S1 Trade Finance solutions help financial institutions increase the efficiency of processing their trade transactions. S1 Trade Finance delivers one integrated system to create and report on trade documents from purchase order, to letter of credit, to direct collections. These solutions enhance the risk evaluation process for global trade using optimized workflow and reporting and deliver up-to-date status reports on all outstanding trade finance engagements.

         In the branch automation space, we currently offer the following Java-based products. In 2004, we will focus on delivery of J2EE-based branch and call center applications and expect to deliver a web-based teller application in late 2004.

•

S1 Teller provides the complete set of transactions and core services necessary for fulfilling the rigorous requirements of today’s teller environment, including host communications, sharing and storing of information, cumulative totals, electronic journal, transaction security and approval, and balancing aids.

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•

S1 Sales and Service Platform includes an extensive set of transactions, sales tools, and core services that expedite selling new products, as well as servicing existing accounts.

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S1 Banking Call Center provides the customer information, sales and service capabilities, process flows, reporting, and fulfillment management that are exclusive to call center operations. The S1 Banking Call Center application integrates with other call center technologies, including integrated voice response (IVR) systems, computer telephony integration servers, and automatic call distributor systems.

         When it comes to voice banking, we currently offer two solutions: (1) a packaged IVR system that is typically used by community banks and mid-size institutions, and (2) a complex set of tools that an institution can use to customize to meet its unique voice banking needs.

•

S1 Voice Banking delivers IVR functionality in a stable, flexible, Windows-based application. With the push of a button or through simple voice commands, users can check on a deposit or account balance, find a CD rate, pay bills or transfer funds.

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S1/Edify Voice and Speech Recognition products help companies automate their customer service facilities, improving customer satisfaction and enabling new revenue-generating opportunities while reducing operational costs. Edify’s voice and speech applications are scalable, multilingual and flexible, allowing companies to easily integrate multiple backend systems with a variety of contact interfaces. Our voice and speech solutions combine speech recognition, speaker verification, text-to-speech, fax, and touch-tone automation with a powerful application development environment and natural language capabilities to help organizations optimize customer service while lowering costs. Edify’s open, standards-based platform manages millions of customer interactions every day across a broad range of industries.

     S1 Insurance Solutions

         S1 Insurance solutions include products for both the customer and the agent/intermediary. The applications support product sales capabilities as well as self-service capabilities for the property and casualty and life and annuity markets.

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S1 Consumer Insurance provides the features and functionality to enable insurance providers to improve customer service, acquire new business and reduce costs by providing anytime, anywhere access to meet insurance needs. Customers can view policy information, request changes to their policies, initiate the claims process and get insurance quotes as well as apply and purchase products online.

     S1 CRM Solutions

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S1 Analytics features easy to use analytical and segmentation tools, comprehensive campaign development and management capabilities, and a unique methodology to drive the results of CRM out to all channels. It permits real time access to customer contact and value information, as well as target campaigns, and significantly enhances the value of CRM efforts.

•

S1 Marketing Center supports the planning and execution of marketing campaigns based on multiple segmentations of customers and prospects. It includes robust inbound and outbound telemarketing features that can be combined with advanced Computer Telephony Integration (CTI) functionality to enhance the efficiency of our customer’s marketing personnel.

•

S1 Sales Center supports sales associates and managers in a telesales or field sales environment by tracking all relevant information and proactively guiding the associate through initiating, closing and tracking opportunities.

•

S1 Support Center enables customer service representatives and managers to create, assign and manage customer support requests such as incidents, problems and resolutions. It provides details of the problem, the ability to request status and history and the ability to suggest products for cross-sell and up-sell.

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     Website Solutions

•

S1 Customer Center is a virtual financial lobby which provides customers with a destination web site or portal that gives them access to product information, news and other content, as well as community pages and bulletin boards. The S1 Customer Center enables financial institutions to efficiently create, manage and quantify their web presence.

     Financial Reporting Solutions

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Under the FRS brand, our financial reporting solutions provide financial institutions worldwide with a suite of optimized regulatory reporting, financial intelligence and analytic solutions. FRS FinancialAnalytics provides a consolidated global data foundation to help banks prepare and comply with Basel II and IAS. FRS Regulatory Reporting eases the burden of complying with national regulatory reporting requirements of central banks, monetary authorities, and other financial regulators in more than 20 countries. More than 600 financial institutions, including 37 of the top 50 European financial institutions and 55 and the top 100 global institutions, utilize our financial reporting solutions.

     Account Aggregation

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Through our reseller agreement with Yodlee, Inc., which is described in Note 18 to our consolidated financial statements included elsewhere in this report, we provide account aggregation capabilities, which allow the delivery of an integrated balance sheet consolidating, organizing and presenting a consumer’s personal account information from a variety of providers for confidential viewing and access.

S1 Services

         We provide services to assist our customers in the planning, implementation and customization of their applications as well as ongoing maintenance and support and, if desired, application hosting services.

     S1 Hosting Services

         Our hosting services provide operational management and control across the full range of banking, brokerage, insurance, loan, credit card and content applications and information. We host S1 applications for more than 400 customers in our global data center facility in Atlanta, which handles more than 2.5 million transactions every day. Our mature operating environment was designed to address mission-critical operational issues for financial applications, such as security, recovery and availability of data. Our global data center is a hardened facility that can scale to support large volumes of customers.

     S1 Customer Support

         The S1 Customer Support team offers various levels of service to meet an organization’s support needs and budgets:

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Technical Support — Customer support engineers will work to provide solutions on S1 products;

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Software Release Management — Software upgrades that include enhancements to our software as well as operational and performance improvements; and

•

Online Support — The S1 Support Website is designed to provide “one-stop” access to technical information for S1 products. The S1 Support Website provides access to technical FAQs, download patches, the latest documentation, and support bulletins.

     S1 Professional Services

         Our professional services team helps financial institutions bring their solutions to market — rapidly and efficiently. Our professional services organization is engaged in the following activities:

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Project Management — Our project managers are responsible for keeping a project on schedule and within budget throughout the implementation cycle;

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•

Custom Software Development — Our developers will customize our solutions to meet the specific business requirements of our customers — from analysis and design to building and testing;

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Technical Services — Our team will design, implement and test the servers and network infrastructure to support our solutions. Our expertise includes software integration, database services, networking and the applications skills required to deliver secure, robust solutions;

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Educational Services — Our training professionals help financial institutions train their employees to use our solutions to better serve their customers; and

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Web Design Services — Our web design group is available to assist with delivery of a complete web presence for financial institutions.

Customers and Markets

            We provide solutions to global financial services organizations as well as regional and community financial institutions. Currently, we serve more than 4,000 banks, credit unions, insurance providers and investment firms. During 2002 and 2003, we had two major customers and during 2001, we had one major customer (defined as those who individually contribute more than 10% of total revenues).

         We provided implementation, hosting and product enhancement services to State Farm Mutual Automobile Insurance Company. Revenues from State Farm were 28%, 22% and 18% of our total revenues during the years ended December 31, 2001, 2002 and 2003, respectively. We expect revenues from this customer to be approximately 18% of our total revenues in 2004.

         The other major customer, Zurich Insurance Company and certain of its affiliates or subsidiaries, accounted for 15% and 17% of our total revenues during the years ended December 31, 2002 and 2003. These revenues were derived from agreements to provide a subscription license, data center services and professional services, all of which ended during 2003. We will not earn any revenues from Zurich in 2004. This customer contributed less than 10% of our total revenues in 2001.

Strategic Alliances and Partners

         We have built a global network of more than 70 alliances, allowing us to more fully extend our expertise, capabilities, and reach within the financial services industry. We have established strategic, technology, and channel relationships with a number of organizations. We have alliances with companies such as IBM and BearingPoint as well as with numerous core processing vendors, bill payment providers, credit card processing vendors and printed product vendors. In certain geographies, including Asia, the Middle East and some European countries, we are using partners as our primary sales channel to increase our market reach.

Sales and Marketing

         We sell our solutions to small, mid-sized and large financial organizations. Our sales force is comprised of professionals structured in three major regional groups: (i) the Americas region, (ii) the Europe, Middle East and Africa region (EMEA) and (iii) the Asia-Pacific and Japan (APJ) region. We reported revenues of $278.3 million, $292.2 million and $252.6 million in 2001, 2002 and 2003, respectively, of which 76%, 73% and 71%, respectively, were attributed to sales in the United States.

         In the Americas region, our sales force is a mix of named account support, geographic support and inside sales support, depending on the size of the financial institution. The named accounts sales force focuses on developing long-term relationships with senior management team members of financial institutions. Once we have established a relationship with these organizations and their senior management teams, the sales team continues to market additional products and services to them. The sales cycle for large financial institutions generally lasts from six to 18 months. Contracts with these large financial organizations typically have multi-year terms. Sales to the small community and regional financial institutions are executed by a telephone sales team. The sales cycle for these small to mid-sized financial organizations typically lasts from six to nine months, and the contracts entered into with them typically provide for direct delivery and service requirements. In addition, we have relationships with distribution partners, thereby maximizing our market penetration through the reseller channel.

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         In the EMEA region, we sell through both a named account structure in specific territories such as the United Kingdom, Belgium, the Netherlands, Germany, France, Luxemburg, Spain and Portugal, and through resellers in other territories such as Switzerland, Italy, the Middle East and Africa. In the APJ region our sales efforts are focused primarily through resellers in countries such as China, Hong Kong, Taiwan, Malaysia and Singapore.

         Within each group are trained sales support personnel who provide functional and technical expertise to maximize the customer’s understanding of S1’s solutions.

         In addition to internal sales efforts and joint efforts with distribution partners, S1 markets its products and services in other ways to build awareness of the S1 brand. Our marketing efforts include participating in and exhibiting at industry conferences and trade shows, hosting an annual users conference, maintaining memberships in key industry organizations and establishing close relationships with industry analysts to help guide product development and marketing efforts.

Product Development

		Our product development efforts are focused on:
•		Enhancing the S1 Enterprise Platform. In mid-2003, we delivered the second major release of our flagship suite of products – S1 Enterprise. This release included the delivery of our retail Internet banking, small business Internet banking, corporate cash management and insurance applications on a single platform – the S1 Enterprise Platform. Later in the year, we released a version of our branch automation applications that could integrate with the S1 Enterprise Platform through the common data model. Utilizing leading industry standards such as J2EE, the S1 Enterprise Platform is an open, flexible and scalable architecture that will serve as a common base for S1 product deployments. Its layered framework ensures that all applications are consistent in their interpretation and presentation of all data and that they can be consistently extended, upgraded, maintained and operated. It also allows all applications and channels to access customer information via a single database.

•

Creating Centers of Development Excellence. In 2003, we created centers of development excellence that focus on development and delivery of specific components of our product line. These development centers include Charlotte, North Carolina for banking; Littleton, Massachusetts for insurance; West Hills, California for branch automation; Dublin, Ireland for CRM and the Enterprise Platform; Austin, Texas for community banking and voice banking and Pune, India which provides general development support to the other centers. Atlanta, Georgia serves as the integration center supporting the development centers. Our development center in Pune was developed through a build-to-buy arrangement with an Indian software development company. In 2004, we expect to establish an S1 owned operation in Pune.

•

Enhancing Existing Products and Services. We are developing new functions and features across our entire product line in order to provide a broader range of capabilities and continue to best meet our customers needs.

         We spent $53.9 million, $51.2 million and $45.1 million on product development efforts in 2001, 2002 and 2003, respectively. During 2004, we expect product development costs to be approximately $45 million.

Competition

         The market for financial software is competitive, rapidly evolving and subject to technological change. We currently perceive our near-term competition as coming from primary three areas: (1) in-house development organizations of financial institutions, (2) best of breed solution providers and (3) core processing vendors. We perceive our long-term competition as coming from other enterprise software providers.

     In-house Development Organizations

         We believe financial organizations may encounter the following challenges when building financial software in-house:

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building, maintaining and upgrading an in-house solution can be very costly;

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attracting and retaining the necessary technical personnel can be difficult and costly; and

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technological development may be too far outside the financial organization’s core competencies to be effective or successful.

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     Best of Breed Solution Providers

         These vendors offer solutions for a specific line of business and/or channel for the financial institution. In the retail Internet banking space, we compete primarily with Digital Insight Corporation, Financial Fusion (a division of Sybase, Inc.) and Corillian Corporation. In branch banking, we compete primarily with Argo Data Resource, Inc. and Fidelity Information Services, Inc. In business banking, we compete primarily with Fundtech Ltd., Politzer & Haney and Metavante Corporation. In CRM, we compete with Siebel Systems, Inc., PeopleSoft, Inc. and Onyx Software Corporation. We believe the disadvantages associated with a best of breed solution approach include:

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integrating additional applications and channels with multiple vendors greatly lengthens a financial organization’s time-to-market;

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operating and upgrading solutions from multiple vendors is very costly; and

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a combination of best of breed solutions across different channels does not provide an integrated view of the customer.

     Core Processing Vendors

         These vendors offer data processing services and outsourcing for financial institutions’ systems of record. In this space we compete with companies such as Metavante, Fiserv, Inc. and Jack Henry and Associates, Inc. Many of these companies offer front-office products at a sharp discount to augment their back-office capabilities. We believe the primary disadvantage of this approach is that these front office applications will lag behind the market to some degree in terms of functions and features and are of secondary focus to the vendor behind their back-office products and services.

     Enterprise Solution Vendors

         As we continue to roll out our Enterprise suite in 2004, we believe we may increasingly see interest and competition from various enterprise software and solution providers such as SAP Aktiengesell, Oracle Corporation and PeopleSoft. We believe our advantage in the financial services market will continue to stem from our deep domain knowledge and tight integration with the various key business systems within our financial organization customers base. Additionally, our large installed base will differentiate our ability to establish, deliver and defend our core market over time.

Government Regulation

         We are subject to examination by, and are indirectly regulated by, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the various state financial regulatory agencies that supervise and regulate the banks and thrift institutions for which we provide data processing services. Matters subject to review and examination by federal and state financial institution regulatory agencies include our internal controls in connection with our performance of data processing services and the agreements giving rise to those processing activities.

         Laws and regulations that apply to communications and commerce over the Internet are becoming more prevalent. Currently, there are Internet laws regarding copyrights, taxation and the transmission of specified types of material. Congress also adopted legislation imposing obligations on financial institutions to notify their customers of the institution’s privacy practices, restrict the sharing of non-public customer data with non-affiliated parties at the customer’s request, and establish procedures and practices to protect and secure customer data. These privacy provisions are implemented by regulations with which compliance is now required. Additionally, there are many legislative and regulatory actions pending at the state and federal level with respect to privacy. Further, our customers and we may be faced with state and federal requirements that differ drastically, and in some cases conflict. In addition, the European Union enacted its own privacy regulations and is currently considering other Internet-related legislation. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet. In addition, the growth and development of the market for online financial services, including online banking, may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online. We are also subject to encryption and security export laws which, depending on future developments, could adversely affect our business.

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Employees

         As of February 27, 2004, we had approximately 1,245 employees, including 437 in customer support, hosting services and professional services, 122 in sales and marketing and 386 in product development. In addition to full-time employees, we have used the services of various independent contractors for professional services projects and product development. We also have 217 independent contractors in Pune, India working on product development and professional services activities.

Available Information

         Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are available free of charge at our website at www.s1.com as soon as reasonably practicable after we electronically file such materials with, or furnish to, the Securities and Exchange Commission. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains our reports.

Risk Factors

         You should consider carefully the following risks. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could decline, and you may lose all or a part of the money you paid to buy our common stock.

Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price of our common stock

         Our quarterly operating results have fluctuated significantly to date. If we fail to meet the expectations of securities analysts or investors as a result of any future fluctuations in our quarterly operating results, the market price of our common stock would likely decline. We may experience fluctuations in future quarters because:

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we cannot accurately predict the number and timing of contracts we will sign in a period, in part because the budget constraints and internal review processes of existing and potential customers are not within our control;

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the length of our sales cycle to large financial organizations generally lasts from six to eighteen months, which adds an element of uncertainty to our ability to forecast revenues;

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if we fail to introduce new or enhanced products, or if our competitors introduce new or enhanced products, sales of our products and services may not achieve expected levels and/or may decline;

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our ability to expand the mix of distribution channels through which our products are sold may be limited;

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our products may not achieve widespread consumer acceptance, which could cause our revenues to be lower than expected;

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we have had significant contracts with legacy customers that have decreased or terminated their services and we may not be able to replace this revenue and / or the gross margins associated with this revenue;

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our sales may be constrained by the timing of releases of third-party software that works with our products; and

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a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in the short term if revenues decrease.

In 2004, we will depend on one customer for a significant portion of our revenue and if that customer terminates its contract with us, our revenues and financial performance would decline

         In 2002 and 2003, we derived 37% and 35% of our total revenues from two customers, respectively. One customer accounted for 28%, 22% and 18% of our total revenue in 2001, 2002 and 2003, respectively. Over the past three years, this customer has moved from a period of heavy investment and is now entering a stable maintenance state with their applications. We expect revenues from this customer to be approximately 18% of our total revenues in 2004. In 2002 and 2003, another customer accounted for 15% and 17% of our total revenues. Revenues from this customer were derived from a subscription license, professional services and a hosting agreement all of which ended in 2003. We do not expect to completely replace the loss of revenue from this customer in 2004.

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We have experienced substantial losses and may not achieve and/or maintain profitable operations in the future

         Although we were profitable in the fourth quarter of 2002 and the fourth quarter of 2003, we incurred losses in fiscal years 2001, 2002 and 2003. In the past, we approved restructuring plans to streamline our worldwide operations and to reduce our total operating expenses. We continue to review our cost structure on a worldwide basis and look for additional ways to streamline our operations. We believe our efforts to streamline operations, including headcount reductions and consolidation of our operating facilities, have resulted in cost savings that have improved our margins and our cash flows from operating activities during 2001, 2002 and 2003. We cannot ensure that our efforts to streamline our operations will improve our financial performance, or that we will be able to achieve profitability on a quarterly or annual basis in the future. We generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues. As a result, we may experience losses, which could negatively impact the value of our common stock.

We are engaged in offshore software development activities, which may not be successful and which may put our intellectual property at risk

         In order to optimize available research and development resources and meet development timeframes, we established a relationship with an Indian-based development organization in 2001 to outsource portions of our product development. In 2002 and 2003, we expanded this relationship resulting in the establishment of a development center in India. We also have a development center in Dublin, Ireland. While our experience to date with these offshore development activities has been positive, there is no assurance that this will continue. Specifically, there are a number of risks associated with this activity, including but not limited to the following:

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communications and information flow may be less efficient and accurate as a consequence of the time, distance and language differences between our primary development organization and the foreign based activities, resulting in delays in development or errors in the software developed;

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potential disruption from the involvement of the United States in the conflicts in the Middle East region;

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ramp-up time for our Indian based development efforts may adversely impact the ability to meet anticipated schedules;

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the quality of the development efforts undertaken off-shore may not meet our requirements because of language, cultural and experiential differences, resulting in potential product errors and/or delays;

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we have experienced a greater level of voluntary turnover of personnel in India than in other development centers which could have an adverse impact on efficiency and timeliness of development as well as the opportunity for misappropriation of our intellectual property; and

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in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general risk of the potential for misappropriation of our intellectual property that might not be readily discoverable.

Acquisitions and divestitures may be costly and difficult to integrate / divest, divert management resources or dilute stockholder value

         We acquired one company in 2001 and two companies in the first quarter of 2002. We sold one company in January 2001. The integration of these companies and any future acquisitions into our existing operations is a complex, time-consuming and expensive process and may disrupt our business. We have encountered difficulties, costs and delays in integrating the acquired operations with our own and may continue to do so in the future. Among the issues related to integration are:

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potential incompatibility of business cultures;

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potential delays in rationalizing diverse technology platforms;

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potential difficulties in coordinating geographically separated organizations;

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potential difficulties in re-training sales forces to market all of our products across all of our intended markets;

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potential difficulties implementing common internal business systems and processes;

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potential conflicts in third-party relationships; and

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the loss of key employees and diversion of the attention of management from other ongoing business concerns.

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A significant portion of our customers are in a consolidating financial services industry, which is subject to economic changes that could reduce demand for our products and services

         For the foreseeable future, we expect to derive most of our revenue from products and services we provide to the banking industry and other financial services firms such as insurance and securities brokerage companies. Changes in economic conditions and unforeseen events, like recession or inflation, could occur and reduce consumers’ use of banking services. Any event of this kind, or implementation for any reason by banks of cost reduction measures, could result in significant decreases in demand for our products and services. Mergers and acquisitions are pervasive in today’s banking industry. Our existing customers may be acquired by or merged into other financial institutions that have their own financial software solution or decide to terminate their relationships with us for other reasons. As a result, our sales could decline if an existing customer is merged into or acquired by another company.

Market volatility may affect the price of our common stock

         The trading prices of technology stocks in general, and ours in particular, have experienced extreme price fluctuations. Our stock price has declined significantly since reaching a high in 2000. Any further negative change in the public’s perception of the prospects of technology based companies, particularly those which are associated with the Internet or e-commerce such as ours, could further depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions such as a recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to the following factors:

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actual or anticipated variations in our quarterly operating results;

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announcements of new products, product enhancements, technological innovations or new services by us or our competitors;

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changes in financial estimates by securities analysts;

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conditions or trends in the computer software, electronic commerce and Internet industries;

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changes in the market valuations of other technology companies;

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developments in Internet regulations;

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

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unscheduled system downtime of our products in either a hosted or in-house environment;

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additions or departures of key personnel; and

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sales of our common stock or other securities in the open market.

Future sales of our common stock in the public market could negatively affect our stock price

         If our stockholders sell substantial amounts of our common stock, including shares issued when options and warrants are exercised or shares of our preferred stock are converted into common stock, the market price of our common stock could fall. As of March 5, 2004, we had 70.9 million shares of common stock outstanding, assuming no exercise of outstanding options or warrants or conversion of preferred stock. As of March 5, 2004, there were outstanding employee stock options to purchase 15.1 million shares of our common stock, options and warrants to acquire 0.1 million shares of our common stock, and 0.8 million shares of preferred stock convertible into an aggregate of 1.1 million shares of our common stock. The common stock issuable after vesting and upon exercise of these options and warrants and upon conversion of this preferred stock will be eligible for sale in the public market from time to time. The possible sale of a significant number of these shares may cause the market price of our common stock to fall. Some of the holders of restricted shares of our common stock, our preferred stock and vested options or warrants have rights that may require us to register shares of common stock with the Securities and Exchange Commission. By exercising their registration rights and causing a large number of shares to be sold in the public market, these stockholders could cause the market price of our common stock to fall.

Network or Internet security problems could damage our reputation and business

         Despite our security measures, the core of our network infrastructure could be vulnerable to unforeseen technology problems. Although we have taken steps to mitigate much of the risk, we may in the future experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Unknown security risks may result in liability to us and also may deter financial organizations from licensing our software and services.

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Although we intend to continue to implement and establish security measures, there can be no assurance that measures we have implemented will not be circumvented in the future, which could have a material adverse effect on our business, financial condition or results of operations. The occurrence of any of these problems could reduce product demand from potential customers and cause existing customers to terminate their license or data center contracts with us. These problems could also require us to spend significant capital to remedy any failure and could subject us to costly litigation with customers or their end users.

Our market is highly competitive and if we are unable to keep pace with evolving technology our revenue and future prospects may decline

         The market for our products and services is characterized by rapidly changing technology, intense competition and evolving industry standards. We have many competitors who offer various components of our suite of applications or who use a different technology platform to accomplish similar tasks. In some cases, our existing customers also use some of our competitors’ products. Our future success will depend on our ability to develop, sell and support enhancements of current products and new software products in response to changing customer needs. If the completion of the next version of any of our products is delayed, our revenue and future prospects could be harmed. In addition, competitors may develop products or technologies that the industry considers more attractive than those we offer or that render our technology obsolete.

System failures or performance problems with our products could cause demand for these products to decrease, require us to make significant capital expenditures or impair customer relations

         There are many factors that could adversely affect the performance, quality and desirability of our products and could delay or prevent these products from gaining market acceptance. These factors include, but are not limited to the following:

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extraordinary end-user volumes or other events could cause systems to fail;

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our products could contain errors, or “bugs”, which could impair the services we provide;

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during the initial implementation of some products, we have experienced significant delays in implementing and integrating software, and we may experience similar difficulties or delays in connection with future implementations and upgrades to new versions; and

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many of our products require integration with third-party products and systems, and we may not be able to integrate these products with new or existing products.

International operations may adversely affect us

         We conduct our business worldwide and may be adversely affected by changes in demand resulting from:

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fluctuations in currency exchange rates;

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governmental currency controls;

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changes in various regulatory requirements;

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political and economic changes and disruptions;

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difficulties in enforcing our contracts in foreign jurisdictions;

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export/import controls;

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tariff regulations;

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difficulties in staffing and managing foreign sales and support operations;

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greater difficulties in trade accounts receivable collection; and

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possible adverse tax consequences.

         Our solutions use encrypted technology, the export of which is regulated by the United States government. If the United States government were to adopt new legislation restricting the export of software or encryption technology, we could experience delays or reductions in our shipments of products internationally. In addition, existing or future export regulations could limit our ability to distribute our solutions outside of the United States.

         We maintain our international executive offices and a significant portion of our maintenance, consulting, and research and development operations in Europe. Therefore, our operations may also be affected by economic conditions in Europe. The risks associated with international operations may harm our business.

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We are involved in litigation over proprietary rights, which may be costly and time consuming

         We have received a claim that certain of our products, trademarks or other proprietary rights require a license of intellectual property rights or infringe, or may infringe, on the intellectual property rights of others. Those claims, with or without merit, could:

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be time-consuming;

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result in costly litigation;

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cause product shipment delays;

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require us to enter into royalty or licensing agreements; or

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result in an injunction being issued against the use of our products.

         Royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all, which could harm our business, financial condition and results of operations. Litigation to determine the validity of any claims could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not the litigation is determined in our favor. In the event of an adverse ruling, we may be required to:

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pay substantial damages;

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discontinue the use and sale of infringing products;

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expend significant resources to develop non-infringing technology; or

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obtain licenses to infringing technology.

         Our failure to develop or license a substitute technology could significantly harm our business. We expect software to be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlaps. Third parties may have, or may eventually be issued, patents that would be infringed by our products or technology. Any of these third parties could make a claim of infringement against us with respect to our products or technology. In addition, we may become involved in costly and time-consuming litigation to protect the validity of our intellectual property rights.

Infringement of our proprietary technology could hurt our competitive position and income potential

         Our success depends upon our proprietary technology and information. We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary technology and information. Because it is difficult to police unauthorized use of software, the steps we have taken to protect our services and products may not prevent misappropria