10-Q 1 goldleaf_10q.htm QUARTERLY REPORT

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

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2007

Commission file number 000-25959

Goldleaf Financial Solutions, Inc.
(Exact name of registrant as specified in its charter)

Tennessee		62-1453841
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9020 Overlook Blvd., Brentwood, Tennessee		37027
(Address of principal executive offices)		(Zip Code)

(615) 221-8400
(Registrant’s telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one.)

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

Yes o No x

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

Class		Outstanding as of October 31, 2007
Common Stock, no par value		17,279,315 Shares

GOLDLEAF FINANCIAL SOLUTIONS, INC.
Form 10-Q
For Quarter Ended September 30, 2007
INDEX

			Page No.
Part I –	Financial Information
	Item 1	Financial Statements
		Unaudited Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	3
		Unaudited Consolidated Statements of Operations for the Three Months ended September 30, 2007 and 2006	4
		Unaudited Consolidated Statements of Operations for the Nine Months ended September 30, 2007 and 2006	5
		Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2007 and 2006	6
		Notes to Unaudited Consolidated Financial Statements	8
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4T	Controls and Procedures	20

Part II –	Other Information
	Item 1A	Risk Factors	21
	Item 6	Exhibits	27
Signatures
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED

	September 30,			December 31,
	2007			2006
	(in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents	$	725		$	6,760
Restricted cash		4,355			3,029
Accounts receivable— trade, net of allowance for doubtful accounts of $407 and $396, respectively		8,141			6,180
Accounts receivable— other		4			16
Inventory		390			432
Deferred tax assets		1,256			1,377
Investment in direct financing leases		2,335			2,230
Prepaid and other current assets		2,934			2,368
Total current assets		20,140			22,392

Property and Equipment, net		3,793			3,196
Operating Lease Equipment, net		26			70
Other Assets:
Software development costs, net		4,189			2,705
Deferred tax assets		2,821			3,121
Investment in direct financing leases, net of current portion		2,888			4,310
Intangible and other assets, net		14,590			13,033
Goodwill		32,631			26,477
Total other assets		57,119			49,646
Total assets	$	81,078		$	75,304

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	2,375		$	3,385
Accrued liabilities		2,504			4,014
Deferred revenue		4,902			3,654
Customer deposits		4,301			2,977
Current portion of capital lease obligations		414			364
Current portion of non-recourse lease notes payable		1,835			2,141
Note payable		—			150
Total current liabilities		16,331			16,685
Revolving Line of Credit		10,000			2,500
Non-Recourse Lease Notes Payable, net of current portion		2,923			3,977
Deferred Revenue		1,179			1,840
Capital Lease Obligations, net of current portion		645			957
Other Non-Current Liabilities		796			91
Total liabilities		31,874			26,050

Commitments and Contingencies

Stockholders’ Equity:
Common stock, no par value; 100,000,000 shares authorized; shares issued and outstanding, 17,279,316
and 17,023,948, respectively.		—			—
Additional paid-in capital		68,214			68,080
Accumulated deficit		(19,010	)		(18,826	)
Total stockholders’ equity		49,204			49,254
Total liabilities and stockholders’ equity	$	81,078		$	75,304

The accompanying notes are an integral part of these consolidated financial statements.

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
For the Three Months Ended September 30, 2007 and 2006

	2007			2006
	(in thousands, except
	per share data)
Revenues:
Financial institution services	$	11,560		$	11,160
Retail inventory management services		2,040			2,025
Other products and services		743			1,326
Total revenues		14,343			14,511
Cost of Revenues:
Financial institution services		2,330			1,710
Retail inventory management services		211			210
Other products and services		516			984
Gross profit		11,286			11,607
Operating Expenses:
General and administrative		5,272			5,106
Selling and marketing		4,290			4,420
Research and development		610			349
Amortization		572			647
Other operating expense, net		13			9
Total operating expenses		10,757			10,531
Operating Income		529			1,076
Interest Expense, Net		(256	)		(871	)
Income Before Income Taxes		273			205
Income tax expense		181			80
Net Income		92			125
Preferred stock dividends		—			583
Net Income (Loss) Available to Common Stockholders	$	92		$	(458	)
Income (Loss) Per Share:
Basic	$	0.01		$	(0.14	)
Diluted	$	0.01		$	(0.14	)
Weighted Average Common Shares Outstanding:
Basic		17,279			3,163
Diluted		17,297			3,163

The accompanying notes are an integral part of these consolidated financial statements.

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
For the Nine Months Ended September 30, 2007 and 2006

	2007			2006
	(in thousands, except
	per share data)
Revenues:
Financial institution services	$	33,240		$	32,680
Retail inventory management services		6,158			6,148
Other products and services		2,737			2,812
Total revenues		42,135			41,640
Cost of Revenues:
Financial institution services		6,421			5,055
Retail inventory management services		626			693
Other products and services		1,986			1,985
Gross profit		33,102			33,907
Operating Expenses:
General and administrative		15,774			15,057
Selling and marketing		13,676			14,273
Research and development		1,576			840
Amortization		1,745			1,746
Other operating expense, net		27			133
Total operating expenses		32,798			32,049
Operating Income		304			1,858
Interest Expense, Net		(570	)		(2,443	)
Loss Before Income Taxes		(266	)		(585	)
Income tax benefit		(82	)		(226	)
Net Loss		(184	)		(359	)
Preferred stock dividends		—			1,700
Net Loss Available to Common Stockholders	$	(184	)	$	(2,059	)
Loss Per Share:
Basic	$	(0.01	)	$	(0.65	)
Diluted	$	(0.01	)	$	(0.65	)
Weighted Average Common Shares Outstanding:
Basic		17,275			3,157
Diluted		17,275			3,157

The accompanying notes are an integral part of these consolidated financial statements.

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
For the Nine Months Ended September 30, 2007 and 2006

	2007			2006
	(in thousands)
Cash Flows From Operating Activities:
Net loss	$	(184	)	$	(359	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Write-off of debt issuance costs		—			118
Depreciation and amortization		3,347			3,257
Depreciation on fixed assets under operating leases		25			100
Deferred taxes		582			(260	)
Amortization of debt issuance costs and discount		90			508
Stock compensation expense		116			520
Deferred gain on land sale		(11	)		(12	)
Loss on write-down or disposal of fixed assets		19			38
Amortization of lease income and initial direct costs		(544	)		(468	)
Gain on sale of leased equipment		(57	)		(60	)
Gain on sale of other assets		—			(40	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(896	)		(947	)
Prepaid and other current assets		(418	)		(882	)
Other non-current assets		(108	)		(131	)
Inventory		42			(42	)
Accounts payable		(1,125	)		(90	)
Accrued liabilities		(1,073	)		2,250
Deferred revenue		(48	)		481
Other non-current liabilities		290			(13	)
Net cash provided by operating activities		47			3,968
Cash Flows From Investing Activities:
Acquisition of businesses, net of cash acquired		(10,389	)		(17,364	)
Investment in direct financing leases		(886	)		(1,636	)
Lease receivables collected		2,811			2,313
Proceeds from lease terminations		—			265
Proceeds received from sale of other assets		—			62
Additions to property and equipment		(1,741	)		(679	)
Additions to intangibles and other assets		(12	)		(311	)
Additions to software development costs		(1,635	)		(1,159	)
Payments received on notes receivable		20			45
Net cash used in investing activities		(11,832	)		(18,464	)

– Continued - .

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
For the Nine Months Ended September 30, 2007 and 2006
- Continued -

	2007			2006
	(in thousands)
Cash Flows From Financing Activities:
Repayments on long-term debt	$	—		$	(250	)
Repayments on capital lease obligations		(262	)		(169	)
Proceeds from amended and restated debt facility with Bank of America,
net of issuance costs of $543		—			15,457
Proceeds from revolving line of credit, net		7,500			1,943
Repayments of note payable		(150	)		(850	)
Repayments of non-recourse lease financing notes payable		(2,240	)		(1,726	)
Proceeds from non-recourse lease financing notes payable		895			1,369
Receipt of dividends previously paid		—			500
Repurchase of common stock		—			(2	)
Proceeds from exercise of employee stock options		54			5
Expenses related to Secondary Offering		(47	)		—
Stock issued through employee stock purchase plan		—			5
Net cash provided by financing activities		5,750			16,282

Net Change in Cash and Cash Equivalents		(6,035	)		1,786
Cash and Cash Equivalents at beginning of period		6,760			137
Cash and Cash Equivalents at end of period	$	725		$	1,923

Supplemental Cash Flow Information:
Cash payments for income taxes during period	$	198		$	257
Cash payments of interest during period	$	486		$	743

Non-cash Investing Activities:
Issuance of 62,953 common shares as purchase consideration in the Goldleaf Technologies, Inc. and
P.T.C. Banking acquisitions	$	—		$	462
Issuance of note payable to Goldleaf executive for signing bonus	$	—		$	1,000
Payment-in-kind on Series A preferred stock dividend	$	—		$	1,537
Payment-in-kind on Series C preferred stock dividend	$	—		$	556

The accompanying notes are an integral part of these consolidated financial statements.

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

A. The Company

Goldleaf Financial Solutions, Inc. (“we” or the “Company”) is a provider of a suite of technology-based products and services that assist community financial institutions to serve their customers, improve their operational efficiencies, enhance their competitive position, increase their profitability and satisfy regulatory requirements. We provide our solutions primarily on an outsourced basis, which enables our clients to obtain advanced products without having to incur substantial capital expense and hire the skilled personnel required to develop, implement, update and maintain their internal systems. In addition to the suite of solutions we offer to community financial institutions, we also offer products and services to small and medium sized businesses engaged in the retail sector.

B. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X.

In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position, and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

These consolidated financial statements, footnote disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006.

Principles of Consolidation

The accompanying financial statements include the accounts of Goldleaf Financial Solutions, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Our significant accounting policies include revenue recognition, software development costs, income taxes, acquisition accounting, and accounting for long-lived assets, intangible assets, and goodwill. Please refer to our critical accounting policies as described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2006 for a more detailed description of these accounting policies.

Income Taxes

On January 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN No. 48”) Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN No. 48 requires a company to evaluate all uncertain tax positions and assess whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Adoption of FIN No. 48 resulted in an accrual of approximately $456,000 related to uncertain tax positions, which were previously accrued as contingent liabilities, thus there was no cumulative adjustment to retained earnings. These uncertain tax positions, if recognized, would not have an effect on the effective tax rate.

During the quarter ended June 30, 2007, a new uncertain tax position was identified. As a result, the Company recorded an additional $217,000 reserve relating to the new uncertain tax position, which has been incorporated into the Company’s overall effective annual tax rate in the accompanying consolidated statements of operations, resulting in an effective tax rate of 68.3%. The Company’s overall statutory rate at September 30, 2007 was 38.5% which was the rate applied to the deferred tax asset balances. In addition, during the quarter ended September 30, 2007, the Company resolved one of the uncertain tax positions and reversed the $137,000 reserve previously accrued as a contingent liability. Therefore, the Company’s accrual for uncertain tax positions totaled $536,000 at September 30, 2007. The Company has elected to classify interest associated with uncertain tax positions as interest expense in the accompanying consolidated statements of operations. Additionally, penalties associated with uncertain tax positions will be classified as income tax expense in the accompanying consolidated statements of operations. There were no penalties and interest accrued as of January 1, 2007. For the three and nine months ended September 30, 2007, interest expense for uncertain tax positions totaled $11,000 and $23,000, respectively.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal tax examinations for any returns before 2004. State jurisdictions that remain subject to examination range from 2001 to 2006.

Stock-Based Compensation

As of September 30, 2007, there was $2.0 million of total forfeiture adjusted unrecognized compensation cost related to unvested share-based compensation arrangements. We expect to recognize this cost over a weighted-average period of 3.0 years.

Share-based compensation expense lowered pre-tax income by $101,000 and $181,000 for the three month periods ended September 30, 2007 and 2006, respectively, and $116,000 and $521,000 for the nine month periods ended September 30, 2007 and 2006, respectively.

During the quarter ended September 30, 2007, the Company granted 819,000 common stock options. The weighted-average grant date fair value of options granted during the three months ended September 30, 2007 and 2006 was $2.93 and $4.20, respectively and $2.99 and $4.25 for the nine month periods ended September 30, 2007 and 2006, respectively. The total fair value of stock options that vested during the three months and nine months ended September 30, 2007 was $0 and $1,612, respectively. The total intrinsic value of stock options exercised during the three months and nine months ended September 30, 2007 was $106 and $24,901, respectively.

C. Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation. The Company has reclassified certain cost of revenues from financial institution service fees to other products and services to better correlate with the Company’s revenue categories.

D. Acquisitions

Assets of DataTrade, LLC

On May 1, 2007, the Company acquired certain operating assets and liabilities of DataTrade, LLC (“DataTrade”), a Missouri limited liability company, for total cash consideration of approximately $5.8 million, which was funded by the Company’s revolving line of credit. In addition to the consideration at closing, the selling shareholders may be entitled to contingent consideration based on the financial performance of the acquired business during the next twenty four months. The operating results of DataTrade are included with those of the Company beginning May 1, 2007. Pro forma financial results of DataTrade are not required due to the size of the transaction. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The preliminary purchase price allocation is as follows:

(In thousands)
Purchase Price:
Cash	$	5,698
Direct costs of acquisition		131

Total purchase price	$	5,829

Value assigned to assets and liabilities:
Assets:
Accounts receivable/Unbilled accounts receivable		695
Prepaid and other current assets		13
Deferred tax assets		147
Property and equipment		171
Customer list (estimated life of ten years)		950
Acquired technology (estimated life of five years)		720
Goodwill/unidentified intangibles		3,643
Liabilities:
Accounts payable		(55	)
Accrued liabilities		(80	)
Deferred revenue		(375	)
Total net assets	$	5,829

The Company continues to evaluate and value the identifiable intangible assets and acquisition costs of DataTrade. The above preliminary purchase price allocation was adjusted in the third quarter based on the results of this ongoing analysis. The results of this ongoing analysis are reflected in the above purchase price allocation and resulted in a net increase of $212,000 to goodwill for the three months ended September 30, 2007.

Assets of Community Banking Systems, Ltd.

On March 14, 2007, the Company executed an asset purchase agreement to acquire certain operating assets and liabilities from Community Banking Systems, Ltd. (“CBS”), in exchange for cash consideration of $4.8 million. In addition to the cash consideration at closing, the selling shareholders may be entitled to contingent consideration based on the financial performance of the business during the next twenty four months. Simultaneous with the execution of the asset purchase agreement, the Company entered into two-year employment agreements with two of the principal officers of CBS. The operating results of CBS are included with those of the Company beginning March 14, 2007. Pro forma financial results of CBS are not required due to the size of the transaction. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The preliminary purchase price allocation is as follows:

(In thousands)

Purchase Price:
Cash	$	4,650
Direct costs of acquisition		134

Total purchase price	$	4,784

Value assigned to assets and liabilities:
Assets:
Cash		224
Accounts receivable/Unbilled accounts receivable		378
Prepaid and other current assets		15
Deferred tax assets		100
Property and equipment		68
Customer list (estimated life of ten years)		504
Acquired technology (estimated life of five years)		1,040
Non-compete (estimated life of three years)		170
Goodwill/unidentified intangibles		2,656
Liabilities:
Accounts payable		(89	)
Accrued liabilities		(22	)
Deferred revenue		(260	)
Total net assets	$	4,784

The Company continues to evaluate and value the identifiable intangible assets and acquisition costs of CBS. The above preliminary purchase price allocation was adjusted in the third quarter based on the results of this ongoing analysis. The results of this ongoing analysis are reflected in the above purchase price allocation, and resulted in a net increase of $206,000 to goodwill for the three months ended September 30, 2007.

E. Net Income (Loss) Per Share

Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period, which includes the additional dilution related to outstanding stock options and warrants as computed under the treasury stock method and the conversion of preferred stock under the if-converted method.

The following table represents information necessary to calculate earnings per share for the three and nine months ended September 30, 2007 and 2006:

	Three Months					Nine Months
	Ended September 30					Ended September 30
	2007		2006			2007			2006
	(in thousands)					(in thousands)
Net income (loss) available to common shareholders	$	92	$	(458	)	$	(184	)	$	(2,059	)

Weighted average common shares outstanding - basic		17,279		3,163			17,275			3,157
Plus additional shares from common stock equivalent shares:
Options		18		-			-			-
Diluted weighted average common shares outstanding		17,297		3,163			17,275			3,157

For the nine months ended September 30, 2007 and 2006, there were approximately 54,000 options and 5.9 million employee stock options, warrants and Series B preferred shares, respectively, that were excluded from diluted earnings per share calculations, as their effects were anti-dilutive.

F. Legal Proceedings

The Company is not currently a party to, and none of our material properties is currently subject to, any material litigation that the Company believes could have a material effect on its financial condition.

G. Segment Information

The Company presents segment information in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Corporate overhead costs and interest have not been allocated to income before taxes of the retail inventory management services segment. As such, the disclosure below includes gross profit by segment.

The following tables summarize the financial information concerning the Company’s reportable segments as of and for the three and nine months ended September 30, 2007 and 2006.

	Three Months Ended September 30, 2007						Three Months Ended September 30, 2006
			Retail						Retail
	Financial		Inventory				Financial		Inventory
	Institution		Management				Institution		Management
	Services		Services		Total		Services		Services		Total
	(In thousands)
Revenues	$	12,303	$	2,040	$	14,343	$	12,486	$	2,025	$	14,511
Gross Profit	$	9,457	$	1,829	$	11,286	$	9,792	$	1,815	$	11,607
Total expenditures for additions to long-lived assets	$	808	$	—	$	808	$	671	$	—	$	671

	Nine Months Ended September 30, 2007						Nine Months Ended September 30, 2006
			Retail						Retail
	Financial		Inventory				Financial		Inventory
	Institution		Management				Institution		Management
	Services		Services		Total		Services		Services		Total
	(In thousands)
Revenues	$	35,977	$	6,158	$	42,135	$	35,492	$	6,148	$	41,640
Gross Profit	$	27,570	$	5,532	$	33,102	$	28,452	$	5,455	$	33,907
Assets	$	77,786	$	3,292	$	81,078	$	74,290	$	3,435	$	77,725
Total expenditures for additions to long-lived assets	$	3,376	$	12	$	3,388	$	2,137	$	12	$	2,149
Goodwill	$	30,561	$	2,070	$	32,631	$	22,528	$	2,070	$	24,598

Total gross profit by segment reconciles to operating income as follows:

	Three Months						Nine Months
	Ended September 30						Ended September 30
	2007			2006			2007			2006
	(in thousands)						(in thousands)
Gross Profit	$	11,286		$	11,607		$	33,102		$	33,907
Less: Operating Expenses		(10,757	)		(10,531	)		(32,798	)		(32,049	)
Operating Income	$	529		$	1,076		$	304		$	1,858

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

Note Regarding Forward Looking Information

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future economic performance, plans and objectives of management for future operations and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The words “expect,” “estimate,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. We make forward-looking statements in Items 2 and 3 of Part I and in Item 1A of Part II of this report. Some of the forward-looking statements relate to our intent, belief or expectations regarding our strategies and plans for operations and growth. Other forward-looking statements relate to trends affecting our financial condition and results of operations and our anticipated capital needs and expenditures. These statements involve risks, uncertainties and assumptions, including industry and economic conditions, competition and other factors discussed in this and our other filings with the SEC. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those that are anticipated in the forward-looking statements. Other forward-looking statements relate to trends affecting our financial condition and results of operations and our anticipated capital needs and expenditures. See Part II, Item 1A, “Risk Factors” below, for a description of some of the important factors that may affect actual outcomes.

For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf is expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We provide a suite of technology-based products and services that assist community financial institutions in their efforts to compete more effectively with larger regional and national financial institutions. We believe that community financial institutions, which have traditionally competed on personalized service, are facing increasing challenges to improve their operating efficiencies and grow their customer base. These challenges include:

growing competition with larger national and regional banks;
the emergence of non-traditional competitors;
the compression of margins on traditional products;
the convergence of financial products into a single institution; and
legislative changes accelerating the need for financial institutions to offer a wider range of products and services to their customers.

We believe that these competitive pressures are particularly acute for community financial institutions, which in many instances lack the substantial capital and specialized personnel to address their technology needs internally. Our solutions enable our clients to focus on their core competencies while we assist them in addressing their product and technology needs. We provide our solutions primarily on an outsourced basis.

The financial technology industry is currently characterized by significant acquisition activity, the introduction of new product and service offerings for financial institutions and an increased emphasis on security of customer data. We believe that these trends may result in greater opportunities for providers of financial technology.

Historically, we have generated our revenues primarily from participation fees, software licenses fees, maintenance fees and insurance brokerage fees derived from BusinessManager, our accounts receivable financing solution, and from fees associated with our retail inventory management services product. For the three and nine months ended September 30, 2007, we derived approximately 39% and 40%, respectively, of our consolidated revenues from BusinessManager and approximately 14% and 15%, respectively, of our consolidated revenues from retail inventory management services. We expect to continue to generate a substantial portion of our revenues from these sources during the remainder of 2007. In recent years, our revenues from BusinessManager and retail inventory management services have declined from year-to-year, and this trend may continue. Partly as a result of the performance of our BusinessManager and retail inventory management services businesses, in December 2005 we broadened our focus to providing a suite of solutions primarily to community financial institutions. In connection with this shift in strategy we acquired the following companies during 2006:

Captiva, which added core data processing as well as image and item processing;
P. T. C. , which added teller automation systems; and
Goldleaf Technologies, which added ACH processing, remote capture processing, and website design and hosting.

In early 2007, we have continued to broaden our product offerings with the acquisitions of:

Community Banking Systems, which added check imaging, report archival, and document imaging; and
DataTrade, LLC, which added data conversion services, remote deposit, report management, interactive voice response, and checkscan.

We now offer products and services to approximately 2,800 community financial institution relationships, which gives us an opportunity to cross-sell our full range of products and services across this client base.

Revenues

We generate revenue from three main sources:

financial institution services;
retail inventory management services; and
other products and services.

Financial Institution Services

Financial institution services include:

participation fees and insurance brokerage fees;
core data processing and image processing fees;
software license and maintenance fees;
ACH origination and processing fees;
remote capture and deposit processing fees;
leasing revenues;
financial institution website design and hosting fees;
check imaging;
report archival;
document imaging;
data conversion services;
merchant and branch capture;
report management; and
voice response.

Participation Fees, Insurance Brokerage Fees and Maintenance Fees from Our Accounts Receivable Financing Solution. We derive revenue from two types of participation fees. First, we earn a fee during the first 30 days after a client financial institution implements our solution and purchases accounts receivable from its small business customers. Second, we earn an ongoing participation fee from subsequent purchases of accounts receivable by the client. Both types of fees are based on a percentage of the accounts receivable that the client purchases during each month, with the second type of fee being a smaller percentage of the accounts receivable purchased. Insurance brokerage fees are derived from the sale of credit and fraud insurance products issued by a third-party national insurance company. We earn fees based on a percentage of the premium paid to the insurance company. We recognize these commission revenues when our financial institution clients purchase the accounts receivable covered by credit and fraud insurance policies.

Core Data Processing and Image Processing Fees. We generate support and service fees from implementation services, from ongoing support services to assist the client in operating the systems and to enhance and update the software processing and from providing outsourced core data processing services. We derive revenues from outsourced item and core data processing services from monthly usage fees, typically under multi-year contracts with our clients.

Software License and Maintenance Fees. We receive software license fees from the sale of software associated with our accounts receivable financing solutions and our core data processing solution. Software license fees for our accounts receivable financing solutions consist of two components: a license fee and a client training and support fee. We receive these one-time fees on the initial licensing of our program to a client financial institution. Our license agreements have terms ranging from three to five years and are renewable for subsequent terms. We generate annual software maintenance fees from our client financial institutions. We license our core data processing product under standard license agreements that typically provide the client with a non-exclusive, non-transferable right to use the software. We generate annual software maintenance fees from our client financial institutions starting on the first anniversary of the core data processing license agreement and annually thereafter.

ACH Origination and Processing, Remote Capture and Deposit Processing Fees. We license these products via up-front fees to financial institutions at the time of execution of the agreements, which are typically five-year contracts. We recognize these up-front fees when we complete customer implementation, which typically occurs within the first thirty days after contract execution. We also generate monthly fees for hosting services from each originator of ACH transactions, and we receive fees for each ACH transaction that occurs each month. We offer annual hosting and maintenance support to all of our financial institution clients for a fee that is generally equal to 16% to 20% of the up-front license fees.

Leasing Revenues. Subsequent to our acquisition of KVI Capital in August 2005, we began to offer equipment leasing services to some of our clients. We have no credit risk exposure for these leases. Our leases fall into two categories: direct financing leases and operating leases. For direct financing leases, the investment in direct financing leases caption consists of the sum of the minimum lease payments due during the remaining term of the lease and unguaranteed residual value of the leased asset. We record the difference between this sum and the cost of the leased asset as unearned income. We amortize unearned income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease. For leases classified as operating leases, we record the leased asset at cost and depreciate the leased asset. We record lease payments as rent income during the period earned.

Financial Institution Website Design and Hosting Fees. We offer website design and hosting services to financial institutions, although we do not host any confidential bank data on our servers. The revenues we generate for these services consist of up-front fees associated with the design and implementation of each website and monthly hosting fees for hosting each website in our data center.

Document Imaging. We offer document management products to help banks and corporations organize and archive masses of business information. Imaging software is offered as a network-based system for scalable document imaging, scanning, and storage solutions. We earn license fees from the sale of software as well as installation and training fees. These fees are recognized as revenue upon completion of the installation of the software. We also generate annual software maintenance fees upon the installation completion.

Data Conversion Services. We provide digital to digital conversion and migration services for document images, check images, computer reports (C.O.L.D) and data. We charge a fee per volume count of data to be converted. We recognize revenue for these services upon completion of the conversion and delivery of the converted data.

Merchant and Branch Capture. With our acquisition of DataTrade, we also offer Merchant Capture as a remote deposit application that provides a bank’s commercial customers a means to capture check images, make electronic deposits, and improve treasury operations. Additionally, our remote deposit solutions provide banks with branch capture and a full function lockbox/remittance application. We license these products via up-front license fees as well as installation, testing, and training fees. We recognize these fees when installation is complete or as services are provided.

Report Management and Voice Response Services. Our report management software provides digital report storage and management solutions to banks and corporations to securely store and retrieve digital report information via network or web connectivity. Our voice response services offer customers 24/7 access to information on all types of accounts to initiate transactions, check on other products and services and receive statement and invoice information through simple touchtone or speech commands. Similar to our document imaging products, we earn license fees from the sale of software as well as installation, implementation, testing, and training fees. We generate annual software maintenance fees upon completion of the installation or as services are provided.

Retail Inventory Management Services

We generate retail inventory management services revenue from fees we charge primarily for providing inventory merchandising and forecasting information for specialty retail stores and ancillary services related to these products. We use proprietary software to process sales and inventory transactions and provide the merchandising forecasting information.

Other Products and Services

We generate revenues from scanner equipment and printer sales, charges for our deposit acquisition direct mail program, hardware used with our document imaging and report management products, sales of standard business forms used in our BusinessManager program, and statement rendering and mailing.

Historically, we have derived a significant portion of our revenues from fees associated with our accounts receivable financing solutions and retail inventory management services. While we believe that our recent acquisitions and product diversification will enable us to derive revenues from a broader mix of products and services, we anticipate that revenues derived from our accounts receivable solutions and inventory management services will continue to account for a substantial portion of our revenues in 2007.

Results of Operations

The following table provides, for the periods indicated, the percentage relationship of the identified consolidated statement of operations items to total revenues.

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2007		2006		2007		2006
Revenues:
Financial institution services	80.6	%	76.9	%	78.9	%	78.5	%
Retail inventory management services	14.2		14.0		14.6		14.8
Other products and services	5.2		9.1		6.5		6.7
Total Revenues	100.0		100.0		100.0		100.0
Cost of Revenues:
Financial institution services	16.2		11.8		15.2		12.1
Retail inventory management services	1.5		1.4		1.5		1.7
Other products and services	3.6		6.8		4.7		4.8
Total Cost of Revenues	21.3		20.0		21.4		18.6
Gross Profit	78.7		80.0		78.6		81.4
Operating Expenses:
General and administrative	36.8		35.2		37.4		36.2
Selling and marketing	29.9		30.5		32.5		34.3
Research and development	4.3		2.4		3.7		2.0
Amortization	4.0		4.5		4.1		4.2
Other operating expense, net	0.1		0.1		0.1		0.3
Total Operating Expenses	75.1		72.7		77.8		77.0
Operating Income	3.6		7.3		0.8		4.4
Interest Expense, net	(1.8	)	(6.0	)	(1.4	)	(5.9	)
Income (Loss) before Taxes	1.8		1.3		(0.6	)	(1.5	)
Income Tax Expense (Benefit)	1.2		0.5		(0.2	)	(0.5	)
Net Income (Loss)	0.6	%	0.8	%	(0.4	)%	(1.0	)%

Three and Nine Months Ended September 30, 2007 Compared to Three and Nine Months Ended September 30, 2006

Total revenues for the three months ended September 30, 2007 decreased 1.2% to $14.3 million and for the nine month period ended September 30, 2007 revenues increased 1.2% to $42.1 million as compared to $14.5 million and $41.6 million for the comparable periods of 2006.

Financial Institution Services. Financial institution services increased 3.6% and 1.7% to $11.6 million and $33.2 million for the three and nine month periods ended September 30, 2007 compared to $11.2 million and $32.7 million for the comparable periods ended September 30, 2006. Electronic processing revenue increased $1.4 million and $3.7 million for the three and nine months periods ended September 30, 2007, respectively. The increase is primarily attributable to revenues generated by the entities we acquired during the current year, which totaled $347,000 and $662,000 for products acquired through the acquisition of CBS and $668,000 and $956,000 for products acquired through the acquisition of DataTrade for the three and nine month periods ended September 30, 2007, respectively. These increases were offset by decreases in financial lending revenues of $955,000 and $3.1 million for the three and nine month periods ended September 30, 2007, respectively, primarily due to declining funding volume with our Business Manager product. As a percentage of total revenues, financial institution services revenues accounted for 80.6% and 78.9%, respectively, for the three and nine months ended September 30, 2007 compared to 76.9% and 78.5% for the comparable periods ended September 30, 2006. Our BusinessManager product represented 38.7% and 40.1% of total revenues, respectively, for the three and nine month periods ended September 30, 2007 compared to 44.5% and 47.4%, respectively, for the prior year periods.

Retail Inventory Management Services. Retail inventory management services (“RMSA”) revenues totaled $2.0 million and $6.2 million for the three and nine months ended September 30, 2007 as compared to $2.0 million and $6.1 million for the three and nine months ended September 30, 2006. As a percentage of total revenues, retail inventory management services accounted for 14.2% and 14.6% for the three and nine month periods ended September 30, 2007 as compared to 14.0% and 14.8% for the comparable periods of 2006.

Other Products and Services. Revenues from other products and services decreased 44.0% and 2.7% to $743,000 and $2.7 million for the three and nine month periods ended September 30, 2007 compared to $1.3 million and $2.8 million for the comparable periods of 2006. Other products and services include the sale of equipment associated with our remote capture and ACH products and hardware for our report management, merchant and branch capture, and imaging software products. For the three months ended September 30, 2007, the decrease in revenue is primarily due to a decline in scanner equipment sales, which is a result of increased sales for the comparable prior year period due to a supplier backlog during the first half of 2006 that was remedied during the three month period ended September 30, 2006. For the nine months ended September 30, 2007, the decrease in revenue is due to a decline in scanner equipment sales, which was partially offset by revenues from the CBS and DataTrade acquisitions. Revenues from other products and services accounted for 5.2% and 6.5% of total revenues for the three and nine months ended September 30, 2007 compared to 9.1% and 6.7% for the comparable periods of 2006.

Cost of Revenues — financial institution services. Cost of revenues for financial institution services increased 36.2% and 27.0% to $2.3 million and $6.4 million for the three and nine months ended September 30, 2007 compared to $1.7 million and $5.1 million for the comparable periods of 2006. Of this increase, $266,000 and $460,000, for the three and nine month periods respectively, relate to the 2007 acquisitions of CBS and DataTrade. Additionally, costs associated with our electronic processing product and our deposit acquisition efforts increased by approximately $425,000 and $1.2 million, respectively, for the three and nine months ended September 30, 2007. These increases were partially offset by decreases of $100,000 and $315,000, respectively, in software development amortization for the three and nine month periods ended September 30, 2007 due to mature software development project costs becoming fully amortized. As a percentage of total revenues, cost of revenues for financial institution services increased to 16.2% and 15.2% for the three and nine months ended September 30, 2007 compared to 11.8% and 12.1% for the comparable periods of 2006.

Cost of Revenues — retail inventory management services. Cost of revenues related to retail inventory management services totaled $211,000 for the three month period ended September 30, 2007 and decreased 9.7% to $626,000 for the nine month period ended September 30, 2007, which compares to $210,000 and $693,000 for the comparable periods of 2006. The nine month decrease is primarily due to lower salary and benefit expenses as a result of reduced headcount when compared to the prior period. As a percentage of total revenues, cost of sales for retail inventory management services was 1.5% for both the three and nine month periods ended September 30, 2007 compared to 1.4% and 1.7% for the comparable periods of 2006.

Cost of Revenues — other products and services. Cost of revenues related to other products and services decreased 47.5% to $516,000 and increased by less than 1% to $2.0 million for the three and nine month periods ended September 30, 2007, which compares to $984,000 and $2.0 million, respectively, for the comparable periods of 2006. The decline for the three month period is primarily related to reduced scanner sales and other hardware associated with our deposit acquisition efforts. As a percentage of total revenues, cost of revenues for other products and services decreased to 3.6% and 4.7% for the three and nine months ended September 30, 2007 compared to 6.8% and 4.8% for the comparable periods of 2006.

General and Administrative. General and administrative expenses increased 3.3% and 4.8% to $5.3 million and $15.8 million for the three and nine months ended September 30, 2007 compared to $5.1 million and $15.1 million for the comparable periods of 2006. General and administrative expenses include the cost of our executive, finance, human resources, information and support services, administrative functions and general operations. The increase for the nine month period is primarily due to the severance charges of $579,000 for the former president of GTI and other employee terminations. Additionally, the increase is attributable to the increased salary expense relating to new employees acquired with our 2007 acquisitions, offset by a reduction in discretionary bonus expense for the nine month period ended September 30, 2007. The remaining increase for the nine months ended September 30, 2007 relates to increases in accounting expenses associated with the Company’s ongoing Sarbanes-Oxley compliance efforts. As a percentage of total revenues, general and administrative expenses increased to 36.8% and 37.4% for the three and nine months ended September 30, 2007 compared to 35.2% and 36.2% for the comparable periods of 2006.

Selling and Marketing. Selling and marketing expenses decreased 2.9% and 4.2% to $4.3 million and $13.7 million for the three and nine months ended September 30, 2007 compared to $4.4 million and $14.3 million for the comparable periods of 2006. Selling and marketing expenses include cost of wages and commissions paid to our sales force, travel costs of the sales force, recruiting for new sales and marketing personnel and marketing fees associated with direct and telemarketing programs. The decrease was primarily due to a decline in commission expense due to lower revenues associated with our financial lending products. As a percentage of total revenues, selling and marketing expenses were 29.9% and 32.5% for the three and nine months ended September 30, 2007 compared to 30.5% and 34.3% for the comparable periods of 2006.

Research and Development. Research and development expenses increased 74.8% and 87.6% to $610,000 and $1.6 million for the three and nine months ended September 30, 2007 compared to $349,000 and $840,000 for the three and nine months ended September 30, 2006. Research and development expenses include the non-capitalizable direct costs associated with developing new versions of our software, as well as other software development projects that, in accordance with GAAP, we do not capitalize. The increase was primarily due to the level of research and development activities for our electronic processing products. As a percentage of total revenues, research and development expenses increased to 4.3% and 3.7% for the three and nine months ended September 30, 2007 compared to 2.4% and 2.0% for the three and nine months ended September 30, 2006.

Amortization. Amortization expense decreased 11.6% and 0.1% to $572,000 and $1.7 million for the three and nine months ended September 30, 2007 compared to $647,000 and $1.7 million for the three and nine months ended September 30, 2006. These expenses include the expense associated with amortizing intangible assets, including identified intangibles recorded in connection with our 2007 acquisitions. The decrease for the three month period is due to reduced intangibles for the GTI acquisition in February 2006 as part of the Company’s purchase price analysis. As a percentage of total revenues, amortization expense decreased to 4.0% and 4.1% for the three and nine months ended September 30, 2007 compared to 4.5% and 4.2% for the three and nine months ended September 30, 2006.

Other Operating Expense, Net. Other operating expense, net for the three and nine months ended September 30, 2007 totaled $13,000 and $27,000, respectively, compared to $9,000 and $133,000 for the comparable periods ended September 30, 2006. The nine month decrease is primarily due to an approximate $118,000 charge related to the write-off of debt issuance costs associated with an amendment to a prior debt facility on January 23, 2006.

Operating Income. As a result of the above factors, the Company generated operating income of $529,000 and $304,000, respectively, for the three and nine months ended September 30, 2007, compared to operating income of $1.1 million and $1.9 million, respectively, for the three and nine months ended September 30, 2006. As a percentage of total revenue operating income was 3.6% and 0.8% for the three and nine months ended September 30, 2007 as compared to 7.3% and 4.4% for the three and nine months ended September 30, 2006, respectively.

Interest Expense, Net. Interest expense, net, decreased 70.6% and 76.7% to $256,000 and $570,000 for the three and nine months ended September 30, 2007 compared to $871,000 and $2.4 million for the three and nine months ended September 30, 2006. The decrease for the nine months ended September 30, 2007 is primarily due to a decline in average debt outstanding in both the third quarter and first nine months of 2007 as compared to the same periods of 2006. Our average debt outstanding for the first nine months of 2007 was approximately $8.5 million compared to approximately $18.4 million for the first nine months of 2006, as a significant recapitalization was accomplished in October of 2006. For the three and nine month periods ended September 30, 2007, interest expense included approximately $30,000 and $90,000 of debt issuance cost amortization, respectively, as compared to the three and nine month periods ended September 30, 2006 in which interest expense included approximately $187,000 and $508,000 of debt issuance cost amortization.

Income Tax Expense (Benefit). We had an income tax provision of $181,000 for the three months ended September 30, 2007 and an income tax benefit of $82,000 for the nine months ended September 30, 2007 compared to an income tax provision of $80,000 and an income tax benefit of $226,000, respectively, for the three months and nine months ended September 30, 2006. The income tax amount for the three months and nine months ended September 30, 2007 includes $217,000 of the $536,000 reserve relating to uncertain tax positions, which is currently being recognized in the tax provision as a component of the effective tax rate. Without this additional reserve, the Company’s effective tax rate is approximately 47.7% resulting in an income tax expense for the three months ended September 30, 2007 of $130,000 and an income tax benefit for the nine months ended September 30, 2007 of $127,000. We currently anticipate our effective tax rate to be approximately 68.3% in 2007 as compared to 38.7% in 2006.

Critical Accounting Policies

Please refer to our Form 10-K for the year-ended December 31, 2006 for a complete discussion of our critical accounting policies, except for the required adoption of FIN 48 on January 1, 2007, as discussed in footnote B of our Notes to Consolidated Financial Statements - Unaudited included in this quarterly report.

Liquidity and Capital Resources

The following table sets forth the elements of our cash flow statement for the following periods:

	Nine Months Ended
	September 30,
	2007			2006
Net cash provided by operating activities	$	47		$	3,968
Net cash used in investing activities		(11,832	)		(18,464	)
Net cash provided by financing activities		5,750			16,282

Cash from Operating Activities

Cash provided by operations for the nine months ended September 30, 2007 totaling $47,000 was primarily attributable to our operating results plus non-cash depreciation and amortization expense of $3.4 million, offset by changes in accounts payable of $1.1 million, accrued liabilities of $1.1 million, and accounts receivable of $896,000 during the nine month period ended September 30, 2007.

Cash from Investing Activities

Cash used in investing activities for the nine months ended September 30, 2007 totaling $11.8 million which consisted primarily of business acquisitions, purchases of fixed assets, and expenditures for software development costs. Total capital expenditures, including software development costs, totaled $3.4 million for the nine months ended September 30, 2007. These expenditures primarily related to the purchase of computer equipment, computer software, and software development activities. During the first nine months of 2007, we used approximately $4.6 million, net of cash acquired, to acquire the operating assets of Community Banking Systems and $5.8 million to acquire the operating assets of DataTrade. As compared to the first nine months of 2006, total cash used in investing activities was $18.4 million consisting primarily of business acquisitions, lease receivable collections, purchases of fixed assets and capitalization of software development costs.

Cash from Financing Activities

Cash from financing activities primarily relates to borrowings from our credit facility and repayments of non-recourse lease financing notes payable. During the first nine months of 2007, net cash provided by financing activities was $5.8 million and was attributable primarily to borrowings of $7.5 million from our amended and restated syndicated credit facility, offset by $2.2 million in repayments on non-recourse lease notes payable. For the first nine months of 2006, cash provided by financing activities totaled $16.3 million, and was attributable primarily to new borrowings of $15.5 million from our amended and restated syndicated credit facility, net of $543,000 in debt issuance costs, as well as the return of $500,000 in preferred dividends on the Series A preferred shares for the fourth quarter of 2005, which were subsequently paid-in-kind during 2006.

Analysis of Changes in Working Capital

As of September 30, 2007, we had working capital of approximately $3.8 million compared to working capital of approximately $5.7 million as of December 31, 2006. The change in working capital resulted primarily from a decrease in cash of $6.0 million and an increase in accounts receivable of $2.0 million, partially offset by decreases in accounts payable of $1.0 million and accrued liabilities of $1.5 million and a $1.2 million increase in deferred revenue. The decrease in cash and increases in accounts receivable and deferred revenue were primarily the result of completing the acquisitions in 2007.

We believe that the existing, non-restricted cash, future operating cash flows, and availability from our amended and restated syndicated credit facility will be sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months. Furthermore, we expect to be in compliance with the financial covenants of our syndicated credit facility throughout 2007. There can be no assurance that we will have sufficient cash flows to meet our obligations or that we will remain in compliance with the new covenants. Non-compliance with these covenants could have a material adverse effect on our operating and financial results.

In the future, we may acquire businesses or products that are complementary to our business, although we cannot be certain that we will make any acquisitions. The need for cash to finance additional working capital or to make acquisitions may cause us to seek additional equity or debt financing. We cannot be certain that financing will be available on terms acceptable to us or at all, or that our need for higher levels of working capital will not have a material adverse effect on our business, financial condition or results of operations.

Obligations and Commitments for Future Payments as of September 30, 2007

The following is a schedule of our obligations and commitments for future payments as of September 30, 2007:

			Payments Due by Period
			Less
			Than		1-2		3-4		5 Years &
Contractual Obligations	Total		1 Year		Years		Years		After
	(In thousands)
Revolving line of credit	$	10,000	$	—	$	—	$	10,000	$	—
Capital lease obligations		1,166		479		439		248		—
Non-recourse lease notes payable		4,758		1,835		1,453		1,280		190
Operating leases		4,275		2,126		1,513		627		9
Total contractual cash obligations	$	20,199	$	4,440	$	3,405	$	12,155	$	199

Credit Agreement

On November 30, 2006, we entered into a second amended and restated credit agreement with Bank of America, N.A., Wachovia Bank, N.A., and The People’s Bank of Winder. The Second Amended and Restated Credit Agreement amends and restates in its entirety the amended and restated credit agreement originally dated January 19, 2004, as amended and restated on January 23, 2006 and as further amended on February 17, 2006, April 5, 2006, May 3, 2006, June 15, 2006, and August 31, 2006. In the Second Amended and Restated Credit Agreement and the form of the Second Amended and Restated Note the parties thereto agreed to certain changes from the existing credit agreement, including the following:

the credit facility was converted to a revolving credit facility in the amount of $40 million, an increase of $15 million over the previously existing credit facility;
the maturity of the credit facility was extended from January 23, 2008 to November 30, 2009 with an option, conditioned upon the consent of the lenders, to extend the maturity for 12 additional months;
the Funded Debt to EBITDA Ratio under the credit facility was increased from 2.25 (times) to 3 (times);
Wachovia Bank, N.A. joined as a participant in the credit facility; and
the limit on capital expenditures in the credit facility was increased from $3 million to $5 million per fiscal year.

Our syndicated credit facility contains financial covenants, including the maintenance of financial ratios and limits on capital expenditures. We are required to maintain on a quarterly basis a ratio of Funded Debt (as defined in the credit agreement and generally including all liabilities for borrowed money) to EBITDA as defined in the debt agreement. We are required to maintain on a quarterly basis a ratio of Funded Debt to EBITDA not exceeding 3:1. This ratio is calculated (a) at the end of each fiscal quarter, using the results of the twelve-month period ending with the fiscal quarter and after giving pro forma effect, as defined in the debt agreement, to any acquisition made during such period and (b) on the date of any borrowing under the credit facility, using EBITDA for the most recent period and Funded Debt after giving pro forma effect to such borrowing. We are also required to maintain for the 12-calendar month period ending on the last day of each calendar quarter, a Fixed Charge Coverage Ratio (as defined) of 2:1. In addition, we may not acquire fixed assets (other than any equipment purchased by KVI Capital with proceeds of non-recourse loans) having a value greater than $5.0 million during any 12-month period ending with each fiscal quarter. The credit agreement also contains customary negative covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock.

As of September 30, 2007, we were in compliance with all restrictive financial and non-financial covenants contained in the syndicated credit facility.

Off-Balance Sheet Arrangements

As of September 30, 2007 and as of the date of this report, we did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

Income Taxes

On January 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN No. 48”) Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN No. 48 requires a company to evaluate all uncertain tax positions and assess whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Adoption of FIN No. 48 resulted in an accrual of approximately $456,000 related to uncertain tax positions, which were previously accrued as contingent liabilities, thus there was no cumulative adjustment to retained earnings. This uncertain tax position, if recognized, would not have an effect on the effective tax rate.

Seasonality

Historically, we have generally realized lower revenues and income in the first quarter and, to a lesser extent, in the second quarter of each year. We believe that this seasonal decline in revenues is primarily due to a general slowdown in economic activity following the fourth quarter’s holiday season and, more specifically, a decrease in the amount of accounts receivable that our client financial institutions purchase. Therefore, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and that you should not rely on that comparison as an indicator of our future performance. Due to the relatively fixed nature of costs such as personnel, facilities and equipment costs, a revenue decline in a quarter will typically result in lower profitability for that quarter.

Inflation

We do not believe that inflation has had a material effect on our results of operations. There can be no assurance, however, that inflation will not affect our business in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing and cash management activities. Currently, our exposure relates primarily to our borrowings under our amended and restated syndicated credit facility, which accrue interest at LIBOR plus 1.375 basis points or the lender’s base rate (as defined), as we select. We are currently paying interest at an average rate of 7.3% per annum. As of September 30, 2007, $10.0 million was outstanding under this facility. Changes in interest rates that increase the interest rate on the credit facility would make it more costly to borrow under that facility and may impede our acquisition and growth strategies if we determine that the costs associated with borrowing funds are too high to implement those strategies. An increase or decrease of 1.0% in the interest rate on the syndicated credit facility would increase or decrease, respectively, our interest expense by approximately $100,000 per year.

Item 4T. Controls and Procedures

Based on our management’s evaluation, with the participation of our chief executive officer and chief financial officer, as of September 30, 2007, the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting identified in the evaluation that occurred during the third quarter of fiscal year 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information

Item 1A. Risk Factors

RISK FACTORS

This section summarizes certain risks, among others, that shareholders and prospective investors should consider. Many of these risks are discussed in other sections of this report. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline and you may lose all or part of your investment. These risks are not the only ones we face. Additional risks of which we are presently unaware or that we currently consider immaterial may also impair our business operations and hinder our financial performance.

Risks Related to Our Business

We generate a significant amount of our revenues from our accounts receivable financing solution and our retail inventory management services, and those revenues have declined in recent years. If these trends continue, our financial performance may be materially and adversely affected.

For the three and nine months ended September 30, 2007, we derived approximately 39% and 40%, respectively of our consolidated revenues from participation fees, license fees, insurance brokerage fees, and maintenance fees from BusinessManager, our accounts receivable financing solution, and approximately 14% and 15%, respectively, of our consolidated revenues from fees generated by RMSA, our retail inventory management services product. We expect to continue to generate a substantial portion of our revenues from BusinessManager and RMSA during 2007. In recent years, our revenues from BusinessManager and RMSA have declined from year-to-year. If our annual revenues from BusinessManager or RMSA continue to decline or begin to decline more rapidly, we may not be able to generate sufficient revenues from our other products or services to offset that decline. In addition, we cannot be certain that we will be able to continue to successfully market and sell BusinessManager to both financial institutions and their small business customers or successfully market and sell our RMSA services to small businesses. Our failure to do so, or any events that adversely affect BusinessManager or RMSA, would materially and adversely affect our overall business.

The loss of our chief executive officer or other key employees could have a material adverse effect on our business.

Mr. Boggs, our chief executive officer, has substantial experience in our industry. Although we maintain key man life insurance on Mr. Boggs and we have an employment agreement with him, our client and marketing relationships would likely be impaired and our business would likely suffer if, for any reason, we lost the services of Mr. Boggs. In addition, we believe that our success as a combined company depends on the continued contribution of a number of our other executive officers or key employees. The loss of services of any of these individuals would similarly adversely affect our business.

Acquisitions could result in integration difficulties, unexpected expenses, diversion of management’s attention and other negative consequences.

Our growth strategy is partly based on making acquisitions. We plan to continue to acquire complementary businesses, products and services. We must integrate the technology, products and services, operations, systems and personnel of acquired businesses, including our recent acquisitions, with our own and attempt to grow the acquired businesses as part of our company. The integration of other businesses is a complex process and places significant demands on our management, financial, technical and other resources. The successful integration of businesses we acquire is critical to our future success, and if we are unsuccessful in integrating these businesses, our financial and operating performance could suffer. The risks and challenges associated with acquisitions include:

the inability to centralize and consolidate our financial, operational and administrative functions with those of the businesses we acquire;
our management’s attention may be diverted from other business concerns;
the inability to retain and motivate key employees of an acquired company;
our entrance into markets in which we have little or no prior direct experience;
the inability to prepare and file with the SEC in a timely manner the required financial statements of any businesses we acquire;
litigation, indemnification claims and other unforeseen claims and liabilities that may arise from the acquisition or operation of acquired businesses;
the costs necessary to complete integration exceeding our expectations or outweighing some of the intended benefits of the acquisitions we close;
the inability to maintain the client relationships of an acquired business; and
the costs necessary to improve or replace the operating systems, products and services of acquired businesses exceeding our expectations.

We may be unable to integrate our acquisitions with our operations on schedule or at all. We cannot assure you that we will not incur large accounting charges or other expenses in connection with any of our acquisitions or that our acquisitions will result in cost savings or sufficient revenues or earnings to justify our investment in, or our expenses related to, these acquisitions. We may acquire companies that have significant deficiencies or material weaknesses in their internal control over financial reporting, which may cause us to fail to meet our reporting obligations, cause our financial statements to contain material misstatements and harm our business and operating results.

If we are unable to successfully integrate the business operations of companies we acquire in the future into our business operations, we will not realize the anticipated potential benefits from these acquisitions and our business could be adversely affected.

Any future acquisitions we complete will involve the integration of companies that have previously operated independently and may be in markets that are new to us. Successful integration of future acquired businesses with ours entails numerous challenges and will depend on our ability to consolidate operations, systems and procedures, eliminate redundancies and reduce costs. If we are unable to do so, we will not realize any anticipated potential benefits of the acquisitions, and our business and results of operations would be adversely affected.

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings. Under generally accepted accounting principles, we review our amortizable intangible assets for impairment annually and more frequently when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.

Because our business involves the electronic storage and transmission of data, security breaches and computer viruses could expose us to litigation and adversely affect our reputation and revenue.

Our online transaction processing systems electronically store and transmit sensitive business information of our clients. The difficulty of securely storing confidential information electronically has been a significant issue in conducting electronic transactions. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our clients involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing clients to lose confidence in our systems and could inhibit our ability to attract new clients.

As an example of the risks of this nature that we faced in May 2006, our Goldleaf Technologies division suffered an attempt to redirect its clients’ customers to a phishing website to entice them to enter their personal financial information. To ensure the security of the network, Goldleaf Technologies temporarily suspended all Internet access to its website services. Although Goldleaf Technologies does not host any personal data for its community financial institution clients and consequently lost no data in the incident, the interruption of service, the inconvenience to its clients and their customers, the management time required to deal with the issue, and the potential loss of personal data by consumers who may have been enticed to enter their information on the false website have had and may continue to have an adverse effect on our financial performance and business reputation.

If we experience losses, we could experience difficulty meeting our business plan and our stock price could decline.

We may not be able to maintain our financial performance as we implement our business plan. Any failure to achieve and maintain profitability could negatively affect the market price of our common stock. If our revenues decline or grow slower than we anticipate, or if our operating expenses exceed our expectations and cannot be adjusted accordingly, our business operations and financial results will suffer. We anticipate that we will incur significant product development, administrative, and sales and marketing expenses. In light of these expenses, any failure to increase revenues significantly may also harm our ability to achieve and maintain profitability.

If we are unable to maintain or grow our business, our operating results and financial condition would be adversely affected.

In recent years, revenues generated by our accounts receivable financing solution and retail inventory management products and services have declined. We cannot guarantee that our revenues will not continue to decline. If we are unable to grow our business and revenues, our operating results and financial condition would be adversely affected.

If we are unable to manage our growth, our business and results of operations could be adversely affected.

Any new sustained growth will place a significant strain on our management systems and operational resources. We anticipate that new sustained growth, if any, will require us to recruit, hire and retain new managerial, finance, sales, marketing and support personnel. We cannot be certain that we will be successful in recruiting, hiring or retaining those personnel. Our ability to compete effectively and to manage our future growth, if any, will depend on our ability to maintain and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our work force. If we begin to grow, we cannot be certain that our personnel, systems, procedures and controls will be adequate to support our operations.

Our business significantly depends on a productive sales force, and our sales force has experienced management and employee turnover in recent years. If these problems recur, we may not be able to achieve our sales plans or maintain our current level of sales.

An important part of our sales strategy is to attract, hire and retain qualified sales and marketing personnel to maintain and expand our marketing capabilities. Because competition for experienced sales and marketing personnel is intense, we cannot be certain that we will be able to attract and retain enough qualified sales and marketing personnel or that those we do hire will be able to generate new business at the rate we currently expect. In recent years, we have experienced a significant amount of turnover in the management and personnel of our sales force, which we believe has been a factor in our declining revenues from our accounts receivable financing and retail inventory management products. If we are unable to hire and retain enough qualified sales and marketing personnel, or those we hire are not as productive as we expect, we may not be able to achieve our sales plans or maintain our current level of sales.

Because we have a long sales and implementation cycle for some of our solutions, we face the risk of not closing sales after expending significant resources, which could materially and adversely affect our business, financial condition and results of operations.

We must expend substantial time, effort and money educating potential clients about the value of some of our solutions, particularly our core data processing solution. We may expend significant funds and management resources during the sales cycle and ultimately fail to generate any revenues. For our core data processing solution, our sales cycle generally ranges between six to nine months, and our implementation cycle generally ranges between six to nine additional months. Many of our other products require similarly long sales and implementation cycles. Our sales cycle for all of our products and services is subject to significant risks and delays over which we have little or no control, including:

our clients’ budgetary constraints;

the timing of our clients’ budget cycles and approval processes;

our clients’ willingness to replace their current vendors;

the success and continued support of our strategic marketing partners’ sales efforts; and

the timing and expiration of our clients’ current license agreements or outsourcing agreements for similar services.

If we are unsuccessful in closing sales after expending significant funds and management resources or if we experience delays as discussed above, our business, financial condition and results of operations will be materially and adversely affected.

Competition, restrictions under our credit facility, market conditions and other factors may impede our ability to acquire other businesses and may inhibit our growth.

We anticipate that we may derive a portion of our future growth through acquisitions. The success of this strategy depends on our ability to:

identify suitable acquisition candidates;

reach agreements to acquire these companies;

obtain necessary financing on acceptable terms; and

successfully integrate the operations of these businesses.

In pursuing acquisitions, we may compete with other companies that have similar growth strategies. Many of these competitors are larger and have greater financial, operational and technical resources than we have. This competition may inhibit our ability to acquire businesses that could improve our growth or expand our operations.

We may not be able to enter into and successfully implement strategic alliances, which could limit our ability to grow our business as we intend.

One element of our growth strategy is to evaluate and pursue strategic alliances that are complementary to our business. However, we may not be able to identify or negotiate strategic alliances on acceptable terms. If we are not able to establish and maintain strategic alliances, we may not be able to fully implement our growth strategy. In addition, pursuing and implementing strategic alliances may cause a significant strain on our management, operational and financial resources that could have a material adverse effect on our results of operations.

We may be unable to market our products and services successfully to new client financial institutions or to retain current client financial institutions. If we are unable to do so, our business may be materially and adversely affected.

Our success depends to a large degree on our ability to persuade prospective client financial institutions to use our products. Failure to maintain market acceptance, retain clients or successfully expand the products and services we offer could adversely affect our business, operating results and financial condition. We have spent, and will continue to spend, considerable resources educating potential clients about our products and services. Even with these educational efforts, however, we may be unable to grow or maintain market acceptance of our products and services or retain our clients. In addition, as we continue to offer new products and expand our services, existing and potential client financial institutions or their small business customers may be unwilling to accept the new products or services.

The failure to execute our growth plans may affect our ability to remain a publicly traded company.

We intend to grow organically and through acquisitions and strategic alliances. These growth plans will require a substantial expenditure of time, money and other valuable resources. Not only does this take resources away from our current business, but we face the risk that our strategy will not ultimately be successful. In that event, the continued costs associated with being a public company may outweigh the anticipated organic growth of our current business, which could result in our being delisted from the Nasdaq Global Market or engaging in a going private transaction.

Our plans to expand the number of products and services we offer may not be successful and may lower our overall profit margin.

Part of our business strategy is to expand our offering of products and services. We believe that we can provide these new services profitably, but they may generate a lower profit margin than our current products and services. As a result, by offering additional products and services, we may lower our overall profit margin. Although gross revenues would likely increase, the lowering of our profit margin may be viewed negatively by the stock market, possibly resulting in a reduction in our stock price.

We may be unable to compete in our markets, which could cause us not to achieve our growth plans and materially and adversely affect our financial performance.

The market for community financial institutions and small business financial services is highly competitive. We face primary competition from a number of companies that offer to financial institutions products and services that are similar to ours, and many of these competitors are much larger and have more resources than we do. Community financial institution clients that offer BusinessManager, our accounts receivable financing solution, compete with other financial institutions and financing providers that offer lines of credit, amortizing loans, factoring and other traditional types of financing to small businesses. Many of these other financial institutions and financing providers are much larger and more established than we are, have significantly greater resources, generate more revenues and have greater name recognition. In addition, as we expand our service offerings, we may begin competing against companies with whom we have not previously competed. Increased competition may result in price reductions, lower profit margins and loss of our market share, any of which could have a material adverse effect on our business, operating results and financial condition. Both our traditional and new competitors may develop products and services comparable or superior to those that we have developed or adapt more quickly to new technologies, evolving industry trends or changing small business requirements.

We may be unable to protect our proprietary technology adequately, which may have a material adverse effect on our revenue, our prospects for future growth and our overall business.

Our success depends largely upon our ability to protect our current and future proprietary technology through a combination of copyright, trademark, trade secret and unfair competition laws. Although we assess the advisability of patenting any technological development, we have historically relied on copyright and trade secret law, as well as employee and third-party non-disclosure agreements, to protect our intellectual property rights. The protection afforded by these means may not be as complete as patent protection. We cannot be certain that we have taken adequate steps to deter misappropriation or independent development of our technology by others. Although we are not currently subject to any dispute regarding our proprietary technology, any claims of that nature brought or resolved against us could have a material adverse effect on our business, operating results and financial condition.

The Company depends on proprietary technology licensed from third parties; if the Company loses these licenses, it could delay shipments of products incorporating this technology and could be costly.

The Company's products use some of the technology that it licenses from third parties, generally on a nonexclusive basis. The Company believes that there are alternative sources for each of the material components of technology it licenses from third parties. However, the termination of any of these licenses, or the failure of the third-party licensors to adequately maintain or update their products, could delay the Company's ability to ship these products while it seeks to implement technology offered by alternative sources. Any required replacement licenses could prove costly. Also, any delay, to the extent it becomes extended or occurs at or near the end of a fiscal quarter, could harm the Company's quarterly results of operations. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of the Company's products or relating to current or future technologies, the Company cannot assure that it will be able to do so on commercially reasonable terms or at all.

If our products or services are found to infringe the proprietary rights of others, we may be required to change our business practices and may also become subject to significant costs and monetary penalties.

Others may claim that our proprietary technology infringes their intellectual property. Any claims of that nature, whether with or without merit, could:

be expensive and time-consuming to defend;

cause us to cease making, licensing or using products that incorporate the challenged intellectual property;

require us to redesign our products, if feasible;

divert our management’s attention and resources; and

require us to enter into royalty or licensing agreements to obtain the right to use necessary technologies.

Others may assert infringement claims against us in the future with respect to our current or future products and services. In that event, we cannot be certain that those claims will be resolved in our favor. Although we are not currently engaged in any dispute of that nature, any infringement claims resolved against us could have a material adverse effect on our business, operating results and financial condition.

The failure of our network infrastructure and equipment could have a material adverse effect on our business.

Failure of our network infrastructure and equipment, as well as the occurrence of significant human error, a natural disaster or other unanticipated problems, could halt our services, damage network equipment and result in substantial expense to repair or replace damaged equipment. In addition, the failure of our telecommunication providers to supply necessary services to us could also interrupt our business, particularly the application hosting and transaction processing services we offer to our client financial institutions via secure Internet connections. The inability to supply these services to our clients could negatively affect our business, reputation, operating results and financial condition. Currently, we have only one core data and two item processing centers. Interruption in our processing or communications services could delay transfers of our clients’ data, or damage or destroy the data. Any of these occurrences could result in lawsuits or loss of clients and may also harm our reputation.

We rely on the technological infrastructure of our client financial institutions and their individual customers, and any failure of that infrastructure could have a material adverse effect on our revenue and our business.

The success of the products and services we offer depends, to a degree, on the technological infrastructure and equipment of our client financial institutions and their small business customers. We provide application hosting and transaction processing services to our clients that require some level of integration with the client’s technological infrastructure. Proper technical integration between our clients and us is critical to our being able to provide the services we have agreed to provide. A failure of a client’s infrastructure for any reason could negatively affect our business, financial condition and results.

Increased fraud committed by small businesses and increased uncollectible accounts of small businesses may adversely affect our accounts receivable financing business.

Small business customers of our financial institution clients sometimes fraudulently submit artificial receivables to our clients. In addition, small business customers may keep cash payments that their consumers mistakenly send to them instead of our financial institution clients. Our clients are also susceptible to uncollectible accounts from their small business customers. Many of our clients purchase insurance through us to insure against some of these risks. If the number and amount of fraudulent or bad debt claims increase, our clients may decide to reduce or terminate their use of our accounts receivable financing products and services, reducing our ability to attract and retain revenue-producing clients and to cross-sell our other products and services to them. Further, our insurance carrier providing coverage for the insurance products may increase rates or cancel coverage, reducing our ability to produce revenue and reducing our margins on that business.

We could be sued for contract or product liability claims that exceed our available insurance coverage, which could have a material adverse effect on our business, financial condition and results of operations.

Failures in the products and services we provide could result in an increase in service and warranty costs or a claim for substantial damages against us. We can give no assurance that the limitations of liability in our contracts would be enforceable or would otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors and omissions in excess of the applicable deductible amount. We can give no assurance that this coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or coinsurance requirements, could have a material adverse effect on our business, financial condition and results of operations. Further, any litigation, regardless of its outcome, could result in substantial cost to us and divert management’s attention from our operations. Any contract liability claim or litigation against us could have a material adverse effect on our business, financial condition and results of operations. In addition, because some of our products and services affect the core business processes of our community financial institution clients, a failure or inability to meet a client’s expectations could seriously damage our reputation and negatively affect our ability to attract new business.

We may not have adequate capital to support our planned growth, which could significantly impair our ability to add new products or services.

A significant part of our growth plans rests on the development of new products, strategic acquisitions and the formation of strategic alliances for our primary products. To execute our growth plans as we intend, we may need additional capital. Market conditions when we need this capital may preclude access to new capital of any kind or to capital on terms acceptable to us. Any of these developments could significantly hinder our ability to add new products or services, pursue strategic acquisitions or enter into strategic alliances.

If our products and services contain errors, we may lose clients and revenues and be subject to claims for damages.

Our new products and services, and enhancements to our existing products and services, may have undetected errors or failures, despite testing by our current and potential clients and by us. If we discover errors after we have introduced a new or updated product to the marketplace, we could experience, among other things:

delayed or lost revenues while we correct the errors;

a loss of clients or the delay or failure to achieve market acceptance; and

additional and unexpected expenses to fund further product development.

Our agreements with our clients generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. These provisions may not be effective because of existing or future federal, state or local laws or ordinances, or unfavorable judicial decisions. If our products and services fail to function properly, we could be subject to product liability claims, which could result in increased litigation expense, damage awards and harm to our business reputation.

Technological changes may reduce the demand for our products and services or render them obsolete, which would reduce our revenue and income.

The introduction of new technologies and financial products and services can render existing technology products and services obsolete. We expect other vendors to introduce new products and services, as well as enhancements to their existing products and services, which will compete with our current products and services. To be successful, we must anticipate evolving industry trends, continue to apply advances in technology, enhance our existing products and services and develop or acquire new products and services to meet the demands of our clients. We may not be successful in developing, acquiring or marketing new or enhanced products or services that respond to technological change or evolving client needs. We may also incur substantial costs in developing and employing new technologies. If we fail to adapt to changes in technologies, we could lose clients and revenues, and fail to attract new clients or otherwise realize the benefits of costs we incur.

Examination of our business by regulatory agencies could cause us to incur significant expenses, and failure to remedy any identified deficiency would adversely affect our business.

We are subject to federal and state examination under the authority of the Bank Service Company Act and must comply with the Gramm-Leach-Bliley Act and other laws and regulations that apply to depository and financial institutions. Bank regulators have broad supervisory authority to require the correction of any deficiencies or other negative findings identified in any such examination. Efforts to correct any deficiency or to otherwise comply with existing regulations could result in substantial costs and divert our management’s attention and resources. The failure to adequately correct any deficiency or to comply with existing regulations could result in the imposition of monetary penalties or prevent us from offering one of our products or services to some our clients and could have a substantial negative effect on our business and operations.

Governmental laws and regulations may adversely affect us by making it more costly and burdensome to conduct our business or operations.

Federal, state or foreign authorities could adopt new laws, rules or regulations relating to the financial services industry and the protection of consumer personal information belonging to financial institutions that affect our business. Those laws and regulations may address issues such as end-user privacy, pricing, content, characteristics, taxation and quality of services and products. Adoption of these laws, rules or regulations could render our business or operations more costly and burdensome and could require us to modify our current or future products or services.

Risks Related to Our Industry

We depend heavily on a single industry and any downturn in that industry would materially and adversely affect our business and operations.

We sell our financial institution products and services almost exclusively to financial institutions, primarily community financial institutions. As a result, any events that adversely affect the industry in general and community financial institutions in particular, such as changed or expanded financial institution regulations, could adversely affect us and our operations. A downturn in this industry would have a substantial negative effect on our business and operations.

Financial institutions are subject to industry consolidation, and we may lose clients with little notice, which could adversely affect our revenues.

The financial institution industry is prone to consolidations that result from mergers and acquisitions. Other financial institutions that do not use our products and services may acquire our existing clients and then convert them to competing products and services. Most of our contracts provide for a charge to the client for early termination of the contract without cause, but these charges are insufficient to replace the recurring revenues that we would have received if the financial institution had continued as a client.

The banking industry is highly regulated, and changes in banking regulations could negatively affect our business.

Our financial institution clients are subject to the supervision of several federal, state and local government regulatory agencies, and we must continually ensure that our products and services work within the extensive and evolving regulatory requirements applicable to our financial institution clients. Regulation of financial institutions, especially with respect to accounts receivable services such as BusinessManager, can indirectly affect our business. While the use of our products by financial institutions is either not subject to, or is currently in compliance with, banking regulations, a change in regulations or the creation of new regulations on financial institutions, including modifying a financial institution’s ability to offer products and services similar to ours, could prevent or lessen the use of our products and services by financial institutions, which would have a substantial negative effect on our business and operations.

Risks of Owning Our Common Stock

Our stock price is volatile and any investment in our common stock could suffer a decline in value.

The market 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 revenues, operating results and profitability;

changes in financial estimates by us or by a securities analyst who covers our stock;

publication of research reports about our company or industry;

conditions or trends in our industry;

stock market price and volume fluctuations of other publicly-traded companies and, in particular, those whose businesses involve technology products and services for financial institutions;

announcements by us or our competitors of technological innovations, new services, service enhancements, significant contracts, acquisitions, commercial relationships, strategic partnerships, divestitures, technological innovations, new services or service enhancements;

announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

the passage of legislation or other regulatory developments that adversely affect us, our clients or our industry;

additions or departures of key personnel; and

general economic conditions.

We believe that period-to-period comparisons of our results of operations are not necessarily meaningful. We can provide no assurance that future revenues and results of operations will not vary substantially. In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.

If we are required to restate or reissue our financial statements, the price of our stock may decline significantly.

We believe that we have prepared our financial statements in accordance with generally accepted accounting principles and the SEC’s regulations. We base these financial statements on our interpretation of those regulations, our use of estimates and assumptions and our internal controls. We may make faulty judgments, errors and mistakes regarding these matters, however, particularly in the context of accounting for acquisitions. As a result of the complexity of these matters and our rate of growth, our financial statements may contain or may in the future contain mistakes or errors. If we are required to restate our financial statements, it is highly likely that the price of our stock will decline significantly. Further, any exchange on which our stock may then be traded may suspend trading on our stock, in which case it is highly likely that the market price of our stock will fall significantly when trading resumes.

If we fail to maintain adequate internal controls over financial reporting, then our business and operating results could be harmed.

Internal controls over financial reporting are processes designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We have previously disclosed a material weakness in our internal controls over financial reporting in our annual report on Form 10-K. A failure of our remedial measures to correct this material weakness may cause us to fail to meet our reporting obligations, cause our financial statements to contain material misstatements and harm our business and operating results. Even after effecting remedial measures our internal controls may not prevent all potential errors, because any control system, regardless of its design, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be achieved.

Complying with Section 404 of the Sarbanes-Oxley Act of 2002 may strain our resources and distract management.

We expect to incur material costs and to spend significant management time to comply with Section 404. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to hire additional accounting and financial staff with appropriate experience and technical accounting knowledge, and we cannot assure you that we will be able to do so in a timely fashion.

The Company has not yet been required to perform an assessment of its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and the Company may, during its process, encounter delays in such process or deficiencies with respect to certain internal control practices.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company is expected, beginning with its fiscal year ending December 31, 2007 to include in its annual report management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the Company’s audited financial statements as of December 31, 2007. Furthermore, the Company’s independent registered public accounting firm will be expressing an opinion on the effectiveness of the Company’s internal control over financial reporting based on its audit. The Company is in the final stages of completing the documentation of its internal controls. Due to the number of controls to be documented and examined, the complexity of the project, as well as the subjectivity involved in determining effectiveness of controls, the Company cannot be certain that it will complete its Section 404 compliance work on a timely basis or, if it does, that all of the Company's internal controls will be considered effective. Therefore, the Company can give no assurances that its systems will satisfy regulatory requirements. If the Company fails to timely complete its Section 404 compliance work, including this assessment, or if the Company’s independent public accounting firm cannot timely attest to the Company's controls, the Company could be subject to regulatory sanctions and a loss of public confidence in its internal controls. Also, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or commercial relationships or cause the Company to fail to timely meet its regulatory reporting obligations. Any of these failures could have a negative effect on the trading price of the Company’s stock.

We do not anticipate paying any dividends on our common stock in the foreseeable future.

In the foreseeable future, we do not expect to declare or pay any cash or other dividends on our common stock. Our credit facility prohibits our paying cash dividends on our common stock, and we may enter into other borrowing arrangements in the future that restrict our ability to declare or pay cash dividends on our common stock.

We may not be able to use the tax benefit from our operating losses.

As of December 31, 2006, we had total net operating losses, or NOLs, of approximately $47.8 million that will expire beginning in 2011 if not used. We acquired approximately $37.6 million of these NOLs in connection with our 2001 merger with Towne Services. Section 382 of the Internal Revenue Code limits the amount of NOLs available to us in any given year. This limitation permits us to realize only a small portion of the potential tax benefit of the NOLs each year. We estimate that we will be able to realize approximately $5.3 million of the Towne Services NOLs, which we recorded as a $1.9 million deferred tax asset at December 31, 2006. We may be unable to use all of these NOLs before they expire. We may be required to record a valuation allowance in our financial statements during any period in which it is determined that we will not be able to realize all of our NOLs.

Provisions in our organizational documents and under Tennessee law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.

Our charter, bylaws and Tennessee law contain provisions that could make it more difficult for a third party to obtain control of us. For example, our charter provides for a staggered board of directors, restricts the ability of shareholders to call a special meeting and prohibits shareholder action by written consent. Our bylaws allow the board to expand its size and fill any vacancies without shareholder approval. In addition, the Tennessee Business Corporation Act contains the Tennessee Business Combination Act and the Tennessee Greenmail Act, which impose restrictions on shareholder actions.

Part II – Other Information
Item 6. Exhibits

The exhibits described in the following Index to Exhibits are filed as part of this quarterly report on Form 10-Q.

Exhibit
Number			Description of Exhibit
3.1			Amended and Restated Charter of the Company (incorporated by reference to Exhibit 3.1 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 33375013) filed with the SEC on May 3, 1999).
3.1.1			Charter Amendment dated August 9, 2001 (incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
3.1.2			Charter Amendment dated August 9, 2001 (incorporated by reference to Exhibit 3.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
3.1.3			Charter Amendment dated January 16, 2004 (incorporated by reference to Exhibit B of the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on December 29, 2003).
3.1.4			Charter Amendment dated January 23, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).
3.1.5			Charter Amendment dated January 24, 2006 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K with the SEC on January 26, 2006).
3.1.6			Charter Amendment dated May 4, 2006 and effective May 5, 2006 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2006).
3.1.7			Charter Amendment dated September 8, 2006 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 8, 2006).
3.2			Second Amended and Restated Bylaws of the Company incorporated by reference to Exhibit 3.2 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-722;75013) filed with the SEC on May 3, 1999).
3.2.1			Bylaws Amendment dated January 20, 2004 (incorporated by reference to Exhibit 3.2.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.1			Employment Agreement between the Company and John R. Polchin dated August 28, 2007. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 31, 2007).
10.2			Advisor Agreement between the Company and J. Scott Craighead, dated August 14, 2007. (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2007).
31.1			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.
31.2			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.
32.1			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer.
32.2			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer.

Signatures

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

	Goldleaf Financial Solutions, Inc.
	(Registrant)

Date: November 14, 2007	By:	/s/ G. Lynn Boggs
		G. Lynn Boggs
		Chief Executive Officer

Date: November 14, 2007	By:	/s/ John R. Polchin
		John R. Polchin
		Chief Financial Officer