Goldleaf Financial Solutions 10K/A 2005 Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 2


CHECK ONE:
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005, OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-25959

GOLDLEAF FINANCIAL SOLUTIONS, INC.

(Formerly named Private Business, Inc.)

(Exact name of Registrant as specified in its charter)


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

9020 OVERLOOK BOULEVARD, THIRD FLOOR BRENTWOOD, TENNESSEE (Address of principal executive offices)		37027 (Zip Code)

(615) 221-8400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yeso Noþ

Indicate by check mark whether the Registrant (1) has filed all reports pursuant 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 the filing requirements for the past 90 days. Yesþ Noo

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

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

Large accelerated filero Accelerated filero Non-accelerated filerþ

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

The aggregate market value of Registrant’s voting stock held by non-affiliates of the Registrant, computed by reference to the price at which the stock was sold, or average of the closing bid and asked prices, as of June 30, 2005 was approximately $21,085,885.

On July 14, 2006, 15,913,723 shares of the Registrant’s no par value Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for its 2006 annual meeting of stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

EXPLANATORY NOTE

Goldleaf Financial Solutions, Inc. filed its Annual Report on Form 10-K for fiscal year 2005 with the SEC on March 23, 2006. On April 26, 2006, we filed a Registration Statement on Form S-1 with the SEC. On June 6, 2006, we filed Amendment No. 1 to the Registration Statement in response to the SEC’s letter containing comments on the initial filing. On June 7, 2006, we filed Amendment No. 1 to our Annual Report on Form 10-K to conform the disclosure contained in the Annual Report on Form 10-K to the disclosure contained in Amendment No. 1 to the Registration Statement. The SEC subsequently issued a letter containing additional comments on Amendment No. 1 to the Registration Statement, and, in response to those comments, we filed Amendment No. 2 to the Registration Statement on July 10, 2007. In response to that Amendment No. 2, the SEC issued a letter containing additional comments. To address the comments in that letter that relate to our Annual Report on Form 10-K, we are filing with the SEC this Amendment No. 2 to our Annual Report on Form 10-K.

This Amendment No. 2 to our Annual Report on Form 10-K amends only the items listed below. With respect to each item, we are amending the annual report to delete the disclosure under that item contained in our Annual Report on Form 10-K, as amended, and to replace it in its entirety with the disclosure contained in this amendment.

TABLE OF CONTENTS


		Page
PART II
Item 6 Selected Financial Data		3
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations		6
Item 8 Financial Statements and Supplementary Data		24
Item 9A Controls and Procedures		24
PART IV
Item 15 Exhibits and Financial Statement Schedules		25
Index of Financial Statements		F-1
Reports of Independent Registered Public Accounting Firms		F-2
Consolidated Balance Sheets		F-5
Consolidated Statements of Income		F-6
Consolidated Statements of Stockholders’ Equity (Deficit)		F-7
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-10
Schedule II Valuation and Qualifying Accounts		F-35
EX-23.1 CONSENT OF GRANT THORNTON LLP
EX-23.2 CONSENT OF ERNST & YOUNG LLP
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

Except for the foregoing amended information, this Annual Report on Form 10-K/A continues to speak as of the date of the original filing or the subsequent amendment, as applicable, and we have not updated the disclosures contained in this report to reflect events that occurred at a later date.

Part II

Item 6. Selected Financial Data.

You should read the following selected consolidated financial data together with our consolidated financial statements and the related notes and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this annual report. Our selected consolidated statement of operations data for the year ended December 31, 2005 and our selected consolidated balance sheet data at December 31, 2005 have been derived from, and are qualified by reference to, our consolidated financial statements that have been audited by Grant Thornton, an independent registered public accounting firm, and that are included in this annual report. Our selected consolidated statement of operations data for the years ended December 31, 2003 and 2004 and our selected consolidated balance sheet data at December 31, 2003 and 2004 are derived from, and are qualified by reference to, our consolidated financial statements that have been audited by Ernst & Young, an independent registered public accounting firm, and that are included in this annual report. Our selected consolidated statement of operations data for the years ended December 31, 2001 and 2002 and the selected consolidated balance sheet data at December 31, 2001 and 2002 are derived from our audited consolidated financial statements that are not included in this annual report.





			Year Ended December 31,

			2001			2002			2003			2004			2005
(In thousands, except per share data)

Consolidated Statement of Operations Data:
Total revenues			$	55,760		$	54,545		$	42,730		$	39,649		$	38,351
Cost of revenues				3,529			4,221			4,011			3,593			3,969

Gross profit				52,231			50,324			38,719			36,056			34,382
General and administrative				23,231			22,722			16,764			13,596			12,118
Selling and marketing				20,644			19,122			16,367			17,415			17,514
Research and development				453			566			445			398			257
Amortization				628			915			848			356			421
Other operating (income) expense, net				4,270			131			(145	)		1,457			(3	)
	Total operating expenses			49,226			43,456			34,279			33,222			30,307

Operating income (loss)				3,005			6,868			4,440			2,834			4,075

Interest expense, net				(3,344	)		(1,798	)		(1,492	)		(468	)		(381	)

Other income				—			—			—			266			—
(Loss) income before provision for income taxes				(339	)		5,070			2,948			2,632			3,694
Benefit (provision) for income taxes				132			(1,977	)		(1,150	)		(62	)		(1,359	)

		Net (loss) income		(207	)		3,093			1,798			2,570			2,335
		Preferred stock dividends		(63	)		(160	)		(160	)		(2,056	)		(2,160	)

		Net (loss) income available to common stockholders	$	(270	)	$	2,933		$	1,638		$	514		$	175

Net (loss) income per share:
	Basic		$	(0.02	)	$	0.21		$	0.12		$	0.04		$	0.01
	Diluted		$	(0.02	)	$	0.20		$	0.12		$	0.04		$	0.01
Shares used in calculation of net income per share:
	Basic			11,073			14,005			14,028			14,243			14,727
	Diluted			11,073			14,310			14,116			14,706			15,018
Other Financial Data:
EBITDA(1)			$	7,493		$	11,949		$	8,958		$	5,941		$	6,179


	Year Ended December 31,

	2001			2002			2003			2004		2005
(In thousands)

Consolidated Balance Sheet Data:
Cash	$	2,648		$	1,146		$	1,586		$	7	$	187
Receivables		8,387			7,146			5,003			4,610		4,799
Total assets		41,627			33,301			27,085			21,371		36,557	(2)
Total long-term debt(3)		31,109			23,190			19,277			1,666		8,509	(4)
Stockholders’ (deficit) equity		(9,191	)		(5,989	)		(4,368	)		13,396		16,853

(1)

EBITDA is a non-GAAP financial measure. GAAP means generally accepted accounting principles in the United States. EBITDA is defined as GAAP net income plus interest expense, income taxes and depreciation and amortization less interest earned. We have provided EBITDA because we believe it is a commonly used measure of financial performance in comparable companies and because we believe it will help investors and analysts evaluate companies on a consistent basis, as well as enhance an understanding of our operating results. Our management uses EBITDA:


	•	as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, given that it removes the effect of items not directly resulting from our core operations;

	•	for planning purposes, including the preparation of our internal annual operating budget and the calculation of our ability to borrow under our credit facility (with further adjustments as required under the terms of our credit facility);


	•	to allocate resources to enhance the financial performance of our business;

	•	to evaluate the effectiveness of our operational strategies; and

	•	to evaluate our capacity to fund capital expenditures and expand our business.

Other companies may calculate EBITDA differently than we do. In addition, EBITDA:


	•	does not represent net income or cash flows from operating activities as defined by GAAP;

	•	is not necessarily indicative of cash available to fund our cash flow needs; and

	•	should not be considered as an alternative to net income, income from operations, cash provided by operating activities or our other financial information as determined under GAAP.

Reconciliations of net (loss) income to EBITDA are as follows:





	Year Ended December 31,

	2001			2002		2003		2004		2005
(In thousands)

Net (loss) income	$	(207	)	$	3,093	$	1,798	$	2,570	$	2,335
Interest expense, net		3,344			1,798		1,492		468		381
(Benefit) provision for income taxes		(132	)		1,977		1,150		62		1,359
Depreciation and amortization		4,488			5,081		4,518		2,844		2,104

EBITDA	$	7,493		$	11,949	$	8,958	$	5,944	$	6,179


	In calculating EBITDA, we do not add non-cash stock compensation expense to net (loss) income. We recorded non-cash stock-based compensation expense for the following periods as noted: $426,000 for the year ended December 31, 2001 and $46,000 for the year ended December 31, 2002.


(2)	Total assets excludes investments in direct financing leases of approximately $6.9 million as of December 31, 2005 purchased with the proceeds of long-term non-recourse lease notes.

(3)	Long-term debt excludes long term non-recourse lease notes payable of approximately $6.4 million as of December 31, 2005, which are non-recourse to us and are secured by the leased equipment purchased using the proceeds of the non-recourse notes.

(4)	Net of discount of $1,491,000.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition and results of operations and should be read in conjunction with our consolidated financial statements and related notes, and with the information contained in Item 6, “Selected Financial Data,” included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could vary materially from those indicated, implied or suggested by these forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this annual report. For an overview of our business segments, including a description of products and services that we provide, see Item 1 entitled “Business.”

Overview

We provide a suite of technology-based products and services that help community financial institutions 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 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 help them meet 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 will 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 quarter ended March 31, 2006, we derived approximately 53.0% of our consolidated revenues from BusinessManager and approximately 16.1% 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 2006 and for some period thereafter. 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. We accomplished this shift in strategy by acquiring:


	•	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.

We paid approximately $29.0 million for these acquisitions and our earlier acquisition of KVI Capital in July 2005, and we recorded goodwill totaling approximately $17.5 million.

In addition to these acquisitions, we further implemented our strategy by adding several new members to our management team who have significant industry experience, including Lynn Boggs, our new chief executive officer. We now offer products and services to over 2,500 community financial institutions, which gives us an opportunity to cross-sell our full range of products and services across our client base.

Revenues

We generate revenue from three main sources:


	•	financial institution service fees;

	•	retail inventory management services; and

	•	other products and services.

Financial Institution Service Fees

Financial institution service fees include:


	•	participation fees and insurance brokerage fees;

	•	core data processing and image processing fees;

	•	software license and maintenance fees; and

	•	leasing revenues.

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 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 derive 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 starting on the first anniversary of the BusinessManager license agreement and annually thereafter. 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.

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.

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 charges for our Free Checking direct mail program, sales of standard business forms used in our BusinessManager program and statement rendering and mailing.

Historically, we have derived substantially all 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 2006 and for a period thereafter.

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.



			Year Ended December 31,

			2003			2004			2005

Revenues:
	Financial institution service fees			77.4	%		76.7	%		76.3	%
	Retail inventory management services			21.3			22.7			22.6
	Other products and services			1.3			0.6			1.1

		Total revenues		100.0			100.0			100.0
Cost of revenues:
	Financial institution service fees			6.5			6.1			7.7
	Retail inventory management services			2.9			2.9			2.6

Gross profit				90.6			90.9			89.7
Operating expenses:
	General and administrative			39.2			34.3			31.6
	Selling and marketing			38.3			43.9			45.7
	Research and development			1.0			1.0			0.7
	Amortization			2.0			0.9			1.1
	Other operating (income) expense, net			0.0			3.7			0.0

		Total operating expenses		80.3			83.8			79.1

Operating income				10.3			7.1			10.6
Interest expense, net				(3.5	)		(1.2	)		(1.0	)
Other income				0.0			0.7			0.0

Income (loss) before income taxes				6.8			6.6			9.6
Income tax provision (benefit)				2.7			0.2			3.4

Net income (loss)				4.1	%		6.4	%		6.2	%

Historically, we have reported our results of operations using the following line items: participation fees; software license; retail inventory management services; insurance brokerage fees; and maintenance and other. Due to our recent acquisitions, we believe that the presentation set forth above, using line items for financial institution service fees, retail inventory management services and other products and services, will be more useful to an understanding of our operations. Therefore, we intend to present our consolidated statement of operations as set forth above on an ongoing basis.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Total revenues decreased 3.3% to $38.4 million for the year ended December 31, 2005, compared to $39.6 million for the year ended December 31, 2004.

Financial Institution Service Fees. Financial institution service fees decreased $1.1 million, or 3.6%, to $29.3 million for the year ended December 31, 2005, compared to $30.4 million for the year ended December 31, 2004. The decrease was primarily due to a decline in revenues of $2.2 million attributable to our accounts receivable financing product, BusinessManager. Total receivables funded through BusinessManager declined to $3.82 billion in 2005 compared to $4.03 billion in 2004. This decrease was primarily the result of fewer small businesses funding through BusinessManager and fewer community financial institutions offering funding through BusinessManager during 2005 as compared to 2004, which we believe was due in part to a significant amount of turnover in the management and personnel of our sales force for this product. Although attrition rates for small businesses and client financial institutions were relatively stable, new sales to small businesses were lower than necessary to increase total participation fees. This decrease was partially offset by $595,000 in fees from new product introductions and $678,000 related to the acquisitions of KVI Capital and Captiva, both of which we acquired during 2005.

Retail Inventory Management Services. Retail inventory management services fees decreased to $8.7 million for 2005 as compared to $9.0 million for 2004. The decrease of $325,000, or 3.6%, from 2004 was primarily a result of a decline in monthly forecast service fees of $227,000 due to a decrease in the number of forecast customers. As a percentage of total revenues, retail inventory management services fees accounted for 22.6% during 2005 compared to 22.7% in 2004.

Other Products and Services. Revenues from other products and services increased $179,000, or 74.9%, to $418,000 for the year ended December 31, 2005 compared to $239,000 for the year ended December 31, 2004. This increase was primarily attributable to $298,000 in revenue from our Free Checking program, partially offset by a reduction in forms sales and other miscellaneous revenue.

Cost of Revenues — financial institution service fees. Cost of revenues related to financial institution service fees increased 21.1% to $3.0 million for the year ended December 31, 2005 compared to $2.4 million for the year ended December 31, 2004. This increase is primarily attributable to a cost of sales related to our Free Checking program of $378,000 and cost of sales for discount interest expense of $180,000 associated with our leasing product. Neither of these products existed in 2004. As a percentage of total revenues, cost of sales for financial institution service fees increased to 7.7% for the year ended December 31, 2005 compared to 6.1% for the year ended December 31, 2004.

Cost of Revenues — retail inventory management services. Cost of revenues related to retail inventory management services decreased 12.9% to $1.0 million for the year ended December 31, 2005 compared to $1.2 million for the year ended December 31, 2004. The decrease is due to a decline of approximately $76,000 in salary and benefits expense related to a reduction in headcount and a $54,000 reduction in the cost of postage and outside processing services associated with the generation of our forecast reports.

General and Administrative. General and administrative expenses decreased 10.9% to $12.1 million for the year ended December 31, 2005, compared to $13.6 million for the year ended December 31, 2004. The decrease was due to a $655,000 decrease in depreciation expense in 2005 due to lower capital spending over the last two years. Also contributing to the decrease was a decline $586,000 in salary and benefits expense due to a decrease in the number of general and administrative personnel during 2005 as compared to 2004. As a percentage of total revenues, general and administrative expenses decreased to 31.6% for the year ended December 31, 2005 compared to 34.3% for the year ended December 31, 2004.

Selling and Marketing. Selling and marketing expenses increased 1.0% to $17.5 million for the year ended December 31, 2005, compared to $17.4 million for the year ended December 31, 2004. 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. Sales salaries and benefits increased by $539,000. This increase was partially offset by decreases in commission expense of $431,000. As a percentage of total revenues, selling and marketing expenses increased to 45.7% for the year ended December 31, 2005, compared to 43.9% for the year ended December 31, 2004.

Research and Development. Research and development expenses decreased 35.4% to $257,000 for the year ended December 31, 2005, compared to $398,000 for the previous year ended December 31, 2004. 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 decrease was primarily due to our capitalizing an increased percentage of total development staff during 2005. As a percentage of total revenues, research and development expenses decreased to 0.7% for the year ended December 31, 2005 compared to 1.0% for 2004.

Amortization. Amortization expenses increased 18.3% to approximately $421,000 for the year ended December 31, 2005, compared to approximately $356,000 for the previous year. These expenses include the cost of amortizing intangible assets, including trademarks and identified intangibles recorded from our August 2001 merger with Towne Services and the acquisitions of KVI Capital and Captiva. The increase is primarily due to the amortization of new intangibles recorded as a result of the KVI and Captiva acquisitions in 2005.

Other Operating (Income) Expense, Net. Other operating (income) expense, net decreased significantly to operating income of $3,000 for the year ended December 31, 2005 from approximately $1.5 million of expense for 2004. Other operating expenses include property tax and other miscellaneous costs associated with providing support and services to our client financial institutions. The decrease in 2005 is due to significant charges related to the $20.0 million financing we completed with Lightyear in January 2004. The January 2004 Lightyear financing resulted in two significant unusual items: a $780,000 charge for the write-off of deferred financing costs associated with our 1998 credit facility, and a $896,000 charge related to the purchase of a tail directors and officers insurance policy that was required to be expensed immediately. Partially offsetting those two items in 2004 was a reduction in expense of approximately $400,000 due to the favorable conclusion of several state sales tax contingency matters.

Operating Income. As a result of the above factors, our operating income increased 43.7% to $4.1 million for the year ended December 31, 2005, compared to $2.8 million for the previous year.

Interest Expense, Net. Interest expense, net decreased $87,000 to $381,000 for the year ended December 31, 2005, compared to $468,000 in 2004. The decrease was primarily due to the reduction of our outstanding debt. Our average debt balance for 2005 was approximately $3.1 million compared to $6.9 million in 2004.

Other Income. For the year ended December 31, 2004, we received proceeds totaling $266,000 relating to notes receivable from former officers of one of our subsidiaries. Because we had previously written off these notes as uncollectible, their subsequent collection resulted in this gain.

Income Tax Provision. The income tax provision for the year ended December 31, 2005 was approximately $1.4 million as compared to $62,000 for the year ended December 31, 2004. During September 2004, we recorded a tax benefit of $972,000 relating to an income tax contingent liability for which the statute of limitations expired in that month. As a result, the effective tax rate for the year ended December 31, 2004 was 2.3%. We expect our effective tax rate to be approximately 39.0% in future periods.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Total revenues decreased 7.2% to $39.6 million for the year ended December 31, 2004, compared to $42.7 million for the year ended December 31, 2003.

Financial Institution Service Fees. Financial institution service fees decreased $2.7 million, or 8.2%, to $30.4 million for the year ended December 31, 2004, compared to $33.1 million for the year ended December 31, 2003. The decrease was primarily due to a decline in revenues of $2.6 million attributable to Business Manager. Total receivables funded through BusinessManager declined to $4.03 billion in 2004 compared to $4.44 billion in 2003. This decrease was primarily the result of fewer small businesses funding through BusinessManager and fewer community financial institutions offering funding through BusinessManager during 2004 as compared to 2003, which we attribute in part to a significant amount of turnover in the management and personnel of our sales force for this product. Although attrition rates for small businesses and client financial institutions were stable, sales to new small businesses were sluggish, which is why we invested heavily in our sales force during 2004. We also incurred a decrease of $244,000 in insurance brokerage fees.

Retail Inventory Management Services. Retail inventory management services fees decreased to $9.0 million for 2004 as compared to $9.1 million in 2003. As a percentage of total revenues, retail inventory management services fees accounted for 22.7% during 2004 compared to 21.1% in 2003.

Other Products and Services. Revenues from other products and services decreased $307,000 or 75.5% to $241,000 for the year ended December 31, 2004 compared to $548,000 for the year ended December 31, 2003. This decrease was primarily attributable to recording a $250,000 legal settlement in 2003 without a similar gain in 2004.

Cost of Revenues — financial institution service fees. Cost of revenues associated with financial institution service fees decreased 12.1% to $2.4 million for the year ended December 31, 2004 as compared to $2.8 million for the year ended December 31, 2003. The decrease was due to a decline in salary and benefits of approximately $182,000 related to a reduction in personnel in our processing departments, as well as an $88,000 decline in bank lockbox processing fees. As a percentage of total revenues, cost of sales related to financial institution service fees decreased to 6.1% for the year ended December 31, 2004 compared to 6.5% for the year ended December 31, 2003.

Cost of Revenues — retail inventory management services. Cost of revenues associated with retail inventory management services decreased 6.6% to $1.2 million for the year ended December 31, 2004 compare to $1.2 million for the year ended December 31, 2003. The decrease is due to a $78,000 decline in the cost of postage and outside processing services related to the generation of our forecast reports. As a percentage of total revenues, cost of revenues related to retail inventory management services remained constant at 2.9% between years.

General and Administrative. General and administrative expenses decreased 18.9% to $13.6 million for the year ended December 31, 2004, compared to $16.8 million for the year ended December 31, 2003. The decrease was due to a $1.0 million decrease in depreciation expense to $1.7 million in 2004 as compared to $2.7 million in 2003. This is due to lower capital spending over the last two years. Also contributing to the decrease was a decline in salary and benefits expenses of $1.0 million, due to a decrease in the number of general and administrative personnel during 2004 as compared to 2003. As a percentage of total revenues, general and administrative expenses decreased to 34.3% for the year ended December 31, 2004 compared to 39.2% for the year ended December 31, 2003.

Selling and Marketing. Selling and marketing expenses increased 6.4% to $17.4 million for the year ended December 31, 2004 compared to $16.4 million for the year ended December 31, 2003. The increase was primarily due to an increase in sales staff, travel expenses and recruiting costs, partially offset by a decrease in commissions expense. As a percentage of total revenues, selling and marketing expenses increased to 43.9% for the year ended December 31, 2004 compared to 38.3% for the year ended December 31, 2003.

Research and Development. Research and development expenses decreased 10.6% to $398,000 for the year ended December 31, 2004, compared to $445,000 for the previous year ended December 31, 2003. These costs 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 decrease was primarily due to fewer personnel on staff devoted to research and development activities in 2004. As a percentage of total revenues, research and development expenses remained constant at 1.0% for the years ended December 31, 2004 and 2003.

Amortization. Amortization expenses decreased 58.0% to approximately $356,000 for the year ended December 31, 2004, compared to approximately $848,000 for the previous year. These expenses include the cost of amortizing intangible assets including trademarks, and debt issuance costs related to our recapitalization in 1998 (reflected only in our 2003 results) as well as identified intangibles recorded from our August 2001 merger with Towne Services. The decrease is primarily the result of decreased debt issuance cost amortization associated with the Bank of America credit facility we entered into in January 2004.

Other Operating (Income) Expense. Other operating expenses increased significantly to $1.5 million for the year ended December 31, 2004 from income of approximately $145,000 for 2003. Other operating expense included property tax and other miscellaneous costs associated with providing support and services to our client financial institutions. The increase in 2004 is due to significant charges related to the January 2004 Lightyear financing noted above. That financing resulted in two significant unusual items: a $780,000 charge for the write-off of deferred financing costs associated with our 1998 credit facility, and a $896,000 charge related to the purchase of a tail directors and officers insurance policy that was required to be expensed immediately. Partially offsetting these two items was a reduction in expense of approximately $400,000 due to the favorable conclusion of several state sales tax contingency matters. For the year ended December 31, 2003, we recorded a gain of $427,000 related to the sale of our insurance division.

Operating Income. As a result of the above factors, our operating income decreased 36.1% to $2.8 million for the year ended December 31, 2004, compared to $4.4 million for the previous year.

Interest Expense, Net. Interest expense, net decreased $1.0 million to $468,000 for the year ended December 31, 2004 compared to $1.5 million in 2003. The decrease was primarily due to the reduction of our outstanding debt resulting from the January 2004 Lightyear financing. Our average debt balance for 2004 was approximately $6.9 million compared to $26.8 million in 2003.

Other Income. For the year ended December 31, 2004, we received proceeds totaling $266,000 relating to notes receivable from former officers of one our subsidiaries. Because we had previously written off these notes as uncollectible, their subsequent collection resulted in this gain.

Income Tax Provision. The income tax provision for 2004 was approximately $62,000 as compared to $1.2 million for the year ended December 31, 2003. During September 2004, we recorded a tax benefit of $972,000 relating to an income tax contingent liability for which the statute of limitations expired in September 2004. As a result, the effective tax rate for the year ended December 31, 2004 was 2.3%. We expect our effective tax rate to be approximately 39.0% in future periods.

Critical Accounting Policies

Management has based this discussion and analysis of financial condition and results of operations on our consolidated financial statements. The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its critical accounting policies and estimates on a periodic basis.

A “critical accounting policy” is one that is both important to the understanding of the company’s financial condition and results of operations and requires management’s most difficult, subjective or

complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:


	*Revenue Recognition*

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 and other related generally accepted accounting principles. We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

Financial institution service fees. We earn two types of participation fees. Both types of fees are based on a percentage of the receivables that a client financial institution purchases from its small business customers during each month. Participation fees are recognized as earned, which is based upon the transaction dates of financial institution purchases from its small business customers.

We recognize insurance brokerage fee revenues when our financial institution clients purchase the accounts receivable covered by credit and fraud insurance policies and earn our fees based on a percentage of the premium paid to the insurance company.

We generate maintenance fees and other revenues from several ancillary products and services that we provide to our client financial institutions ratably over a 12-month period beginning on the first anniversary of the agreement with our client.

For customers that install our core data processing system at their location, we recognize revenues from the installation and training for the system as we provide the installation and training services. In addition, we charge an annual software maintenance fee, which we recognize ratably over the year to which it relates.

We recognize core data processing and image processing fees as we perform services for our clients. We also generate revenues from the licensing of our core data processing systems. We recognize revenue for licensing these systems in accordance with Statement of Position 97-2, “Software Revenue Recognition.” We recognize the software license after we have signed a non-cancelable license agreement, have installed the products and have fulfilled all significant obligations to the client under the agreement.

Software license fees for our accounts receivable financing solution 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. Some agreements contain performance or deferred payment terms that must be met for us to receive payment and recognize revenue. We recognize revenues from the license fee once we have met the terms of the client agreement. We recognize the client training and support fee ratably over a four-month service period after activation of the license agreement.

Revenue recognition rules for up-front fees are complex and require interpretation and judgment on the part of management. Each of our products containing software elements, including core data processing, accounts receivable financing and teller automation systems, requires the establishment of vendor specific objective evidence, or VSOE, for each element of the arrangement. Determining each element of an agreement and establishing VSOE can be complex. If we modify our contract terms to an extent that changes our VSOE conclusions, our revenue recognition practices could be materially affected. Management completed a thorough analysis of the new client licenses for accounts receivable financing we obtained in 2003 and 2004 and concluded that we completed all services related to the up-front fees in approximately four months. As a result, effective January 1, 2005, we changed the estimated service period for recognition of the up-front license fee from a twelve-month to a four-month revenue recognition period. This change in assumptions resulted in an increase of approximately $115,000 in financial institution service fees during the quarter ended March 31, 2005 and increased financial institution service fees by $130,000 for the year ended December 31, 2005. We believe that this practice most accurately portrays the economic reality of the transactions.

We recognize leasing revenues for both direct financing 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 the total above 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. There is a significant amount of judgment involved in estimated residual values of leased assets at the inception of each lease. Management bases these estimates primarily on historical experience; however, changes in the economy or product obsolescence could adversely affect the residual values actually obtainable. We monitor residual values quarterly to re-assess the recorded amounts. In the event our assumptions change regarding the amounts expected to be realized, we could incur substantial losses related to leased assets. 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.


	*Retail Inventory Management Services*

We recognize revenues for our retail inventory management services as the transactions occur and as we perform merchandising and forecasting services.


	*Other Products and Services*

Revenues from other products and services consist of revenues from Free Checking, our direct mail program, and revenues from the sale of business forms. We record revenues from our Free Checking direct mail campaign as the customer of our client financial institution opens a checking account and receives a premium gift. We also receive a fee for each month that the checking account remains open through the third anniversary of the date that the customer opened the account. We recognize this revenue each month. We recognize revenues related to the business forms we sell in the period that we ship them to the client financial institution.


	*Software Development Costs*

We expense software development costs incurred in the research and development of new software products and enhancements to existing software products as we incur those expenses until technological feasibility has been established. After that point, we capitalize any additional costs in accordance with Statement of Financial Accounting Standards SFAS No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. In addition, we capitalize the cost of internally used software when application development begins in accordance with AICPA SOP No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which is generally the point when we have completed research and development, we have established project feasibility, and management has approved a development plan. Many of the costs capitalized for internally used software relate to upgrades or enhancements of existing systems. If the development costs will result in specific additional functionality of the existing system, we capitalize these costs at the point that application development begins. We amortize capitalized software development costs on a straight-line basis over their useful lives, generally three years. The key assumptions and estimates for this accounting policy relate to determining when we have achieved technological feasibility and whether the project being undertaken is one that will be marketable or enhance the marketability of an existing product for externally marketed software and whether the project will result in additional functionality for internal use software projects. Management consults monthly with all project managers to ensure that management understands the scope and expected results of each project to make a judgment on whether a particular project meets the requirements outlined in the authoritative accounting literature described above. There have been no significant changes in the critical assumptions affecting software development costs during any of the reporting periods presented in this annual report.


	*Income Taxes*

We account for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes. SFAS No. 109 requires the asset and liability method, meaning that deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. We evaluate our ability to realize the deferred tax assets based on an assessment of the likelihood that we will have sufficient taxable income in future years to realize the recorded deferred tax assets. Deferred taxes for us primarily relate to NOLs, which require considerable judgment regarding whether we will ultimately realize them. For us, this judgment relies largely on whether we expect to have sufficient taxable income in future years that will allow for full use of the NOLs we record. The other key assumption affecting the amount of NOLs we record as a deferred tax asset is the estimated restriction in usage

due to Section 382 of the Internal Revenue Code. Section 382 is very complex, requiring significant expertise and professional judgment to properly evaluate its effect on our usable NOLs. We use an independent public accounting firm to assist with this evaluation and believe that we have appropriately considered the limitations required by Section 382 in arriving at the deferred tax asset for NOLs. If our assumptions change, we could have significant increases in income tax expense and reductions in deferred tax assets and operating cash flows.


	*Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations*

Our business combinations require us to estimate the fair value of the assets acquired and liabilities assumed in accordance with SFAS No. 141,Accounting for the Impairment or Disposal of Long-Lived Assets. In general, we determine the fair values based upon information supplied by the management of the acquired entities, which information we substantiate, and valuations using standard valuation techniques. The valuations have been based primarily on future cash flow projections for the acquired assets, discounted to present value using a risk-adjusted discount rate. These future cash flow projections are highly subjective, and changes in these projections could materially affect the amounts calculated for intangible assets. In connection with our acquisitions, we have recorded a significant amount of intangible assets. We are amortizing these assets over their expected economic lives, generally ranging from three to ten years.


	*Long-Lived Assets, Intangible Assets and Goodwill*

We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is measured as the amount by which the carrying value of the intangible asset exceeds its fair value. Factors we consider important that could trigger an impairment review include the following:


	•	significant underperformance relative to expected historical or projected future operating results,

	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business, and

	•	significant negative industry or economic trends.

We also perform an annual impairment test of goodwill at December 31. We assess potential impairment through a comparison of the fair value of each reporting unit versus its carrying value. The estimated fair value of goodwill and intangible assets is based on a number of factors including past operating results, budgets, economic projections, market trends, product development cycles and estimated future cash flows. Changes in these assumptions and estimates could cause a material effect on our financial statements.

Liquidity and Capital Resources

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



	Year Ended December 31,

	2003			2004			2005

	(in thousands)
Net cash provided by operating activities	$	7,936		$	6,471		$	4,389
Net cash used in investing activities		(500	)		(1,201	)		(8,281	)
Net cash provided by (used in) financing activities		(6,996	)		(6,849	)		4,072


	*Cash from Operating Activities*

Cash provided by operations for the year ended December 31, 2005 was attributable to net income of $2.3 million, depreciation and amortization expense of $2.1 million and a deferred tax provision of $973,000. These amounts were partially offset by a decline in working capital of $707,000, which was a result of an increase in prepaid and other current assets of $203,000, and a decrease in accrued liabilities of $892,000, partially offset by an increase in accounts payable of $433,000. Cash provided by operations for the year ended December 31, 2004 was attributable to net income of $2.6 million, depreciation and amortization expense of $2.8 million, the write-off of debt issuance costs of $780,000 and a deferred tax provision of $1.1 million. These operating cash flows were partially offset by a decline in working capital of $927,000, largely due to a decrease in accrued liabilities of $1.8 million, partially offset by decreases in accounts receivable and prepaid and other current assets of $402,000 and $289,000, respectively. Cash provided by operations in the year ended December 31, 2003 was attributable to net income of $1.8 million, depreciation and amortization of $4.2 million and a deferred tax provision of $1.0 million. Operating cash flows for 2003 were positively affected by an increase in working capital of approximately $879,000, due to decreases in accounts receivable and prepaid assets of $2.1 million and $890,000, respectively, partially offset by decreases in accounts payable and accrued liabilities of $298,000 and $1.6 million, respectively.


	*Cash from Investing Activities*

Cash from investing activities consisted primarily of purchases of fixed assets, business acquisitions and capitalization of software development costs. Total capital expenditures were $545,000 for the year ended December 31, 2005, $530,000 for the year ended December 31, 2004 and $113,000 for the year ended December 31, 2003. These expenditures primarily related to the purchase of computer equipment, computer software, software development services, furniture and fixtures and leasehold improvements.

Net cash used in investing activities for the year ended December 31, 2005 included $6.6 million for the acquisition of Captiva and $575,000 for the acquisition of KVI Capital.


	*Cash from Financing Activities*

Cash from financing activities primarily relates to borrowings (paydowns) on our credit facilities, the payment of preferred dividends, inflows from the sale of preferred stock and new debt issuances.

Cash from financing activities primarily relates to borrowings (paydowns) on our credit facilities, the payment of preferred dividends and inflows from the sale of preferred stock. During 2005, net cash provided by financing activities was $4.1 million and was attributable primarily to net additional borrowings of $6.7 million offset by preferred dividends of $2.2 million. During 2004, net cash used in financing activities was $6.8 million and was attributable to the repayment of $28.3 million in outstanding indebtedness and the payment of $2.8 million of preferred dividends, partially offset by net proceeds of $16.9 million from the sale of Series A preferred stock and $7.5 million from a new credit facility. During 2003, net cash used in financing activities was $7.0 million and primarily related to the repayment of indebtedness and capital leases.


	*Analysis of Changes in Working Capital*

As of December 31, 2005, we had working capital of approximately $2.2 million compared to a working capital deficit of approximately $158,000 as of December 31, 2004. The change in working capital resulted primarily from a decrease in the amount of the current portion of long-term debt by $1.7 million, as well as a decrease in accrued liabilities of $429,000 plus increases in cash of $180,000, accounts receivable and other of $189,000, deferred taxes of $300,000 and prepaid and other current assets of $287,000, partially offset by a $674,000 increase in accounts payable. The decrease in current portion of long-term debt is a result of the December 2005 Lightyear note issuance described below, as well as the use of available cash balances to pay down our revolving line of credit. The decrease in accrued liabilities primarily relates to a reduction in accrued severance expenses of $190,000.

We believe that the existing cash available, future operating cash flows and our amended and restated 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 new credit facility throughout 2006. 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.


	*Obligations and Commitments for Future Payments as of December 31, 2005*

The following is a schedule of our obligations and commitments for future payments as of December 31, 2005:


			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	$	—	$	—	$	—	$	—	$	—
Long-term debt(1)		—		—		—		—		—
Operating leases		6,607		1,816		1,776		1,592		1,423
Senior subordinated note		10,000		—		—		—		10,000

Total contractual cash obligations	$	16,607	$	1,816	$	1,776	$	1,592	$	11,423

Standby letters of credit commitment	$	400	$	400	$	—	$	—	$	—


(1)	Debt excludes non-recourse lease notes payable of approximately $6.4 million, which are non-recourse to us and are secured by the leased equipment purchased using the proceeds of the non-recourse notes.

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.


	*Historical Uses of Debt*

As described below, we have used the proceeds from borrowings for several purposes since January 2004. We entered into an $11.0 million credit facility with Bank of America in January 2004 in conjunction with our sale of Series A preferred stock and common stock warrants to Lightyear for net proceeds of $16.9 million. We used the proceeds of the Bank of America facility for general corporate purposes, including working capital.

In December 2005, in connection with our acquisition of Captiva, we amended the Bank of America credit facility to convert it to a $5.0 million revolving line of credit, and we issued a $10.0 million unsecured senior subordinated note and common stock warrants to Lightyear. We paid Lightyear a fee of $250,000 in connection with this transaction and agreed to reimburse Lightyear for its legal fees up to $100,000. As of December 31, 2005, no amount was outstanding under the Bank of America credit facility. We were in compliance with all restrictive financial and non-financial covenants contained in the Bank of America credit facility throughout 2005.

On January 23, 2006, we entered into an amended and restated $18.0 million credit facility with Bank of America. We used the proceeds of the facility on January 31, 2006 to buy Goldleaf Technologies. Simultaneously with the acquisition, we also structured a signing bonus to Mr. McCulloch, then Goldleaf Technologies’ chief executive officer, to include notes totaling $1.0 million as described above.

Our Bank of America 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 and generally including all liabilities for borrowed money, to EBITDA. The definition of EBITDA in the credit facility agreement is different from the one used elsewhere in this annual report in that it permits to be added back to EBITDA various specified amounts that include employee severance expenses, non-cash debt amortization expenses, costs associated with the change of our corporate name, certain litigation expenses and non-cash stock compensation expenses. We are required to maintain on a quarterly basis a ratio of Funded Debt to EBITDA not exceeding 2:1 until the earlier of the sale of a specified subsidiary or the earlier of July 23, 2006 or the repayment of the $6,000,000 term loan that is part of the credit facility. Thereafter, we must maintain on a quarterly basis a ratio of Funded Debt to EBITDA not exceeding 1.75:1. This ratio is calculated (a) at the end of each fiscal quarter, using the results of the twelve-month period ending with that fiscal quarter and after giving pro forma effect 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: 1.75:1 through June 30, 2006; 1.50:1 through September 30, 2006; 1.30:1 through December 31, 2006; and 1.60:1 thereafter. 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 $2.5 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.

In connection with the January 2006 amendment and restatement of the Bank of America credit facility:


	•	The Lightyear Fund, L.P., an affiliate of Lightyear, guaranteed a $6.0 million term loan included in the facility that is due July 23, 2006 and we agreed to pay a fee of $45,000 to The Lightyear Fund, L.P. and to reimburse the Lightyear Fund, L.P. for up to $50,000 of its expenses in connection with this guaranty;


	•	Lightyear exchanged its senior subordinated $10.0 million note for 10,000 shares of our Series C preferred stock, which decreased our debt by $10.0 million but added that same amount in redeemable preferred stock; and

	•	we amended and restated the common stock warrants that we issued to Lightyear in December 2005 in connection with the Lightyear note.

The Series C preferred stock issued to Lightyear has a mandatory redemption date of December 9, 2010 at a redemption price of $10.0 million plus accrued and unpaid dividends, and has a 10% annual dividend rate that increases to 12% on June 9, 2007.

We subsequently amended the Bank of America credit facility again in April 2006 to provide for an additional $1.75 million in short-term loans. The facility currently provides for a total of $19.75 million in loans.

Off-Balance Sheet Arrangements

As of December 31, 2005 and as of the date of this annual report, we did not have and do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised 2004)Share-Based Payment, or SFAS No. 123R. SFAS No. 123R replaces SFAS No. 123 and supersedes Accounting Principles Board, or APB, Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 123R became effective for us on January 1, 2006. SFAS No. 123R requires us to recognize in our financial statements the cost of employee services received in exchange for equity instruments awarded or liabilities incurred. We will measure compensation cost using a fair-value based method over the period that the employee provides service in exchange for the award. We anticipate using the Black-Scholes option-pricing model to determine the annual compensation cost related to share-based payments under SFAS No. 123R. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current rules. This requirement will reduce net operating cash flow and reduce net financing cash outflow by offsetting and equal amounts.

As disclosed in Note 2 to our audited consolidated financial statements included in this annual report, based on the current assumptions and calculations used, had we recognized compensation expense based on the fair value of awards of equity instruments, net income would have increased by approximately $71,000 for the year ended December 31, 2005. This compensation expense is the after-tax net effect of the stock-based compensation expense determined using the fair-value based method for all awards and stock-based employee compensation included previously in reported net income under APB Opinion No. 25. SFAS No. 123R will apply to all awards we grant or have granted after January 1, 2006 and to the unvested portion of our existing option awards, as well as modifications, repurchases or cancellations of our existing awards. We estimate the impact of the adoption of SFAS No. 123R for the year ending December 31, 2006, based upon the options outstanding as of March 31, 2006, to result in an increase in compensation expense of approximately $640,000. The actual effect of adopting SFAS No. 123R will depend on future awards and actual option forfeitures, which are currently unknown. The effect of future awards will vary depending on factors that include the timing, amount and valuation methods used for those awards, and our past awards are not necessarily indicative of our future awards.

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 thatperiod-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.

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 Bank of America credit facility, which accrue interest at LIBOR plus 300 basis points or Bank of America’s prime rate, as we select. We are currently paying interest at a rate of 7.75% per annum. As of June 5, 2006, $19.1 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. Changes in interest rates that increase the interest rate by 1.0% would increase our interest expense by approximately $190,000 per year.

Item 8. Financial Statements and Supplementary Data.

Financial statements are contained on pages F-1 through F-35 of this Report.

Item 9A. Controls and Procedures.

Based on our management’s evaluation, with the participation of our chief executive officer and chief financial officer, as of December 31, 2005, 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 ineffective 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.

Our chief executive officer and chief financial officer reached the conclusion expressed in the preceding paragraph because, as of December 31, 2005, we failed to prepare and report within the time periods specified in the rules and forms of the SEC certain audited and interim unaudited financial statements in connection with our acquisitions of KVI Capital, Inc, which we acquired effective August 1, 2005, and Captiva Solutions, LLC, which we acquired on December 9, 2005. With respect to KVI Capital, we failed to prepare and file audited annual and unaudited interim financial statements of that company within 75 days after August 1, 2005 as required by applicable SEC rules, because we initially concluded that we were not required to file any financial statements of KVI Capital with the SEC. With respect to Captiva, we initially concluded that we were required to file only one year of audited financial statements of Captiva because we did not include the contingent purchase price for Captiva in the significance analysis used to determine the number of years of audited financial statements we were required to file with the SEC. Accordingly, we filed a Current Report on Form 8-K on December 12, 2005 relating to the Captiva acquisition in which we provided only one year of audited financial statements instead of the required two years of audited financial statements and unaudited interim financial statements.

In connection with our review of the significance of our January 31, 2006 acquisition of Goldleaf Technologies, Inc., we determined that we needed to prepare and file additional financial statements for both KVI Capital and Captiva. With regard to KVI Capital, we determined that the size of the invested lease assets required us to include additional historical financial statements. We have since filed these additional historical financial statements with the SEC in a Current Report on Form 8-K filed April 26, 2006, as amended on August 1, 2006. For Captiva, we determined that we should include the contingent purchase price in our significance analysis, from which we concluded that we were required to include an additional year of audited financial statements and unaudited interim financial statements. We have since filed these additional historical financial statements with the SEC in a Current Report on Form 8-K filed April 26, 2006, as amended on June 7, 2006 and August 1, 2006. We have not entered into any other acquisitions since we acquired Goldleaf Technologies.

We believe that our failure to prepare and file with the SEC the financial statements described above within the time periods specified in the rules and forms of the SEC was primarily the result of our misapplication of accounting standards. We have remediated this significant deficiency in our internal control over financial reporting by improving our internal controls and implementing other remediation measures that include the following.

•

After we determined that we needed to strengthen our internal controls in connection with acquisitions, in April 2006 we gave our executive vice president of finance and strategy, Scott R. Meyerhoff, the specific task of reviewing and analyzing all accounting aspects of the acquisitions we may pursue and close in the future. Mr. Meyerhoff was executive vice president

and chief financial officer of Infor Global Solutions, Inc., a global provider of enterprise software solutions, from April 2004 until May 2005 and served as chief financial officer for InterCept, Inc. from January 1998 until March 2004. Mr. Meyerhoff is a certified public accountant and has extensive experience in accounting for mergers and acquisitions

	•		We have increased the time allocated to review our acquisitions.

	•		We have determined to seek additional outside financial expertise from an accounting firm, other than our independent registered public accounting firm, with appropriate expertise in these matters. We intend to use this firm to assist with our determination of which financial statements, if any, are required to be filed with the SEC in connection with any acquisitions we close, and with the preparation, review and filing with the SEC of any such required financial statements and related reports.

Notwithstanding the significant deficiency in our internal control over financial reporting that existed as of December 31, 2005, management has concluded that the consolidated financial statements included in this Annual Report on Form 10-K/A present fairly, in all material respects, our financial position, results of operation and cash flows in conformity with accounting principles generally accepted in the United States of America.

There have been no changes in our internal control over financial reporting identified in the evaluation that occurred during our fourth quarter of fiscal year 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

Financial statements and schedules of the company and its subsidiaries required to be included in Part II, Item 8 are listed below.

Financial Statements

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets as of December 31, 2005 and 2004

Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003

Notes to Consolidated Financial Statements

Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts

No other schedules are required or are applicable.

Exhibits

The Exhibits filed as part of the Report on Form 10-K are listed in the Index to Exhibits immediately following the signature page.

INDEX TO FINANCIAL STATEMENTS


GOLDLEAF FINANCIAL SOLUTIONS, INC. (FORMERLY PRIVATE BUSINESS, INC.) AND SUBSIDIARIES
	Reports of Independent Registered Public Accounting Firms	F-2
	Consolidated Balance Sheets as of December 31, 2005 and 2004	F-5
	Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003	F-6
	Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2005, 2004, and 2003	F-7
	Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003	F-8
	Notes to Consolidated Financial Statements	F-10
	Schedule II Valuation and Qualifying Accounts	F-35

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Goldleaf Financial Solutions, Inc. (formerly Private Business, Inc.)

We have audited the accompanying consolidated balance sheet of Goldleaf Financial Solutions, Inc. (formerly Private Business, Inc.) and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statement of income, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Goldleaf Financial Solutions, Inc. and subsidiaries are not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.


	/s/ Grant Thornton, LLP

Raleigh, North Carolina

June 5, 2006

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Goldleaf Financial Solutions, Inc. (formerly Private Business, Inc.)

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Goldleaf Financial Solutions, Inc. (formerly Private Business, Inc.) and subsidiaries referred to in our report dated June 5, 2006, which is included in the annual report to security holders and incorporated by reference in Part II of this form. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule titled “Schedule II-Valuation and Qualifying Accounts” is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.


	/s/ Grant Thornton, LLP

Raleigh, North Carolina

June 5, 2006

F-3

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Goldleaf Financial Solutions, Inc.

We have audited the accompanying consolidated balance sheet of Goldleaf Financial Solutions, Inc. (formerly Private Business, Inc.) and subsidiaries as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the two years in the period then ended. Our audits also included the financial statement schedule titled “Schedule II — Valuation and Qualifying Accounts” for each of the two years in the period ended December 31, 2004. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Goldleaf Financial Solutions, Inc. (formerly Private Business, Inc.) and subsidiaries at December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.


	/s/ Ernst & Young LLP

Nashville, Tennessee

February 18, 2005, except for the Reclassifications paragraph

of Note 1, as to which the date is August 1, 2006

F-4

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004


	2005		2004

	(Dollars in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	187	$	7
Accounts receivable—trade, net of allowance for doubtful accounts of $206 and $242, respectively		4,773		4,506
Accounts receivable—other		26		104
Deferred tax assets		370		70
Investment in direct financing leases		2,235		—
Prepaid and other current assets		1,567		1,280

Total Current Assets		9,158		5,967

Property and Equipment, Net		2,187		2,327
Operating Lease Equipment, Net		187		—
Other Assets:
Software development costs, net		1,618		1,138
Deferred tax assets		1,456		2,704
Investment in direct financing leases, net of current portion		4,642		—
Intangible and other assets, net		4,931		2,074
Goodwill		12,378		7,161

Total other assets		25,025		13,077

Total assets	$	36,557	$	21,371


Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	2,535	$	1,861
Accrued liabilities		1,582		2,011
Deferred revenue		456		586
Current portion of non-recourse lease notes payable		2,336		—
Current portion of long-term debt		—		1,667

Total current liabilities		6,909		6,125

Revolving Line of Credit		—		110
Non-Recourse Lease Notes Payable, net of current portion		4,056		—
Other Non-Current Liabilities		230		74
Long-Term Debt, net of current portion		—		1,666
Senior Subordinated Long-Term Debt, net of unamortized debt discount of $1,491		8,509		—

Total liabilities		19,704		7,975

Commitments and Contingencies
Stockholders’ Equity:
Common stock, no par value; 100,000,000 shares authorized and 15,489,454 and 14,388,744 shares issued and outstanding, respectively		—		—
Preferred Stock, 20,000,000 shares authorized:
Series A non-convertible, no par value; 20,000 shares issued and outstanding		6,209		6,209
Series B convertible, no par value; 40,031 shares issued and outstanding		114		114
Additional paid-in capital		6,998		3,716
Retained earnings		3,532		3,357

Total Stockholders’ Equity		16,853		13,396

Total Liabilities and Stockholders’ Equity	$	36,557	$	21,371

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

F-5

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2005, 2004 and 2003


		2005			2004			2003

		(In thousands, except per share data)
Revenues:
	Financial institution service fees	$	29,255		$	30,405		$	33,058
	Retail inventory management services		8,678			9,003			9,124
	Other products and services		418			241			548

Total revenues			38,351			39,649			42,730

Cost of revenues:
	Financial institution service fees		2,965			2,440			2,776
	Retail inventory management service		1,004			1,153			1,235

Gross profit			34,382			36,056			38,719
Operating Expenses:
	General and administrative		12,118			13,596			16,764
	Selling and marketing		17,514			17,415			16,367
	Research and development		257			398			445
	Amortization		421			356			848
	Other operating (income) expenses, net		(3	)		1,457			(145	)

Total operating expenses			30,307			33,222			34,279

Operating Income			4,075			2,834			4,440
Interest Expense, Net			(381	)		(468	)		(1,492	)
Other Income			—			266			—

Income Before Income Taxes			3,694			2,632			2,948
Income tax provision			1,359			62			1,150

Net Income			2,335			2,570			1,798
Preferred stock dividends			(2,160	)		(2,056	)		(160	)

Net Income Available to Common Stockholders		$	175		$	514		$	1,638

Earnings Per Share:
Basic		$	0.01		$	0.04		$	0.12

Diluted		$	0.01		$	0.04		$	0.12

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

F-6

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the Years Ended December 31, 2005, 2004 and 2003


	Shares of					Additional			Retained
	Common			Preferred		Paid-In			Earnings
	Stock			Stock		Capital			(Deficit)			Total

	(In thousands)
Balance December 31, 2002		14,047			114	$	(7,195	)	$	1,206		$	(5,875	)
Preferred stock dividends					—					(160	)		(160	)
Exercise of stock options		13			—		9			—			9
Shares issued under employee stock purchase plan		71			—		54			—			54
Other		(68	)		—		(194	)		—			(194	)
Comprehensive income:
2003 net income		—			—		—			1,798			1,798

Balance December 31, 2003		14,063			114	$	(7,326	)	$	2,844		$	(4,368	)

Series A preferred stock issuance and common stock warrant issuance		—			6,209	$	10,685		$	—		$	16,894
Preferred stock dividends		—			—		—			(2,056	)		(2,056	)
Exercise of stock options		299			—		325			—			325
Shares issued under employee stock purchase plan		27			—		32			—			32
Other		—			—		—			(1	)		(1	)
Comprehensive income:
2004 net income		—			—		—			2,570			2,570

Balance December 31, 2004		14,389			6,323	$	3,716		$	3,357		$	13,396

Issuance of common stock for purchase of KVI Capital, LLC		116			—	$	200		$	—		$	200
Issuance of common stock for the merger with
Captiva Solutions, LLC		758			—		925			—			925
Issuance of Private Business stock options for the merger with Captiva Solutions, LLC		—			—		381			—			381
Issuance of common stock warrants		—			—		1,510			—			1,510
Preferred stock dividends		—			—		—			(2,160	)		(2,160	)
Exercise of stock options		299			—		381			—			381
Shares issued under employee stock purchase plan		25			—		35			—			35
Repurchase of treasury stock		(98	)		—		(150	)		—			(150	)
Comprehensive income:
2005 net income		—			—		—			2,335			2,335

Balance December 31, 2005		15,489			6,323	$	6,998		$	3,532		$	16,853

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

F-7

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2005, 2004 and 2003


	2005			2004			2003

	(In thousands)
Cash Flows From Operating Activities:
Net income	$	2,335		$	2,570		$	1,798
Adjustments to reconcile net income to net cash provided by operating activities:
Write-off of debt issuance costs		—			780			—
Depreciation and amortization		2,056			2,844			4,159
Depreciation on fixed assets under operating leases		48			—			—
Deferred taxes		973			1,065			1,033
Amortization of debt issuance costs and discount		126			90			359
Amortization of lease income and initial direct costs		(376	)		—			—
Loss on write-down or disposal of fixed assets and software development costs		16			65			150
Deferred gain on land sale		(16	)		(16	)		(16	)
Gain on sale of leased equipment		(66	)		—			—
Gain on sale of insurance division		—			—			(427	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		4			402			2,143
Prepaid and other current assets		(203	)		289			890
Other assets		—			—			1
Accounts payable		433			120			(298	)
Accrued liabilities		(892	)		(1,767	)		(1,610	)
Deferred revenue		(130	)		29			87
Other non-current liabilities		81			—			(333	)

Net cash provided by operating activities		4,389			6,471			7,936

Cash Flows From Investing Activities:
Proceeds from lease terminations		122			—			—
Investment in capital leases		(719	)		—			—
Lease receivables paid		1,001			—			—
Additions to property and equipment		(545	)		(530	)		(113	)
Software development costs		(1,028	)		(714	)		(765	)
Additions to intangible and other assets		(26	)		—			—
Proceeds from sale of property and equipment		—			—			25
Proceeds from sale of financial institution insurance division		—			—			325
Proceeds from note receivable		60			43			28
Acquisition of KVI Capital, LLC, net of cash acquired		(575	)		—			—
Acquisition of Captiva Solutions, LLC, net of cash acquired		(6,571	)		—			—

Net cash used in investing activities		(8,281	)		(1,201	)		(500	)

F-8

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2005, 2004 and 2003


	2005			2004			2003

	(In thousands)
Cash Flows From Financing Activities:
Repayments on long-term debt		(3,333	)		(1,667	)		(5,077	)
Repayments on capitalized lease obligations		—			(201	)		(303	)
Extinguishment of long-term debt, facility with Fleet		—			(23,875	)		(295	)
Payments on other short term borrowings		—			(388	)		(795	)
Payment of debt issuance costs and amendment fees		(287	)		(286	)		(589	)
Payment of preferred dividends declared		(2,160	)		(2,793	)		—
Net proceeds (payments) from revolving line of credit		(110	)		(2,390	)		—
Net proceeds from sale of Series A preferred shares and common stock warrant		—			16,894			—
Proceeds from new debt facility with Bank of America		—			7,500			—
Proceeds from issuance of senior subordinated long-term debt and common stock warrant		10,000			—			—
Net repayments of non-recourse lease financing notes payable		(304	)		—			—
Repurchase of common stock		(150	)		—			—
Proceeds from exercise of employee stock options		381			325			9
Stock issued through employee stock purchase plan		35			32			54

Net cash provided by (used in) financing activities		4,072			(6,849	)		(6,996	)

Net Change in Cash and Cash Equivalents		180			(1,579	)		440
Cash and Cash Equivalents at beginning of year		7			1,586			1,146

Cash and Cash Equivalents at end of year	$	187		$	7		$	1,586

Supplemental Cash Flow Information:
Cash payments for income taxes during period	$	749		$	306		$	221

Cash payments of interest during period	$	168		$	237		$	1,492

Supplemental Non-Cash Disclosures:
Dividends accrued on preferred stock	$	—		$	—		$	160

Notes payable issued for certain insurance and software contracts	$	—		$	—		$	1,184

Common stock issued in connection with acquisitions	$	1,125		$	—		$	—

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

F-9

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES


	*Organization*

Goldleaf Financial Solutions, Inc., originally named Private Business, Inc. (the “Company”), was incorporated under the laws of the state of Tennessee on December 26, 1990 for the purpose of marketing a solution that helps financial institutions market and manage accounts receivable financing. Effective May 5, 2006, the Company changed its name to Goldleaf Financial Solutions, Inc. The Company operates primarily in the United States and its customers consist of financial institutions of various sizes, primarily community financial institutions. The Company consists of two wholly owned subsidiaries, Towne Services, Inc. and Captiva Solutions, LLC (“Captiva”). Towne Services, Inc. (“Towne”) owns Forseon Corporation (d/b/a RMSA), Private Business Insurance, LLC (“Insurance”) and KVI Capital, LLC (“KVI”). Insurance brokers credit and fraud insurance, which is underwritten through a third party, to its customers. KVI Capital was acquired in August 2005 and is in the business of providing a “turn-key” leasing solution for financial institutions who want to offer a leasing option to their commercial customers. Captiva was acquired in December 2005 and is in the business of providing core data and image processing services to financial institutions.

The market for the Company’s services is concentrated in the financial institution industry. Further, the Company’s services are characterized by risk and uncertainty as a result of the Company’s reliance primarily on one product to generate a substantial amount of the Company’s revenues. There are an increasing number of competitors and alternative products available and rapid consolidations in the financial institution industry. Consequently, the Company is exposed to a high degree of concentration risk relative to the financial institution industry environment and its limited product offerings.


	*Principles of Consolidation*

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter company transactions and balances have been eliminated.


	*Cash and Cash Equivalents*

The Company considers all highly liquid investments that mature in three months or less to be cash equivalents. As of December 31, 2005, the Company reclassified $529,000 of uncleared checks to accounts payable.


	*Property and Equipment*

Property and equipment are recorded at cost. Depreciation is calculated using an accelerated method over 5 to 10 years for furniture and equipment, 3 years for purchased software and the shorter of estimated useful life or the life of the lease for all leasehold improvements. Expenditures for maintenance and repairs are charged to expense as incurred, whereas expenditures for renewals and betterments are capitalized. The Company evaluates the carrying value of property and equipment whenever events or circumstances indicate that the carrying value may have been impaired in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.

Equipment under operating leases is carried at cost and is depreciated to the individual equipment’s net realizable value. Depreciation is calculated using the straight-line method over the shorter of the life of the lease or the estimated useful life of the equipment, typically 5 to 7 years.

F-10

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	*Allowance for Doubtful Accounts*

The Company estimates its allowance for doubtful accounts on a case-by-case basis, based on the facts and circumstances surrounding each potentially uncollectible receivable. An allowance is also maintained for expected billing adjustments and for accounts that are not specifically reviewed that may become uncollectible in the future. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. The Company considers customer balances in excess of sixty days past due to be delinquent and thus subject to consideration for the allowance for doubtful accounts.

Software Development Costs

Development costs incurred in the research and development of new software products and significant enhancements to existing software products are expensed as incurred until technological feasibility has been established. After such time, any additional costs are capitalized in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Capitalized software development costs are amortized on a straight-line basis over the estimated life of the product or enhancement, typically 2 to 5 years.

Also, the Company capitalizes costs of internally used software when application development begins in accordance with American Institute of Certified Public Accounts’ Statement of Position (“AICPA SOP”) No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This is generally defined as the point when research and development have been completed, the project feasibility is established, and management has approved a development plan. Many of the costs capitalized for internally used software are related to upgrades or enhancements of existing systems. These costs are only capitalized if the development costs will result in specific additional functionality of the existing system, and are capitalized at the point that application development begins. Typically these costs are amortized on a straight-line basis over a three to five year time period.

Amortization expense associated with capitalized software development costs was approximately $548,000, $788,000 and $954,000 during the years ended December 31, 2005, 2004, and 2003, respectively, and is included in cost of revenues in the accompanying consolidated statements of operations.

Intangible and Other Assets

On January 1, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets(“SFAS No. 142”). SFAS No. 142 addresses how intangible assets and goodwill should be accounted for upon and after their acquisition. Specifically, goodwill and intangible assets with indefinite useful lives are not amortized, but are subject to impairment tests based on their estimated fair value.

Intangible and other assets consist primarily of the excess of purchase price over the fair value of the identifiable assets acquired for the minority share of Insurance purchased during 1998, Towne acquired in 2001, and KVI and Captiva acquired in 2005. Also included in intangible and other assets are debt issuance costs that are amortized using the effective interest method over the respective terms of the financial institution loans. In addition, intangible and other assets include non-competition agreements, customer lists and acquired technology.

F-11

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenue Recognition

Software Licenses

The Company accounts for software revenues in accordance with the AICPA SOP No. 97-2,Software Revenue Recognition(“SOP 97-2”). Further, the Company has adopted the provisions of SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions, which supercedes and clarifies certain provisions of SOP 97-2.

The Company licenses its software under automatically renewing agreements, which allow the licensees use of the software for the term of the agreement and each renewal period. The fee charged for this license is typically stated in the contract and is not inclusive of any post contract customer support. The original license agreement also includes a fee for post contract customer support (“PCS”), which must be renewed annually. This fee covers all customer training costs, marketing assistance, phone support, and any and all software enhancements and upgrades. The Company defers the entire amount of this fee and recognizes it over the twelve-month period in which the PCS services are provided. The Company has established vendor specific objective evidence (“VSOE”) for its PCS services, therefore the portion of the up-front fee not attributable to PCS relates to the software license and to all other services provided during the initial year of the agreement, including installation, training and marketing services. The portion of the up-front fee related to these activities is recognized over the first four months of the contract, which is the average period of time over which these services are performed. The agreements typically do not allow for cancellation during the term of the agreement. However, for agreements that contain refund or cancellation provisions, the Company defers the entire fee until such refund or cancellation provisions lapse.

Participation Fees

The Company’s license agreements are structured in a manner that provides for a continuing participation fee to be paid for all receivables purchased by customers using the Company’s software product. These fees are recognized as earned based on the volume of receivables purchased by customers.

Retail Inventory Management Services

Retail inventory management services revenue is recognized as earned as the inventory forecasting services are performed.

Insurance Brokerage Fees

The Company acts as a licensee insurance agent for the credit and fraud insurance products that can be purchased in conjunction with the Company’s accounts receivable financing services. The Company earns an insurance brokerage commission for all premiums paid by our financial institution customers. The brokerage fees are recorded on a net basis as opposed to reflecting the entire insurance premium as revenues because the Company does not take any credit risk with respect to these premiums.

Lease Accounting

As a result of the KVI acquisition (Note 2), the Company is an equipment lessor. As such, the Company accounts for its leasing business in accordance with SFAS No. 13,Accounting for Leases. SFAS No. 13 requires lessors to evaluate each lease transaction and determine whether it qualifies as a

F-12

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

sales-type, direct financing, leveraged, or operating lease. KVI’s leases fall into two of those categories: direct financing 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 the unguaranteed residual value of the leased asset. The difference between the total above and the cost of the leased asset is then recorded as unearned income. Unearned income is amortized to income over the lease term as to produce a constant periodic rate of return on the net investment in the lease.

For leases classified as operating leases, lease payments are recorded as rent income during the period earned.

Amounts earned are included in Maintenance and other in the consolidated statements of income.


	Core Data and Image Processing

Core data and image processing services are primarily offered on an outsourced basis but are also offered through licenses for use by the institution on an in-house basis. Support and services fees are generated from implementation services contracted with us by the customer, ongoing support services to assist the customer in operating the systems and to enhance and update the software, and from providing outsourced data processing services. Outsourcing services are performed through our data and item centers. Revenues from outsourced item and data processing are derived from monthly usage fees typically under multi-year contracts with our customers and are recorded as revenue in the month the services are performed.

Amounts earned are included in Maintenance and other in the consolidated statements of income.


	Maintenance and Other

Maintenance revenue is deferred and recognized over the period in which PCS services are provided. Other revenues are recognized as the services are performed.

Income Taxes

The Company accounts for income taxes under SFAS No. 109,Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of December 31, 2005 the Company believes that it is more likely than not that the Company will be able to generate sufficient taxable income in future years in order to realize the deferred tax assets that are recorded. As such, no valuation allowance has been provided against the Company’s deferred tax assets as of December 31, 2005.

Concentration of Revenues

Substantially all of the Company’s revenues are generated from financial institutions.

Earnings Per Share

The Company applies the provisions of SFAS No. 128,Earnings per Share, which establishes standards for both the computation and presentation of basic and diluted EPS on the face of the consolidated statement of operations. Basic earnings per share have been computed by dividing net income available to common stockholders by the weighted average number of common shares

F-13

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

outstanding during each year presented. Diluted earnings per common share have been computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding plus the dilutive effect of options and other common stock equivalents outstanding during the applicable periods.

Stock Based Compensation

The Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and does not utilize the fair value method. However, the Company has adopted the disclosure requirements of SFAS No. 123,Accounting for Stock-Based Compensation,and has adopted the additional disclosure requirements as specified in SFAS No. 148,Accounting For Stock-Based Compensation-Transition and Disclosure,for the three years ended December 31, 2005.

The following table illustrates the effect on net income available to common shareholders and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.


	2005		2004			2003

(In thousands, except per share data)
Net income available to common shareholders, as reported	$	175	$	514		$	1,638
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—		—			—
Add(Deduct): Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		71		(219	)		(509	)

Pro forma net income	$	246	$	295		$	1,129


	2005		2004		2003

(In thousands, except per share data)
Earnings per share:
Basic— as reported	$	0.01	$	0.04	$	0.12

Basic— pro forma	$	0.02	$	0.02	$	0.08

Diluted— as reported	$	0.01	$	0.04	$	0.12

Diluted— pro forma	$	0.02	$	0.02	$	0.08

Fair Value of Financial Instruments

To meet the reporting requirements of SFAS No. 107,Disclosures About Fair Value of Financial Instruments, the Company estimates the fair value of financial instruments. At December 31, 2005 and 2004, there were no material differences in the book values of the Company’s financial instruments and their related fair values. Financial instruments primarily consists of cash, accounts receivable, accounts payable and debt instruments.

Comprehensive Income

The Company applies the provisions of SFAS No. 130,Reporting Comprehensive Income. SFAS No. 130 requires that the changes in the amounts of certain items, including gains and losses on certain securities, be shown in the financial statements as a component of comprehensive income. The

F-14

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company reports comprehensive income as a part of the consolidated statements of stockholders’ equity (deficit).

Segment Disclosures

The Company applies the provisions of SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the method that business enterprises report information about operating segments in annual and interim financial statements. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic area and major customers. The Company operates in two industry segments, financial institution services and retail inventory management. Note 22 of these consolidated financial statements discloses the Company’s segment results.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform with current year classifications. For all years presented, the Company has reclassified its revenue presentation to conform to the presentation that it believes is more useful in understanding the Company’s business. Furthermore, the Company has reclassified certain expenses from its operating expense categories to a new cost of revenues category in the accompanying consolidated statements of income. The Company has also reclassified the gain on sale of its bank insurance division totaling $427,000 from other revenues to other operating (income) expense in its accompanying 2003 consolidated statement of income.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after December 15, 2005 and therefore the Company adopted SFAS 123R on January 1, 2006. SFAS No. 123R requires the cost of employee services received in exchange for equity instruments awarded or liabilities incurred to be recognized in the financial statements. Compensation cost will be measured using a fair-value based method over the period that the employee provides service in exchange for the award. The Company anticipates using the Black-Scholes option-pricing model to determine the annual compensation cost related to share-based payments under SFAS No. 123R. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current rules. This requirement will reduce net operating cash flow and reduce net financing cash outflow by offsetting and equal amounts. As disclosed above, based on the current assumptions and calculations used, had the Company recognized compensation expense based on the fair value of awards of equity instruments, net income would have been increased by approximately $71,000 for the year ended December 31, 2005. This compensation expense is the after-tax net effect of the stock-based compensation expense determined using the fair-value based method for all awards and stock-based employee compensation included previously in reported net income under APB No. 25. SFAS No. 123R will apply to all awards granted after the effective date and to the unvested portion of existing awards, as well as, to modifications, repurchases or cancellations of existing awards. The impact

F-15

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of the adoption of SFAS No. 123R for the year ending December 31, 2006, based upon the options outstanding as of February 28, 2006, is estimated to result in an increase in compensation expense of approximately $800,000. The actual impact of adopting SFAS No. 123R will change for the effect of potential future awards and actual option forfeitures which are not known at this time. The impact of those future awards will vary depending on the timing, amount and valuation methods used for such awards, and the Company’s past awards are not necessarily indicative of such potential future awards.


2.	ACQUISITIONS

Leasing Business

Effective August 1, 2005, the Company acquired 100% of the outstanding membership units of KVI in exchange for cash consideration of $699,000 and common stock consideration of $200,000 (115,607 shares). In addition to the consideration at closing, the selling shareholder will be entitled to contingent consideration equal to 20% of the operating income (as defined in the stock purchase agreement) of KVI for each of the three years ending December 31, 2008. Any contingent consideration payments made will be treated as additional purchase price and therefore increase goodwill. Simultaneous to the execution of the stock purchase agreement, the Company entered into a three year employment agreement with the principal selling member of KVI. The operating results of KVI were included with those of the Company beginning August 1, 2005. The transaction was accounted for in accordance with SFAS No. 141,Business Combinations. The purchase price allocation is as follows:


(In thousands except share amounts)
Purchase Price:
Cash	$	699
Common shares (115,607 shares valued at $1.73 per share)		200

Total purchase price	$	899

Value assigned to assets and liabilities:
Assets:
Cash and cash equivalents	$	124
Accounts receivable		200
Property and equipment		44
Operating lease equipment		209
Investment in direct financing leases		8,280
Customer list (estimated life of seven years)		116
Vendor program (estimated life of seven years)		119
Non-compete (estimated life of two years)		75
Goodwill		216
Liabilities:
Accounts payable		(196	)
Accrued liabilities		(352	)
Other non-current liabilities		(26	)
Non-recourse lease notes payable		(7,910	)

Total net assets	$	899


	*Core Data and Item Processing Business*

On December 9, 2005, the Company acquired 100% of the membership units of Captiva Solutions, LLC in exchange for cash consideration of $6,000,000 and common stock consideration of $925,000

F-16

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(757,576 shares). In addition to the consideration at closing, the selling shareholders will be entitled to up to an additional 1.2 million common shares, upon the achievement of certain annualized acquired revenue targets during 2006. Any contingent consideration payments made will be treated as additional purchase price and therefore increase goodwill. Simultaneous with the execution of the merger agreement, the Company entered into a two year employment agreement with the chief executive officer of Captiva to become the chief executive officer of the Company. The operating results of Captiva were included with those of the Company beginning December 9, 2005. The transaction was accounted for in accordance with SFAS No. 141,Business Combinations. The purchase price allocation is as follows:


(In thousands except share amounts)
Purchase Price:
Cash	$	6,000
Common shares (757,576 shares valued at $1.22 per share)		925
Common stock options		381
Direct acquisition costs		579

Total purchase price	$	7,885

Value assigned to assets and liabilities:
Assets:
Cash	$	8
Accounts receivable		181
Other current assets		78
Property and equipment		317
Customer list (estimated life of ten years)		1,450
Acquired technology (estimated life of three years)		760
Non-compete (estimated life of three years)		640
Goodwill		5,033
Liabilities:
Accounts payable		(45	)
Accrued liabilities		(466	)
Other non-current liabilities		(71	)

Total net assets	$	7,885

We expect that the goodwill originating from both the KVI and Captiva transactions will be deductible for tax purposes over fifteen years.


3.	PREFERRED STOCK ISSUANCE AND CREDIT FACILITY CLOSING

On January 20, 2004, the Company completed the sale of 20,000 shares of Series A non-convertible preferred stock and a warrant to purchase 16,000,000 shares of our common stock ($1.25 per share exercise price) for a total of $20 million to PBI Holdings, LLC (“Lightyear”), an affiliate of The Lightyear Fund, L.P. (the “Lightyear Transaction”). The preferred shares carry a cash dividend rate of 10% of an amount equal to the liquidation preference, payable quarterly in arrears, when and as declared by the Board of Directors. The Series A preferred stock has a liquidation preference superior to the common stock and to the extent required by the terms of the Series B preferred stock, in parity with the currently outstanding Series B preferred stock. The liquidation preference is equal to the original $20 million purchase price, plus all accrued but unpaid dividends. In addition, the securityholders agreement between the Company and Lightyear executed in conjunction with the sale of the preferred stock and warrant, entitles Lightyear to an additional equity purchase

F-17

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

right. The equity purchase right allows Lightyear, so long as Lightyear continues to hold any shares of Series A Preferred Stock, all or any portion of its rights under the warrant or any shares of common stock issued pursuant to an exercise of the warrant, the right to purchase its pro rata portion of all or any part of any new securities which the Company may, from time to time, propose to sell or issue. However, in the case of new security issuances resulting from the exercise of employee stock options, which have an exercise price less than $1.25 per share, Lightyear must still pay $1.25 per share under this equity purchase right. To the extent that new security issuances resulting from the exercise of employee stock options occur which have an exercise price in excess of $1.25 per share, then Lightyear will be required, if they choose to exercise their equity purchase right, to pay the same price per share as the employee stock options being exercised.

The net proceeds from the Lightyear Transaction are shown below:


	(In thousands)
Cash Received from Lightyear	$	20,000
Less:
Broker fees		1,256
Legal and accounting fees		383
Transaction structuring fees		1,200
Other		267

Net Proceeds Received	$	16,894

Simultaneous with the closing of the Lightyear Transaction, the Company entered into a credit facility with Bank of America. See Notes 11 and 12 for discussion of the Company’s credit facility.

The total net proceeds of both the Lightyear Transaction and the Bank of America credit facility were used to extinguish the Company’s 1998 credit facility.

On December 8, 2005, this facility was amended by converting the entire facility to a revolving line of credit and reducing the total amount of the facility to $5.0 million. The amended credit facility was slated to mature March 8, 2006. It was replaced by the Amended and Restated Credit Facility described below.

On December 9, 2005, the Company entered into a $10.0 million senior subordinated note payable instrument with Lightyear (“Lightyear Note”) as approved by the shareholders of the Company during a special shareholders meeting on that same date. Prior to its conversion into Series C Preferred Stock as discussed below, the Lightyear Note was due in total on December 9, 2010, carried an interest rate of 10% through June 8, 2007, which thereafter increases to 12% annum until maturity. The Lightyear Note was unsecured and could be redeemed by the Company, in whole or part, at anytime at 100% of the principal amount plus any accrued and unpaid interest. In conjunction with the Lightyear Note, the Company issued warrants to Lightyear PBI Holdings, LLC to acquire up to 3,787,879 common shares at $1.32 per share. As part of the warrant agreement, in the event that the Company repaid all or a portion of the Lightyear Note prior to June 9, 2007, then 50% of the warrants above are cancelable on a pro-rata basis. The warrant agreement and the warrants were amended in connection with the conversion of the Lightyear Note into shares of Series C Preferred Stock.

On January 23, 2006, the Company entered into an Amended and Restated Credit Agreement with Bank of America (“Amended and Restated Credit Facility”). The Amended and Restated Credit Facility is for a total of $18.0 million, has a two year term and is secured by a pledge of all of the Company’s assets. The Amended and Restated Credit Facility total of $18.0 million consists of two-term loans totaling $16.0 million and a revolving credit line totaling $2.0 million. The Term A loan is for $10.0 million and has a maturity date of January 23, 2008. The Term B loan is for $6.0 million and

F-18

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

has a maturity date of no later than July 23, 2006. The revolving credit line matures on January 23, 2008.

The Term A loan has scheduled repayment terms as follows:


March 31 and June 30, 2006	$	250,000/quarter
September 30 and December 31, 2006	$	500,000/quarter
Thereafter (until maturity)	$	750,000/quarter

In conjunction with this Amended and Restated Credit Facility, The Lightyear Fund, L.P. guaranteed the Term B loan and exchanged its senior subordinated $10.0 million note due on December 9, 2010 for 10,000 shares of the Company’s Series C Preferred Stock. Therefore, the senior subordinated debt discussed above was converted to Series C Preferred Stock on January 23, 2006. In connection with the conversion of the Lightyear Note into Series C Preferred Stock, the warrants that were issued as part of the Lightyear Note were amended such that the exercise price of such warrants can now be paid, at the option of their holder; (i) in cash or by wire transfer, (ii) by the surrender of shares that would otherwise be issuable upon exercise of the warrant that have a market price equal to the aggregate exercise price, or (iii) through a redemption of shares of the Company’s Series C Preferred Stock having a liquidation value equal to the aggregate exercise price. Under the terms of the amended warrant agreement and amended warrants, in the event that the Company redeems any shares of Series C Preferred Stock on or before June 23, 2007, the number of shares issuable pursuant to the warrants will be reduced in accordance with a formula set forth in the warrant agreements.

In the event that we are unable to repay the $6.0 million Term B loan by July 23, 2006 and The Lightyear Fund, L.P. is required to repay the Term B loan on our behalf, we are obligated to issue new Series D preferred shares to The Lightyear Fund, L.P. The Series D preferred shares will carry a 10% per annum dividend rate, will have a mandatory redemption date nine months from the date of issuance, and will require the issuance of 66,045 common stock warrants with an exercise price of $0.01 per share. We will also be required to pay a closing fee equal to 3.75% of the amount repaid by The Lightyear Fund, L.P. to Bank of America.

The Series C Preferred Shares issued to Lightyear have mandatory redemption date of December 9, 2010 and have a 10% annual dividend rate that increases to 12% on June 9, 2007. The Series C preferred shares do not carry any voting rights. Due to the mandatory redemption requirement, the Series C preferred stock will be included in the liability section of our consolidated balance sheet.

The Amended and Restated Credit Facility includes certain restrictive financial covenants, measured quarterly, relating to net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charge coverage ratio, as defined in the agreement. The Amended and Restated Credit Facility also contains customary negative covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock, including the Series A, Series B, and Series C preferred shares outstanding.

As a result of the 1998 debt facility extinguishment, the Company recorded a charge of $780,000 to write-off the unamortized portion of debt issuance costs as of January 20, 2004. Also, the Lightyear Transaction required that the Company obtain directors and officers tail insurance coverage for periods prior to January 20, 2004. The premium for the tail directors and officers’ liability insurance coverage totaled approximately $900,000. The Company expensed the entire premium in January 2004. Therefore, 2004 operating results include two non-recurring expense items totaling approximately $1.7 million, and are included in other operating expenses in the accompanying 2004 consolidated statements.

F-19

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


4.	SALE OF BANK INSURANCE DIVISION

On June 30, 2003, the Company entered into an agreement to sell certain operating assets of its Bank Insurance business for cash of $325,000 and a note receivable for $175,000. The note is secured by all assets of the business sold, is due in equal quarterly installments of principal and interest through June 2006 and bears interest at 3%. The result of this transaction was a gain on sale of approximately $427,000, which is included in other operating (income) expense in the accompanying 2003 consolidated statement of income.


5.	PROPERTY AND EQUIPMENT

Property and equipment are classified as follows:


	2005			2004

	(In thousands)
Purchased software	$	3,765		$	4,876
Leasehold improvements		697			694
Furniture and equipment		8,031			8,277

		12,493			13,847
Less accumulated depreciation		(10,306	)		(11,520	)

	$	2,187		$	2,327

Depreciation expense was approximately $1,042,000, $1,642,000, and $2,698,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

During the fourth quarter of 2003, the Company completed an extensive review of its fixed assets and determined that certain fixed assets, primarily computer equipment, should be written off. As such, $160,000 of computer equipment was expensed in 2003, which is included in other operating expense in the accompanying 2003 consolidated statement of income. Also in 2003, the Company retired fully depreciated fixed assets with a cost of approximately $4,706,000.


6.	OPERATING LEASE PROPERTY

�� The following schedule provides an analysis of the Company’s investment in property leased under operating leases by major classes as of December 31, 2005:


	2005

	(In thousands)
Computer Equipment	$	20
Office Furniture		38
Manufacturing Equipment		7
Medical Equipment		16
Copiers		134

Total Equipment		215
Plus: Initial direct costs		2
Less: Accumulated depreciation		(30	)

Net property on operating leases	$	187

F-20

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a schedule by years of minimum future rentals on noncancelable operating leases as of December 31, 2005:


2006	$	88
2007		37
2008		20
2009		2

	$	147

Depreciation expense on operating lease property was $39,000 for the year ended December 31, 2005.


7.	NET INVESTMENT IN DIRECT FINANCING LEASES

The following lists the components of the net investment in direct financing leases as of December 31, 2005:


	2005

	(In
	thousands)
Total minimum lease payment to be received	$	7,291
Less: Allowance for uncollectibles		—

Net minimum lease payments receivable		7,291
Unguaranteed estimated residual values of leased property		862
Initial direct costs		102
Less: Unearned income		(1,378	)

Net investment in direct financing leases	$	6,877

At December 31, 2005, minimum lease payments for each of the next five years are as follows:


2006	$	2,868
2007		1,929
2008		1,351
2009		861
2010		229
Thereafter		53

	$	7,291

F-21

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


8.	INTANGIBLE AND OTHER ASSETS

Intangible and other assets consist of the following:


	2005		2004

	(In thousands)
Debt issuance costs, net of accumulated amortization of $199 and $90, respectively	$	375	$	195
Non-compete agreements, net of accumulated amortization of $389 and $359, respectively (remaining weighted average life of 26 months)		1,626		961
Customer lists, net of accumulated amortization of $1,126 and $841, respectively (remaining weighted average life of 88 months)		1,740		459
Acquired technology, net of accumulated amortization of $308 and $279, respectively (remaining weighted average life of 50 months)		872		183
Other, net		318		276

	$	4,931	$	2,074

Amortization expense of identified intangible assets during the years ended December 31, 2005, 2004 and 2003 was approximately $421,000, $356,000, and $342,000, respectively.

The estimated amortization expense of intangible assets during the next five years is as follows:


	(In thousands)
2006	$	1,159
2007		840
2008		744
2009		283
2010		228
2011 and thereafter		1,653

	$	4,907


9.	GOODWILL

The changes in the carrying amount of goodwill for 2005 and 2004 are as follows:


	2005			2004

	(In thousands)
Balance as of January 1	$	7,161		$	7,161
Goodwill acquired during year		5,249			—
Decrease resulting from change to deferred tax assets associated with Towne acquisition (Note 14)		(25	)		—
Write off of goodwill		(7	)		—

Balance as of December 31	$	12,378		$	7,161

F-22

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


10.	ACCRUED LIABILITIES

Accrued liabilities consist of the following:


	2005		2004

	(In thousands)
Commissions and other payroll costs	$	704	$	843
Accrued severance costs		103		294
Other		775		874

	$	1,582	$	2,011


11.	REVOLVING LINE OF CREDIT

In January 2004, the Company entered into a new credit facility with Bank of America, which included a revolving line of credit. The revolving line of credit with Bank of America allowed for a $6.0 million line, including a $1.0 million letter of credit sublimit. The revolver availability reduced by $1.0 million on each of the first two anniversary dates of the credit facility.

On December 8, 2005, the Bank of America credit facility was amended such that the entire facility (both revolver and term loan) was converted into a revolving credit line with a total capacity of $5.0 million. As of December 31, 2005, there was $0 drawn against the facility and $400,000 was utilized for standby letters of credit. Weighted average borrowings drawn against the facility during 2005 were $3.1 million.


12.	LONG-TERM DEBT

Long-term debt consists of the following:


	2005		2004

	(In thousands)
Senior Subordinated Note Payable with Lightyear PBI Holdings, Inc., net of unamortized debt discount of $1,491	$	8,509	$	—
Term Loan with Bank of America, principal and interest due quarterly At LIBOR plus the applicable margin		—		3,333

Less current portion		—		(1,667	)

	$	8,509	$	1,666

As stated in Note 11, the Bank of America facility was amended on December 8, 2005, which converted the term loan to a revolver with a maximum borrowing capacity of $5.0 million. The facility is secured by all assets of the Company. There were no amounts outstanding at December 31, 2005 and, as such, there were no scheduled term debt repayments at December 31, 2005. The facility had restrictive financial covenants including a minimum net worth requirement, a maximum debt to EBITDA ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all such restrictive covenants for all periods in which they were applicable. The amended facility had a stated maturity date of March 8, 2006.

On December 9, 2005, the Company issued a $10.0 million unsecured senior subordinated note to Lightyear PBI Holdings, Inc. (“Lightyear Note”) and warrants to acquire 3,787,879 common shares at $1.32 per share in exchange for $10.0 million in cash. On January 23, 2006, the Lightyear Note was converted into shares of the Company’s Series C Preferred Stock as described below. The Lightyear Note was unsecured and was subordinated to the then existing Bank of America facility. The Lightyear

F-23

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note accrued interest monthly at a rate of 10%, increasing to 12% beginning June 9, 2007, and was payable semi-annually in arrears beginning July 1, 2006. The term of the Lightyear Note was five years, at which time the entire principal was to become due. In the event that the Company prepaid the Lightyear Note in full or any partial payments prior to June 9, 2007, up to 50% of the 3,787,879 of common stock warrants would be cancelled on a pro rata basis in proportion to the amount of debt prepaid. The $10.0 million in proceeds received was allocated to the two instruments in proportion to their relative fair values. As a result, the Lightyear Note has been recorded at a discount. The discount will be accrued over the term of the debt as interest expense. The proceeds of the Lightyear Note were used to acquire Captiva Solutions and repay the outstanding balance of the Bank of America facility. The warrant agreement and the warrants were amended in connection with the conversion of the Lightyear Note into shares of Series C Preferred Stock.

On January 23, 2006, the Bank of America Credit Agreement was amended and restated in its entirety (See Note 23) (“Amended and Restated Facility”).


13.	NON-RECOURSE LEASE NOTES PAYABLE

As part of the leasing business, the Company borrows funds from its community bank partners on a non-recourse basis in order to acquire the equipment to be leased. In the event of a lease default, the Company is not obligated to continue to pay on the non-recourse note payable associated with that particular lease. As of December 31, 2005, the principal balance of all non-recourse lease notes payable, due to various financial institutions, totaled $6.4 million ($2.3 million of the total is classified as current). Interest and principal are primarily due monthly with interest rates ranging from 4% to 10.75%.

The following is the scheduled non-recourse notes payable principal payments over the next five years as of December 31, 2005:


	(In thousands)
2006	$	2,336
2007		1,694
2008		1,241
2009		841
2010		230
Thereafter		50

	$	6,392


14.	INCOME TAXES

Income tax provision (benefit) consisted of the following for the three years ended December 31, 2005:


	2005		2004			2003

	(In thousands)
Current income tax expense (benefit)	$	386	$	(1,003	)	$	117
Deferred tax expense		973		1,065			1,033

Income tax provision, net	$	1,359	$	62		$	1,150

F-24

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A reconciliation of the tax provision from the U.S. federal statutory rate to the effective rate for the three years ended December 31, 2005 is as follows:


	2005			2004			2003

	(In thousands)
Tax expense at U.S. federal statutory rate	$	1,256		$	895		$	1,032
State tax expense, net of reduction to federal taxes		148			129			118
Expenses not deductible		58			56			80
Other		(103	)		(1,018	)		(80	)

Income tax provision, net	$	1,359		$	62		$	1,150

During September 2004, the Company recorded a $972,000 tax benefit relating to an income tax contingent liability for which the statue of limitations expired in September 2004. This resulted in the large other reconciling item above and the low effective tax rate for 2004.

Significant components of the Company’s deferred tax assets and liabilities, using an average tax rate of 37% at December 31, 2005 and 39% at December 31, 2004 are as follows:


	2005			2004

	(In thousands)
Current assets (liabilities):
Deferred revenue	$	87		$	138
Allowances on assets		57			97
Net operating loss carryforwards		400			—
Prepaid and accrued expenses		(174	)		(165	)

Deferred tax assets, current	$	370		$	70

Non-current assets (liabilities):
Software development costs	$	(607	)	$	(446	)
Net operating loss carryforwards, net of current portion		2,746			3,747
Other		38			42
Depreciation and amortization		(721	)		(639	)

Deferred tax assets, non-current		1,456			2,704

Total net deferred tax assets	$	1,826		$	2,774

As a result of the completion of the 2002 federal tax return, certain costs associated with the Towne merger were determined to be deductible for tax purposes, thereby creating additional deferred tax assets that had not been previously recognized. As such, goodwill, associated with the Towne merger, was reduced by approximately $1.6 million in 2003.

The Company has gross net operating loss carryforwards of approximately $40.8 million available as of December 31, 2005 for both federal and state tax purposes. Of this total, $37.6 million were acquired during the Towne merger. At the time of the merger, an analysis was performed to assess the realizability of these NOLs due to Section 382 of the US tax code. The results of this analysis concluded that the likelihood of ever being able to utilize the majority of those NOLs was remote; therefore, the Company recorded only the portion of the Towne NOLs estimated to be usable under Section 382. These carryforwards are limited in use to approximately $1.1 million per year in years 2005 through 2009 and $333,000 annually thereafter due to the Lightyear transaction and the Towne merger and expire at various times through 2021.

F-25

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


15.	PREFERRED STOCK

On August 9, 2001, the Company issued 40,031 shares of Series B Convertible Preferred Stock valued at approximately $114,000 as a condition of the merger of Towne into Private Business. These preferred shares were issued in exchange for all the issued and outstanding Towne Series B preferred stock. The preferred stock is entitled to dividends, in preference to the holders of any and all other classes of capital stock of the Company, at a rate of $0.99 per share of preferred stock per quarter commencing on the date of issuance. Holders of the Series B preferred shares are entitled to one vote per share owned. Approximately $351,000 in accrued dividends payable was assumed by the Company as a part of the merger transaction and approximately $160,000, $160,000 and $63,000 of dividends payable were accrued during the years ended December 31, 2003, 2002 and the period from August 9, 2001 through December 31, 2001, respectively. Total accrued dividends were $735,000 as of December 31, 2003. Accrued dividends payable were paid in full during 2004 and 2005.

The Series B Convertible Preferred Stock is convertible to common stock on a one share for one share basis at the option of the preferred stockholders at any time after August 9, 2002 upon the written election of the stockholder. The Series B Convertible Preferred Stock is also redeemable at the option of the Company for cash at any time, in whole or in part, with proper notice. The stated redemption price is $50.04 per Series B Convertible Preferred share, plus any accrued but unpaid dividends as of the redemption date. The Series B Convertible Preferred Stock, in the event of liquidation, dissolution or winding up of the Company, contains a liquidation preference over all other capital stock of the Company equal to and not less than the stockholder’s invested amount plus any declared but unpaid dividends payable. As of December 31, 2005, in the event of liquidation, dissolution or winding up of the Company, the preferred stockholders would be entitled to receive a total of approximately $2.0 million.

The Series A Non-convertible Preferred Stock issued on January 20, 2004 in conjunction with the capital event is described in Note 3. Holders of the Series A preferred shares are entitled to 800 votes per share owned on all matters on which our common stock is entitled to vote.

As stated in Note 23, subsequent to December 31, 2005, the Company issued 10,000 shares of Series C Preferred Stock to Lightyear in exchange for the outstanding senior subordinated note payable. The Series C preferred shares are non-voting and have a mandatory redemption date of December 9, 2010 at $10.0 million, plus accrued dividends. The Series C preferred shares have a stated annual dividend rate of 10% per annum, increasing to 12% on June 9, 2007 thereafter until maturity and have a liquidation preference equal to the original $10.0 million purchase price, plus all accrued and unpaid dividends.


16.	EMPLOYEE STOCK OPTION PLAN

The Company has four stock option plans: the 1994 Stock Option Plan, the 1999 Stock Option Plan, the 2004 Equity Incentive Plan and the 2005 Long-Term Equity Incentive Plan. Options under these plans include non-qualified and incentive stock options and are issued to officers, key employees and directors of the Company. The Company has reserved 8,203,547 shares of common stock for these plans under which the options are granted at a minimum of 100% of the fair market value of common stock on the date of the grant, expire 10 years from the date of the grant and are exercisable at various times determined by the Board of Directors. The Company also has approximately 848,484 shares of common stock reserved for the issuance of options replacing the Towne options outstanding at the time of the Towne merger. The Company applies APB No. 25 in accounting for its options and, accordingly, no compensation cost has been recognized.

F-26

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the status of the Company’s stock options is as follows:


				Weighted
				Average
	Number of			Exercise
	Shares			Price

Balance at December 31, 2002		2,233,507		$	5.56
Granted		745,700			0.59
Exercised		(15,268	)		0.64
Canceled		(454,054	)		9.81

Balance at December 31, 2003		2,509,885		$	3.35

Granted		160,000		$	1.59
Exercised		(296,274	)		1.09
Canceled		(131,531	)		4.73

Balance at December 31, 2004		2,242,080		$	3.44

Granted		3,802,210		$	1.38
Exercised		(299,739	)		1.27
Canceled		(381,255	)		3.06

Balance at December 31, 2005		5,363,296		$	2.24

The following table summarizes information about stock options outstanding at December 31, 2005:


	Options Outstanding						Options Exercisable

			Weighted Average		Weighted				Weighted
			Remaining		Average Exercise				Average Exercise
Exercise Price	Number		Contractual Life		Price		Number		Price

$0.00 to $4.99		5,135,330		8.5 years	$	1.51		1,557,933	$	1.85
$5.00 to $14.99		129,548		2.4 years		7.33		129,548		6.88
$15.00 to $34.99		59,949		3.2 years		29.90		59,949		21.59
$35.00 to $54.99		38,469		2.4 years		39.72		38,469		39.72

Total		5,363,296		8.3 years	$	2.24		1,785,899	$	3.69

At the end of 2005, 2004 and 2003, the number of options exercisable was approximately 1,785,899, 1,983,000, and 1,638,000, respectively, and the weighted average exercise price of these options was $3.69, $3.70, and $4.38, respectively.

SFAS No. 123 requires that compensation expense related to options granted be calculated based on the fair value of the options as of the date of grant. The fair value calculations take into account the exercise prices and expected lives of the options, the current price of the underlying stock, its expected volatility, the expected dividends on the stock, and the current risk-free interest rate for the expected life of the option. Under SFAS No. 123, the weighted average fair value of the 2005, 2004, and 2003 options at the date of grant was approximately $0.78, $1.20, and $1.17 per share, respectively. The fair value was calculated using a weighted average risk-free rate of 4.5%, 4.0%, and 4.0%, an expected dividend yield of 0% and expected stock volatility of 59%, 75%, and 75% for 2005, 2004, and 2003, respectively, and an expected life of the options of 6.5 years, 8 years, and 8 years for 2005, 2004, and 2003, respectively.

F-27

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


17.	NET INCOME PER SHARE

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of dilutive common and common equivalent shares outstanding during the fiscal year, which includes the additional dilution related to conversion of preferred stock, common stock warrants and stock options as computed under the treasury stock method. Neither the Series B Convertible Preferred Stock nor the common stock warrant held by the Series A shareholder were included in the adjusted weighted average common shares outstanding for 2005, 2004 and 2003 as the effects of conversion are anti-dilutive.

The following table is a reconciliation of the Company’s basic and diluted earnings per share in accordance with SFAS No. 128:


	2005		2004		2003

	(In thousands, except per share
	data)
Net income available to common stockholders	$	175	$	514	$	1,638

Basic earnings per Share:
Weighted average common shares outstanding	$	14,727	$	14,243	$	14,028

Basic earnings per share	$	0.01	$	.04	$	0.12

Diluted earnings per Share:
Weighted average common shares outstanding	$	14,727	$	14,243	$	14,028
Dilutive common share equivalents		291		463		88

Total diluted shares outstanding		15,018		14,706		14,116

Diluted earnings per share	$	0.01	$	0.04	$	0.12

For the years ended December 31, 2005, 2004, and 2003, approximately 25.0 million, 17.1 million and 1.9 million employee stock options, warrants and the Series B preferred shares, respectively, were excluded from diluted earnings per share calculations as their effects were anti-dilutive.


18.	COMMITMENTS AND CONTINGENCIES

The Company leases office space and office equipment under various operating lease agreements. Rent expense for the years ended December 31, 2005, 2004 and 2003 totaled approximately $1,535,000, $1,446,000, and $1,503,000, respectively, and is included in general and administrative expense in the consolidated statements of income.

As of December 31, 2005, the future minimum lease payments relating to operating lease obligations are as follows:


	(In
	thousands)
2006	$	1,816
2007		1,776
2008		1,592
2009		1,140
2010		283

	$	6,607

F-28

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Legal Proceedings

We are not currently a party to, and none of our material properties is currently subject to, any material litigation other than routine litigation incidental to our business.

Employment Agreements

The Company has entered into employment agreements with certain executive officers of the Company. The agreements provide for compensation to the officers in the form of annual base salaries and bonuses based on the earnings of the Company. The employment agreements also provide for severance benefits, ranging from 0 to 24 months, upon the occurrence of certain events, including a change in control, as defined. As of December 31, 2005, the total potential payouts under all employment agreements was approximately $2.7 million.


19.	EMPLOYEE BENEFIT PLANS

The Company has an employee savings plan, the Private Business, Inc. 401(k) Profit Sharing Plan (the “Plan”), which permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The Company matches contributions contributed by employees up to a maximum of $1,000 per employee per year and may, at its discretion, make additional contributions to the Plan. Employees are eligible for participation beginning with the quarter immediately following one year of service. Total contributions made by the Company to the Plan were $136,000, $153,000, and $192,000, in 2005, 2004 and 2003, respectively, and are included in general and administrative expense in the consolidated statements of income.

During 2000, the Company established an employee stock purchase plan whereby eligible employees may purchase Company stock at a discount through payroll deduction of up to 15% of base pay. The price paid for the stock is the lesser of 85% of the closing market price on the first or last day of the quarter in which payroll deductions occur. The Company has reserved 333,333 shares for issuance under this plan. The Company issued 25,000 shares during 2005, 30,000 shares during 2004, and 71,000 shares during 2003. Effective December 31, 2005, the Company terminated the employee stock purchase plan.

As a result of the Towne merger, the Company has an employee stock ownership plan (“ESOP”), the RMSA Employee Stock Ownership Plan (the “ESOP Plan”). The purpose of the ESOP is to provide stock ownership benefits for substantially all the employees of RMSA who have completed one year of service. The plan is subject to all the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. The Company may make discretionary contributions to the ESOP Plan in the form of either cash or the Company’s common stock. The ESOP Plan does not provide for participant contributions. Participants vest in their accounts ratably over a seven-year schedule. The Company made no contribution to the ESOP Plan in 2005, 2004 or 2003. As of December 31, 2005, all of the Company’s common shares previously held by the ESOP Plan were distributed to participants as a result of the Plan’s termination.


20.	RELATED PARTY TRANSACTIONS

During the years ended December 31, 2005, 2004 and 2003, the Company paid fees of approximately $0, $15,000, and $25,000, respectively, for legal services to a law firm in which a shareholder and a former director of the Company is a partner. Additionally, this former director held a material membership interest in Captiva prior to the Company’s acquisition of Captiva. Because of this ownership interest, the acquisition of Captiva required a shareholder vote, which was held on December 9, 2005. The former director received approximately $1.1 million cash, 287,272 shares of the

F-29

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company’s common stock and 670,000 common stock options with a $1.32 exercise price as his portion of the total consideration paid for Captiva.

During the year ended December 31, 2004, the Company received proceeds of $266,000 for the repayment of notes receivable owed to the Company by two former officers of Towne Services. The Company had previously written these notes off as uncollectible, therefore collection of these notes resulted in a gain. This gain was recorded in 2004 as a non-operating gain in the accompanying consolidated statement of income.


21.	QUARTERLY FINANCIAL DATA (UNAUDITED)


	Quarter Ended

	March 31,			June 30,		Sept. 30,			Dec. 31,		March 31,			June 30,		Sept. 30,		Dec. 31,
	2004			2004		2004			2004		2005			2005		2005		2005

	(In thousands, except per share data)
Statement of income data:
Revenues	$	9,843		$	10,156	$	9,998		$	9,652	$	9,199		$	9,501	$	9,554	$	10,097

Operating income (loss)	$	(982	)	$	1,174	$	1,216		$	1,426	$	693		$	1,158	$	1,189	$	1,035

Income (loss) from operations before income taxes	$	(1,172	)	$	1,341	$	1,123		$	1,340	$	623		$	1,088	$	1,110	$	873
Income tax provision (benefit)		(457	)		526		(531	)		524		244			423		433		259

Net income (loss)		(715	)		815		1,654			816		379			665		677		614
Preferred stock dividends		438			545		540			533		540			540		540		540

Net income (loss) available to common Stockholders	$	(1,153	)	$	270	$	1,114		$	283	$	(161	)	$	125	$	137	$	74

Earnings (loss) per diluted common share	$	(0.08	)	$	0.02	$	0.07		$	0.02	$	(0.01	)	$	0.01	$	0.01	$	0.01

The quarter ended March 31, 2004 included unusual charges totaling $1.7 million in operating expenses related to the completion of the capital event described in Note 3.

The quarter ended September 30, 2004 included a $972,000 income tax benefit related to the favorable settlement of an income tax contingency as described in Note 14.


22.	SEGMENT INFORMATION

The Company operates in two business segments: financial institution services and retail inventory management and forecasting. The Company accounts for segment reporting under SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information. Corporate overhead costs and interest have been allocated to income before income taxes of the retail inventory forecasting segment. Additionally, $1.5 million of the goodwill originating from the Towne acquisition has been allocated to the retail inventory forecasting segment and is therefore included in the segment’s total assets.

F-30

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the financial information concerning the Company’s reportable segments from continuing operations for the years ended December 31, 2005, 2004 and 2003.


	2005						2004						2003

	Financial		Retail				Financial		Retail				Financial		Retail
	Institution		Inventory				Institution		Inventory				Institution		Inventory
	Services		Forecasting		Total		Services		Forecasting		Total		Services		Forecasting		Total

	(In thousands)
Revenues	$	29,673	$	8,678	$	38,351	$	30,646	$	9,003	$	39,649	$	33,606	$	9,124	$	42,730

Income before taxes	$	2,607	$	1,087	$	3,694	$	1,606	$	1,026	$	2,632	$	2,216	$	732	$	2,948

Assets	$	32,868	$	3,689	$	36,557	$	17,283	$	4,088	$	21,371	$	22,689	$	4,396	$	27,085

Total expenditures for additions to long-lived assets	$	1,580	$	19	$	1,599	$	1,095	$	149	$	1,244	$	838	$	40	$	878


23.	SUBSEQUENT EVENTS (UNAUDITED)

On January 18, 2006, the Company acquired certain operating assets of P.T.C. Banking Systems, Inc. for total consideration of approximately $1.0 million. The acquisition will be accounted for as a purchase in accordance with SFAS No 141. The operating results of this business will be included in the operating results of the Company beginning on the date of acquisition.

On January 23, 2006, the Bank of America Credit Agreement was amended and restated in its entirety (“Amended and Restated Credit Facility”). The Amended and Restated Credit Facility is for a total of $18.0 million, consisting of a $10.0 million term loan due January 23, 2008, a $6.0 million term loan due July 23, 2006 and a $2.0 million revolving credit facility due January 23, 2008. The $10.0 million Term A note has scheduled principal payments as follows:


March 31 and June 30, 2006	$	250,000/quarter
September 30 and December 31, 2006	$	500,000/quarter
Thereafter (until maturity)	$	750,000/quarter

Interest on the term notes and the revolving line of credit is due quarterly in arrears at LIBOR plus 3.0% or the lender base rate (as defined in the agreement) as selected by the Company.

The Amended and Restated Credit Facility prohibits the payment in cash of any dividends in all classes of stock for the entire term of the facility.

The $6.0 million Term B note is guaranteed by The Lightyear Fund, L.P. In the event that we are unable to repay the $6.0 million Term B loan by July 23, 2006 and Lightyear is required to repay the Term B loan on our behalf, we are obligated to issue new Series D preferred shares to Lightyear. The Series D preferred shares will carry a 10% per annum dividend rate, will have a mandatory redemption date nine months from the date of issuance, and will require the issuance of 66,045 common stock warrants with an exercise price of $0.01 per share. We will also be required to pay a closing fee equal to 3.75% of the amount repaid by The Lightyear Fund, L.P. to Bank of America.

Simultaneous with the execution of the Amended and Restated Credit Facility, the Company and Lightyear PBI Holdings, LLC exchanged the Lightyear Note for 10,000 shares of Series C Preferred Stock of the Company. The Series C shares have a stated redemption date of December 9, 2010 at $10.0 million and carry a 10% annual dividend rate through June 8, 2007 and thereafter increasing to 12% annually. In accordance with SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, the Series C preferred shares will be included in the liability section of our consolidated balance sheet. Further, the originally recorded debt discount did not

F-31

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

change as a result of the exchange and it will continue to be accrued to interest expense until the stated redemption date. In connection with the conversion of the Lightyear Note into Series C Preferred Stock, the warrants that were issued as part of the Lightyear Note were amended such that the exercise price of such warrants can now be paid, at the option of their holder: (i) in cash or by wire transfer, (ii) by the surrender of shares that would otherwise be issuable upon exercise of the warrant that have a market price equal to the aggregate exercise price, or (iii) through a redemption of shares of the Company’s Series C Preferred Stock having a liquidation value equal to the aggregate exercise price. Under the terms of the amended warrant agreement and amended warrants, in the event that the Company redeems any shares of Series C Preferred Stock on or before June 23, 2007, the number of shares issuable pursuant to the warrants will be reduced in accordance with a formula set forth in the warrant agreements.

On January 31, 2006, the Company acquired all of the outstanding capital stock of Goldleaf Technologies, Inc. (“Goldleaf Technologies”) for $17.2 million total consideration, consisting of $16.8 million in cash and $350,000 in common shares (272,342 shares). In conjunction with the Goldleaf Technologies acquisition, the Company entered into employment agreements with four of Goldleaf Technologies’ executives, which included signing bonuses totaling $1.8 million. Additionally, a total of 1.6 million common stock options with an exercise price of $1.33 were issued to certain employees of Goldleaf Technologies at closing. The acquisition will be accounted for as a purchase in accordance with SFAS No. 141 and the results of Goldleaf Technologies will be included with those of the Company beginning as of the date of acquisition.


24.	SUPPLEMENTAL PRO FORMA DATA (UNAUDITED)

As described in Note 2, the Company acquired both KVI and Captiva during 2005. Below is a pro forma consolidated statement of operations data of the Company as if these businesses were acquired as of January 1, 2005 and January 1, 2004, respectively.


	2005

	Private								Pro Forma
	Business		KVI			Captiva			Adjustments			Total

	(In thousands)
Revenues	$	38,351	$	816		$	1,713		$	—		$	40,880
										A 517
Operating expenses		34,276		927			2,289			B 393			38,402

Operating income (loss)		4,075		(111	)		(576	)		(910	)		2,478
Nonoperating expense (income)		381		23			164			C 924			1,492
Income tax provision (benefit)		1,359		—			—			D (974	)		385

Net income (loss)		2,335		(134	)		(740	)		(860	)		601
Preferred dividends		2,160		—			—			—			2,160

Net income (loss) available to common shareholders	$	175	$	(134	)	$	(740	)	$	(860	)	$	(1,559	)

Diluted earnings (loss) per share	$	0.01		—			—			—		$	(0.10	)

F-32

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	2004

	Private						Pro Forma
	Business		KVI		Captiva		Adjustments			Total

	(In thousands)
Revenues	$	39,649	$	1,711	$	1,902	$	—		$	43,262
								A 683
Operating expenses		36,815		1,513		1,746		B 669			41,426

Operating income		2,834		198		156		(1,352	)		1,836
Nonoperating expense (income)		202		102		84		C 1,003			1,391
Income tax provision (benefit)		62		—		—		D (859	)		(797	)

Net income		2,570		96		72		(1,496	)		1,242
Preferred dividends		2,056		—		—		—			2,056

Net income (loss) available to common shareholders	$	514	$	96	$	72	$	(1,496	)	$	(814	)

Diluted earnings (loss) per share	$	0.04		—		—		—		$	(0.05	)

The 2005 Private Business column above includes the results of KVI and Captiva from their dates of acquisition of August 1, 2005 and December 9, 2005, respectively.

Proforma adjustments:


	A To increase amortization expense of new intangibles recorded as a result of the KVI and Captiva transactions. The pro forma amounts utilized the $3.2 million of identified intangibles recorded (See Note 2), consisting of acquired technology ($760,000), customer lists ($1,566,000), non-competes ($715,000), and vendor program ($119,000) and are amortized over estimated average useful lives of three, ten, three and seven years, respectively.

	B To increase general and administrative costs for the increased salaries of the new Chief Executive Officer and Senior Vice President of Leasing based on the employment agreements executed as part of these transactions

	C To increase interest expense for additional debt acquired by the company as consideration paid for the membership units of Captiva and KVI. Interest expense has been estimated assuming that the Lightyear PBI Holdings financing discussed above is used for the acquisitions. Therefore, the pro forma interest expense was calculated using an interest rate of 10% and includes amortization of the debt discount using the effective interest method.

	D To record income tax effects (at an effective rate of 39%) of the pro forma adjustments of each period.

The pro forma statement of operations data does not include stock compensation expense for the new stock options issued in conjunction with the Captiva acquisition described in Note 2 above. The stock option grants made on October 20, 2005 totaled 3.3 million and the fair value using the Black-Scholes model is $0.74 per share. The Company accounts for stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and does not utilize the fair value method. If the Company expensed options under SFAS No. 123, Accounting for Stock-Based Compensation, an estimated additional $398,000 of compensation expense would have been expensed during each of the years ended December 31, 2005 and 2004, respectively. Beginning January 1, 2006, the Company will be required to expense the remaining unvested fair value of all stock options, including those issued as

F-33

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

part of this transaction. The estimated annual stock compensation expense for the stock options issued as part of the Captiva acquisition is $398,000.

Captiva organized and began operations on April 1, 2005. On June 1, 2005, Captiva acquired all operating assets of Total Bank Technology, LLC (“TBT”). The year ended December 31, 2005 consists of the full five months results of TBT (January 1— May 31, 2005 presented separately) prior to the acquisition by Captiva along with the results of Captiva from April 1, 2005 through December 31, 2005, including the results of TBT for the months of June through December 2005. Had Captiva been in existence as of January 1, 2004, the 2004 and 2005 results would have reflected additional expenses for the management team and facilities expense of Captiva.

The pro forma financial data are presented for informational purposes. You should not rely on the pro forma amounts as being indicative of the financial position or the results of operations of the consolidated companies that would have actually occurred had the acquisitions been effective during the periods presented or of the future financial position or future results of operations of the consolidated companies. You should read this information in conjunction with the accompanying notes thereto and with the historical consolidated financial statements and accompanying notes of the company included elsewhere in this document.

F-34

SCHEDULE II

GOLDLEAF FINANCIAL SOLUTIONS, INC.

VALUATION AND QUALIFYING ACCOUNTS


			Additions
	Balance at		Charged to		Deductions		Balance at
	Beginning of		Costs and		(Charge		End of
	Period		Expenses(1)		Offs)(1)		Period

Year ended December 31, 2005
Allowance for doubtful accounts	$	242,000	$	138,000	$	174,000	$	206,000

Year ended December 31, 2004
Allowance for doubtful accounts	$	358,000	$	31,000	$	147,000	$	242,000

Year ended December 31, 2003
Allowance for doubtful accounts	$	632,000	$	260,000	$	534,000	$	358,000


(1)	Additions to the allowance for doubtful accounts are included in general and administrative expense. All deductions or charge offs are charged against the allowance for doubtful accounts.

F-35

SIGNATURES

Pursuant to the requirements of Schedule 13 or 15(d) of the Securities 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. (FORMERLY NAMED PRIVATE BUSINESS, INC.)


	By:


	/s/ G. Lynn Boggs
	G. Lynn Boggs
	Chief Executive Officer

Date: August 1, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date


/s/ G. Lynn Boggs G. Lynn Boggs	Chief Executive Officer and Director (principal executive officer)	August 1, 2006

/s/ J. Scott Craighead J. Scott Craighead	Chief Financial Officer (principal financial and accounting officer)	August 1, 2006

/s/ John D. Schneider, Jr. John D. Schneider, Jr.	Director	August 1, 2006

/s/ David W. Glenn David W. Glenn	Director	August 1, 2006

/s/ Thierry F. Ho Thierry F. Ho	Director	August 1, 2006

/s/ David B. Ingram David B. Ingram	Director	August 1, 2006

/s/ Robert A. McCabe, Jr. Robert A. McCabe, Jr.	Director	August 1, 2006

/s/ Lawrence A. Hough Lawrence A. Hough	Director	August 1, 2006

INDEX TO EXHIBITS


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. 333-75013) 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 filed 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).
	3.2	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. 333-75013) 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	Stock Purchase Agreement dated July 24, 1998 (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-75013) filed with the SEC on March 25, 1999).
	10.2	Form of Indemnification Agreement between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 (File No. 333-75013) filed with the SEC on March 25, 1999).
	10.3	Form of Non-qualified Stock Option Agreement without change of control provision (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (File No. 333-75013) filed with the SEC on March 25, 1999).
	10.4	Form of Non-qualified Stock Option Agreement with change of control provision (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-75013) filed with the SEC on March 25, 1999).
	10.5	The Company 1999 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-75013) filed with the SEC on May 3, 1999).
	10.6	Cendant Termination and Non-Competition Agreement dated August 7, 1998 (incorporated by reference to Exhibit 10.9 of Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-75013) filed with the SEC on May 24, 1999).
	10.7	Lease between Triple Brentwood as Landlord and 21 the Company as Tenant (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999).


Exhibit
Number		Description of Exhibit

	10.8	Amended and Restated Securities Purchase Agreement dated December 24, 2003, between the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on December 29, 2003).
	10.9	Warrant Agreement dated January 20, 2004, by and among the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit C of the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on December 29, 2003).
	10.10	Security-holders Agreement dated January 20, 2004, by and among the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit D of the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on December 29, 2003).
	10.11	Credit Agreement dated January 19, 2004 between the Company, certain guarantees, and Bank of America, N.A. (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
	10.12	The Company 2004 Equity Incentive Plan (incorporated by reference to Appendix B to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 23, 2004).
	10.13	Employment Agreement dated July 1, 2004 between the Company and Henry M. Baroco (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
	10.14	Incentive Stock Option Agreement dated August 4, 2004 between the Company and Henry M. Baroco (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
	10.15	Employment Agreement dated July 25, 2002 between the Company and Scott Craighead (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 14, 2005).
	10.16	Amendment to Employment Agreement dated October 21, 2005 between the Company and Henry M. Baroco (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 20, 2005).
	10.17	Agreement and Plan of Merger dated October 20, 2005 among the Company, CSL Acquisition Corporation, Captiva Solutions, LLC, and certain of the Captiva Solutions, LLC members (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 25, 2005).
	10.18	Registration Rights Agreement dated December 9, 2005 between the Company and certain of the Captiva Solutions, LLC members (incorporated by reference to Annex B to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on November 17, 2005).
	10.19	The Company 2005 Long-Term Equity Incentive Plan (incorporated by reference to Annex E to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on November 17, 2005).
	10.20	Securities Purchase Agreement dated December 9, 2005 between the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2005).
	10.21	Warrant Agreement dated December 9, 2005 between the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2005).
	10.22	Warrant Certificate dated December 9, 2005 issued by the Company to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2005).
	10.23	Warrant Certificate dated December 9, 2005 issued by the Company to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2005).


Exhibit
Number		Description of Exhibit

	10.24	First Amendment to Credit Agreement dated December 8, 2005 between the Company, the guarantors thereto, and Bank of America, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2005).
	10.25	Revolving Note dated December 8, 2005 issued by the Company to Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2005).
	10.26	Employment Agreement dated December 9, 2005 between the Company and G. Lynn Boggs (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2005).
	10.27	Stock Purchase Agreement dated January 23, 2006 among the Company and the Stockholders of Goldleaf Technologies, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 24, 2006).
	10.28	Amended and Restated Credit Agreement dated January 23, 2006 between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).
	10.29	Guaranty Side Letter dated January 23, 2006 between the Company, The Lightyear Fund, L.P. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).
	10.30	Exchange Agreement dated January 23, 2006 between the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).
	10.31	Amended and Restated Warrant Agreement dated January 23, 2006 between the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).
	10.32	Amended and Restated Warrant Certificate dated January 23, 2006 issued by the Company to Lightyear PBI Holdings, LLC. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).
	10.33	Amended and Restated Warrant Certificate dated January 23, 2006 issued by the Company to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).
	10.34	Second Amendment to Amended and Restated Credit Agreement dated April 5, 2005 by and among the Company, Bank of America, N.A., First Horizon Bank, and The Peoples Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2006).
	10.35	Term C Loan Note dated April 5, 2006 between the Company and First Horizon Bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2006).
	10.36	Term D Loan Note dated April 5, 2006 between the Company and The People’s Bank (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2006).
	10.37	Employment Agreement dated January 31, 2006 between the Company and Paul McCulloch (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 26, 2006.
	10.38	Redemption and Recapitalization Agreement dated April 25, 2006 between the Company and Lightyear PBI Holdings, LLC. (incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1 filed with the SEC on April 26, 2006).
	10.39	Third Amendment to Amended and Restated Credit Agreement dated May 3, 2006 by and among the Company, Bank of America, N.A., First Horizon Bank, and The Peoples Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 16, 2006).
	21.1	Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed with the SEC on June 6, 2006).
	23.1	Consent of Grant Thornton LLP.
	23.2	Consent of Ernst & Young LLP.
	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.

Goldleaf Financial Solutions Inactive 10-K/A2005 FY Annual report (amended)