Goldleaf Financial Solutions 10Q/A 2006 Q3 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A
Amendment No. 1

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

For the Quarterly Period Ended September 30, 2006

Commission file number 000-25959

Goldleaf Financial Solutions, Inc.

(Exact name of registrant as specified in its charter)

Tennessee		62-1453841

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

9020 Overlook Blvd., Brentwood, Tennessee		37027

(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes o

No x

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

Yes o

No x

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

Class		Outstanding as of March 9, 2007

Common Stock, no par value		17,030,628 shares

GOLDLEAF FINANCIAL SOLUTIONS, INC.
Form 10-Q/A
For Quarter Ended September 30, 2006
EXPLANATORY NOTE

Goldleaf Financial Solutions, Inc. filed its Quarterly Report on Form 10-Q for the three months ended September 30, 2006 with the SEC on November 14, 2006. During our year-end audit it was determined that all audit fees for audits of the historical periods of KVI Capital and Goldleaf Technologies incurred in the first, second and third quarters of 2006 should be recorded as period costs rather than capitalized as direct costs of the acquisitions. These changes affect our consolidated statements of operations for the three and nine months ended September 30, 2006. Accordingly, to reflect this adjustment in the statements of operations for the three and nine month periods, we are filing this Amendment No. 1 to our Quarterly Report for the three months ended September 30, 2006. The adjustment lowers our operating income by $51,000 and $387,000, increases our net loss available to common shareholders by $31,000 and $238,000 and increases our diluted loss per share by $0.01 and $0.08, respectively, for the three and nine months ended September 30, 2006.

This Amendment No. 1 to our Quarterly Report on Form 10-Q for the three months ended September 30, 2006 amends only the items listed below and only to reflect the adjustments discussed above. With respect to each item we are amending the quarterly report to delete the disclosure under that item contained in our Quarterly Report on Form 10-Q as amended, and to replace it in its entirety with the disclosure contained in this amendment.

INDEX

		Page No.

Part I — Financial Information

Item 1 Financial Statements:

Unaudited Interim Consolidated Financial Data

Unaudited Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005		3

Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005		4

Unaudited Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005		5

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005		6

Notes to Unaudited Consolidated Financial Statements		8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Part II — Other Information

Item 6 Exhibits		35

Signatures		37

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 amended information contained herein, this Quarterly Report on Form 10-Q/A continues to speak as of the date of the original filing or subsequent amendment, as applicable, and we have not updated the disclosures contained in this report to reflect events that occurred at a later date unless otherwise noted.

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	September 30, 2006		December 31, 2005

	Restated (Unaudited)		(Audited)
	(in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents	$	1,923	$	137
Restricted cash		11,246		50
Accounts receivable—trade, net of allowance for doubtful accounts of $354 and $206, respectively		6,039		4,773
Accounts receivable—other		6		26
Deferred tax assets		272		370
Investment in direct financing leases		1,989		2,235
Prepaid and other current assets		3,043		1,567

Total current assets		24,518		9,158

Property and equipment, net		3,545		2,187
Operating lease equipment, net		94		187
Other assets:
Software development costs, net		2,414		1,618
Deferred tax assets		1,986		1,456
Investment in direct financing leases, net of current portion		4,276		4,642
Intangible and other assets, net		16,294		4,931
Goodwill		24,598		12,378

Total other assets		49,568		25,025

Total assets	$	77,725	$	36,557

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,611	$	2,535
Accrued liabilities		5,651		1,582
Dividends payable		663		—
Deferred revenue		3,175		456
Customer deposits		11,194		—
Current portion of capital lease obligations		328		—
Current portion of non-recourse lease notes payable		2,016		2,336
Note payable		150		—
Current portion of long-term debt		6,000		—

Total current liabilities		32,788		6,909

Revolving line of credit		2,050		—
Non-recourse lease notes payable, net of current portion		3,825		4,056
Deferred revenue		2,099		—
Capital lease obligations, net of current portion		1,059		—
Other non-current liabilities		98		230
Long-term debt, net of current portion		9,750		—
Senior subordinated long-term debt, net of unamortized discount of $1,491		—		8,509
Preferred Stock, Series C redeemable, no par value, 10,667.4 shares issued and outstanding; net of unamortized discount of $1,265		8,735		—

Total liabilities		60,404		19,704

Commitments and Contingencies
Stockholders’ Equity:
Common stock, no par value; 100,000,000 shares authorized; shares issued and outstanding, 3,163,148 and 3,097,891, respectively		—		—
Preferred Stock, 20,000,000 shares authorized:
Series A non-convertible, no par value; 21,537.8 and 20,000 shares issued and outstanding, respectively		7,087		6,209
Series B convertible, no par value; 40,031 shares issued and outstanding		114		114
Additional paid-in capital		8,647		6,998
Retained earnings		1,473		3,532

Total Stockholders’ Equity		17,321		16,853

Total Liabilities and Stockholders’ Equity	$	77,725	$	36,557

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

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
For the Three Months Ended September 30, 2006 and 2005

	2006			2005

	Restated
	(in thousands, except per share data)
Revenues:
Financial institution service fees	$	11,160		$	7,309
Retail inventory management services		2,025			2,176
Other products and services		1,326			69

Total revenues		14,511			9,554

Cost of Revenues:
Financial institution service fees		2,694			791
Retail inventory management services		210			245

Gross profit		11,607			8,518
Operating Expenses:
General and administrative		5,136			2,867
Selling and marketing		4,390			4,322
Research and development		349			69
Amortization		647			82
Other operating expense, net		9			(11	)

Total operating expenses		10,531			7,329

Operating Income		1,076			1,189
Interest Expense, Net		(871	)		(79	)

Income Before Income Taxes		205			1,110
Income tax provision		80			433

Net Income		125			677
Preferred stock dividends		583			540

Net (Loss) Income Available to Common Shareholders	$	(458	)	$	137

(Loss) Earnings Per Share:
Basic	$	(0.14	)	$	0.05

Diluted	$	(0.14	)	$	0.05

Weighted Average Common Shares Outstanding:
Basic		3,163			2,951

Diluted		3,163			3,002

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

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
For the Nine Months Ended September 30, 2006 and 2005

	2006			2005

	Restated
	(in thousands, except per share data)
Revenues:
Financial institution service fees	$	32,680		$	21,484
Retail inventory management services		6,148			6,571
Other products and services		2,812			199

Total revenues		41,640			28,254

Cost of Revenues:
Financial institution service fees		7,040			1,959
Retail inventory management services		693			770

Gross profit		33,907			25,525
Operating Expenses:
General and administrative		15,097			8,841
Selling and marketing		14,233			13,194
Research and development		840			197
Amortization		1,746			245
Other operating expense, net		133			8

Total operating expenses		32,049			22,485

Operating Income		1,858			3,040
Interest Expense, Net		(2,443	)		(219	)

(Loss) Income Before Income Taxes		(585	)		2,821
Income tax (benefit) provision		(226	)		1,100

Net (Loss) Income		(359	)		1,721
Preferred stock dividends		1,700			1,620

Net (Loss) Income Available to Common Shareholders	$	(2,059	)	$	101

(Loss) Earnings Per Share:
Basic	$	(0.65	)	$	0.03

Diluted	$	(0.65	)	$	0.03

Weighted Average Common Shares Outstanding:
Basic		3,157			2,933

Diluted		3,157			2,999

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

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
For the Nine Months Ended September 30, 2006 and 2005

	2006			2005

	Restated
	(in thousands)
Cash Flows From Operating Activities:
Net (loss) income	$	(359	)	$	1,721
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Write-off of debt issuance costs		118			—
Depreciation and amortization		3,257			1,486
Depreciation on fixed assets under operating leases		100			18
Deferred taxes		(260	)		740
Amortization of debt issuance costs and discount		508			72
Stock option compensation expense		520			—
Deferred gain on land sale		(12	)		(11	)
Loss on write-down or disposal of fixed assets and software development costs		38			16
Amortization of lease income and initial direct costs		(468	)		—
Gain on sale of leased equipment		(60	)		—
Gain on sale of other assets		(40	)		—
Changes in assets and liabilities:
Accounts receivable		(947	)		(148	)
Prepaid and other current assets		(924	)		82
Other non-current assets		(131	)		—
Accounts payable		(90	)		(298	)
Accrued liabilities		2,250			(981	)
Deferred revenue		481			(142	)
Other non-current liabilities		(13	)		—

Net cash provided by operating activities		3,968			2,555

Cash Flows From Investing Activities:
Acquisition of P.T.C. Banking assets		(968	)		—
Acquisition of Goldleaf Technologies, Inc. net of cash acquired		(16,396	)		—
Acquisition of leasing business, net of cash acquired		—			(508	)
Investment in direct financing leases		(1,636	)		(201	)
Lease receivables paid		2,313			—
Proceeds from lease terminations		265			—
Proceeds received from sale of other assets		62			—
Additions to property and equipment		(679	)		(424	)
Additions to intangibles and other assets		(311	)		(96	)
Software development costs		(1,159	)		(711	)
Payments received on notes receivable		45			44

Net cash used in investing activities		(18,464	)		(1,896	)

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

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
For the Nine Months Ended September 30, 2006 and 2005

	2006			2005

	Restated
	(in thousands)
Cash Flows From Financing Activities:
Repayments on long-term debt	$	(250	)	$	(1,249	)
Repayments on capital lease obligations		(169	)		—
Proceeds from amended and restated debt facility with Bank of America, net of issuance costs of $543		15,457			—
Proceeds from revolving line of credit, net		1,943			1,490
Repayment of note payable		(850	)		—
Repayments of non-recourse lease financing notes payable		(1,726	)		(293	)
Proceeds from non-recourse lease financing notes payable		1,369			364
Proceeds from exercise of employee stock options		5			369
Stock issued through employee stock purchase plan		5			27
Repurchase of common stock		(2	)		(150	)
Receipt of dividends previously paid		500			—
Payments of preferred dividends declared		—			(1,080	)

Net cash provided by (used in) financing activities		16,282			(522	)

Net Change in Cash and Cash Equivalents		1,786			137
Cash and Cash Equivalents at beginning of year		137			7

Cash and Cash Equivalents at end of period	$	1,923		$	144

Supplemental Cash Flow Information:
Cash payments for income taxes during period	$	257		$	694

Cash payments of interest during period	$	743		$	115

Non-cash Investing Activities:
Issuance of 314,786 common shares as purchase consideration in the Goldleaf Technologies, Inc. and P.T.C. Banking acquisitions	$	462		$	—

Issuance of 115,607 common shares as purchase consideration in the KVI leasing business acquisition	$	—		$	200

Non-cash Financing Activities:
Issuance of note payable to Goldleaf executive for signing bonus	$	1,000		$	—

Payment-in-kind on Series A preferred stock dividend	$	1,537		$	—

Payment-in-kind on Series C preferred stock dividend	$	556		$	—

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

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

A. The Company

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

B. Restatement of Historical Financial Statements

The Company has restated its previously issued financial statements to correct for an error related to audit fees incurred for historical audits of acquired companies.

The Company was required to complete audits of certain historical periods of both KVI Capital and Goldleaf Technologies following its acquisitions of these entities. The audits were performed in the quarters ended March 31, 2006, June 30, 2006 and September 30, 2006. The company capitalized these audit fees as direct acquisition costs of the entities. However, during the Company’s year-end audit, it was determined that these audit costs should be expensed as incurred rather than capitalized as part of the direct costs of the acquisitions. Therefore, the Company has restated its consolidated financial statements for the three and nine months ended September 30, 2006 to properly reflect these audit costs as a period expense. The adjustment lowers the Company’s operating income by $ 51,000 and $ 387,000, increases the Company’s net loss available to common shareholders by $ 31,000 and $ 238,000 and i ncreases our diluted loss per share by $ 0.01 and $ 0.08, respectively, for the three and nine months ended September 30, 2006.

The Company also restated its previously issued financial statements for the three months ended March 31, 2006 and the three and six months ended June 30, 2006.

The following tables shows the affect of the restatement on the consolidated financial statements of the Company for the three and nine months ended September 30, 2006:

	September 30, 2006

	As Reported		As Restated

	(in thousands)
Balance Sheet Changes:
Prepaid and other current assets	$	2,894		3,043
Total Current assets		24,369		24,518
Goodwill		24,985		24,598
Retained earnings		1,711		1,473

	Three months ended September 30, 2006

Statement of Operations changes:
General and administrative		5,085		5,136
Total operating expenses		10,480		10,531
Operating income		1,127		1,076
Income before income taxes		256		205
Income tax provision		100		80
Net Income		156		125
Net loss available to common shareholders		(427	)	(458	)
Diluted loss per share		(0.13	)	(0.14	)

	Nine months ended September 30, 2006

General and administrative		14,710			15,097
Total operating expenses		31,662			32,049
Operating income		2,245			1,858
Loss before income taxes		(198	)		(585	)
Income tax benefit		(77	)		(226	)
Net loss		(121	)		(359	)
Net loss available to common shareholders		(1,821	)		(2,059	)
Diluted loss per share	$	(0.57	)	$	(0.65	)

C. Summary of Significant Accounting Policies

Basis of Presentation

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

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

These consolidated financial statements, footnote disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

Stock Split

On August 8, 2006, the Company’s Board of Directors approved a one for five reverse stock split which was effected on September 8, 2006. As a result, all common share, common share options and warrants and per share amounts for all prior periods have been adjusted to reflect this reverse split in the accompanying consolidated financial statements.

Principles of Consolidation

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

Our significant accounting policies include revenue recognition, software development costs, income taxes and acquisition accounting and accounting for long-lived assets, intangibles assets and goodwill. Please refer to our critical accounting policies as described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2005 for a more detailed description of these accounting policies.

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. For the three and nine months ended September 30, 2006 and 2005, there was no difference between total comprehensive income and net loss.

Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment, which replaces SFAS No. 123 and supersedes APB Opinion No. 25. 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. Under this method, compensation cost beginning January 1, 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated using the Black-Scholes option pricing.

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 1,640,709 new shares of

common stock for these plans, under which the options are typically 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 typically vest over a four-year service period as determined by the board of directors. Certain options provide for accelerated vesting if there is a change in control (as defined by the plans). The Company also has approximately 169,697 shares of common stock reserved for the options that replaced the Towne options outstanding at the time of the Company’s merger with Towne Services, Inc. in August 2001.

Under the Black-Scholes option-pricing model, the Company estimated volatility using its historical share price performance over the expected life of the option. Results of prior periods do not reflect any restated amounts, and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises or grants of restricted shares. The Company has determined that it has two pools of employees for the purpose of calculating the estimated compensation cost: executive officers pool and non-executive officers’ pool. These two pools properly segregate our employees that have similar historical exercise and forfeiture behavior.

The adoption of SFAS No. 123R decreased the Company’s third quarter and first nine months of 2006 reported operating income and decreased income before income taxes for the third quarter ended September 30, 2006 and increased the loss before income taxes for the nine months ended September 30, 2006 by approximately $180,000 and $520,000, respectively, decreased the reported net income for the three months ended September 30, 2006 and increased the reported net loss for the nine months ended September 30, 2006 by approximately $110,000 and $318,000, respectively, and increased the reported basic and diluted net loss per share by $0.03 and $0.10, respectively, per share. The expense, before income tax effect, is reflected in general and administrative expense. The Company’s adoption of SFAS No. 123R did not affect operating income, income before income taxes, net income, cash flow from operations, cash flow from financing activities, and basic and diluted net income per share in the comparable second periods of 2005.

The fair value of each option award is estimated, on the date of grant using the Black-Scholes option pricing model, which incorporates ranges of assumptions for inputs as shown in the following table.

•	The expected volatility is estimated based on the historical volatility of the Company’s stock over the contractual life of the options and the Company’s expectations regarding stock volatility in the future.

•	The Company uses historical data to estimate option exercise and employee termination behavior within the valuation model; the expected life of options granted is derived from historical Company experience and represents the period of time the options are expected to be outstanding.

•	The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

	Nine Months Ended September 30,

	2006			2005

Dividend yield range		0.0	%		0.0	%
Expected volatility		58	%		75	%
Risk-free interest rate range		4.31% - 5.08	%		4.00	%
Expected term (in years)		6.2 years			8 years

As of September 30, 2006, there was $2.3 million of total unrecognized compensation cost related to unvested share-based compensation arrangements. We expected to recognize this cost over a weighted-average period of 3.2 years. However, due to the completion of the Company’s secondary offering on October 11, 2006, the vesting of the majority of the Company’s outstanding unvested options was accelerated. See footnote L “Subsequent Events”.

Below is a summary of the Company’s option activity as of September 30, 2006, and changes during the nine months ended September 30, 2006:

	Number of Shares			Weighted Average Exercise Price		Remaining Contractual Life		Intrinsic Value

Balance at December 31, 2005		1,072,659		$	11.20
Granted		404,460			6.80
Exercised		(1,560	)		2.95
Canceled		(101,110	)		17.32

Balance at September 30, 2006		1,374,449		$	9.01		8.3 years	$	703,400

Balance exercisable at September 30, 2006		285,558		$	17.49		5.1 years	$	271,173

The weighted-average grant date fair value of options granted during the three months ended September 30, 2006 and 2005 was $0.84 and $0.0, respectively, and $0.85 and $1.65 for the nine months ended September 30, 2006 and 2005, respectively. The total fair value of stock options that vested during the three months and nine months ended September 30, 2006 was $1,195 and $87,346, respectively. The total intrinsic value of stock options exercised during the three months and nine months ended September 30, 2006 was $0 and $9,462, respectively.

During the third quarter and first nine months of 2006, cash received from options exercised was $0 and $5,000, respectively, and the actual tax benefit realized for the tax deductions from stock options exercised totaled $0 for both periods.

Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and did not utilize the fair value method.

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 for the three and nine-month periods ended September 30, 2005.

(In thousands, except per share data)	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005

Net income available to common shareholders, as reported	$	137		$	101
Add (Deduct): Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(14	)		229

Pro forma net income	$	123		$	330

Income per share:
Basic —as reported	$	0.05		$	0.03

Basic —pro forma	$	0.04		$	0.11

Diluted —as reported	$	0.05		$	0.03

Diluted —pro forma	$	0.04		$	0.11

New Accounting Pronouncement

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (“FIN No. 48”) Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN No. 48 requires a company to evaluate all uncertain tax positions and determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.

The Company must adopt FIN No. 48 beginning January 1, 2007. The Company is currently evaluating the requirements and impact, if any, of FIN No. 48 on its consolidated results of operations and financial position.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.

Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatement. These methods are referred to as the “roll-over” and “iron curtain” method. The roll-over method quantifies the amount by which the current year income statement is misstated. Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts. The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated. Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that results from the correction of an error existing in previously issued financial statements. We currently use the roll-over method for quantifying identified financial statement misstatements.

SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods.

SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.

Our adoption of SAB 108 will not have any effect on our consolidated financial statements as we have not identified any prior year misstatements.

On September 20, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). This new standard provides guidance for using fair value to measure assets and liabilities as required by other accounting standards. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which they reporting entity transacts. SFAS No. 157 must be adopted by the Company effective January 1, 2008, although early application is permitted. The Company is currently evaluating the effects of SFAS No. 157 upon adoption, however at this time it does not believe that adoption of this standard will have a material affect on its operating results or consolidated financial position.

D. Reclassifications

Historically, the Company has reported its results of operations using the following revenue line items: participation fees; software license; retail inventory management services; insurance brokerage fees; and maintenance and other. Due to the Company’s recent acquisitions, we believe that the presentation using revenue 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. Also, we added a cost of revenues category to capture direct costs associated with the generation of our revenues. Revenues and cost of revenues for the three and nine months ended September 30, 2005 have been reclassified to reflect this presentation.

Certain prior year amounts have been reclassified to conform with current year presentation.

E. Acquisitions

Assets of P.T.C. Banking Systems, Inc.

On January 18, 2006, the Company executed an asset purchase agreement to acquire certain operating assets and liabilities from P.T.C. Banking Systems, Inc. (“P.T.C.”), in exchange for cash consideration of $948,836 and common stock consideration of $62,000 (8,485 shares valued at $7.30). Simultaneous with the execution of the asset purchase agreement, the Company entered into a one-year employment agreement with the principal officer of P.T.C. The operating results of P.T.C. were included with those of the Company beginning January 18, 2006. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations.

The preliminary purchase price allocation is as follows:

(In thousands, except per share amounts)

Purchase Price:
Cash	$	949
Common shares (8,485 shares valued at $7.30 per share)		62
Direct costs of acquisition		19

Total purchase price	$	1,030

Value assigned to assets and liabilities:
Assets:
Current assets	$	10
Property and equipment		15
Customer list (estimated life of ten years)		53
Acquired technology (estimated life of five years)		280
Non-compete (estimated life of three years)		375
Goodwill		461
Liabilities:
Accounts payable		14
Accrued liabilities		10
Deferred revenue		140

Total net assets	$	1,030

During the quarter ended June 30, 2006, the Company updated its analysis of the estimated fair value of the intangible assets of P.T.C. The results of this analysis are reflected in the above purchase price allocation, and resulted in a net decrease to goodwill totaling approximately $15,000.

Goldleaf Technologies, Inc.

On January 31, 2006, the Company acquired 100% of the outstanding capital stock of Goldleaf Technologies, Inc. (“GTI”) in exchange for cash consideration of $16,785,121 and common stock consideration of $400,341 (54,464 shares valued at $7.35 per share). Simultaneous with the execution of the merger agreement, the Company entered into a two-year employment agreement with the chief executive officer of GTI to become an executive vice president of the Company. The operating results of GTI were included with those of the Company beginning January 31, 2006. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The preliminary purchase price allocation is as follows:

(In thousands except share amounts)

Purchase Price:
Cash (includes $830,000 paid to executives considered as purchase price)	$	17,615
Note payable to executive		1,000
Common shares (54,468 shares valued at $7.35 per share)		400
Direct acquisition costs		186

Total purchase price	$	19,201

Value assigned to assets and liabilities:
Assets:
Cash	$	1,405
Restricted cash		11,258
Accounts receivable		466
Other current assets		156
Property and equipment		1,811
Deferred tax asset		171
Customer list (estimated life of ten years)		3,290
Acquired technology (estimated life of seven years)		3,090
Trademarks/tradenames (indefinite life)		4,470
Non-compete (estimated life of three years)		1,300
Goodwill		11,234
Liabilities:
Accounts payable		1,176
Accrued liabilities		1,269
Customer deposits		11,258
Capital lease obligations		1,557
Deferred revenue		4,190

Total net assets	$	19,201

During the quarter ended June 30, 2006, the Company updated its analysis of the estimated fair value of the intangible assets of GTI. The results of this analysis are reflected in the above purchase price allocation, and resulted in a net decrease to goodwill totaling approximately $262,000.

The acquisition of GTI brings an additional three primary products from which its revenues are generated; ACH Manager and Client, remote deposit and website design and hosting. Below are the current revenue recognition policies for these products.

ACH Manager and Client (“ACH”) and Remote Deposit Revenue

Historically, GTI had accounted for the ACH and Remote Deposit products in accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. These products are licensed under automatically renewing agreements, which allow the licensees use of the software for the term of the agreement (typically five years) and each renewal period. Typically, there is an up-front fee, an annual or monthly maintenance fee and hosting fee for each year of the contract, and per transaction fees for processing of ACH and remote deposit transactions.

During the second quarter of 2006, the Company began the process of modifying GTI’s ACH and Remote Deposit contracts entered into after the January 31, 2006 acquisition date. The primary modification related to allowing for customers of these products to take possession of the software for use on an in-house basis versus the primary application service provider (“ASP”) basis that GTI typically employs. In accordance with the guidance provided in EITF No. 00-3, Application of AICPA SOP 97-2, “Software Revenue Recognition,” to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, this change in contractual terms results in a change in the applicable accounting literature from EITF 00-21 to SOP 97-2, Software Revenue Recognition, as modified by SOPs 98-4 and 98-9. Under SOP 97-2, if Vendor Specific Objective Evidence of Fair Value, (“VSOE”) has been established for all undelivered elements, the residual method applies. Under the residual method, the fair value of each undelivered element is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Therefore, in April 2006, the Company began recognizing the up-front fees when all of the revenue recognition criteria in paragraph 8 of SOP 97-2 have been met, which is normally upon customer implementation. Revenue related to the undelivered elements is recognized as the services are delivered. Included in second quarter revenue is approximately $388,000 related to up-front fees for contracts entered into in the first quarter that were amended in the second quarter as discussed above and approximately $434,000 related to up-front fees for contracts entered into in the second quarter. Included in revenue for the three months ended September 30, 2006, is $479,000 related to up-front fees from contracts entered into in the third quarter. Had the Company not adopted this change, the total of $1.3 million in additional revenue in the first three quarters of 2006 would have been spread over the estimated life of the client relationships, which is approximately 60 months. The effect of this change on how the Company recognizes revenue from sales of these products in future quarters will be to accelerate the amount of revenue it recognizes in each quarter in which it sells the products although the precise amount will vary depending on the number and dollar amount of its contracts.

The annual maintenance fee covers phone support and all unspecified software enhancements and upgrades. Annual maintenance fees are deferred and recognized into income over the one-year life of the maintenance agreement. Monthly maintenance and hosting fees are recognized on a monthly basis as earned. The transaction fees are recognized monthly as the transactions occur. Training is recognized when delivered based on the fair value of the training services when delivered separately.

The Company also offers training services on a per training day basis if the customer requests training.

Website Design and Hosting Revenue

The Company offers financial institution website design services as well as hosting and content support services for the website once design is complete. The Company charges an up-front fee for the design services and charges a monthly website hosting and content support fee each month of the contract, which is typically five years. The website design services are derived from standard templates the Company has developed. Typically included in the monthly hosting and content support fee is a limited amount of website content support hours each month. Any content support services exceeding the designated number of hours included in the monthly hosting and content support fee is billed at an agreed upon hourly rate as the services are rendered. The Company accounts for the website design, hosting and content support services in accordance with EITF No. 00-21. During July 2006, the Company was able to establish objective and reliable evidence of fair value of the undelivered elements (the hosting and content support services). As a result, the up-front fee for the design services is recognized at the time the customer website is completed and operational. Included in third quarter revenue is approximately $163,000 related to up-front fees for completed customer websites that had previously been deferred. Had the Company not adopted this change, the total of $163,000 in additional revenue in the third quarter of 2006 would have been spread over the estimated life of the client relationships, which is approximately 60 months. The effect of this change on how the Company recognizes revenue from sales of these products in future quarters will be to accelerate the amount of revenue it recognizes in each quarter in which it sells the products, although the precise amount will vary depending on the number and dollar amount of its contracts. Monthly hosting and content support revenues are recognized on a monthly basis as earned.

F. Debt

On January 23, 2006, the Company’s Bank of America Credit Agreement was amended and restated in its entirety. As amended and restated, the Bank of America credit facility had an original principal amount of $18.0 million, consisting of a $10.0 million term loan due January 23, 2008, a $6.0 million term loan due September 30, 2006 and a $2.0 million revolving credit facility due January 23, 2008. The $10.0 million Term A Note had 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

As a result of entering into the amended and restated credit facility with Bank of America, the Company recorded a one-time charge of $112,296 to write off the remaining unamortized debt issuance costs from the prior debt facility.

On April 5, 2006, the Company further amended the Bank of America credit facility to allow for two additional term loans for $1.0 million and $750,000, respectively (the “Additional Term Loans”). Both loans were scheduled to mature on September 30, 2006 and carried the same interest rates as the existing term loans.

On June 15, 2006, the Company amended the facility to increase the total facility to $25.0 million, which currently consists of the $9.75 million outstanding on the Term A note, the $6.0 million Term B note, and a $9.25 million revolving credit line. The June amendment also eliminated the scheduled quarterly Term A note payments of $250,000 on June 30, 2006, $500,000 on both September 30, 2006 and December 31, 2006 and $750,000 per quarter thereafter until maturity. As part of this amendment, the Additional Term Loans issued in April 2006 were rolled into the revolving line of credit.

On September 1, 2006, the Company amended the facility to extend the Term B note maturity date from September 30, 2006 to January 31, 2007, lowering the Term B note interest rate from LIBOR plus 3% to LIBOR plus 1.25%, increasing the funded debt to EBITDA ratio from 2.0:1.0 to 2.25:1.0 for the period beginning July 1, 2006 and ending March 31, 2007, and increasing the annual capital expenditure limit from $2.5 million to $3.0 million.

Interest on the Term A note and the revolving line of credit is due quarterly in arrears at LIBOR plus 3.0% or the Lender Base Rate (as defined) as selected by the Company.

On October 11, 2006, the Term A and B notes were paid in full. Upon paying down these term debt instruments, the term debt was extinguished and converted into additional revolving debt, making the credit facility a $25.0 million revolving credit facility.

As of September 30, 2006, the $6.0 million Term B Note was guaranteed by The Lightyear Fund, L.P. Lightyear was released from its guaranty on October 11, 2006 in connection with the Term B repayment. See Note L “Subsequent Events.”

Simultaneous with the execution of the amended and restated Bank of America credit facility on January 23, 2006, the Company and Lightyear PBI Holdings, LLC (“Lightyear”) exchanged a $10.0 million subordinated note that the Company had issued to Lightyear in December 2005 (the “Lightyear Note”) for 10,000 shares of the Company’s Series C Preferred Stock. 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 are included in the liability section of our consolidated balance sheet, and dividends on the Series C Preferred Stock are charged to interest expense as accrued. Further, the originally recorded debt discount did not 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 exchange of the Lightyear Note for Series C Preferred Stock, the warrants that were issued in December 2005 in connection with 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 agreement. The Series C Preferred Stock and the warrants were redeemed and recapitalized on October 11, 2006. See Note L “Subsequent Events.”

Under the terms of the Bank of America credit facility, we are prohibited from declaring and paying cash dividends on our preferred stock during the term of the facility. On January 23, 2006, Lightyear agreed to accept PIK (paid in kind) dividends consisting of preferred stock and warrants, in lieu of cash dividends on the Series A preferred stock through January 1, 2007. On the Series C preferred stock, if cash dividends are not paid quarterly, the dividend rate increases from 10% to 12% annually through January 1, 2008. Accordingly, effective July 1, 2006, we issued:

•	an additional 525.3 shares of Series A preferred stock to Lightyear in lieu of $525,300 in cash dividends that became due on July 1, 2006 on the Series A preferred stock;

•	warrants to Lightyear that give Lightyear the right to purchase 79,593 shares of our common stock at an exercise price of $6.60 per share.

The Bank of America credit facility is secured by a pledge of all Company assets, imposes financial and other covenants, and contains limitations on the Company’s ability to sell material assets, redeem capital stock and pay dividends, among other actions. As of September 30, 2006, the Company was in compliance with all covenants in the Bank of America credit facility. The facility had an interest rate of approximately 8.25% as of September 30, 2006. Total interest expense for this facility for the third quarter and first nine months of 2006 was approximately $353,000 and $958,000, respectively.

In conjunction with the acquisition of GTI discussed in Note D, the Company issued two notes payable to Paul McCulloch, the President of GTI, as a portion of the consideration paid to him for executing an employment agreement with the Company. The notes had original principal balances of $850,000 (due June 15, 2006) and $150,000 (due April 30, 2007), are unsecured and carry interest at prime rate as published in The Wall Street Journal (8.25% at June 30, 2006). In June 2006, the Company paid $350,000 in principal plus accrued interest through June 15, 2006 on the $850,000 note and extended the remaining $500,000 until July 15, 2006. On July 15, 2006, the remaining principal and interest were paid on the $850,000 note.

G. Net Income (Loss) Per Share

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

The following table represents information necessary to calculate earnings per share for the three and nine-month periods ended September 30, 2006 and 2005:

	Three Months Ended September 30,					Nine Months Ended September 30,

	2006			2005		2006			2005

	(in thousands)					(in thousands)
Net (loss) income available to common shareholders	$	(458	)	$	137	$	(2,059	)	$	101

Weighted average common shares outstanding		3,163			2,951		3,157			2,933
Plus additional shares from common stock equivalent shares:
Options, warrants, and convertible preferred stock		—			51		—			66

Diluted weighted average common shares outstanding		3,163			3,002		3,157			2,999

For the nine months ended September 30, 2006 and 2005, approximately 5.9 million and 3.5 million employee stock options, warrants and the Series B preferred shares were excluded from diluted earnings per share calculations, as their effects were anti-dilutive.

H. 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.

I. Segment Information

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 not been allocated to income before taxes of the retail inventory management services segment. Additionally, $1.5 million of goodwill associated with the Company’s August 2001 merger with Towne Services, Inc. has been allocated to the retail inventory management services segment and is therefore included in the segment’s total assets.

The following tables summarize the financial information concerning the Company’s reportable segments as of and for the three and nine months ended September 30, 2006 and 2005.

	Three Months Ended September 30, 2006							Three Months Ended September 30, 2005

	Financial Institution Service Fees			Retail Inventory Management Services		Total		Financial Institution Service Fees		Retail Inventory Management Services		Total

	(In thousands)
Revenues	$	12,486		$	2,025	$	14,511	$	7,378	$	2,176	$	9,554

Cost of revenues		2,694			210		2,904		791		245		1,036

Gross profit		9,792			1,815		11,607		6,587		1,931		8,518

(Loss) income before taxes		(303	)		508		205		644		466		1,110

Assets		74,290			3,435		77,725		26,155		3,895		30,050

Total expenditures for additions to long-lived assets		671			—		671		607		6		613

Goodwill	$	22,528		$	2,070	$	24,598	$	5,767	$	2,070	$	7,837

	Nine Months Ended September 30, 2006								Nine Months Ended September 30, 2005

	Financial Institution Service Fees			Retail Inventory Management Services		Total			Financial Institution Service Fees		Retail Inventory Management Services		Total

	(In thousands)
Revenues	$	35,492		$	6,148	$	41,640		$	21,683	$	6,571	$	28,254

Cost of revenues		7,040			693		7,733			1,959		770		2,729

Gross profit		28,452			5,455		33,907			19,724		5,801		25,525

(Loss) income before taxes		(1,905	)		1,320		(585	)		1,653		1,168		2,821

Assets		74,290			3,435		77,725			26,155		3,895		30,050

Total expenditures for additions to long-lived assets		2,137			12		2,149			1,216		15		1,231

Goodwill	$	22,528		$	2,070	$	24,598		$	5,767	$	2,070	$	7,837

J. Stock Option Grants

During the quarter ended September 30, 2006, the Company granted 13,000 common stock options at an exercise price of $7.00 per share. These options were issued under the Company’s 1999 Stock Option Plan and vest one-fourth each year. The Company calculated the estimated fair value of these options in accordance with SFAS 123(R) using a volatility rate of 58%, and expected dividend yield of 0.0%, a risk-free rate of return of 4.86% and an expected life of 6.25 years. The estimated fair value of these options, using the above assumptions, is $0.84 per share.

K. Supplemental Unaudited Pro Forma Financial Data

As described in Note D, the Company acquired GTI in the first quarter of 2006. Furthermore, the Company acquired KVI Capital, Inc. (KVI Capital) and Captiva Solutions, LLC (Captiva) in the third and fourth quarters of 2005, respectively. Below is unaudited pro forma consolidated statement of operations data of the Company as if these businesses were acquired as of January 1, 2005.

	Unaudited Pro Forma Statement of Operations For The Nine Months Ended September 30, 2006

						Unaudited Pro Forma Adjustments

	Goldleaf			GTI		Debit			Credit		Total

	(In thousands, except per share data)
Revenues	$	41,640		$	1,014	A $	41				$	42,613
						B	100
Operating expenses		39,782			1,010	C	6					40,898

Operating income		1,858			4		(147	)				1,715
Interest expense, net		2,443			—	D	87					2,530

Income (loss) before provision (benefit) for income taxes		(585	)		4		(234	)				(815	)

Benefit for income taxes		(226	)		—				E	90		(316	)

Net income (loss)		(359	)		4		(234	)		90		(499	)
Preferred dividends		1,700			—							1,700

Net (loss) income available to common shareholders	$	(2,059	)	$	4		(234	)		90	$	(2,199	)

Diluted loss per share	$	(0.65	)								$	(0.70	)

	Unaudited Pro Forma Statement of Operations For The Year Ended December 31, 2005

												Unaudited Pro Forma Adjustments

	Goldleaf		Captiva			KVI Capital			GTI			Debit			Credit		Pro Format

	(In thousands, except per share data)
Revenues	$	38,351	$	1,713		$	816		$	9,412		A $	917		$		$	49,375
												B	1,276
Operating expenses		34,276		2,289			950			10,721		C	468					49,980

Operating income (loss)		4,075		(576	)		(134	)		(1,309	)		(2,661	)				(605	)
Interest expense, net		381		164			—			(39	)	D	2,369					2,875

Income (loss) before provision for income taxes		3,694		(740	)		(134	)		(1,270	)		(5,030	)				(3,480	)
Provision (benefit) for income taxes		1,359													E	2,716		(1,357	)

Net income (loss)		2,335		(740	)		(134	)		(1,270	)		(5,030	)		2,716		(2,123	)
Preferred stock dividends		2,160								2,915					F	2,915		2,160

Net income (loss) available to common shareholders	$	175	$	(740	)	$	(134	)	$	(4,185	)		(5,030	)	$	5,631	$	(4,283	)

Diluted earnings (loss) per share	$	0.06															$	(1.39	)

The 2006 Goldleaf column above includes the results of GTI from its date of acquisition of January 31, 2006. The 2005 Goldleaf columns above includes the results of KVI Capital and Captiva from their dates of acquisition of August 1 and December 9, 2005, respectively.

Pro forma adjustments:

A.	To reduce revenues for GTI related to estimated deferred revenues that would not have been realized had we acquired GTI as of January 1, 2005 and recorded the deferred service obligation at its estimated fair value as of that date.

B.	To increase amortization expense of new intangibles recorded as a result of the acquisitions. For 2006, the pro forma amounts assume that the Company recorded approximately $12.2 million of identified intangibles, consisting of acquired technology ($3.1 million), customer lists ($3.3 million), non-compete agreements ($1.3 million), and tradenames and trademarks ($4.5 million), and that the Company amortizes these amounts over estimated useful lives of seven, ten, three, and indefinite years, respectively. For 2005, the pro forma amounts assume that the Company recorded approximately $15.3 million of identified intangibles, consisting of acquired technology ($3.9 million), customer lists ($4.9 million), vendor program ($0.1 million), non-compete agreements ($2.0 million), and tradenames and trademarks ($4.5 million), and that the Company amortizes these amounts over estimated average useful lives of five, ten, seven, three, and indefinite, years, respectively.

C.	To increase general and administrative costs for the increased salary of the Company’s new chief executive officer and executive officers of KVI Capital and GTI based on the employment agreements executed as part of these acquisitions.

D.	To increase interest expense for additional debt we acquired to fund the purchase prices of KVI Capital, Captiva and GTI. The Company has estimated interest expense assuming a weighted average interest rate for the two debt instruments used to complete the transactions: the $10.0 million Lightyear Series C redeemable preferred stock at 10% (as received in exchange for a $10.0 million subordinated note we originally issued) and the $18.0 million Bank of America credit facility. Therefore, the pro forma interest expense was calculated using an interest rate of 7.5% (2006) and 8.3% (2005) and includes accretion of the debt discount (related to common stock warrants issued to Lightyear in connection with the $10.0 million financing) using the effective interest method.

E.	To record income tax effects of the pro forma adjustments at the Company’s effective rate of 39%.

F.	To reduce preferred dividends for the elimination of GTI dividends ($2.9 million in 2005). As a result of our acquisition of Goldleaf Technologies, it no longer has a preferred stockholder. Therefore, on a pro forma basis, no preferred stock dividends would have existed in 2005 related to Goldleaf Technologies.

The pro forma statement of operations data for the year ended December 31, 2005 do not include stock compensation expense for the new stock options issued in conjunction with the Captiva and GTI acquisitions. The stock option grants made on October 20, 2005 (related to Captiva) and January 31, 2006 (related to GTI) totaled 920,000. Had these option grants been issued as of January 1, 2005, the estimated fair value using the Black-Scholes model would have been $7.45 and $8.05 per share, respectively. Until January 1, 2006, the Company accounted 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 did not utilize the fair value method. If the Company expensed options under SFAS No. 123, Accounting for Stock-Based Compensation, during 2005 and if the Company had acquired Captiva and GTI on January 1, 2005, an estimated additional $1.3 million of compensation expense would have been expensed during the year ended December 31, 2005. Beginning January 1, 2006, the Company began to expense the remaining unvested fair value of all stock options, including those issued as part of the GTI and Captiva transactions. The estimated annual stock compensation expense for the stock options issued as part of these acquisitions, using the actual calculated fair values of $3.70 and $4.15, respectively, is approximately $464,000.

Captiva organized and began operations on April 1, 2005. On June 1, 2005, Captiva acquired all the 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, 2005, the 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.

L. Related Party Transaction

In conjunction with the acquisition of GTI discussed in Note D, the Company issued two notes payable to Paul McCulloch, the President of GTI, as a portion of the consideration paid to him for executing an employment agreement with the Company. The notes had original principal balances of $850,000 (due June 15, 2006) and $150,000 (due April 30, 2007), are unsecured and carry interest at prime rate as published in The Wall Street Journal (8.25% at June 30, 2006). On June 15, 2006, $350,000 of the $850,000 note was paid and the remaining $500,000 was extended to July 15, 2006. On July 15, 2006, the $500,000 was paid in full. These notes were classified as additional purchase price.

M. Subsequent Events

On October 11, 2006, the Company completed the sale of 10,000,000 shares of its common stock in a secondary public offering at a price of $5.50 per share for proceeds, net of underwriting fees, of $51,150,000. Subsequently, on October 18, 2006, the underwriter exercised the over-allotment option to purchase an additional 1,500,000 shares of the Company’s common stock at $5.50 per share for proceeds, net of underwriting fees, of $7,672,500. The proceeds from the offering were used to redeem our Series A and C preferred stock and certain warrants held by Lightyear for a total of approximately $34.5 million. The remaining proceeds from the offering and the proceeds from the over-allotment option were used to pay down the Company’s $17.8 million Bank of America credit facility. The following is a summary of the secondary offering transaction:

(In thousands, except per share amounts)

Gross proceeds (10.0 million and 1.5 million shares sold at $5.50 per share)	$	63,250
Less:
Underwriting and advisory fees		4,428
Legal and accounting fees		1,776
Printing and distribution expenses		266
Roadshow expenses		267
Other expenses		234

Net offering proceeds	$	56,279

The accounting for the secondary offering has not been finalized and the above table represents the Company’s best estimate as of the filing of this quarterly report. The Company’s accompanying consolidated balance sheet includes approximately $555,000 of the offering expenses disclosed above in prepaid and other current assets as of September 30, 2006.

In conjunction with the secondary offering, the Company redeemed all of the Series A and C preferred shares for $33.1 million, including all accrued but unpaid dividends, paid $1.2 million to redeem the 378,788 common stock warrants issued in January 2006, and issued 2,346,000 new common shares to Lightyear, representing 14.9% ownership of the fully diluted common stock of the Company as of October 11, 2006, in exchange for the 3,200,000 common stock warrants held by Lightyear and the release of Lightyear from its guaranty of our Term B Note. This redemption resulted in a deemed distribution of approximately $16.8 million representing the difference in the total value of what the Company paid in cash as well as the estimated fair value of the 2.3 million in common shares issued to Lightyear totaling $47.4 million compared to the recorded values of the Series A and C preferred stock of $15.8 million. The deemed distribution will be included in the preferred dividends caption in the accompanying consolidated statement of operations for the quarter ended December 31, 2006. The Company also will record a one-time, non-recurring charge for the write-off of the debt discount and the debt issuance costs previously recorded on the Series C preferred stock. This expense will be included in other operating expense during the quarter ended December 31, 2006 and totals approximately $1.5 million.

The Company has also sent notification to its Series B preferred shareholder that it intends to redeem all outstanding Series B preferred shares at the stated redemption price, plus accrued and unpaid dividends, on December 8, 2006. The total amount of the redemption and accrued dividends is expected to total $2.2 million. As a result of the Series B redemption, the Company will record a deemed distribution of approximately $1.8 million during the quarter ended December 31, 2006.

As a result of the completion of the secondary offering, 1,058,142 of the Company’s outstanding stock options vesting accelerated. In accordance with SFAS No. 123R, the acceleration in vesting results in the acceleration of non-cash stock compensation associated with these options. Therefore, a non-cash stock compensation charge of approximately $2.2 million for stock compensation expense will be recorded during the quarter ended December 31, 2006. Approximately 930,000 of the stock options held by executives and directors that became vested are subject to lock-up agreements with the underwriters. Fifty percent (50%) of the accelerated executive and director options are locked-up for six months with the balance being locked-up for twenty-four months.

Upon the paydown of the Bank of America credit facility, the term debt was extinguished and converted into additional revolving debt, making the credit facility a $25.0 million revolving credit facility.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Three and Nine Months Ended September 30, 2006 and 2005

Note Regarding Forward Looking Information

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

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

Subsequent Events

On October 11, 2006, we completed the sale of 10,000,000 shares of our common stock in a secondary public offering at a price of $5.50 per share for proceeds, net of underwriting fees, of $51,150,000. Subsequently, on October 18, 2006, the underwriter exercised the over-allotment option to purchase an additional 1,500,000 shares of our common stock at $5.50 per share for proceeds, net of underwriting fees, of $7,672,500. The proceeds from the offering were used to redeem our Series A and C preferred stock and certain of our warrants held by Lightyear at a total redemption price of approximately $34.5 million. The remaining proceeds from the offering and the proceeds from the over-allotment option were used to pay down the full $17.8 million balance under our Bank of America credit facility.

We have also sent notification to our Series B preferred shareholder that we intend to redeem all outstanding Series B preferred shares at the stated redemption price, plus accrued and unpaid dividends, on December 8, 2006. The total amount of the redemption and accrued dividends is expected to total $2.2 million. As a result of the Series B redemption, we will record a deemed distribution of approximately $1.8 million during the quarter ended December 31, 2006.

We also issued 2,346,000 new common shares to Lightyear, representing 14.9% ownership of our fully diluted common stock as of October 11, 2006, in exchange for the 3,200,000 common stock warrants held by Lightyear and the release of Lightyear from its guaranty of our Term B Note.

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 and nine months ended September 30, 2006, we derived approximately 44.5% and 47.4%, respectively, of our consolidated revenues from BusinessManager and approximately 14.0% and 14.8%, respectively, of our consolidated revenues from retail inventory management services. We expect to continue to generate a substantial portion of our revenues from these sources during the remainder of 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.

Given the above trends in the performance of our BusinessManager and retail inventory management services businesses, we decided in December 2005 to broaden our strategy to add other products and services that we believed offered greater opportunity for future growth, with the goal of 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 further pursuit of our strategy, we intend to acquire businesses, products, or technologies to expand our suite of solutions, though we can provide no assurance that suitable acquisitions will be identified or that acquisitions will be consummated.

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 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;

	•	ACH origination and processing fees;

	•	remote capture and deposit processing fees;

	•	leasing revenues; and

	•	financial institution website design and hosting fees.

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.

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

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

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

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.

	Three Months Ended September 30,						Nine Months Ended September 30,

	2005			2006			2005			2006

Revenues:
Financial institution service fees		76.5	%		76.9	%		76.0	%		78.5	%
Retail inventory management services		22.8			14.0			23.3			14.8
Other products and services		0.7			9.1			0.7			6.7

Total revenues		100.0			100.0			100.0			100.0
Cost of revenues:
Financial institution service fees		8.3			18.6			6.9			16.9
Retail inventory management services		2.6			1.4			2.7			1.7

Gross profit		89.1			80.0			90.4			81.4
Operating expenses:
General and administrative		30.0			35.4			31.3			36.3
Selling and marketing		45.2			30.3			46.7			34.2
Research and development		0.7			2.4			0.7			2.0
Amortization		0.9			4.5			0.9			4.2
Other operating (income) expense, net		(0.1	)		0.1			0.0			0.3

Total operating expenses		76.7			72.7			79.6			77.0

Operating income		12.4			7.3			10.8			4.4
Interest expense, net		0.8			6.0			0.8			5.9

Income (loss) before income taxes		11.6			1.3			10.0			(1.5	)
Income tax provision (benefit)		4.5			0.5			3.9			(0.5	)

Net income (loss)		7.1	%		0.8	%		6.1	%		(1.0	)%

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.

Three and Nine Months Ended September 30, 2006 Compared to Three and Nine Months Ended September 30, 2005

Total revenues for the three and nine month periods ended September 30, 2006 increased 51.9% and 47.4% to $14.5 million and $41.6 million compared to $9.6 million and $28.3 million for the comparable periods ended September 30, 2005.

Financial Institution Service Fees. Financial institution service fees increased 52.7% and 52.1% to $11.2 million and $32.7 million for the three and nine month periods ended September 30, 2006 compared to $7.3 million and $21.5 million for the comparable periods ended September 30, 2005. The increase is primarily attributable to revenues generated by the entities we acquired during late 2005 and early 2006: KVI Capital, Captiva, P.T.C. and Goldleaf Technologies. Increased revenues from these acquired businesses totaled $3.8 million and $10.6 million for the third quarter and first nine months of 2006. The remaining increase for the three and nine month periods ended September 30, 2006 primarily relates to increases in Free Checking and MedCash Manager revenues totaling approximately $166,000 and $631,000. As a percentage of total revenues, financial institution service fees accounted for 76.9% and 78.5% for the three and nine months ended September 30, 2006 compared to 76.5% and 76.0% for the comparable periods ended September 30, 2005.

Retail Inventory Management Services. Retail inventory management services revenues declined 6.9% and 6.4% to $2.0 million and $6.1 million during the three and nine month periods ended September 30, 2006 as compared to $2.2 million and $6.6 million for the comparable periods ended September 30, 2005. The decline primarily is due to a reduction in point-of-sale support customers and a decline in billing services provided by RMSA to its customers. As a percentage of total revenues, retail inventory management services accounted for 14.0% and 14.8% for the three and nine month periods ended September 30, 2006 compared to 22.8% and 23.3% for the comparable periods of 2005.

Other Products and Services. Revenues from other products and services increased substantially to $1.3 and $2.8 million for the three and nine months ended September 30, 2006 compared to $69,000 and $199,000 for the three and nine months ended September 30, 2005. Other products and services include the sale of premium gifts associated with our Free Checking product and equipment sales associated with our remote capture and ACH products. The increase is primarily attributable to Free Checking gifts totaling $32,000 and $436,000, respectively and remote capture equipment sales totaling $1.1 million and $1.9 million, respectively, for the three and nine months ended September 30, 2006. Revenues from other products and services accounted for 9.1% and 6.7% of total revenues for the three and nine months ended September 30, 2006 compared to 0.7% for the comparable periods ended September 30, 2005.

Cost of Revenues — financial institution service fees. Cost of revenues for financial institution services fees increased to $2.7 million and $7.0 million for the three and nine months ended September 30, 2006 compared to $791,000 and $2.0 million for the three and nine months ended September 30, 2005. For the three and nine months ended September 30, 2006, the increase is primarily due to cost of sales associated with our acquisitions totaling $1.8 million and $4.5 million, respectively. The remaining increase relates to increases in Free Checking expenses of $0 and $359,000, respectively, and MedCash expenses of $106,000 and $285,000, respectively, for the three and nine months ended September 30, 2006. As sales of these products have increased in the third quarter of 2006, the costs associated with these products have also increased. As a percentage of total revenues, cost of sales for financial institution service fees increased to 18.6% and 16.9% for the three and nine months ended September 30, 2006 compared to 8.3% and 6.9% for the comparable periods ended September 30, 2005. The increase as a percentage of total revenues is a result of the products from our acquisitions and the Free Checking and MedCash products having higher direct costs, resulting in a higher cost of revenues for financial institution service fees in total.

Cost of Revenues — retail inventory management services. Cost of revenues related to retail inventory management services decreased 14.3% and 10.0% to $210,000 and $693,000 for the three and nine months ended September 30, 2006 compared to $245,000 and $770,000 for the three and nine months ended September 30, 2005. This decrease is primarily due to a decline in salaries and benefits expense related to our point-of-sale customer support department. As a percentage of total revenues, cost of sales for retail inventory management services decreased to 1.4% and 1.7% for the three and nine months ended September 30, 2006 compared to 2.6% and 2.7% for the comparable periods ended September 30, 2005.

General and Administrative. General and administrative expenses increased 79.1% and 70.8% to $5.1 million and $15.1 million for the three and nine months ended September 30, 2006 compared to $2.9 million and $8.8 million for the comparable periods ended September 30, 2005. General and administrative expenses include the cost of our executive, finance, human resources, information and support services, administrative functions and general operations. The increase for the three and nine months ended September 30, 2006 is primarily due to the additional general and administrative expenses of $793,000 and $2.1 million associated with the Goldleaf Technologies acquisition, respectively, and $601,000 and $1.8 million associated with the Captiva acquisition, respectively. The majority of these expenses are salary and benefits for the non-sales employees of these entities. Also expensed in the three and nine months ended September 30, 2006 is approximately $180,000 and $520,000, respectively, of non-cash stock compensation expense as a result of our adoption of SFAS No. 123R, which requires the estimated fair value of employee stock options to be expensed over the service period. Additionally, $51,000 and $387,000 of audit fees related to the required acquisition audits of KVI Capital and Goldleaf Technologies were expensed during the three and nine months ended September 30, 2006. As a percentage of total revenue, general and administrative expenses increased to 35.4% and 36.3% for the three and nine months ended September 30, 2006 compared to 30.0% and 31.3% for the comparable periods ended September 30, 2005.

Selling and Marketing. Selling and marketing expenses increased 1.6% and 7.9% to $4.4 million and $14.2 million for the three and nine months ended September 30, 2006 compared to $4.3 million and $13.2 million for the comparable periods ended September 30, 2005. Selling and marketing expenses include cost of wages and commissions paid to our sales force, travel costs of the sales force, recruiting for new sales and marketing personnel and marketing fees associated with direct and telemarketing programs. The increase was primarily due to the acquisition of Goldleaf Technologies, which contributed approximately $721,000 and $2.1 million to this category for the three and nine months ended September 30, 2006, respectively. The increase due to Goldleaf Technologies was partially offset by decreases of $609,000 and $958,000 for the three and nine months ended September 30, 2006, respectively, related to decreases in sales personnel, travel expenses, and sales events. As a percentage of total revenue, selling and marketing expenses were 30.3% and 34.2% for the three and nine months ended September 30, 2006 compared to 45.2% and 46.7% for the comparable periods ended September 30, 2005, respectively.

Research and Development. Research and development expenses increased to $349,000 and $840,000 for the three and nine months ended September 30, 2006 compared to $69,000 and $197,000 for the comparable periods ended September 30, 2005. Research and development expenses include the non-capitalizable direct costs associated with developing new versions of our software, as well as other software development projects that, in accordance with GAAP, we do not capitalize. The increase was primarily due to research and development activities for our remote capture and ACH products. These costs totaled approximately $332,000 and $759,000 during the three and nine months ended September 30, 2006. As a percentage of total revenues, research and development expenses increased to 2.4% and 2.0% for the three and nine months ended September 30, 2006 compared to 0.7% for the comparable periods ended September 30, 2005.

Amortization. Amortization expense increased to $647,000 and $1.7 million for the three and nine months ended September 30, 2006 compared to $82,000 and $245,000 for the comparable periods ended September 30, 2005. These expenses include the cost of amortizing intangible assets, including software development costs, as well as identified intangibles recorded from our August 2001 merger with Towne Services and our acquisitions. The increase for the first nine months of 2006 is primarily due to the acquisitions of KVI Capital, Captiva, P.T.C. and Goldleaf Technologies during late 2005 and early 2006. The identifiable intangible assets recorded in these acquisitions resulted in an increase of approximately $1.5 million in total amortization expense for the nine months ended September 30, 2006.

Other Operating (Income) Expense, Net. Other operating (income) expense, net for the three and nine months ended September 30, 2006 totaled $9,000 and $133,000, compared to $(11,000) and $8,000 for the three and nine months ended September 30, 2005. For the nine months ended September 30, 2006, other operating expenses included an approximate $112,000 charge related to the write-off of debt issuance costs associated with the debt facility before it was amended and restated in its entirety on January 23, 2006.

Operating Income. As a result of the above factors, our operating income decreased 9.5% and 38.9% to $1.1 million and $1.9 million for the three and nine months ended September 30, 2006, compared to operating income of $1.2 million and $3.0 million for the three and nine months ended September 30, 2005. As a percentage of total revenue, operating income was 7.3% and 4.4% for the three and nine months ended September 30, 2005 compared to 12.4% and 10.8% for the comparable periods of 2005.

Interest Expense, Net. Interest expense, net increased to $871,000 and $2.4 million for the three and nine months ended September 30, 2006 compared to $79,000 and $219,000 for the comparable periods months ended September 30, 2005. The increase for the first nine months of 2006 is primarily due to a large increase in our total debt outstanding in the first half of 2006 as compared to 2005. Our average debt outstanding in 2006 was approximately $18.4 million compared to approximately $3.4 million in the first nine months of 2005. Interest rates have also increased from approximately 5.9% in 2005 to 8.25% in 2006. Included in interest expense during 2006 are the Series C preferred stock dividends as well as the amortization of the debt discount associated with our Series C preferred stock. For the first nine months of 2006 and 2005, interest expense included approximately $508,000 and $72,000 of debt issuance cost and debt discount amortization (2006 only), respectively.

Income Tax Provision (Benefit). We had an income tax provision of approximately $80,000 for the three months ended September 30, 2006 and a tax benefit of approximately $(226,000) for the nine months ended September 30, 2006 compared to provisions of $433,000 and $1.1 million for the comparable periods ended September 30, 2005. As a percentage of income before taxes, the income tax rate was approximately 39.0% for the third quarter and first nine months of 2006. Excluding the income tax effects related to the one-time charges to be incurred in the quarter ended December 31, 2006 related to our recently completed secondary offering, we anticipate that our effective tax rate will be approximately 39.0% in all 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 (“SOP 97-2”).” 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.

Our acquisition of Goldleaf Technologies added three primary products from which we earn revenues: ACH origination and processing; remote deposit; and website design and hosting. We describe the current revenue recognition policies for these products below.

We account for the ACH and remote deposit products in accordance with the SOP 97-2. We license these products under automatically renewing agreements, which allow our customers to use the software for the term of the agreement, typically five years, and each renewal period. Typically, there is an up-front fee, annual or monthly maintenance and hosting fees for each year of the contract, and per originator and per transaction fees for processing of ACH and remote deposit transactions. We also offer training services on a per training day basis if the customer requests training. During the second quarter of 2006, the Company began the process of modifying GTI’s ACH and Remote Deposit contracts entered into after the January 31, 2006 acquisition date. The primary modification related to allowing for customers of these products to take possession of the software for use on an in-house basis versus the primary application service provider (“ASP”) basis that GTI typically employs. In accordance with the guidance provided in EITF No. 00-3, Application of AICPA SOP 97-2, “Software Revenue Recognition,” to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, this change in contractual terms results in a change in the applicable accounting literature from EITF 00-21 to SOP 97-2, Software Revenue Recognition, as modified by SOPs 98-4 and 98-9. Under SOP 97-2, if Vendor Specific Objective Evidence of Fair Value, (“VSOE”) has been established for all undelivered elements, the residual method applies. Under the residual method, the fair value of each undelivered element is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Therefore, in April 2006, the Company began recognizing the up-front fees when all of the revenue recognition criteria in paragraph 8 of SOP 97-2 have been met, which is normally upon customer implementation. Revenue related to the undelivered elements is recognized as the services are delivered. Included in second quarter revenue is approximately $388,000 related to up-front fees for contracts entered into the first quarter that were amended in the second quarter as discussed above and approximately $434,000 related to up-front fees for contracts entered into in the second quarter. Included in revenue for the three months ended September 30, 2006, is $479,000 related to up-front fees for contracts entered into the third quarter. Had we not adopted this change, the total of $1.3 million in additional revenue in the first three quarters of 2006 would have been spread over the estimated life of the client relationships, which is approximately 60 months. The effect of this change on how we recognize revenue from sales of these products in future quarters will be to accelerate the amount of revenue we recognize in each quarter in which we sell the products, although the precise amount of revenue it recognizes in each quarter in which it sells the products, although the precise amount will vary depending on the number and dollar amount of our contracts.

The annual maintenance fee covers telephone support and all unspecified software enhancements and upgrades. The annual hosting fee covers the actual hosting of the software product on our servers, which are accessed by our customers. We defer both the annual maintenance fees and the hosting fees and recognize them into income over the one-year life of the maintenance and hosting agreements. We recognize monthly maintenance and hosting fees on a monthly basis as earned and recognize transaction fees monthly as the transactions occur. We recognize training revenue when we deliver the training, based on the fair value of the training services when delivered separately.

We offer financial institution website design services as well as hosting and content support services for the website once design is complete. We charge an up-front fee for the design services and a monthly website hosting and content support fee each month of the contract, which is typically five years. The monthly hosting and content support fee includes a limited amount of website content support hours each month. We bill for any content support services exceeding the designated number of hours included in the monthly hosting and content support fee at an agreed-to hourly rate as the services are rendered. We account for the website design and hosting and content support services in accordance with EITF No. 00-21. During July 2006, the Company was able to establish objective and reliable evidence of fair value of the undelivered elements (the hosting and content support services). As a result, the up-front fee for the design services is recognized at the time the customer website is completed and operational. Included in third quarter revenue is approximately $163,000 related to up-front fees for completed customer websites that had previously been deferred. Had the Company not adopted this change, the total of $163,000 in additional revenue in the third quarter of 2006 would have been spread over the estimated life of the client relationships, which is approximately 60 months. The effect of this change on how the Company recognizes revenue from sales of these products in future quarters will be to accelerate the amount of revenue it recognizes in each quarter in which it sells the products although the precise amount will vary depending on the number and dollar amount of its contracts. Monthly hosting and content support revenues are recognized on a monthly basis as earned.

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, ACH processing, remote capture 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 quarterly 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:

	(in thousands)

	Nine Months Ended September 30

	2006			2005

Net cash provided by operating activities	$	3,968		$	2,555
Net cash used in investing activities		(18,464	)		(1,896	)
Net cash provided by (used in) financing activities		16,282			(522	)

Cash from Operating Activities

Cash provided by operations for the nine months ended September 30, 2006 totaling $4.0 million was attributable to our operating results plus non-cash depreciation and amortization expense of $3.4 million as well as a $388,000 net change in working capital assets and liabilities. The change in working capital of $388,000 was due primarily to an increase in accrued liabilities of $2.3 million and an increase in deferred revenue of $481,000 during the first nine months of 2006, partially offset by decreases of $947,000 and $1.2 million in accounts receivable and prepaid and other current assets, respectively. For the first nine months of 2005, cash provided by operations totaled $2.6 million. The increase of $1.4 million in the first nine months of 2006 as compared to the first nine months of 2005 is due primarily to an increase in depreciation and amortization of approximately $1.9 million as well as an increase in working capital asset changes of approximately $2.0 million, partially offset by a $1.0 million decrease in deferred taxes and a decrease of $468,000 in amortization of lease income.

Cash from Investing Activities

Cash used in investing activities totaling $18.5 million consisted primarily of business acquisitions, lease receivable payments, purchases of fixed assets and capitalization of software development costs. Total capital expenditures, including software development costs, totaled $1.8 million for the nine months ended September 30, 2006. Theses expenditures primarily related to the purchase of computer equipment, computer software, software development services, furniture and fixtures, and leasehold improvements. During the first nine months of 2006, we used approximately $17.4 million to acquire the stock of Goldleaf Technologies and operating assets of P.T.C. These uses of cash were partially offset by $942,000 in net proceeds we received from payments on our direct finance leases less new direct finance lease investments. As compared to the first nine months of 2005, total cash used in investing activities was $1.9 million consisting of $1.1 million purchases of fixed assets and capitalization of software development costs as well as $508,000 related to the acquisition of the leasing business.

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. During the first nine months of 2006, net cash provided by financing activities was $16.3 million and was attributable primarily to new borrowings of $17.2 million from our Bank of America credit facility, net of $543,000 in debt issuance costs, as well as the return of $500,000 in preferred dividends on the Series A preferred shares for the fourth quarter of 2005, which were subsequently paid-in-kind. For the first nine months of 2005, cash used in financing activities totaled $522,000, consisting of debt repayments of $1.2 million, and preferred dividend payments of $1.1 million, partially offset by $1.5 million of proceeds from our line of credit and $369,000 in proceeds from stock option exercises.

Analysis of Changes in Working Capital

As of September 30, 2006, we had a working capital deficit of approximately $8.3 million compared to working capital of approximately $2.2 million as of December 31, 2005. The change in working capital resulted primarily from the short-term nature of the Term B debt instrument and the current portion of our long-term debt, as well as increases in accounts payable of $1.1 million, accrued liabilities of $4.1 million, dividends payable of $663,000, deferred revenue of $2.7 million and notes payable of $150,000. These increases were partially offset by increases in cash of $1.8 million and accounts receivable of $1.3 million. All of these changes were primarily the result of completing the Goldleaf Technologies acquisition on January 31, 2006.

We believe that the existing cash available as a result of the completion of our secondary offering, 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 Bank of America credit facility throughout 2006. There can be no assurance, however, 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 September 30, 2006

The following is a schedule of our obligations and commitments for future payments as of September 30, 2006:

			Payments Due by Period

Contractual Obligations	Total		Less Than 1 Year		1-2 Years		3-4 Years		5 Years & After

	(In thousands)
Revolving line of credit	$	2,050	$	—	$	2,050	$	—	$	—
Short-term debt		6,000		6,000		—		—		—
Capital lease obligations		1,387		328		414		645		—
Long-term debt		9,750		—		9,750		—		—
Non-recourse lease notes payable		5,841		2,016		1,843		1,772		210
Operating leases		5,981		2,049		1,917		2,009		6
Notes payable		150		150		—		—		—
Series C redeemable preferred stock		10,000		—		—		—		10,000

Total contractual cash obligations	$	41,159	$	10,543	$	15,974	$	4,426	$	10,216

On October 11, 2006, in conjunction with the completion of our secondary public offering of 10,000,000 common shares and the underwriters’ subsequent exercise of the over-allotment option to purchase an additional 1,500,000 common shares, which raised approximately $56.4 million, net of offering expenses, we redeemed the Series C redeemable preferred stock and repaid the $6.0 million short-term debt and the $9.8 million of long-term debt listed in the table above. Subsequently, on October 18, 2006, we repaid the remaining balance outstanding on our revolving line of credit.

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 primarily for acquisitions, repayment of other debt and general working capital needs 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.

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 September 30, 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. As noted in Note L to our unaudited consolidated financial statements included in this quarterly report, on October 11, 2006 we redeemed the Series C preferred stock and redeemed and recapitalized the warrants previously issued to Lightyear.

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. We further amended the Bank of America credit facility in June 2006 to increase the total facility to $25.0 million, currently consisting of the $9.75 million Term A note, the $6.0 Term B note, and a $9.25 million revolving credit line. The June amendment also extended the Term B note to September 30, 2006 and eliminated the scheduled quarterly Term A note payments of $250,000 on June 30, 2006, $500,000 on both September 30, 2006 and December 31, 2006 and $750,000 per quarter thereafter until maturity. On September 1, 2006, we again amended the Bank of America credit facility to extend the maturity date of the $6.0 million Term B note from September 30, 2006 to January 31, 2007, to reduce the interest rate on the Term B note from LIBOR plus 3% to LIBOR plus 1.25%, to increase the funded debt to EBITDA ratio from 2.0:1.0 to 2.25:1.0 for the period beginning July 1, 2006 and ending March 31, 2007, and to increase the annual capital expenditure limit from $2.5 million to $3.0 million. We have subsequently paid down in full the $17.8 million balance under the Bank of America credit facility, which extinguished the term debt and converted it into additional revolving debt, making the credit facility a $25.0 million credit facility.

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, not exceeding 2:1 (provided that for the period beginning July 1, 2006 and ending March 31, 2007 the ratio shall be 2.25:1). The definition of EBITDA in the credit facility agreement is different from the one used elsewhere in this quarterly 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. This ratio is calculated 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. The ratio is also calculated 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 $3.0 million during any 12-month period ending with each fiscal quarter. The credit agreement also contains customary negative covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock.

Off-Balance Sheet Arrangements

As of December 31, 2005 and as of the date of this amended 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 1 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005, 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 had estimated the impact of the adoption of SFAS No. 123R for the year ending December 31, 2006, based upon the options outstanding as of September 30, 2006, to result in an increase in compensation expense of approximately $700,000. However, as a result of the completion of our secondary offering, the vesting of the majority of our outstanding stock options accelerated, which will result in additional stock compensation costs of $2.2 million in the fourth quarter of 2006. 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.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.

Our adoption of SAB 108 will not have any effect on our consolidated financial statements as we have not identified any prior year misstatements.

Seasonality

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

Inflation

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

PART II — Other Information

Item 6. Exhibits

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

Exhibit No.		Description

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).

3.1.7	—	Charter Amendment dated September 6, 2006, and effective September 8, 2006 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 8, 2006).

3.2	—	Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-75013) 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	—	Fifth Amendment to Amended and Restated Credit Agreement by and among Goldleaf Financial Solutions, Inc., Bank of America, N.A., First Horizon Bank, The People’s Bank of Winder, and the Bankers Bank of Atlanta, Georgia (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2006).

10.2	—	First Amendment to Goldleaf Financial Solutions, Inc. 2005 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 14, 2006).

10.3	—	First Amendment to Goldleaf Financial Solutions, Inc. 2004 Equity Incentive Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 14, 2006).

10.4	—	Employment Agreement between Goldleaf Financial Solutions, Inc. and J. Scott Craighead (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on September 15, 2006).

10.5	—	Employment Agreement between Goldleaf Financial Solutions, Inc. and Scott R. Meyerhoff (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on September 15, 2006).

31.1	—	Certification pursuant to Rule 13a — 14(a)/15d — 14(a) — Chief Executive Officer.

31.2	—	Certification pursuant to Rule 13a — 14(a)/15d — 14(a) — Chief Financial Officer.

32.1	—	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer.

32.2	—	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer.

Signatures

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


	Goldleaf Financial Solutions, Inc. (f/k/a Private Business, Inc.) (Registrant)


Date: March 28, 2007	By:	/s/ G. Lynn Boggs

		G. Lynn Boggs
		Chief Executive Officer

Date: March 28, 2007	By:	/s/ J. Scott Craighead

		J. Scott Craighead
		Chief Financial Officer

Goldleaf Financial Solutions Inactive 10-Q/A2006 Q3 Quarterly report (amended)