UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~June~~September 30, 2008

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.)

350 Technology Blvd., Suite 200, Norcross, Georgia		30071

(Address of principal executive offices)		(Zip Code)

(678) 966-0844

(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.

Yesþ Noo

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


Large accelerated filero		Accelerated filerþ

Non-accelerated filero (Do not check if a smaller reporting company)		Smaller reporting companyþ

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

Yeso Noþ

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 ~~August 1,~~October 31, 2008

Common Stock, no par value		19,168,784 Shares

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS ~~— UNAUDITED~~
(in thousands, except share data)


	June 30,			December 31,			September 30,			December 31,
	2008			2007			2008			2007
	(in thousands, except share data)						(unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	5,503		$	2,648		$	3,790		$	2,648
Restricted cash		3,055			5,362			2,037			5,362
Accounts receivable— trade, net of allowance for doubtful accounts of $655 and $604, respectively		13,594			6,918
Accounts receivable— trade, net of allowance for doubtful accounts of $721 and $604, respectively								12,276			6,918
Inventory		543			237			337			237
Deferred tax assets		1,209			1,443			1,571			1,443
Investment in direct financing leases		1,644			1,736			1,832			1,736
Prepaid and other current assets		2,345			1,774			2,301			1,774

Total current assets		27,893			20,118			24,144			20,118

Property and equipment, net		4,702			3,661			4,709			3,661
Operating lease equipment, net		17			23			14			23
Other Assets:
Software development costs, net		5,916			4,725			6,366			4,725

Deferred tax assets		—			2,009			—			2,009
Investment in direct financing leases, net of current portion		2,535			2,812			3,128			2,812
Intangible and other assets, net		36,713			14,085			35,472			14,085
Goodwill		59,029			34,217			58,649			34,217

Total other assets		104,193			57,848			103,615			57,848

Total assets	$	136,805		$	81,650		$	132,482		$	81,650

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	3,122		$	2,858		$	3,810		$	2,858
Accrued liabilities		7,362			2,055			5,483			2,055
Deferred revenue		10,509			4,867			9,861			4,867
Customer deposits		5,270			5,307			4,252			5,307
Current portion of capital lease obligations		432			414			367			414
Current portion of non-recourse lease notes payable		1,573			1,638			1,711			1,638
Current portion of long term debt		152			—			166			—

Total current liabilities		28,420			17,139			25,650			17,139

Revolving line of credit		42,500			10,000			39,000			10,000
Long term debt, net of current portion		310			—			261			—
Deferred revenue, net of current portion		647			949			523			949
Capital lease obligations, net of current portion		342			544			242			544
Deferred tax liability		1,813			—			2,363			—
Non-recourse lease notes payable, net of current portion		2,236			2,428			2,819			2,428
Convertible notes payable		7,000			—			7,000			—
Other non-current liabilities		312			228			349			228

Total liabilities		83,580			31,288			78,207			31,288

Commitments and Contingencies
Stockholders’ Equity:
Common stock, no par value; 100,000,000 shares authorized; 19,168,784 and 17,279,315 shares issued and outstanding, respectively		—			—			—			—
Preferred stock, no par value; 20,000,000 shares authorized, no shares outstanding		—			—			—			—
Additional paid-in capital		72,818			69,764			73,149			69,764
Accumulated deficit		(19,593	)		(19,402	)		(18,874	)		(19,402	)

Total stockholders’ equity		53,225			50,362			54,275			50,362


Total liabilities and stockholders’ equity	$	136,805		$	81,650		$	132,482		$	81,650

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2008 and 2007
(in thousands, except per share data)


	2008			2007
	(in thousands, except
	per share data)						2008		2007
Revenues:
Financial institution services	$	34,258		$	21,680		$	53,813	$	33,240
Retail inventory management services		3,951			4,118			5,865		6,158
Other products and services		1,475			1,994			2,254		2,737

Total revenues		39,684			27,792			61,932		42,135

Cost of Revenues:
Financial institution services		7,968			4,091			13,042		6,421
Retail inventory management services		446			415			670		626
Other products and services		1,007			1,470			1,532		1,986

Gross profit		30,263			21,816			46,688		33,102
Operating Expenses:
General and administrative		12,674			10,574			18,849		15,774
Selling and marketing		10,482			9,314			15,575		13,676
Research and development		3,507			966			5,001		1,576
Amortization		2,531			1,173			4,023		1,745
Other operating expenses, net		40			14			163		27

Total operating expenses		29,234			22,041			43,611		32,798

Operating Income (Loss)		1,029			(225	)
Operating Income								3,077		304
Interest Expense, Net		(1,380	)		(314	)		2,106		570

Loss Before Income Taxes		(351	)		(539	)
Income tax benefit		(160	)		(263	)
Income (Loss) Before Income Taxes								971		(266	)
Income tax provision (benefit)								443		(82	)

Net Loss	$	(191	)	$	(276	)
Net Income (Loss)							$	528	$	(184	)

Loss Per Share:
Income (Loss) Per Share:
Basic	$	(0.01	)	$	(0.02	)	$	0.03	$	(0.01	)

Diluted	$	(0.01	)	$	(0.02	)	$	0.03	$	(0.01	)


Weighted Average Common Shares Outstanding:
Basic		18,992			17,273			19,051		17,275

Diluted		18,992			17,273			19,051		17,275

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2008 and 2007
(in thousands)


	2008			2007			2008			2007
	(in thousands)
Cash Flows From Operating Activities:
Net loss	$	(191	)	$	(276	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income (loss)							$	528		$	(184	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		3,849			2,246			5,974			3,347
Depreciation on fixed assets under operating leases		6			18			9			25
Deferred taxes		(162	)		(445	)		393			582
Amortization of debt issuance costs and discount		91			59			138			90
Acquired in process research and development charge		448			—			435			—
Stock compensation expense		416			15			747			116
Deferred gain on land sale		(6	)		(8	)		(7	)		(11	)
Loss on write-down or disposal of fixed assets		36			9			150			19
Amortization of lease income and initial direct costs		(292	)		(358	)		(418	)		(544	)
Gain on sale of leased equipment		(10	)		(45	)		(8	)		(57	)
Changes in assets and liabilities, net of acquisitions:
Restricted cash and customer deposits		2,307			—			2,270			—
Accounts receivable		(131	)		(319	)		1,187			(896	)
Prepaid and other current assets		(28	)		11			(188	)		(418	)
Other non-current assets								—			(108	)
Inventory		(306	)		90			(100	)		42
Accounts payable		(228	)		(198	)		460			(1,125	)
Accrued liabilities		1,088			(649	)		1,419			(1,073	)
Deferred revenue		(602	)		(187	)		(1,374	)		(48	)
Other non-current liabilities		90			237			128			290

Net cash provided by operating activities		6,375			200			11,743			47

Cash Flows From Investing Activities:
Acquisition of businesses, net of cash acquired		(32,999	)		(10,223	)		(32,999	)		(10,389	)
Payment to DataTrade shareholders								(2,173	)		—
Investment in direct financing leases		(201	)		(404	)		(416	)		(886	)
Lease receivables collected		862			1,530			422			2,811
Proceeds from lease terminations		10			—			8			—
Additions to property and equipment		(1,389	)		(1,486	)		(2,044	)		(1,741	)
Additions to intangibles and other assets		(313	)		(83	)		(209	)		(12	)
Additions to software development costs		(1,549	)		(1,082	)		(2,270	)		(1,635	)
Payments received on notes receivable								—			20

Net cash used in investing activities		(35,579	)		(11,748	)		(39,681	)		(11,832	)

GOLDLEAF FINANCIAL SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

A. The Company

Goldleaf Financial Solutions, Inc. (“we” or the “Company”) provides a suite of technology-based products and services that help financial institutions serve their customers better, improve their operational efficiency, enhance their competitive position, increase their profitability and help them satisfy regulatory requirements. We focus on the needs and interests of financial institutions and strive to provide our clients with proven, user-friendly technologies, coupled with superior customer service. We offer a broad spectrum of deposit automation and payment processing solutions for financial institutions of all sizes, regardless of footprint and across all channels of their enterprise. In addition to the suite of solutions we offer to financial institutions, we also offer products and services to small businesses. As of ~~June~~September 30, 2008, we had in excess of 3,000 financial institution relationships.

B. Summary of Significant Accounting Policies

Basis of Presentation

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

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

These consolidated financial statements, footnote disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Principles of Consolidation

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

Our significant accounting policies include revenue recognition, software development costs, income taxes, acquisition accounting, and accounting for long-lived assets, intangible assets, and goodwill. Please refer to our critical accounting policies as described in our annual financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007 for a more detailed description of these accounting policies.

C. Income Taxes

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

During 2007 the company identified two new uncertain tax positions and recorded an additional reserve for $249,000. During the quarter ended September 30, 2007 the company resolved one of the uncertain tax positions and reversed $145,000 previously accrued. Therefore, the Company’s accrual for uncertain tax positions totaled $560,000 at September 30, 2008 and December 31, ~~2007 and June 30, 2008.~~2007. The Company has elected to classify interest associated with uncertain tax positions as interest expense in the accompanying consolidated statements of operations. Additionally, penalties associated with uncertain tax positions will be classified as income tax expense in the accompanying consolidated statements of operations. There were no penalties and interest accrued as of December 31, 2007 or for the three or ~~six~~nine months ending ~~June~~September 30, ~~2008 or June 30, 2007.~~2008. These uncertain tax positions, if recognized, would not have an effect on the effective tax rate.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal tax examinations for any returns before 2004. State jurisdictions that remain subject to examination range from 2001 to 2007.

D. Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. ~~The Company has reclassified~~

~~deposits as other non-current assets and certain cost of revenues from financial institution service fees to other products and services to better correlate with the Company’s revenue categories.~~GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

E. Acquisitions

Assets of DataTrade, LLC

On May 1, 2007, the Company acquired certain operating assets and liabilities of DataTrade, LLC (“DataTrade”), a Missouri limited liability company, for total cash consideration of approximately $5.8 million. In addition to the consideration at closing, the selling shareholders were entitled to additional consideration based on the financial performance of the acquired business during the ~~subsequent~~ twenty-four months ~~from~~following the acquisition date. Thus, in accordance with the agreement and operating results, the Company has ~~accrued a $2.1~~paid $2.2 million for the first twelve months of an earn-out liability to the shareholders of DataTrade ~~LLC during the period ended June~~as of September 30, 2008 ~~payable on August 15, 2008~~and increased goodwill of the Company for the ~~first twelve months.~~same amount. The shareholders may be entitled to additional payments under this provision, if earned, based on the financial performance of the acquired business during the remaining ~~12 month~~12-month period ending April 30, 2009. This second payment, if earned, would become due on August 15, 2009.

Alogent Corporation

On January 17, 2008, the Company completed an acquisition by merger of Alogent Corporation (“Alogent”) for an aggregate purchase price of $43.7 million. The acquisition of Alogent broadened our product offerings, adding software licenses for the use of its technology-based software products, providing remote capture, teller capture and image exchange and services associated with maintenance and support and implementation of these products. ~~See Note L for a description of the convertible notes.~~ The price of our common stock issued to the former Alogent shareholders on the day of closing was $1.47 per share, which was the average closing price of our common stock over the 15 days ending on the day prior to the day of closing. For purchase price accounting reflected in the table below, the common shares were valued at $1.40 per share, calculated as the average closing price of ~~Goldleaf Financial Solutions, Inc.~~the Company’s shares for two days before and after the closing date. The operating results of Alogent are included with those of the Company beginning January 17, 2008 and are included in our financial institution services segment. The transaction was accounted for in accordance with SFAS No. 141,Business Combinations. The ~~preliminary~~ purchase price allocation is as follows:

(Inin thousands)


Purchase Price:
Cash	$	32,775
Convertible notes payable		7,000
Common shares (1,889,469 shares valued at $1.40 per share)		2,638
Direct acquisition costs		1,285


Total purchase price	$	43,698


Value assigned to assets and liabilities:
Assets:
Cash	$	1,061
Accounts receivable/Unbilled accounts receivable		6,545
Current deferred tax asset		~~148~~515
Prepaid and other current assets		~~543~~556
Property and equipment		183
Non-current assets		5
Customer list (estimated life of ten years)		7,740
Acquired technology (estimated life of five years)		11,240
Trade names (estimated life of twenty years)		5,300
In process R&D (expensed)		448
Non-compete (estimated life of three years)		680
Goodwill		~~22,614~~22,234
Liabilities:
Accounts payable		(492	)
Accrued liabilities		(2,009	)
Deferred tax liability		(4,366	)
Deferred revenue		(5,942	)

Total net assets	$	43,698

The Company continues to evaluate and value the identifiable intangible assets and acquisition costs of Alogent. The above ~~preliminary~~ purchase price allocation may be adjusted based on the results of this analysis.

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

J. Derivative Instrument

The Company does not enter into derivatives or other financial instruments for trading or speculative purposes; however, in order to manage its exposure to interest rate risk from the Company’s existing credit facility, ~~the Company entered into a derivative financial instrument. On~~on January ~~31,~~30, 2008 the Company entered into an interest rate swap (the “Swap”) with a notional amount of $20.0 million, receiving a one month LIBOR interest rate while paying a fixed rate of 2.95% over the period beginning February 8, 2008 and ending November 30, 2009. The effect of the ~~interest rate swap~~Swap is to lock the LIBOR component interest rate on $20.0 million of one-month floating rate LIBOR debt at 2.95%. As of ~~June~~September 30, 2008 the ~~interest rate swap~~Swap had an estimated fair value equal to ~~$36,000~~$39,000 (asset). We recorded a ~~$270,000~~$3,000 unrealized gain for the three month period ended ~~June~~September 30, 2008, which was recorded as a decrease to interest expense, net in the consolidated statements of operations, in accordance with ~~Statement of Financial Accounting Standards~~SFAS No. 133, ~~(“SFAS 133”),~~Accounting for Derivative Instruments and Hedging Activities(“SFAS No. 133”) . The estimated fair value of the ~~interest rate swap will~~Swap may rise and fall over the life of the ~~swap~~Swap as market expectations of future floating rate LIBOR interest rates ~~over the life of the swap~~ change in relation to the fixed rate of 2.95%.

J.K. Fair Value Measurements

Effective January 1, 2008, we adopted ~~Statement of Financial Accounting Standard~~SFAS No. 157,Fair Value Measurements(“SFAS 157”), as it applies to our financial instruments, and ~~Statement of Financial Accounting Standard~~SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendmentofFASB Statement No. 115(“SFAS 159”). SFAS 157 defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. SFAS 159 permits companies to irrevocably choose to measure certain financial instruments and other items at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities.

Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. SFAS 157 establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. ~~SFAS 157 requires the utilization of the lowest possible level of input to determine fair value.~~ Level 1 inputs include quoted market prices in an active market for identical assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data. Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our Consolidated Balance Sheets, we have elected not to record any other assets or liabilities at fair value, as permitted by SFAS 159.

The following table provides information on ~~those~~the assets and liabilities ~~measured~~we measure at fair value on a recurring basis.

Carrying
Amount
in Consolidated
Balance Sheet Fair Value Fair Value Measurements Using
June 30, 2008 June 30, 2008 Level 1 Level 2 Level 3
Interest rate swap liability $ 36,000 $ 36,000 $ — $ 36,000 $ —


	Carrying
	Amount
	in Consolidated
	Balance Sheet		Fair Value		Fair Value Measurements Using
	September 30, 2008		September 30, 2008		Level 1		Level 2		Level 3
Interest rate swap asset	$	39,000	$	39,000	$	—	$	39,000	$	—

We ~~determine~~determined the fair value of the derivative instrument shown in the table above by using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash ~~flows of each instrument.~~flows. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.

K.L. Comprehensive Income (Loss)

Comprehensive income (loss) for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 and 2007 was comprised solely of net income (loss).

L.M. Debt and Commitments and Contingencies

We entered into the following contractual obligations during 2008:

	•		Corporate office space lease amendment, which was executed by the Company on January 16, 2008 to extend the term of the lease agreement at our corporate headquarters for 66 months to commence on the effective date of May 1, 2008 and terminate on October 31, 2013. The leased space was expanded from 14,522 square feet to 36,006 square feet. Thus, the amendment resulted in an approximately $140,000 increase in rent expense over the next twelve months.

	•		Convertible ~~Notes~~notes of $7.0 million were executed by the Company and delivered to the Alogent shareholders on January 17, 2008, having a 24 month term and a 7.0% annual interest rate payable quarterly in arrears. The principal under the notes is convertible, at the option of the holder, into shares of our common stock at a conversion price of $4.50 per share.

	•		An installment payment agreement for the purchase of internal use software licenses for $462,000 was executed by the Company on March 21, 2008 having a 36 month term and a 3.037% annual interest rate.

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

We are party to a second amended and restated credit agreement with Bank of America, N.A., Wachovia Bank, N.A., and The People’s Bank of Winder, dated November 30, 2006, which amended and restated in its entirety the amended and restated credit agreement originally dated January 19, 2004, as amended and restated on January 23, 2006 and as further amended on February 17, 2006, April 5, 2006, May 3, 2006, ~~June~~August 31, 2006, September 15, 2006, and ~~August 31, 2006.~~January 17, 2008.

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

~~On January 17, 2008 we amended the second amended and restated credit agreement to make certain changes to the Credit Agreement, including the following:~~follows:

	•		the revolving loan commitment ~~was increased by $5.0 million to~~is $45.0 million;

	•		the limit on annual capital expenditures ~~was increased from $5.0 million to~~is $7.0 million;

	•		two additional applicable interest rates were added to the pricing grid, with a minimum level of LIBOR plus 1.375%, and maximum level of LIBOR plus 3% (or base rate plus 0.50%), determined by the funded debt to EBITDA ratio (as defined); the rate used is at the option of the Company;

	•		the funded debt to EBITDA ratio (as defined) ~~was increased to~~is 4.2 with a graduated step-down through 2008 to 3.0 for 2009 and beyond;

	•		a senior funded debt to EBITDA ratio (as defined) was added, beginning at 3.5 with a graduated step down to 3.0 for the fourth quarter of 2008 and beyond;

	•		the Company is to maintain a fixed charge coverage ratio (as defined) of not less than 2:0 to 1:00; and

	•		consent was given for the Alogent acquisition.

We borrowed $32.0 million against the revolving loan commitment to fund the Alogent acquisition. The balance as of September 30, 2008 is $39.0 million. The Company is in compliance with all restrictive financial and non-financial covenants contained in the credit facility as of September 30, 2008. The maturity date on the credit facility is November 30, 2009.

M.N. Recent Accounting Pronouncements

SFAS No. 157

In September 2006, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Statement of Financial Accounting Standards (“SFAS”) No.~~SFAS 157,~~Fair Value Measurements~~~~(“SFAS 157”),~~ which establishes a framework for reporting fair value and expands disclosures about fair value measurements. We adopted the required provisions of SFAS 157 that became effective in our first quarter of 2008. The adoption of these provisions did not have a material impact on our Consolidated Financial Statements.

In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2,Effective Date of FASB Statement No. 157(“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements for items within the scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.

In October 2008, the FASB issued FASB Staff Position No. SFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active(“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. We are currently evaluating the impact of SFAS 157-3 on our Consolidated Financial Statements for the items within the scope of FSP 157-3, which will become effective beginning with our first quarter of 2009.

SFAS No. 159

In February 2007, the FASB issued SFAS ~~No.~~ 159,~~The Fair Value Option for Financial Assets and Financial Liabilities~~~~(“SFAS 159”),~~ which allows entities to choose to measure financial instruments and certain other items at fair value. SFAS 159 became effective beginning with our first quarter of 2008. We adopted the required provisions of SFAS 159 that became effective in our first quarter of 2008. The adoption of these provisions did not have a material impact on our Consolidated Financial Statements.

SFAS No. 141(R)

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations(“SFAS 141(R)”), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. SFAS 141(R) also establishes expanded disclosure requirements for business combinations. SFAS 141(R) will become effective beginning with our first quarter of 2009. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(“SFAS 161”), which requires enhanced disclosures for derivative and hedging activities. SFAS 161 will become effective beginning with our first quarter of 2009. ~~Early adoption is permitted.~~ We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

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

Note Regarding Forward Looking Information

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future economic performance, plans and objectives of management for future operations and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The words “expect,” “estimate,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. We make forward-looking statements in Items 2 and 3 of Part I and in ~~Items~~Item 1A ~~and 4~~ 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” in our Annual Report on Form 10-K for the year ended December 31, 2007 and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, 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.

Overview

We provide a suite of technology-based products and services that assist financial institutions in their efforts to compete more effectively. We believe that financial institutions are facing increasing challenges to improve their operating efficiencies and grow their customer base. These challenges include:

	•		competition for deposits;

	•		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 financial institutions, which in many instances lack the substantial capital and specialized personnel to address all of their technology needs internally. Our solutions enable our clients to focus on their core competencies while we assist them in addressing their product and technology needs. We provide our solutions both on an outsourced and in-house basis.

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

In 2005, we chose to expand the scope of our business, which had historically focused on lending solutions, to payment solutions and data management and marketing solutions. Throughout 2006, we pursued this strategy through strategic acquisitions and in 2007, we continued to broaden our product offerings with the acquisitions of:

	•		the assets of Community Banking Systems ~~(CBS)~~(“CBS”), which added check imaging, report archival, and document imaging; and

	•		the assets of DataTrade, ~~LLC,~~ which added data conversion services, remote deposit, report management, interactive voice response, and checkscan.

In January 2008, we further broadened our product offerings with the acquisition of Alogent, ~~Corporation,~~ which added software licenses for the use of its technology-based software products, providing remote capture, teller capture and image exchange and services associated with maintenance and support and implementation of these products.

The integration of these acquisitions results in a stronger combination and breadth of services to offer to our financial institution clients and their customers and has immediate impact on organic growth across multiple lines of business.

Revenues

We generate revenue from three main sources:

	•		financial institution services;

	•		retail inventory management services; and

	•		other products and services.

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, AICPA’s Statement of Position (“SOP”) No. 97-2Software Revenue Recognition, SOP No. 98-9Software Revenue Recognition with Respect to Certain Transactionsand SOP No. 81-1Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We also consider the applicability of EITF No. 00-03,Application of SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardwareon a contract-by-contract basis. License fees are derived from licensing our products and are recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable and collectability is probable. Under SOP 97-2 and 98-9, 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. When the implementation services provided are considered essential to the functionality of the software, license fees and revenue for implementation services are recognized using the percentage of completion method (SOP 81-1). We recognize 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 services when delivered separately.

Financial Institution Services

Revenue from financial institution services includes:

	•		payment solutions;

	•		lending solutions; and

	•		data management and marketing solutions.

Payment Solutions:

We offer a variety of payment technology solutions to financial institutions and processors which help in the acquisition, automation, and processing of payments and deposits. Our solutions are focused on providing ~~benefit~~benefits in both the transition to electronic payments and the electronic processing of payments. These payments solutions consist primarily of software and services which are delivered on ~~both~~either an in-house ~~and~~or a hosted basis. Revenue is generated from the deployment and use of these various products through license fees, implementation services, software maintenance, hosting services, and transactional fees.

Remote Deposit-— We offer ~~Remote Deposit~~remote deposit solutions which enable a financial institution’s business customers to make a check deposit from their own offices by converting the check payment directly into an electronic deposit. Benefits accrue to the business in convenience, reduced costs, cash position, and improved treasury operations; additionally, benefits accrue to the financial institution in enhanced revenue, increased deposits, increased customer satisfaction, and reduced costs. A number of remote deposit solutions, including check and remittance, are sold ~~both~~either in-house ~~and~~or on a hosted basis in order to serve the different needs of various ~~size~~sized financial ~~institutions to meet the differing needs of their small business and corporate customer market base. Our~~institutions. These financial institutions in turn deploy and sell these solutions to their business customers generating additional revenue for us via additional license and transaction fees.

ACH Origination and Processing-— We offer a comprehensive system for the acquisition and processing of Automated Clearing House ~~(ACH)~~(“ACH”) transactions. Our ACH solutions provide financial institutions the ability to offer business customers a web-based brandable tool for the input of ACH transactions. Transactions can be manually created, imported from source data contained at the business, or captured from original documents, such as converted checks. We further provide financial institutions with the processing capacity to manage all facets of incoming and outgoing ACH files and of ACH processing, including risk tracking, fee

calculations, rule compliance, and daily operations. While our solutions to acquire and process transactions can be used independently, many financial institutions use the two solutions together. Our ACH solutions serve the needs of various sized financial institutions and can be deployed in ~~both~~either a hosted or in-house mode. Our financial institution clients in turn deploy and sell ACH solutions to their business customers, generating additional revenue for us via additional monthly and transaction fees.

Deposit Automation for Branch, Teller, Cash Vault, & ATM-— We provide solutions which automate the deposit process at financial institution branches, cash vaults, and ATMs. Our solutions convert customer paper deposits to electronic deposits at these locations driving reduced costs through truncation and automation along with improved quality and customer service. We provide these solutions primarily on an in-house basis with the technology being deployed within the financial institution’s branches, cash vaults, and ATMs and sold and delivered on a license, implementation services, and software maintenance basis.

Item Processing & Image Exchange-— We offer payment processing solutions for paper based item processing and electronic image based image exchange to financial institutions and processors. These solutions provide cost savings via automation of the back office payment processing function with a focus on the electronic image based processing of traditional paper based checks and payments. We offer these solutions on either a hosted ~~and~~or in-house basis.

Lending Solutions:

Accounts Receivable Financing-— We offer accounts receivable financing programs to ~~our~~ financial institutions to develop lasting, positive and profitable relationships with small-to-medium-sized business customers. This program also offers an insurance component to insure financial institutions against losses due to fraud and credit issues of the borrower. The insurance product is issued by a third-party national insurance company. We also offer an alternative lending network of specialty lenders that may offer similar products to borrowers that may not fit the criteria of financial institutions due to concentrations, specialty needs or credit issues.

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.~~financial institution. 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.

Leasing-— We offer a turnkey equipment leasing program to our financial institutions clients and their small business customers. We have no credit risk exposure for these leases. Our leases fall into two categories: direct financing leases and operating leases. For those opportunities that may not fit a particular financial ~~institution~~institution’s criteria, we offer a funding alternative through a third-party broker relationship.

For direct financing leases, the investment in direct financing leases financial statement caption consists of the sum of the minimum lease payments due during the remaining term of the lease and the unguaranteed residual value of the leased asset. 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 over the life of the lease. We record lease payments as rent income during the period earned.

Data Management and Marketing Solutions:

Our data management and marketing solutions include our core data processing solution, our automated teller solution and other products and services, including the offerings described below.

Website Design and Hosting-— We offer website design and hosting services to financial institutions, although we do not host any confidential financial institution data on our servers.

Document Imaging-— We offer document management products to help financial institutions and corporations organize and archive masses of business information. Imaging software is offered as a network-based system for scalable document imaging, scanning, and storage solutions.

Data Conversion Services-— We provide digital to digital conversion and migration services for document images, check images, computer reports (C.O.L.D) and data. We charge a fee per volume count of data to be converted.

Report Management and Voice Response Services-— Our report management software provides digital report storage and management solutions to financial institutions and corporations to securely store and retrieve digital report information via ~~network or~~

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						Six Months						Three Months						Nine Months
	Ended June 30,						Ended June 30,						Ended September 30,						Ended September 30,
	2008			2007			2008			2007			2008			2007			2008			2007
Revenues:
Financial institution services		86.4	%		78.0	%		86.3	%		78.0	%		87.9	%		80.6	%		86.9	%		78.9	%
Retail inventory management services		9.6			14.0			10.0			14.8			8.6			14.2			9.5			14.6
Other products and services		4.0			8.0			3.7			7.2			3.5			5.2			3.6			6.5

Total Revenues		100.0			100.0			100.0			100.0			100.0			100.0			100.0			100.0
Cost of Revenues:
Financial institution services		20.7			15.1			20.1			14.7			22.8			16.2			21.1			15.2
Retail inventory management services		1.1			1.4			1.1			1.5			1.0			1.5			1.1			1.5
Other products and services		2.5			5.5			2.5			5.3			2.3			3.6			2.4			4.7

Total Cost of Revenues		24.3			22.0			23.7			21.5			26.1			21.3			24.6			21.4

Gross Profit		75.7			78.0			76.3			78.5			73.9			78.7			75.4			78.6

Operating Expenses:
General and administrative		31.3			35.0			31.9			38.0			27.8			36.8			30.4			37.4
Selling and marketing		24.7			32.7			26.5			33.5			23.2			29.9			25.1			32.5
Research and development		8.0			3.5			8.8			3.5			6.7			4.3			8.1			3.7
Amortization		6.7			4.6			6.4			4.2			6.4			4.0			6.5			4.1
Other operating		0.1			0.1			0.1			0.1			0.6			0.1			0.3			0.1

Total Operating Expenses		70.8			75.9			73.7			79.3			64.7			75.1			70.4			77.8
Operating Income (Loss)		4.9			2.1			2.6			(0.8	)
Operating Income														9.2			3.6			5.0			0.8
Interest Expense, net		(2.2	)		(1.6	)		(3.5	)		(1.1	)		3.3			1.8			3.4			1.4

Income (Loss) before Taxes		2.7			0.5			(0.9	)		(1.9	)		5.9			1.8			1.6			(0.6	)

Income Tax Provision (Benefit)		1.1			(0.2	)		(0.4	)		(0.9	)		2.7			1.2			0.7			(0.2	)

Net Income (Loss)		1.6	%		0.7	%		(0.5	)%		(1.0	)%		3.2	%		0.6	%		0.9	%		(0.4	)%

Financial Institution Services.Financial institution services increased ~~54.0%~~69.2% and ~~58.0%~~61.9% to ~~$17.7~~$19.6 million and ~~$34.3~~$53.8 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 compared to ~~$11.5~~$11.6 million and ~~$21.7~~$33.2 million for the comparable periods ended ~~June~~September 30, 2007. The ~~increase~~increases of ~~$6.2~~$8.0 million and ~~$12.6~~$20.6 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 ~~was~~were primarily due to an increase in payment solutions revenue, which included the impact of the Alogent acquisition in the first quarter of 2008, of $6.8 million and $12.1 million for the three and six months periods then ended. Additionally, data management services increased $0.6 million and $1.6 million for the three and six month periods ended June 30, 2008 due to the increased data conversion services.2008. These increases were offset by a decline in accounts receivable financing activities to ~~$5.4~~$5.3 million and ~~$11.0~~$16.2 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 primarily due to a decrease in Business Manager licenses, as compared to ~~$6.0~~$6.2 million and ~~$11.4~~$19.1 million for the comparable periods ended ~~June~~September 30, 2007. Additionally, data management and marketing solutions increased $0.2 million and $1.7 million for the three and nine month periods ended September 30, 2008 due to increased data conversion services. These increases are net of a decline in marketing services of $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2008. As a percentage of total revenues, financial institution services revenues accounted for ~~86.4%~~87.9% and ~~86.3%~~86.9% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~78.0%~~80.6% and 78.9% for each of the comparable periods ended ~~June~~September 30, 2007.

and hardware for our report management, merchant and branch capture, and imaging software products. Hardware sales associated with our Remote Deposit services declined to ~~$0.6~~$0.3 million and $1.1 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 as compared to ~~$1.0~~$0.5 million and ~~$1.7~~$2.0 million for the comparable periods in 2007 as a result of increased competition and pricing pressures. Hardware sales associated with our payment solutions increased to $0.1 million and $0.3 million for the three and nine month period ended September 30, 2008 as a result of the Alogent acquisition in the first quarter of 2008. Revenues from other products and services accounted for ~~4.0%~~3.5% and ~~3.7%~~3.6% of total revenues for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~8.0%~~5.2% and ~~7.2%~~6.5% for the comparable periods of 2007.

Cost of Revenues — financial institution services.Cost of revenues for financial institution services increased ~~90.4%~~117.4% and ~~94.8%~~103.1% to ~~$4.3~~$5.1 million and ~~$8.0~~$13.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~$2.2~~$2.3 million and ~~$4.1~~$6.4 million for the comparable periods of 2007. The increase of ~~$2.1~~$2.8 million and ~~$3.9~~$6.6 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 was primarily due to an increase in payment solutions cost of revenues of ~~$2.1~~$3.0 million and ~~$3.7~~$7.0 million for the three and ~~six~~nine months periods ended ~~June~~September 30, 2008, which included the impact of the Alogent acquisition in the first quarter of 2008. ~~Additionally, the cost of revenues for data conversion services increased $59,000 and $0.2 million for the three and six month periods ended June 30, 2008 due to increased data conversion sales.~~ These increases were offset by a decline in accounts receivable financing cost of revenues of $0.2 million and ~~$0.3~~$0.6 million, respectively, for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 due to a decline in processing fees related to ~~MedCash~~Business Manager. Additionally, the cost of revenues for data conversion services decreased $37,000 and increased $119,000 for the three and nine month periods ended September 30, 2008, respectively. The decrease for the three months ended September 30, 2008 is mainly due to a decrease in marketing solutions. The increase for the nine months ended September 30, 2008 is mainly due to the acquisition of DataTrade, which we acquired in May 2007 showing only five months of expense compared to nine months in 2008 offset by a decrease in marketing solutions. As a percentage of total revenues, cost of revenues for financial institution services increased to ~~20.7%~~22.8% and ~~20.1%~~21.1% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~15.1%~~16.2% and ~~14.7%~~15.2% for the comparable periods of 2007.

Cost of Revenues — retail inventory management services.Cost of revenues related to retail inventory management services increased ~~4.9%~~5.7% and ~~7.5%~~7.0% to ~~$216,000~~$223,000 and ~~$446,000~~$670,000 for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 compared to ~~$206,000~~$211,000 and ~~$415,000~~$626,000 for the comparable periods of 2007. The increase is primarily due to an increase in salaries and benefits expense related to our point-of-sale customer support department. As a percentage of total revenues, cost of revenues for retail inventory management services decreased to 1.0% and 1.1% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~1.4% and~~ 1.5% for the comparable periods of 2007.

Cost of Revenues — other products and services.Cost of revenues related to other products and services increased 1.7% and decreased ~~37.4% and 31.5%~~22.9% to $0.5 million and ~~$1.0~~$1.5 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 compared to ~~$0.8~~$0.5 million and ~~$1.5~~$2.0 million for the comparable periods of 2007. The decrease for the nine month period was primarily due to a decline in sales of web hosting hardware to $0.3 million and $0.6 million for the three and six month periods ended June 30, 2008 as compared to $0.6 million and $1.2 million for the three and six months periods ended June 30, 2007.hardware. As a percentage of total revenues, cost of revenues for other products and services decreased to ~~2.5%~~2.3% and 2.4% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~5.5%~~3.6% and ~~5.3%~~4.7% for the comparable periods of 2007.

General and Administrative.General and administrative expenses increased ~~23.8%~~17.1% and ~~19.9%~~19.5% to ~~$6.4~~$6.2 million and ~~$12.7~~$18.8 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2008 compared to ~~$5.2~~$5.3 and ~~$10.6~~$15.8 million for the comparable periods ended ~~June~~September 30, 2007. General and administrative expenses include legal expenses, the cost of our executive, finance, human resources, information and support services, administrative functions and general operations. The increase is primarily attributable to the increased consulting services and salary expense related to the addition of employees acquired through the acquisition of Alogent and annual merit increases. Additionally, an increase of $0.4 million for the ~~six~~nine months ended ~~June~~September 30, 2008, was due to executive bonuses paid as a result of completing the successful acquisition of Alogent on January 17, 2008. As a percentage of total revenues, general and administrative expenses decreased to ~~31.3%~~27.8% and ~~31.9%~~30.4% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~35.0%~~36.8% and ~~38.0%~~37.4% for the comparable periods of 2007.

Selling and Marketing.Selling and marketing expenses increased ~~4.8%~~20.4% and ~~12.5%~~13.9% to ~~$5.1~~$5.2 million and ~~$10.5~~$15.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~$4.8~~$4.3 million and ~~$9.3~~$13.7 million for the comparable periods of 2007. 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 an increased sales force for payment solutions. Additionally, the increase is attributable to an increase in BusinessManager^{^®} commissions as a result of an additional incentive program to increase BusinessManager^{^®} funding volumes. As a percentage of total revenues, selling and marketing expenses ~~were 24.7%~~decreased to 23.2% and ~~26.4%~~25.1% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~32.7%~~29.9% and ~~33.5%~~32.5% for the comparable periods of 2007.

Research and Development.Research and development expenses increased to ~~$1.6~~$1.5 million and ~~$3.5~~$5.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~$0.5~~$0.6 million and ~~$1.0~~$1.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2007. 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 ACH product offerings and payment processing service ~~products~~.products. As a percentage of total revenues, research and development expenses ~~increased to 8.0%~~were 6.7% and ~~8.8%~~8.1% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 compared to ~~3.5%~~4.3% and 3.7% for the three and ~~six~~nine months ended ~~June~~September 30, 2007.

percentage of total revenues, amortization expense increased to ~~6.7%~~6.4% and ~~6.4%~~6.5% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 as compared to ~~4.6%~~4.0% and ~~4.2%~~4.1% for the three and ~~six~~nine months ended ~~June~~September 30, 2007.

Other Operating Expense, Net.Other operating expense, net for the three and ~~six~~nine months ended ~~June~~September 30, 2008 totaled ~~$24,000~~$123,000 and ~~$40,000,~~$163,000, respectively, compared to ~~$9,000~~$13,000 and ~~$14,000~~$27,000 for the comparable periods ended ~~June~~September 30, 2007. ~~No individual item changed significantly.~~The increase is due to a foreign exchange transaction loss where we received payment in British pounds on a invoice billed in US dollars.

Operating Income (Loss).As a result of the above factors, we generated operating income of ~~$1.0~~$2.0 million and $3.1 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008 as compared to operating income of $0.5 million and $0.3 million for the three and nine months ended ~~June 30, 2007 and an operating loss of $0.2 million for the six months ended June~~September 30, 2007. As a percentage of total revenue, operating income was ~~4.9%~~9.2% and ~~2.7%~~5.0% for the three and ~~six~~nine months ended ~~June~~September 30, 2008 as compared to operating income of ~~2.1%~~3.6% and ~~an operating loss of~~ 0.8% for the three and ~~six~~nine months ended ~~June~~September 30, 2007, respectively.

Interest Expense, Net.Interest expense, net, increased to ~~$0.5~~$0.7 million and ~~$1.4~~$2.1 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008 as compared to ~~$0.2~~$0.3 million and ~~$0.3~~$0.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2007. The increase is primarily due to an increase in average debt outstanding in the first ~~six~~nine months of 2008 as compared to the same period of 2007. Our average debt outstanding for the first ~~six~~nine months of 2008 was approximately $49.0 million compared to approximately $7.2 million for the first ~~six~~nine months of 2007 due to the borrowings to fund the Alogent acquisition in January 2008 and to fund operating cash flows. Additionally, we recorded a ~~$270,000~~$3,000 unrealized gain for the three month period ended ~~June~~September 30, 2008, ~~which was recorded~~ as a decrease to interest expense, which was related to the interest rate swap.

Income Tax Provision (Benefit).We had income tax expense of approximately ~~$229,000~~$603,000 and $443,000 for the three and nine months ended ~~June 30, 2008 and an income tax benefit of approximately $160,000 for the six months ended June~~September 30, 2008 compared to aexpense of $181,000 and benefit of ~~$27,000 and $263,000, respectively,~~$82,000 for the three ~~months~~ and ~~six~~nine months ended ~~June~~September 30, 2007. We expect our effective tax rate to be approximately 45.6% in 2008 as compared to ~~38.5%~~184.0% in 2007 due to permanent tax item differences, including those for stock option incentive ~~compensation.~~compensation, an accrual for uncertain tax positions, valuation allowance and other non-deductible expenses.

As of January 1, 2008 we had a net deferred tax asset of $3,452,000. As a result of the acquisition of Alogent Corporation, we recorded a deferred tax liability of $4,366,000. As a result of the acquisition and normal operations for the three and nine months ended September 30, 2008, we had a current deferred tax asset of $1,571,000 and a non-current deferred tax liability of $2,363,000 as of September 30, 2008.

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 our 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.

Goodwill

Management performs a goodwill impairment test as of December 31 each year and when circumstances may indicate a possible impairment has occurred. As a result of our market capitalization at September 30, 2008, management performed a fair value calculation of its reporting units in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The company’s analysis included a determination of the estimated fair value of our two reporting units based on both the income (which is a discounted cash flow technique) and market (which is a market multiple technique) approaches, which we consider to be the best available approaches to estimate the fair value of our reporting units. The results of testing indicated no impairment exists as of September 30, 2008.

The results of our calculation highlighted that the total estimated fair value exceeded the market capitalization as of September 30, 2008. Management believes the primary reason for this difference is a result of increasing market pressure on large financial institutional investors to reallocate investment portfolios and the general downturn in the equity markets resulting in part from the recent credit crisis, which is particularly impacting financial institutions that are our target customer base.

Please refer to our Annual Report on Form 10-K for the year-ended December 31, 2007 for a complete discussion of our critical accounting policies.

Cash from Investing Activities

Cash used in investing activities for the ~~six~~nine months ended ~~June~~September 30, 2008 totaled ~~$35.6~~$40.0 million, which consisted primarily of the Alogent business acquisition of $33.0 million (net of cash acquired), payment to DataTrade shareholders of $2.2 million and purchases of ~~fixed assets~~property and equipment and expenditures for software development ~~costs. Total capital expenditures, including software development~~ costs ~~totaled $3.3 million for the six months ended June 30, 2008.~~totaling $4.5 million. These expenditures primarily related to the purchase of computer equipment, computer software and software development activities. ~~During the first six months of 2008, we used approximately $33.0 million, net of cash acquired, to acquire Alogent.~~ For the first ~~six~~nine months of 2007, total cash used in investing activities was ~~$11.7~~$11.8 million consisting primarily of business acquisitions, lease receivable collections, purchases of fixed assets and capitalization of software development costs.

Cash from Financing Activities

Cash from financing activities primarily relates to borrowings from our credit facility and of non-recourse lease financing notes payable. During the first ~~six~~nine months of 2008, net cash provided by financing activities was ~~$32.1 million and was~~ attributable primarily to net borrowings of ~~$32.5~~$29.0 million from our amended and restated syndicated credit facility with Bank of America, ~~offset by $0.9~~$1.9 million in ~~repayments on~~proceeds from non-recourse lease notes ~~payable.~~payable, offset by $1.4 million on repayments of non-recourse lease notes payable and repayments on capital lease obligations of $0.4 million. For the first ~~six~~nine months of 2007, cash provided by financing activities totaled ~~$7.5~~$5.8 million, and was attributable primarily to new borrowings of ~~$8.5~~$7.5 million from our amended and restated syndicated credit facility, and $0.9 million of proceeds on non-recourse lease notes payable offset by ~~$1.2~~$2.2 million in repayments on non-recourse lease notes payable.

Analysis of Changes in Working Capital

As of ~~June~~September 30, 2008, we had working capital deficit of approximately ~~$0.5~~$1.5 million compared to working capital of approximately $3.0 million as of December 31, 2007. The change in working capital resulted primarily from a decrease in cash and cash equivalents and restricted cash of $2.2 million, an increase in accounts receivable of ~~$6.7~~$5.4 million, an increase in deferred tax asset of $0.1 million, an increase in prepaid and other current assets of ~~$0.6~~$0.5 million, an increase in accounts payable of ~~$5.3~~$1.0 million, an increase in accrued liabilities ~~and~~of $3.4 million, an increase ~~of $5.6 million~~ in deferred ~~revenue.~~revenue of $5.0 million and a decrease in customer deposits of $1.1 million. The increases were primarily the result of completing the acquisition of Alogent in January 2008.

We believe that the existing, non-restricted cash, future operating cash flows and availability from our amended and restated syndicated credit facility will be sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months. Furthermore, we expect to be in compliance with the financial covenants of our syndicated credit facility throughout 2008. There can be no assurance that we will have sufficient cash flows to meet our obligations or that we will remain in compliance with the ~~new~~ covenants. Non-compliance with these covenants could have a material adverse effect on our operating and financial results.

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

Credit Agreement

We are party to a second amended and restated ~~syndicated~~ credit agreement with Bank of America, N.A., Wachovia Bank, N.A., and The People’s Bank of Winder, dated November 30, 2006, which amended and restated in its entirety the amended and restated credit agreement originally dated January 19, 2004, as amended and restated on January 23, 2006 and as further amended on February 17, 2006, April 5, 2006, May 3, 2006, ~~June~~August 31, 2006, September 15, 2006, and ~~August 31, 2006.~~

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

On January 17, ~~2008 we amended the second amended and restated syndicated credit agreement to make certain changes to its terms,~~2008.

~~including~~The material covenants under the ~~following:~~syndicated credit facility are as follows:

	•		the revolving loan commitment ~~was increased by $5.0 million to~~is $45.0 million;

	•		the limit on annual capital expenditures ~~was increased from $5.0 million to~~is $7.0 million;

	•		two additional applicable interest rates were added to the pricing grid, with a minimum level of LIBOR plus 1.375%, and maximum level of LIBOR plus 3% (or base rate plus 0.50%), determined by the funded debt to EBITDA ratio (as defined); the rate used is at the option of the Company;

	•		the funded debt to EBITDA ratio (as defined) ~~was increased to~~is 4.2 with a graduated step-down through 2008 to 3.0 for 2009 and beyond;

	•		a senior funded debt to EBITDA ratio (as defined) was added, beginning at 3.5 with a graduated step down to 3.0 for the fourth quarter of 2008 and beyond;

	•		the Company is to maintain a fixed charge coverage ratio (as defined) of not less than 2:0 to 1:00; and

	•		consent was given for the Alogent acquisition.

We borrowed $32.0 million against the revolving loan commitment to fund the Alogent acquisition. The balance as of September 30, 2008 is $39.0 million. As of September 30, 2008, we were in compliance with all restrictive financial and non-financial covenants contained in the credit facility. The maturity date on the credit facility is November 30, 2009.

On January 30, 2008, we entered into an interest rate swap ~~agreement~~(the “Swap”) with Bank of America in the notional amount of $20.0 million. The ~~swap~~Swap expires on November 30, 2009. Under the ~~swap,~~Swap, we and Bank of America have agreed to exchange interest payments on the notional amount. We have agreed to pay a fixed interest rate of 2.95%, and Bank of America has agreed to pay a floating interest rate equal to the one-month LIBOR rate. We entered into the ~~swap~~Swap in order to mitigate risk associated with the floating interest rate paid by us under the credit ~~agreement.~~

~~As of June 30,2008, we were in compliance with all restrictive financial and non-financial covenants contained in the syndicated credit~~ facility.

Off-Balance Sheet Arrangements

As of ~~June~~September 30, 2008 and as of the date of this report, we did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing and cash management activities. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes; however, in order to manage its exposure to interest rate risk, the Company entered into a derivative financial instrument. On January ~~31,~~30, 2008 the Company entered into an interest rate swap agreement for a notional amount of $20.0 million. The swap expires on November 30, 2009.

Additionally, our exposure relates to our borrowings under our amended and restated syndicated credit facility, which accrues interest at LIBOR plus 1.375 basis points or the lender’s base rate (as defined), as we select. We are currently paying interest at an average rate of ~~6.2%~~5.2% per annum on the revolving credit line. As of ~~June~~September 30, 2008, ~~$42.5~~$39.0 million was outstanding under this facility. Changes in interest rates that increase the interest rate on the credit facility would make it more costly to borrow under that facility and may impede our acquisition and growth strategies if we determine that the costs associated with borrowing funds are too high to implement those strategies. An increase or decrease of 1.0% in the interest rate on the syndicated credit facility would increase or decrease, respectively, our interest expense by approximately ~~$425,000~~$390,000 per ~~year.~~year based on our current amount outstanding.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We, with the participation of our principal executive and financial officers, have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of ~~June~~September 30, 2008. Based on this evaluation, the principal executive and financial officers have determined that such disclosure controls and procedures are not effective to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In making this determination, management considered the material weaknesses in our internal control over financial reporting that existed as of December 31, 2007.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting identified during the quarter ended ~~June~~September 30, 2008, except for the implementation of measures described below under “Remediation of Material Weaknesses.”

Remediation of Material Weaknesses

We have implemented the following measures in an effort to remediate the material weaknesses in our tax and financial reporting functions due to a lack of sufficient accounting resources identified in our Annual Report on Form 10-K for the year ended December 31, 2007:

	•		In December of 2007, we hired Dan Owens as Senior Vice President of Finance; Mr. Owens was named Chief Financial Officer during the third quarter of 2008; Mr. Owens will oversee our efforts to ensure the effectiveness of our financial reporting functions;

	•		We have hired two additional senior accounting staff and an internal tax professional, and we retained the former Chief Financial Officer of Alogent as a vice-president of finance;

	•		We are enhancing review procedures in our financial reporting and income tax accounting functions;

	•		We are assessing our internal control structure and implementing new controls; and

	•		We have completed a comprehensive evaluation of our organizational structure and are continuing to review our internal processes.

We note that these remediation actions represent ongoing improvement measures. Furthermore, while we have taken steps to remediate the material weaknesses, these steps may not be adequate to fully remediate those weaknesses, and additional measures may be required.

Part II Other Information

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our financial position, results of operations or cash flows. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known by us or that we currently deem to be immaterial also may materially adversely affect our financial position, results of operations or cash flows.

The operating environment for financial institutions has become increasingly difficult and, as we depend heavily on this industry, this may adversely affect our business and operations.

Over recent months, the operating environment for financial institutions has become increasingly more challenging. In that time, ~~a handful of~~several financial institutions in the United States have been placed into receivership by the ~~FDIC.~~FDIC while others have been forced into transactions with other institutions due to a lack of liquidity. While we have not been materially affected, ~~by any institution’s failure,~~ if any of our material customers ~~were to~~ fail or if a significant number of our customers ~~were to~~ fail, ~~it could negatively affect~~ our revenues and results of ~~operations. In this challenging environment, both~~operations could be adversely affected. Both current and potential customers ~~may~~could delay spending on new technology and solutions, which ~~might~~could reduce our sales. The ~~negative~~adverse environment for financial institutions ~~may~~ also ~~make~~makes it more likely that some of our customers may be acquired by their competitor financial ~~institutions.~~institutions either through voluntary transactions or through transactions brokered by the FDIC. If this were to happen, the acquiring institution could terminate the contract for our products and services in favor of their current provider’s products and services. If ~~this deterioration continues~~the difficulties currently experienced by financial institutions continue or ~~becomes~~become more pronounced, ~~it may have an adverse effect on~~ our business, financial condition and results of ~~operations.~~

~~Item 4. Submission of Matters to Vote of Security Holders.~~

Our 2008 annual meeting of shareholders was held on May 21, 2008, at which one proposal was presented to our shareholders for their approval: the re-election of two “Class 3 Directors,” Bill Mathis and Beck A. Taylor to serve three-year terms on our board of directors. At the meeting, the re-election of Bill Mathis and Beck A. Taylor to our board of directors was approved. Continuing directors consisted of: Class 1 directors, Lawrence A. Hough, Robert A. McCabe, Jr. and John D. Schneider, and Class 2 directors: G. Lynn Boggs. No other matters were voted upon at the annual meeting.

~~The votes cast for the re-election of Bill Mathis and Beck Taylor were as follows:~~

Votes For Votes Withheld
Bill Mathis
10,666,282 3,415,704
Beck A. Taylor
11,791,083 2,290,903
Total All Directors
22,457,365 5,706,607
operations may be adversely affected.

Item 6. Exhibits

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


Exhibit
Number		Description of Exhibit
3.1		Amended and Restated Charter of the Company (incorporated by reference to Exhibit 3.1 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 33375013) filed with the SEC on May 3, 1999).

3.1.1		Charter Amendment dated August 9, 2001 (incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).

3.1.2		Charter Amendment dated August 9, 2001 (incorporated by reference to Exhibit 3.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).

3.1.3		Charter Amendment dated January 16, 2004 (incorporated by reference to Exhibit B of the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on December 29, 2003).

3.1.4		Charter Amendment dated January 23, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2006).

3.1.5		Charter Amendment dated January 24, 2006 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K with the SEC on January 26, 2006).

3.1.6		Charter Amendment dated May 4, 2006 and effective May 5, 2006 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2006).

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

3.2		Second Amended and Restated Bylaws of the Company ~~incorporated~~(incorporated by reference to Exhibit 3.2 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-722;75013) filed with the SEC on May 3, 1999).

3.2.1		Bylaws Amendment dated January 20, 2004 (incorporated by reference to Exhibit 3.2.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).

3.2.2		Amendment to Second Amended and Restated Bylaws Dated November 7, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 8, 2007).

10.1		~~Form of Restricted Stock Agreement.~~Amended and Restated Change in Control Severance Pay Agreement between Goldleaf Financial Solutions, Inc. and Dan Owens dated November 6, 2008

10.2		Change in Control Severance Pay Agreement between Goldleaf Financial Solutions, Inc. and Todd Shiver dated April 18, 2008

31.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer.

31.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer.

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

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


	Page No.

Part I — Financial Information

Item 1 Financial Statements

~~Unaudited~~ Consolidated Balance Sheets as of ~~June~~September 30, 2008 (Unaudited) and December 31, 2007		3

~~Unaudited~~ Consolidated Statements of Operations — Unaudited for the Three Months ~~ended June~~Ended September 30, 2008 and 2007		4

~~Unaudited~~ Consolidated Statements of Operations — Unaudited for the ~~Six~~Nine Months ~~ended June~~Ended September 30, 2008 and 2007		5

~~Unaudited~~ Consolidated Statements of Cash Flows — Unaudited for the ~~Six~~Nine Months ~~ended June~~Ended September 30, 2008 and 2007		6

Notes to ~~Unaudited~~ Consolidated Financial Statements — Unaudited		8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3 Quantitative and Qualitative Disclosures About Market Risk		24

Item 4 Controls and Procedures		24

Part II — Other Information		25

Item 1A Risk Factors		25

~~Item 4 Submission of Matters to a Vote of Security Holders~~		25

Item 6 Exhibits		26

Signatures		27
~~Ex-10.1 Form of Restricted Stock Agreement~~EX-10.1
EX-10.2
EX-31.1 ~~Section 302 Certification of the CEO~~
EX-31.2 ~~Section 302 Certification of the CFO~~
EX-32.1 ~~Section 906 Certification of the CEO~~
EX-32.2 ~~Section 906 Certification of the CFO~~


	2008			2007
	(in thousands, except
	per share data)						2008		2007
Revenues:
Financial institution services	$	17,705		$	11,497		$	19,554	$	11,560
Retail inventory management services		1,974			2,073			1,915		2,040
Other products and services		810			1,175			779		743

Total revenues		20,489			14,745			22,248		14,343

Cost of Revenues:
Financial institution services		4,250			2,232			5,066		2,330
Retail inventory management services		216			206			223		211
Other products and services		510			815			525		516

Gross profit		15,513			11,492			16,434		11,286
Operating Expenses:
General and administrative		6,403			5,173			6,176		5,272
Selling and marketing		5,053			4,821			5,165		4,290
Research and development		1,649			511			1,494		610
Amortization		1,372			673			1,428		572
Other operating expenses, net		24			9			123		13

Total operating expenses		14,501			11,187			14,386		10,757

Operating Income		1,012			305			2,048		529
Interest Expense, Net		(461	)		(231	)		725		256


Income Before Income Taxes		551			74			1,323		273
Income tax provision (benefit)		229			(27	)
Income tax provision								603		181


Net Income	$	322		$	101		$	720	$	92

Income Per Share:
Basic	$	0.02		$	0.01		$	0.04	$	0.01

Diluted	$	0.02		$	0.01		$	0.04	$	0.01

Weighted Average Common Shares Outstanding:
Basic		19,169			17,277			19,169		17,279


Diluted		19,169			17,312			19,169		17,297


	2008			2007
	(in thousands)						2008			2007
Cash Flows From Financing Activities:
Repayments on revolving line of credit	$	(1,000	)	$	—		$	(4,500	)	$	(1,000	)
Repayments on capital lease obligations		(184	)		(156	)		(349	)		(262	)
Proceeds from revolving line of credit		33,500			8,500			33,500			8,500
Repayments of note payable		—			(150	)
Repayments of note payable and long term debt								(35	)		(150	)
Repayments of non-recourse lease notes payable		(940	)		(1,198	)		(1,421	)		(2,240	)
Proceeds from non-recourse lease notes payable		683			517			1,885			895
Expenses related to Secondary Offering		—			(47	)
Expenses related to secondary offering								—			(47	)
Proceeds from exercise of employee stock options		—			52			—			54

Net cash provided by financing activities		32,059			7,518			29,080			5,750


Net Change in Cash and Cash Equivalents		2,855			(4,030	)		1,142			(6,035	)
Cash and Cash Equivalents at beginning of period		2,648			6,760			2,648			6,760

Cash and Cash Equivalents at end of period	$	5,503		$	2,730		$	3,790		$	725


Non-cash Investing and Financing Activities:
Issuance of 1,889,469 common shares as purchase consideration in the Alogent acquisition	$	2,638		$	—		$	2,638		$	—

Issuance of convertible notes payable to Alogent shareholders	$	7,000		$	—		$	7,000		$	—

Purchase of software licenses through issuance of debt	$	462		$	—		$	462		$	—


	Goldleaf Financial Solutions, Inc. (Registrant)
Date: ~~August 11,~~November 10, 2008	By:	/s/ G. Lynn Boggs
		G. Lynn Boggs
		Chief Executive Officer


Date: ~~August 11,~~November 10, 2008	By:	/s/ Dan Owens
		Dan Owens
		Chief Financial Officer


	Three Months Ended June 30, 2008						Three Months Ended June 30, 2007						Three Months Ended September 30, 2008						Three Months Ended September 30, 2007
			Retail						Retail						Retail						Retail
	Financial		Inventory				Financial		Inventory				Financial		Inventory				Financial		Inventory
	Institution		Management				Institution		Management				Institution		Management				Institution		Management
	Services		Services		Total		Services		Services		Total		Services		Services		Total		Services		Services		Total
	(In thousands)												(in thousands)
Revenues	$	18,515	$	1,974	$	20,489	$	12,672	$	2,073	$	14,745	$	20,333	$	1,915	$	22,248	$	12,303	$	2,040	$	14,343

Gross Profit	$	13,755	$	1,758	$	15,513	$	9,625	$	1,867	$	11,492	$	14,741	$	1,693	$	16,434	$	9,457	$	1,829	$	11,286

Total expenditures for additions to long-lived assets	$	1,595	$	3	$	1,598	$	1,131	$	12	$	1,143	$	1,355	$	28	$	1,383	$	808	$	—	$	808


	Six Months Ended June 30, 2008						Six Months Ended June 30, 2007						Nine Months Ended September 30, 2008						Nine Months Ended September 30, 2007
			Retail						Retail						Retail						Retail
	Financial		Inventory				Financial		Inventory				Financial		Inventory				Financial		Inventory
	Institution		Management				Institution		Management				Institution		Management				Institution		Management
	Services		Services		Total		Services		Services		Total		Services		Services		Total		Services		Services		Total
	(In thousands)												(in thousands)
Revenues	$	35,733	$	3,951	$	39,684	$	23,674	$	4,118	$	27,792	$	56,066	$	5,866	$	61,932	$	35,977	$	6,158	$	42,135

Gross Profit	$	26,758	$	3,505	$	30,263	$	18,113	$	3,703	$	21,816	$	41,491	$	5,197	$	46,688	$	27,570	$	5,532	$	33,102

Total expenditures for additions to long-lived assets	$	3,226	$	25	$	3,251	$	2,639	$	12	$	2,651	$	4,457	$	66	$	4,523	$	3,376	$	12	$	3,388

Assets	$	133,650	$	3,155	$	136,805	$	79,963	$	3,499	$	83,462	$	129,492	$	2,990	$	132,482	$	77,786	$	3,292	$	81,078

Goodwill	$	56,959	$	2,070	$	59,029	$	30,143	$	2,070	$	32,213	$	56,579	$	2,070	$	58,649	$	30,561	$	2,070	$	32,631


	Six Months Ended						Nine Months Ended September 30,
	June 30,						(in thousands)
	2008			2007			2008			2007
Net cash provided by operating activities	$	6,375		$	200		$	11,743		$	47
Net cash used in investing activities		(35,579	)		(11,748	)		(39,681	)		(11,832	)
Net cash provided by financing activities		32,059			7,518			29,080			5,750


	Votes For		Votes Withheld
Bill Mathis		10,666,282		3,415,704
Beck A. Taylor		11,791,083		2,290,903
Total All Directors		22,457,365		5,706,607