8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported)November 27, 2006

Datawatch Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdictionof Incorporation)

000-19960	02-0405716
(Commission File Number)	(IRS Employer Identification No.)

Quorum Office Park 271 Mill Road Chelmsford, Massachusetts	01824
(Address of Principal Executive Offices)	(Zip Code)

(978) 441-2200

(Registrant’s Telephone Number, Including Area Code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement

On April 20, 2006, Datawatch Corporation (the “Company”), together with its wholly-owned subsidiary Datawatch Technologies Corporation, entered into a one-year Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”), as amended on August 2, 2006. The Loan Agreement established two revolving $1.5 million lines of credit, for a total of $3.0 million. As of September 30, 2006, the Company was in default on its covenant to maintain the minimum level of Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) less capital expenditures under the Loan Agreement. Under a Second Loan Modification Agreement (“Modification Agreement”) dated as of November 27, 2006, SVB has agreed to waive this covenant for the Company for the three month period ended September 30, 2006, suspend this covenant for the three month periods ended October 31, 2006 and November 30, 2006, and to reduce the required EBITDA from $500,000 to $250,000 for each three month period ending on the last day of each month beginning on January 31, 2007 and thereafter. Additionally, the Modification Agreement changes the interest rate applicable to borrowings under the first line of credit. Under this line of credit, from July 31, 2006 until November 27, 2006, the interest rate was equal to the prime rate plus 1.5%, which was reduced to the prime rate plus 1.0% until five days after the Company delivers its December 31, 2006 financial statements indicating it is in compliance with all financial covenants under the Loan Agreement. Thereafter, the interest rate is further reduced to prime rate plus 0.5% for the remainder of the Loan Agreement. The interest rate for the second line of credit remains unchanged. No additional borrowings from the June 30, 2006 borrowing level will be available to the Company until December 31, 2006.

A copy of the Modification Agreement is filed as Exhibit 10.1 to this report.

Item 2.02 Results of Operations and Financial Condition

On November 28, 2006, the Company issued a press release regarding its financial results for the quarter and fiscal year ended September 30, 2006. A copy of the press release is furnished as Exhibit 99.1 to this report.

The information in this Item 2.02, including in Exhibit 99.1 attached hereto, is intended to be furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such filing.

Item 9.01 Financial Statements and Exhibits

(d)  Exhibits

The following Exhibits are filed as part of this report:

Exhibit No.  Description 

10.1  Second Loan Modification Agreement dated November 27, 2006 between Silicon Valley Bank, Datawatch Corporation, and Datawatch Technologies Corporation

99.1 Press Release dated November 28, 2006

SIGNATURES

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

	DATAWATCH CORPORATION
Date:November 28, 2006
	By: /s/ Robert W. Hagger
	Name: Robert W. Hagger
	Title:   President and Chief Executive Officer

EX-10.1

Exhibit 10.1

SECOND LOAN MODIFICATION AGREEMENT

This Second Loan Modification Agreement (this “Loan Modification Agreement”) is entered into as of November 27, 2006, by and between SILICON VALLEY BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054, and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 (“Bank”) and DATAWATCH CORPORATION, a Delaware corporation, and DATAWATCH TECHNOLOGIES CORPORATION, a Delaware corporation, each with its chief executive office located at 271 Mill Road, Quorum Office Park, Chelmsford, Massachusetts 01824-4105 (individually, collectively, jointly and severally, “Borrower”).

1.DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of April 20, 2006, evidenced by, among other documents, a certain Loan and Security Agreement dated as of April 20, 2006, between Borrower and Bank, as amended by that certain First Loan Modification Agreement dated as of August 2, 2006 (as amended, the “Loan Agreement”). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

2.DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, including, without limitation, the IP Security Agreement, the “Security Documents”).

Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.

3.DESCRIPTION OF CHANGE IN TERMS.

A. Modifications to Loan Agreement.

1. The Loan Agreement shall be amended by deleting the following Section 2.3(a) thereof, entitled “Interest Rate,” in its entirety:

“(a) Interest Rate. Subject to Section 2.3(b), the principal amount of Advances outstanding under the Formula Line shall accrue interest at a floating per annum rate equal to one half of one percentage point (0.5%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(f) below. Notwithstanding the foregoing, during the Covenant Suspension Period and through the date which is five (5) days after the termination of the Covenant Suspension Period, subject to Section 2.3(b), the principal amount of Advances outstanding under the Formula Line shall accrue interest at a floating per annum rate equal to one and one half of one percentage point (1.5%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(f) below. Subject to Section 2.3(b), the principal amount of Advances outstanding under the Non-Formula Line shall accrue interest at a floating per annum rate equal to one percentage point (1.0%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(f) below.”

and inserting in lieu thereof the following:

“(a) Interest Rate. Subject to Section 2.3(b), the principal amount of Advances outstanding under the Formula Line shall accrue interest at a floating per annum rate equal to one half of one percentage point (0.5%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(f) below. Notwithstanding the foregoing, subject to Section 2.3(b), the principal amount of

Advances outstanding under the Formula Line shall accrue interest at a floating per annum rate equal to (a) from the beginning of the Covenant Suspension Period through the date which is one day prior to the 2006 Closing Date, one and one half of one percentage point (1.5%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(f) below, and (b) from the 2006 Closing Date through the date which is five (5) days after the termination of the Covenant Suspension Period, one percentage point (1.0%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(f) below. Subject to Section 2.3(b), the principal amount of Advances outstanding under the Non-Formula Line shall accrue interest at a floating per annum rate equal to one percentage point (1.0%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(f) below.”

2. The Loan Agreement shall be amended by deleting the following Section 6.7(b) thereof, in its entirety:

“(b) Minimum Consolidated Cash Flow. EBITDA less Capital Expenditures of at least (i) One Dollar ($1.00) for the three month period ending March 31, 2006, (ii) Two Hundred Fifty Thousand Dollars ($250,000.00) for each of the three month periods ending April 30, 2006, May 31, 2006, and June 30, 2006, (iii) Five Hundred Thousand Dollars ($500,000.00) for each of the three month periods ending July 31, 2006 and August 31, 2006, (iv) One Dollar ($1.00) for each of the three month periods ending September 30, 2006, October 31, 2006, November 30, 2006, and December 31, 2006, (v) Two Hundred Fifty Thousand Dollars ($250,000.00) for each of the three month periods ending January 31, 2007, February 28, 2007, and March 31, 2007, and (vi) Five Hundred Thousand Dollars ($500,000.00) for the three month period ending April 30, 2007, and for each of the three month periods ending on last day of each month thereafter. Notwithstanding the foregoing, Borrower shall not be required to comply with the financial covenant set forth in this Section 6.7(b) for the months ending July 31, 2006 and August 31, 2006.”

and inserting in lieu thereof the following:

“(b) Minimum Consolidated Cash Flow. EBITDA less Capital Expenditures of at least (i) One Dollar ($1.00) for the three month period ending March 31, 2006, (ii) Two Hundred Fifty Thousand Dollars ($250,000.00) for each of the three month periods ending April 30, 2006, May 31, 2006, and June 30, 2006, (iii) Five Hundred Thousand Dollars ($500,000.00) for each of the three month periods ending July 31, 2006 and August 31, 2006, (iv) One Dollar ($1.00) for each of the three month periods ending September 30, 2006, October 31, 2006, November 30, 2006, and December 31, 2006, and (v) Two Hundred Fifty Thousand Dollars ($250,000.00) for the three month period ending January 31, 2007, and for each of the three month periods ending on last day of each month thereafter. Notwithstanding the foregoing, Borrower shall not be required to comply with the financial covenant set forth in this Section 6.7(b) for the months ending July 31, 2006, August 31, 2006, October 31, 2006, or November 30, 2006.”

3. The Loan Agreement shall be amended by deleting the following definition in Section 13.1 thereof:

““Covenant Suspension Period” is the period commencing on July 31, 2006 and ending on the date on which Bank receives Borrower’s financial reporting pursuant to Section 6.2 hereof for the month ending September 30, 2006, which financial reporting evidences, in Bank’s sole discretion, Borrower’s compliance with the financial covenants set forth in Section 6.7 hereof as of the month ending September 30, 2006.”

and inserting in lieu thereof the following:

““Covenant Suspension Period” is the period commencing on July 31, 2006 and ending on the date on which Bank receives Borrower’s financial reporting pursuant to Section 6.2 hereof for the month ending December 31, 2006, which financial reporting evidences, in Bank’s sole discretion, Borrower’s compliance with the financial covenants set forth in Section 6.7 hereof as of the month ending December 31, 2006.”

4. The Loan Agreement shall be amended by inserting the following definition, in alphabetical order, in Section 13.1 thereof:

““2006 Closing Date” is November 27, 2006.”

5. The Compliance Certificate appearing as Exhibit D to the Loan Agreement is hereby replaced with the Compliance Certificate attached as Exhibit A hereto.

B. Waivers.

1. Bank hereby waives Borrower’s existing defaults under the Loan Agreement by virtue of Borrower’s failure to comply with the financial covenant set forth in Section 6.7(b) thereof (Minimum Consolidated Cash Flow) as of the month ending September 30, 2006. Bank’s waiver of Borrower’s compliance of said financial covenant shall apply only to the foregoing specific period.

4.FEES. Borrower shall pay to Bank a modification fee equal to $5,500.00, which fee shall be due on the date hereof and shall be deemed fully earned as of the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents.

5.RATIFICATION OF INTELLECTUAL PROPERTY SECURITY AGREEMENT. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Intellectual Property Security Agreement dated as of April 20, 2006 between Borrower and Bank (the “IP Security Agreement”), and acknowledges, confirms and agrees that the IP Security Agreement contains an accurate and complete listing of all Intellectual Property Collateral as defined in the IP Security Agreement, and shall remain in full force and effect.

6.RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of April 20, 2006 between Borrower and Bank, and acknowledges, confirms and agrees the disclosures and information above Borrower provided to Bank in the Perfection Certificate has not changed, as of the date hereof.

7.AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank’s interest in the Collateral, including a notice that any disposition of the Collateral, by either the Borrower or any other Person, shall be deemed to violate the rights of the Bank under the Code.

8.CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

9.RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

10.             NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether

known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.

11.CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.

12.JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY.

13.COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

[The remainder of this page is intentionally left blank]

This Loan Modification Agreement is executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first written above.

BORROWER:	BANK:
DATAWATCH CORPORATION	SILICON VALLEY BANK
By:       /s/ Robert Hagger	By:       /s/ Michael J. Fell
Name:  Robert Hagger	Name:  Michael J. Fell
Title:    President and CEO	Title:    Relationship Manager
By:      /s/ John Kitchen
Name: John Kitchen
Title:   Secretary, SVP
DATAWATCH TECHNOLOGIES CORPORATION
By:       /s/ Rene Tenazas
Name:  Rene Tenazas
Title:    President
By:       /s/ Robert Hagger
Name:  Robert Hagger
Title:    Director

The undersigned, DATAWATCH INTERNATIONAL LIMITED, ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Deed of Guarantee dated July 11, 2006 (the “Guaranty”) and acknowledges, confirms and agrees that the Guaranty shall remain in full force and effect and shall in no way be limited by the execution of this Loan Modification Agreement, or any other documents, instruments and/or agreements executed and/or delivered in connection herewith.

DATAWATCH INTERNATIONAL LIMITED

By:        /s/ Robert Hagger__________________

Name:   Robert Hagger                                               

Title:     Director                                                           

56120/496

EXHIBIT A

COMPLIANCE CERTIFICATE

TO:SILICON VALLEY BANKDate:____________________________

FROM:        DATAWATCH CORPORATION

     DATAWATCH TECHNOLOGIES CORPORATION

The undersigned authorized officer of DATAWATCH CORPORATION and DATAWATCH TECHNOLOGIES CORPORATION (“Borrower”) certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (1) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below, (2) there are no Events of Default, (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement, and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank. Attached are the required documents supporting the certification. The undersigned certifies that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.

Please indicate compliance status by circling Yes/No under “Complies” column.
Reporting Covenant	Required	Complies
Monthly financial statements with Compliance Certificate	Monthly within 30 days	Yes No
Borrowing Base Certificate A/R Agings	Monthly within 30 days	Yes No
Form 10-Q	Earlier of 45 days after Q-end or 5 days after filing with SEC	Yes No
Form 10-K	Earlier of 120 days after FYE or 5 days after filing with SEC	Yes No
Projections, Operating Budgets, and other financial information	Annually and as requested by Bank	Yes No
Audit	Annually	Yes No
The following Intellectual Property was registered after the Effective Date (if no registrations, state “None”) ____________________________________________________________________________

Financial Covenant	Required	Actual	Complies
Maintain at all times (tested Monthly, on a consolidated basis):
Minimum Adjusted Quick Ratio*	1.25:1.0	_____:1.0	Yes No
Minimum Consolidated Cash Flow**	***	$__________	Yes No
*covenant not to be tested for periods ending 7/31/06, and 8/31/06
**covenant not to be tested for periods ending 7/31/06, 8/31/06, 10/31/06, and 11/30/06
***see Section 6.7 of the Loan and Security Agreement

The following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.

The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)

    By:  __________________________________ Name: ________________________________ Title: _________________________________ BANK USE ONLY   Received by: ___________________________ authorized signer Date: ________________________________   Verified: ______________________________  authorized signer Date: ________________________________   Compliance Status:Yes    No

EX-99.1

Exhibit 99.1

Press Release

DATAWATCH CORPORATION REPORTS EARNINGS FOR ITS FOURTH QUARTER AND FISCAL 2006

Company Confirms Accelerated Strategic Change to Focus

on the Information Management Market

Chelmsford, MA - November 28, 2006 -- Datawatch Corporation (NASDAQ: DWCH), a leader in the rapidly growing Enterprise Information Management market space, today announced results for its fourth quarter and fiscal year ended September 30, 2006.

Revenues for the quarter ended September 30, 2006 were $5,326,000, a decrease of 7% from $5,697,000 for the same period of fiscal 2005. Net loss for the fourth fiscal 2006 quarter was $(530,000), or $(0.10) per diluted share, compared to net income of $617,000, or $0.11 per diluted share, a year ago.

Revenues for the year ended September 30, 2006 were $20,811,000 a decrease of 3% from $21,512,000 for fiscal 2005. Net loss for fiscal 2006 was $(555,000), or $(0.10) per diluted share, compared to net income of $800,000, or $0.14 per diluted share a year ago.

Commenting on the fiscal 2006 results, president and CEO Robert Hagger said, “This was an important year for Datawatch, one of investment and of accelerated strategic change. Datawatch added to its position in the Information Management market with a business document archiving and retrieval acquisition, and decreased its exposure in the consolidating IT support and Service Management space. Revenue from Business Intelligence (BI) products and services grew by approximately 4% in fiscal 2006, even though no new major product version upgrades were released. The revenue improvements in BI products were offset by a 14% decrease in revenue from IT support and Service Management products. International revenue in fiscal 2006 accounted for 32% of total revenue versus 37% in fiscal 2005.

“Following four consecutive years of profitability, fiscal 2006 was a year of significant investment in product acquisition and development with the goal of positioning the company for future growth. The recent investments made in the Integrated Document Archive and Retrieval Systems (IDARS) business help to consolidate the company’s position as a leader in the Information Management space.

“The major accomplishments this year were:

·              Datawatch acquired the Integrated Document Archive and Retrieval Systems (IDARS) business from ClearStory Systems, successfully integrating the technology into our existing product offerings.

·              Maintenance contracts for the acquired BDS business were renewed at a rate of 94% since the date of acquisition, providing a strong re-occurring revenue stream for fiscal 2007 and beyond.

·              We continued to expand our data and information management offerings to meet the rapidly increasing demand in the Business Intelligence market, especially for solutions that provide improved access, analysis and delivery of business documents and information to solve real world business problems, such as meeting compliance and regulatory requirements.

·              Subscription sales grew 36% from $451,000 in fiscal 2005 to $615,000 in 2006.

·              Net Cash provided by operations was more than $1.1 million in the fiscal year.

Mr. Hagger continued; “In October, and subsequent to the year-end results, we reduced headcount and resource allocation for the basic Service Management business in Europe by an annual rate of approximately $1.2 million. The plan is to increase new business focus on the Information Management space both in the US and international markets. This change in strategy will suit our customers well as IT Support and Service Management departments are now looking to take the performance of their organizations to the next level by improving reporting and web-based performance management capabilities.

“From desktop information productivity tools through to enterprise-scale information access, analysis and distribution applications, Datawatch is providing easy to use solutions that deliver a strong return on investment for our customers by fully leveraging their existing systems. We plan to release new versions of all main products during the next calendar year, and look forward to seeing the results of our strategy shift unfold in fiscal 2007.”

Datawatch previously announced that the company will present and discuss its fourth quarter results today at 2 p.m. (EST) in a live conference call broadcast via the Internet at http://www.vcall.com/CustomEvent/NA011345/index.asp?id=110224. Listeners are recommended to go to the website at least 15 minutes early to register and download any necessary audio software. An archived replay of the broadcast will be available for 30 days at the same location.

ABOUT DATAWATCH

Datawatch Corporation is a leader in the rapidly growing Enterprise Information Management market space. By providing solutions that build on a Service Oriented Architecture (SOA) framework and its Monarch report and data mining technology, Datawatch allows organizations to archive, access, enhance, analyze and deliver information from wherever it resides inside or outside the enterprise to solve business problems. Datawatch products are used in more than 20,000 companies, institutions and government agencies worldwide.

The corporate address for Datawatch is 271 Mill Road, Quorum Office Park, Chelmsford, MA 01824; telephone (978) 441-2200. More information on Datawatch and its solutions can be found at www.datawatch.com.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Any statements contained in this press release that do not describe historical facts may constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Any such statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. The factors that could cause actual future results to differ materially from current expectations include the following: risks associated with the uncertainty of the current economic climate; risks associated with fluctuations in quarterly operating results; Datawatch's dependence on its principal products; risks associated with international sales; risks associated with distributor sales; risks associated with acquisitions; an unfavorable result in any litigation; market acceptance of new products; dependence on the introduction of new products and possible delays in those introductions. Further information on factors that could cause actual results to differ from those anticipated is detailed in various publicly-available documents, which include, but are not limited to, filings made by Datawatch from time to time with the Securities and Exchange Commission, including but not limited to, those appearing in the Company's Form 10-K for the year ended September 30, 2005 and Form 10-Q for the quarters ended December 31, 2005, March 31, 2006, and June 30, 2006. Any forward-looking statements should be considered in light of those factors.

# # # #

Datawatch Contact:

Dan Incropera (978) 441-2200

Dan_Incropera@Datawatch.Com

DATAWATCH CORPORATION
Condensed Consolidated Statements of Operations
Amounts in Thousands (except per share data)
	Three Months Ended
	September 30,						Year Ended September 30,
	2006			2005			2006			2005
	(Unaudited)						(Unaudited)
REVENUE:
Software licenses and subscriptions	$	3,096		$	3,952		$	13,080		$	14,233
Maintenance and services		2,230			1,745			7,731			7,279
Total revenue		5,326			5,697			20,811			21,512
COSTS AND EXPENSES:
Cost of software licenses and subscriptions		525			656			2,268			2,516
Cost of maintenance and services		1,145			859			3,949			3,438
Sales and marketing		2,499			2,157			9,136			8,687
Engineering and product development		667			419			2,094			2,031
General and administrative		991			1,041			3,898			4,152
Total costs and expenses		5,827			5,132			21,345			20,824
(LOSS) INCOME FROM OPERATIONS		(501	)		565			(534	)		688
Other income (expense), net		(8	)		30			15			90
(LOSS) INCOME BEFORE INCOME TAXES		(509	)		595			(519	)		778
Provision (benefit) for income taxes		21			(22	)		36			(22	)
NET (LOSS) INCOME	$	(530	)	$	617		$	(555	)	$	800
Net (loss) income per share - basic	$	(0.10	)	$	0.12		$	(0.10	)	$	0.15
Net (loss) income per share - diluted	$	(0.10	)	$	0.11		$	(0.10	)	$	0.14
Weighted Average Shares Outstanding - Basic		5,512			5,346			5,481			5,317
Weighted Average Shares Outstanding - Diluted		5,512			5,771			5,481			5,774

DATAWATCH CORPORATION
Condensed Consolidated Balance Sheets
Amounts in Thousands
	September 30,		September 30,
	2006		2005
	(Unaudited)
Cash and equivalents	$	1,862	$	4,901
Restricted cash		—		268
Accounts receivable, net		3,721		4,097
Inventories		37		55
Prepaid expenses		653		541
Total current assets		6,273		9,862
Property and equipment, net		1,129		516
Other intangible assets, net		8,558		3,034
	$	15,960	$	13,412
Accounts payable and accrued expenses	$	3,121	$	3,056
Deferred revenue		4,403		2,922
Escrow for shareholders of acquired companies		215		128
Other		1,266		—
Total liabilities		9,005		6,106
Total shareholders' equity		6,955		7,306
	$	15,960	$	13,412