10-Q

Here y

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2012

OR

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

Commission File Number: 000-19960

DATAWATCH CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	02-0405716
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

271 MILL ROAD

QUORUM OFFICE PARK

CHELMSFORD, MASSACHUSETTS 01824

(978) 441-2200

(Address and telephone number of principal executive office)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       Yes   xNo   o

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o          Accelerated filer o

Non-accelerated filer   o (Do not check if a smaller reporting company)

Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).   Yes   o    No  x

The number of shares of the registrant’s common stock, $.01 par value, outstanding as of August 8, 2012 was 6,337,222.

DATAWATCH CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended June 30, 2012

TABLE OF CONTENTS

  Page #    

PART I.	FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
a)		Condensed Consolidated Balance Sheets:
		June 30, 2012 and September 30, 2011	3
b)		Condensed Consolidated Statements of Operations:
		Three and Nine Months Ended June 30, 2012 and 2011	4
c)		Condensed Consolidated Statements of Cash Flows:
		Nine Months Ended June 30, 2012 and 2011	5
d)		Notes to Condensed Consolidated Financial Statements	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.		Controls and Procedures	26
PART II.	OTHER INFORMATION
Item 1.		Legal Proceedings	27
Item 1A.		Risk Factors	27
Item 6.		Exhibits	27
SIGNATURES			28
CERTIFICATIONS			29

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PART I. FINANCIAL INFORMATION

Item 1:  FINANCIAL STATEMENTS

DATAWATCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)

	June 30,			September 30,
	2012			2011
ASSETS
CURRENT ASSETS:
Cash and equivalents	$	7,836		$	8,384
Accounts receivable, less allowances for doubtful accounts and sales		4,934			2,966
returns of $174 and $148, respectively
Inventories		51			49
Prepaid expenses		477			528
Total current assets		13,298			11,927
Property and equipment, net		288			270
Acquired intellectual property, net		8,176			—
Other intangible assets, net		853			878
Other long-term assets		299			59
Total assets	$	22,914		$	13,134
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Line of credit	$	1,500		$	—
Accounts payable		698			879
Accrued expenses		2,295			1,802
Deferred revenue		5,352			3,823
Total current liabilities		9,845			6,504
LONG-TERM LIABILITIES:
Note payable, net of unamortized debt discount of $1,056		2,944			—
Deferred revenue		280			113
Other liabilities		194			175
Total long-term liabilities		3,418			288
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common stock, par value $.01; 20,000,000 shares authorized;		63			62
issued, 6,334,511 shares and 6,175,978 shares, respectively;
outstanding, 6,320,265 shares and 6,161,732 shares, respectively
Additional paid-in capital		26,365			24,476
Accumulated deficit		(15,547	)		(16,858	)
Accumulated other comprehensive loss		(1,090	)		(1,198	)
		9,791			6,482
Less treasury stock, at cost, 14,246 shares		(140	)		(140	)
Total shareholders’ equity		9,651			6,342
Total liabilities and shareholders' equity	$	22,914		$	13,134

See notes to condensed consolidated financial statements.

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DATAWATCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share amounts)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2012			2011			2012			2011
REVENUE:
Software licenses	$	4,699		$	2,400		$	13,182		$	7,063
Maintenance		2,106			1,527			5,683			4,569
Professional services		368			486			1,126			1,415
Total revenue		7,173			4,413			19,991			13,047
COSTS AND EXPENSES:
Cost of software licenses		509			530			1,743			1,661
Cost of maintenance and services		668			655			2,019			1,941
Sales and marketing		3,244			1,513			9,041			4,219
Engineering and product development		730			600			2,048			1,883
General and administrative		1,289			921			3,469			3,436
Total costs and expenses		6,440			4,219			18,320			13,140
INCOME (LOSS) FROM OPERATIONS		733			194			1,671			(93	)
Interest (expense) income and other income, net		(176	)		1			(285	)		58
INCOME (LOSS) BEFORE INCOME TAXES		557			195			1,386			(35	)
Provision (benefit) for income taxes		9			(18	)		75			34
NET INCOME (LOSS)	$	548		$	213		$	1,311		$	(69	)
Net income (loss) per share—Basic	$	0.09		$	0.04		$	0.21		$	(0.01	)
Net income (loss) per share—Diluted	$	0.08		$	0.03		$	0.20		$	(0.01	)
Weighted-Average Shares Outstanding—Basic		6,288			6,077			6,224			5,999
Weighted-Average Shares Outstanding—Diluted		6,775			6,278			6,653			5,999

See notes to condensed consolidated financial statements.

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DATAWATCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 (In thousands)

	Nine Months Ended
	June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,311		$	(69	)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization		698			653
Provision for doubtful accounts and sales returns		26			9
Loss on disposition of fixed assets		1			—
Share-based compensation		560			145
Amortization of debt discount		40			—
Changes in operating assets and liabilities:
Accounts receivable		(1,995	)		(455	)
Inventories		(2	)		(17	)
Prepaid expenses and other assets		(185	)		(124	)
Accounts payable, accrued expenses and other liabilities		333			378
Deferred revenue		1,705			433
Cash provided by operating activities		2,492			953
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and fixtures		(117	)		(72	)
Proceeds from sale of equipment		1			—
Purchase of intellectual property		(8,616	)		—
Capitalized software development costs		(54	)		—
Decrease in restricted cash		—			18
Increase in other assets		(4	)		(32	)
Cash used in investing activities		(8,790	)		(86	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		235			388
Advances on line of credit		1,500			—
Proceeds from issuance of long-term debt		4,000			—
Debt issuance costs		(80	)		—
Cash provided by financing activities		5,655			388
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS		95			(46	)
(DECREASE) INCREASE IN CASH AND EQUIVALENTS		(548	)		1,209
CASH AND EQUIVALENTS, BEGINNING OF PERIOD		8,384			7,053
CASH AND EQUIVALENTS, END OF PERIOD	$	7,836		$	8,262
SUPPLEMENTAL INFORMATION:
Income taxes paid	$	51		$	32
Interest paid	$	120		$	—

See notes to condensed consolidated financial statements.

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DATAWATCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Datawatch Corporation (the “Company”) and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 filed with the SEC. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2011, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation with no impact on net income or earnings per share.

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, useful lives of property and equipment, and the valuation of net deferred tax assets, acquired intellectual property, other intangible assets and share-based awards.

Revenue Recognition

Revenue allocated to software products, specified upgrades and enhancements is recognized upon delivery of the related product, upgrades or enhancements. Revenue is allocated by vendor specific objective evidence (“VSOE”) of fair value to post-contract customer support (primarily maintenance) and is recognized ratably over the term of the support, and revenue allocated using VSOE to service elements (primarily training and consulting) is recognized as the services are performed. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements.

The Company licenses its software products directly to end-users, through value added resellers and through distributors. Sales to distributors and resellers accounted for approximately 34% and 44%, respectively, of total sales for the three months ended June 30, 2012 and 2011, and 31% and 42%, respectively, of total sales for the nine months ended June 30, 2012 and 2011. Revenue from the sale of all software products (when separately sold) is generally recognized at the time of shipment, provided there are no uncertainties surrounding product

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acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. Both types of the Company’s software product offerings are “off-the-shelf” as such term is customarily defined. The Company’s software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations by the Company.

Datawatch software products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to the software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the professional services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and do not involve modification or customization of the software or any other unusual acceptance clauses or terms. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the period of support (generally one year). Such deferred amounts are recorded as part of deferred revenue in the Company’s condensed consolidated balance sheets.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. The Company also offers a 30 day money-back guarantee on its Monarch product sold directly to end-users. Additionally, the Company provides its distributors with stock-balancing rights. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors and resellers, which the Company monitors frequently.

Share-Based Compensation

All share-based awards, including grants of employee stock options and restricted stock units, are recognized in the financial statements based on their fair value at date of grant.

The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 6 to the Company’s condensed consolidated financial statements.

Concentration of Credit Risks and Major Customers

The Company licenses its products and services to U.S. and non-U.S. distributors and other software resellers, as well as to end users, under customary credit terms. Two customers, Ingram Micro, Inc. and Lifeboat Distribution, individually accounted for the following percentages of total revenue and accounts receivable for the periods indicated:

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	Percentage of total		Percentage of total
	revenue for the three		revenue for the nine		Percentage of total
	months ended		months ended		accounts receivable at
	June 30,		June 30,		June 30,	September 30,
	2012	2011	2012	2011	2012	2011
Ingram Micro, Inc.	1%	11%	4%	14%	—	14%
Lifeboat Distribution	22%	21%	13%	16%	29%	18%

The Company licenses to Lifeboat Distribution under a distribution agreement which automatically renews for successive one-year terms unless terminated. On December 6, 2011, the Company exercised a 90 day notice provision under a distribution agreement with Ingram Micro, Inc. to terminate its relationship with that distributor. The termination was effective March 6, 2012. Effective March 7, 2012, Lifeboat Distribution became the sole North American distributor for the Company’s Monarch Report Analytics platform. In addition to the customers listed above, one additional customer, United Health Group, individually accounted for approximately 9% of total revenue for the nine months ended June 30, 2012, which included 7% of sales directly to United Health Group and 2% of sales to United Health Group through a reseller. Additionally, one other customer, E&Y Global Services Limited, individually accounted for approximately 13% of total accounts receivable at June 30, 2012. Other than these customers, no other customer constitutes a significant portion (more than 10%) of revenues or accounts receivable for the periods presented. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are provided for anticipated doubtful accounts and sales returns based on management’s review of receivables, inventory held at distributors and historical trends.

Capitalized Software Development Costs

The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to engineering and product development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life of the product (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally 18 to 24 months. The net amount of capitalized software development costs was approximately $39,000 and $14,000 at June 30, 2012 and September 30, 2011, respectively. During the nine months ended June 30, 2012, the Company capitalized approximately $54,000 of software development costs related to products developed in fiscal year 2012. The Company did not capitalize any software development costs during the nine months ended June 30, 2011.

Other Intangible Assets

Other intangible assets consist of internally developed software, patents and customer lists acquired through business combinations. The values allocated to the majority of these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in cost of software licenses. The values allocated to customer relationships are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in sales and marketing expenses. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

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Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits. Valuation allowances are recorded to reduce the net deferred tax assets to amounts the Company believes are more likely than not to be realized.

The Company follows the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Cash and Equivalents

Cash and equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original maturities of 90 days or less. The Company’s cash equivalents are carried at fair value, which 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. The Company classifies the inputs used to measure fair value into the following hierarchy:

·   Level 1 – Observable inputs such as quoted prices in active markets;

·   Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·   Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table represents information about the Company’s cash equivalents measured at fair value on a recurring basis at June 30, 2012 (in thousands):

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Balance at June 30, 2012
Money market funds	$	2,234	$	2,234	$	—	$	—
Balance at September 30, 2011
Money market funds	$	2,233	$	2,233	$	—	$	—

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”(“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This standard also expands the disclosure requirements particularly for level 3 fair value measurements. This standard is effective on a prospective basis for reporting periods beginning on or after December 15, 2011. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.

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In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under this standard, an entity can elect to present items of net income and other comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating what impact, if any, this standard will have on its condensed consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 supersedes certain paragraphs in ASU 2011-05 which pertain to how, when and where reclassification adjustments out of accumulated other comprehensive income are presented. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating what impact, if any, this standard will have on its condensed consolidated financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity to make a qualitative assessment of whether it is not more likely than not that indefinite-lived intangible assets are impaired before calculating the fair value of the assets. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, although early adoption is permitted. The Company does not expect the adoption of this standard to have a material effect on the Company's financial position, results of operations or cash flows.

Note 2 – Acquisition of Intellectual Property

On March 30, 2012, the Company acquired the intellectual property which consisted primarily of the source code underlying its Monarch Report Analytics platform pursuant to an Option Purchase Agreement dated as of April 29, 2004 by and among the Company, Personics Corporation, Raymond J. Huger and Math Strategies, as amended (the “Option Agreement”). Under the formula contained in the Option Agreement, the purchase price paid for the intellectual property assets was $8,541,000 which was calculated based on a multiple of the aggregate royalties paid to Math Strategies by the Company for the four fiscal quarters preceding the exercise of the option. Additionally, the Company capitalized approximately $75,000 in closing costs and adjustments pursuant to a Supplemental Agreement dated March 30, 2012 between the Company and Raymond J. Huger. The intellectual property assets will be amortized to cost of software licenses using the straight-line method over the estimated life of the asset, which is five years. Amortization expense related to the intellectual property assets for the three and nine months ended June 30, 2012 was $431,000 and $440,000, respectively. The estimated future amortization expense related to the intellectual property is as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	431
2013		1,723
2014		1,723
2015		1,723
2016		1,723
2017		853
Total estimated future amortization expense	$	8,176

The purchase was funded in part through the issuance by the Company of a $4.0 million subordinated note and warrants for 185,000 shares of Company common stock to Massachusetts Capital Resource Company (“MCRC”), pursuant to a Note and Warrant Purchase Agreement entered into with MCRC as of March 30, 2012, and through the borrowing of $1.5 million under a new $2.0 million revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan and Security Agreement entered into with SVB as of March 30, 2012. See additional financing arrangement disclosures in Note 4 to the Company’s condensed consolidated financial statements.

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Note 3 – Other Intangible Assets, Net

Other intangible assets, net, were comprised of the following as of June 30, 2012 and September 30, 2011:

			June 30, 2012						September 30, 2011
	Weighted
	Average		Gross				Net		Gross				Net
	Useful Life		Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
Identified Intangible Asset	in Years		Amount		Amortization		Amount		Amount		Amortization		Amount
			(in thousands)
Capitalized software		2	$	2,716	$	2,677	$	39	$	2,662	$	2,648	$	14
Patents		20		160		63		97		160		57		103
Customer lists		10		1,790		1,153		637		1,790		1,029		761
Loan acquisition costs		4		88		8		80		—		—		—
Total			$	4,754	$	3,901	$	853	$	4,612	$	3,734	$	878

For the three months ended June 30, 2012 and 2011, amortization expense related to intangible assets was $52,000 and $108,000, respectively. For the nine months ended June 30, 2012 and 2011, amortization expense related to intangible assets was $167,000 and $492,000, respectively.

The estimated future amortization expense related to amortizing intangible assets as of June 30, 2012 is as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	60
2013		235
2014		193
2015		179
2016		110
2017		13
Thereafter		63
Total estimated future amortization expense	$	853

Note 4 – Financing Arrangements

Subordinated Note and Warrants

In connection with the acquisition of intellectual property disclosed in Note 2 to the Company’s condensed consolidated financial statements, on March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with Massachusetts Capital Resource Company (“MCRC”), the terms of which include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note issued to MCRC has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. The Company is also required under the MCRC agreement to maintain certain interest coverage and leverage ratios.

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Future principal payments related to the subordinated note are as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	—
2013		—
2014		467
2015		800
2016		800
2017		800
Thereafter		1,133
Total future principal payments	$	4,000

The warrants issued to MCRC are exercisable at any time prior to the later of the repayment in full of the MCRC note or February 28, 2019 at a purchase price per share of $11.54, which is equal to the average closing price of the Company’s common stock for the 45 trading days prior to the issuance of the warrants on March 30, 2012. The number of shares issuable upon exercise of the warrants is subject to adjustment in connection with stock splits and other events impacting the Company’s common stock generally, however, the warrants do not provide the holder with any anti-dilution protection.

The Company accounted for the borrowing under the Note and Warrant Purchase Agreement in accordance with the guidance prescribed in the Financial Accounting Standards Board Accounting Standard Codification Topic 470-20, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“ASC 470-20”). In accordance with ASC 470-20, the value of the stock purchase warrants is considered an Original Issue Discount (“OID”) which is required to be amortized over the life of the note as interest expense with a corresponding credit to notes payable.  The fair value of the warrants on March 30, 2012, as determined under the Accounting Standard Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) was approximately $1.1 million which is included in Additional Paid in Capital in the Company’s condensed consolidated balance sheets at June 30, 2012. The unamortized debt discount at June 30, 2012 was $1,056,000 which will be amortized to interest expense over the life of the subordinated note which is seven years. During the three and nine months ended June 30, 2012, interest expense related to the warrants was approximately $39,000 and $40,000, respectively.

Revolving Line of Credit

Also in connection with the intellectual property acquisition, on March 30, 2012, the Company entered into a $2.0 million revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan and Security Agreement with SVB. On March 30, 2012, the Company borrowed $1.5 million under this revolving credit facility. The revolving line of credit under the SVB facility terminates on March 29, 2014. On that date, the principal amount of all advances then outstanding under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor under the SVB agreement of 3.25%. The Company can borrow under the SVB revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the SVB facility requires that the Company maintain certain net asset and net income ratios. The Company’s obligations under the SVB facility are secured by substantially all of the Company’s assets other than intellectual property.

12

Note 5 – Income Taxes

During the three and nine months ended June 30, 2012, the Company recorded $9,000 and $75,000, respectively, related to estimated federal alternative minimum taxes, estimated state taxes and uncertain tax positions relative to foreign taxes. During the three months ended June 30, 2011, the Company recorded $18,000 in income tax benefits primarily related to estimated state tax adjustments. During the nine months ended June 30, 2011, the Company recorded $34,000 related to estimated state taxes, estimated federal alternative minimum taxes and uncertain tax positions relative to foreign taxes.

Deferred Tax Assets

The Company’s deferred tax assets include net operating loss carry forwards and tax credits that expire at different times through and until 2031. Significant judgment is required in determining the Company’s provision for income taxes, the carrying value of deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Factors such as future reversals of deferred tax assets and liabilities, projected future taxable income, changes in enacted tax rates and the period over which the Company’s deferred tax assets will be recoverable are considered in making these determinations. Management does not believe the deferred tax assets are more likely than not to be realized and a full valuation allowance has been provided against the deferred tax assets at June 30, 2012 and September 30, 2011. 

Provision for Uncertain Tax Positions

At September 30, 2011, the Company had a $175,000 tax liability related to tax exposures that could result in cash payments, of which approximately $6,000 and $19,000, respectively, were recorded during the three and nine months ended June 30, 2011. The Company increased its tax liability by $6,000 during each of the three month periods ended December 31, 2011, March 31, 2012 and June 30, 2012. During the three and nine months ended June 30, 2012, the Company released a portion of its reserve for uncertain tax positions and recorded a benefit of $2,000 and $7,000, respectively. The Company does not expect its tax liability to change significantly during the next twelve months. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated statements of operations. To date, the Company has not accrued any amounts for interest and penalties associated with this liability as such amounts have been de minimis.

The Company’s unrecognized tax benefits (before consideration of any valuation allowance) represent differences between tax positions taken by the Company in its various consolidated and separate worldwide tax returns and the benefits recognized and measured for uncertain tax positions. This amount also represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The change in the unrecognized tax benefits during the nine months ended June 30, 2012 was as follows (in thousands):

Balance at October 1, 2011	$	850
Additions for prior year tax positions	12
Balance at June 30, 2012	$	862

In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as the United Kingdom, Germany, Australia, Singapore and the United States, and as a result, files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The fiscal years ended September 30, 2008 through September 30, 2010 are generally still open to examination in the jurisdictions listed above.

13

Note 6 – Shareholders’ Equity

Share-based compensation expense for the three months ended June 30, 2012 and 2011 was $227,000 and $81,000, respectively, and $560,000 and $145,000 for the nine months ended June 30, 2012 and 2011, respectively, as included in the following expense categories:

	Three months ended June 30,				Nine months ended June 30,
	2012		2011		2012		2011
			(In thousands)
Sales and marketing	$	118	$	34	$	317	$	45
Engineering and product development		20		3		29		6
General and administrative		89		44		214		94
	$	227	$	81	$	560	$	145

The Company’s stock compensation plans provide for the granting of restricted stock units and either incentive or non-qualified stock options to employees and non-employee directors. Options and restricted stock units are subject to terms and conditions determined by the Compensation and Stock Committee of the Board of Directors. Options generally vest over a three year period beginning three months from the date of grant and expire either seven or ten years from the date of grant. Restricted stock units generally vest annually over a three year period. Through April 25, 2011, restricted stock units and stock options were granted under the 2006 Equity Compensation and Incentive Plan and thereafter under the 2011 Equity Compensation and Incentive Plan.

Stock Options

The Company uses the Black-Scholes option-pricing model to calculate the fair value of options on the date of grant. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate and dividend yield. No options were granted under the stock option plans for the three or nine months ended June 30, 2012. The weighted-average fair value of options granted under the stock option plans for the three and nine months ended June 30, 2011 was $2.89 and $2.16, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2012 and 2011 was approximately $61,000 and $538,000, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2012 and 2011 was approximately $670,000 and $663,000, respectively. Total cash received from option exercises during the three and nine months ended June 30, 2012 was $9,000 and $235,000, respectively. As of June 30, 2012, there was $280,000 of total unrecognized compensation cost related to non-vested stock option arrangements, which is expected to be recognized over a weighted-average period of 1.83 years.

Many of the assumptions used in the determination of compensation expense are judgmental and highly volatile. The table below indicates the key assumptions used in the option valuation calculations for options granted in the nine months ended June 30, 2011:

	2011
Expected life	5 years
Expected volatility	66.26 – 67.32%
Weighted-average volatility	66.56%
Risk free interest rate	1.49 – 2.38%
Dividend yield	0.0%

The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which are obtained from public data sources. The risk-free interest rate is equal to the historical U.S. Treasury zero-coupon bond rate with a remaining term equal to the expected life of the option. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than estimated.

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The following table summarizes information about the Company’s stock option plans for the nine months ended June 30, 2012:

	Number of Options Outstanding			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value $(000)
Outstanding, October 1, 2011		459,662		$	3.46
Granted		–			–
Canceled		(1,000	)		2.68
Exercised		(92,705	)		2.54
Outstanding, June 30, 2012		365,957		$	3.70		4.38	$	3,368
Vested or expected to vest, June 30, 2012		352,339		$	3.69		4.33	$	3,246
Exercisable, June 30, 2012		229,777		$	3.56		3.62	$	2,145

Restricted Stock Units

The Company periodically grants awards of restricted stock units (“RSU”) to each of its non-employee directors and some of its management team and employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested at June 30, 2012 was 401,414. Each RSU vests at the rate of 33.33% on each of the first through third anniversaries of the grant date with final vesting of the most recent grants scheduled to occur in June 2015. Included in the total number of RSUs unvested at June 30, 2012 are 209,171 RSUs which are subject to a further vesting condition that the Company’s common stock must trade at a price greater than $10 per share on a national securities exchange for a period of twenty consecutive days on or prior to the fifth anniversary of the grant date, 136,400 RSUs with the same $10 per share market price vesting condition on or prior to the fourth anniversary of the grant date and 20,500 RSUs with a $17.50 per share market price vesting condition on or prior to the fourth anniversary of the grant date. The Company’s common stock satisfied the $10 per share market price vesting condition in the quarters ended March 31, 2012 and June 30, 2012. For such RSUs, the Company performed fair value analysis using the Monte Carlo option-pricing model. The fair value related to the RSUs was calculated based primarily on the average stock price of the Company’s common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development and general and administrative expense. The fair values of the RSUs granted in the nine months ended June 30, 2012 and 2011, respectively, were approximately $1,198,0000 (or $6.77 weighted-average fair value per share) and $662,000 (or $3.88 weighted-average fair value per share). The Company recorded compensation expense related to RSUs of approximately $185,000 and $43,000 for the three months ended June 30, 2012 and 2011, respectively, and $431,000 and $72,000 for the nine months ended June 30, 2012 and 2011, respectively. These amounts are included in the total share-based compensation expense disclosed above. As of June 30, 2012, there was approximately $2.2 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.4 years.

15

The following table presents RSU information for the nine months ended June 30, 2012:

	Number of
	RSUs
	Outstanding
Outstanding, October 1, 2011	294,344
Granted	176,900
Canceled	(4,002	)
Vested	(65,828	)
Outstanding, June 30, 2012	401,414

Note 7 - Comprehensive Income (Loss)

The following table sets forth the reconciliation of net income (loss) to comprehensive income (loss):

	Three Months Ended June 30,					Nine Months Ended June 30,
	2012		2011			2012		2011
			(In thousands)
Net income (loss)	$	548	$	213		$	1,311	$	(69	)
Other comprehensive income (loss):
Foreign currency translation adjustments		18		(2	)		108		(54	)
Comprehensive income (loss)	$	566	$	211		$	1,419	$	(123	)

Accumulated other comprehensive loss reported in the condensed consolidated balance sheets consists solely of foreign currency translation adjustments.

Note 8 - Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the impact, when dilutive, of the exercise of stock options and the vesting of restricted stock units using the treasury stock method. Diluted net loss per share for the nine months ended June 30, 2011 is the same as basic net loss per share as the potentially dilutive securities are all anti-dilutive.

There were no potentially dilutive common stock options for the three or nine months ended June 30, 2012. Potentially dilutive common stock options aggregating 12,473 shares and 141,826 shares for the three and nine months ended June 30, 2011, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. Potentially dilutive restricted stock units aggregating 25,599 shares and 2,335 shares for the three months ended June 30, 2012 and 2011, respectively, and 9,560 shares and 29,588 shares for the nine months ended June 30, 2012 and 2011, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. There were no potentially dilutive warrants for the three months ended June 30, 2012. Potentially dilutive warrants aggregating 62,792 shares for the nine months ended June 30, 2012 have been excluded from the computation of diluted net income per share because their inclusion would be anti-dilutive.

Note 9 - Commitments and Contingencies

Prior to the acquisition of intellectual property disclosed in Note 2 to these condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Royalty expense included in cost of software licenses was approximately $21,000 and $413,000, for the three months ended June 30, 2012 and 2011, respectively, and $1,116,000 and $1,126,000, for the nine months ended June 30, 2012 and 2011, respectively. The Company is not obligated to pay any minimum amounts for royalties.  As a result of the acquisition of the intellectual property, the Company is no longer required to pay royalties related to its Monarch Report Analytics platform, exclusive of one final payment representing the amount that would have been due for the 30 day period ended April 30, 2012 had the closing of the acquisition not previously occurred. The final royalty payment related to the Monarch Report Analytics platform was made in July 2012.

From time to time, the Company is subject to claims and may be party to actions that arise in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations.

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Note 10 - Segment Information

The Company has determined that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.

The following table presents information about the Company’s revenue by product lines:

	Three Months Ended		Nine Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
Report Analytics Solutions (including Monarch, Monarch Data Pump, Monarch Enterprise Server, Monarch RMS, Datawatch Dashboards, Monarch Report Manager on Demand and iMergence)	96%	91%	95%	91%
Business Service Management Solutions (including Visual QSM and Visual HD)	4%	9%	5%	9%
Total	100%	100%	100%	100%

The Company conducts operations in the U.S. and internationally. The following table presents information about the Company’s geographic operations:

							Intercompany
	Domestic			International			Eliminations			Total
	(In thousands)
Total Revenue
Three months ended  June 30, 2012	$	6,491		$	869		$	(187	)	$	7,173
Three months ended  June 30, 2011	$	3,542		$	1,060		$	(189	)	$	4,413
Nine months ended  June 30, 2012	$	17,728		$	2,881		$	(618	)	$	19,991
Nine months ended  June 30, 2011	$	10,536		$	3,120		$	(609	)	$	13,047
Total Operating Income (Loss)
Three months ended  June 30, 2012	$	1,030		$	(297	)	$	—		$	733
Three months ended  June 30, 2011	$	216		$	(22	)	$	—		$	194
Nine months ended  June 30, 2012	$	2,231		$	(560	)	$	—		$	1,671
Nine months ended  June 30, 2011	$	(84	)	$	(9	)	$	—		$	(93	)
Non-current Assets
At June 30, 2012	$	9,543		$	73		$	—		$	9,616
At September 30, 2011	$	1,139		$	68		$	—		$	1,207

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company does not provide forecasts of its future financial performance. However, from time to time, information provided by the Company or statements made by its employees may contain “forward looking” information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward looking statements and are made under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date they are made. The Company disclaims any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in the Company’s expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward looking statements. The Company’s actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as well as the accuracy of the Company’s internal estimates of revenue and operating expense levels. 

Datawatch is engaged in the design, development, manufacture, marketing, and support of business computer software primarily for the report analytics and business service management markets to allow organizations to access and analyze information in a more meaningful fashion.

The Company’s principal product lines are Report Analytics Solutions (including Monarch, Monarch Data Pump, Monarch Enterprise Server, Monarch RMS, Datawatch Dashboards, Monarch Report Manager on Demand and iMergence) and Business Service Management Solutions (including Visual QSM and Visual HD). Included in the above categories are:

·   Monarch, a desktop reporting and data analysis application that lets users extract and manipulate data from ASCII report files, PDF files or HTML files produced on any mainframe, midrange, client/server or PC system;

·   Monarch Data Pump, a data replication and migration tool that offers a shortcut for populating and refreshing data marts and data warehouses, for migrating legacy data into new applications and for providing automated delivery of reports in a variety of formats, such as Excel, via email;

·   Monarch Enterprise Server, an enterprise solution that provides web-enabled report storage, transformation and distribution including data analysis, visualization and MS Excel integration for easy to use and cost effective self-serve reporting and analytics;

·   Monarch RMS, a web-based report analysis solution that integrates with any existing enterprise report management or content management archiving solution;

·   Datawatch Dashboards, an interactive dashboard solution that provides a visual overview of operational performance as well as the ability to monitor specific business processes and events;

·   Monarch Report Manager on Demand, a system for high-volume document capture, archiving, and online presentation;

·   iMergence, an enterprise report mining system;

·   Visual QSM, a fully internet-enabled IT service management solution that incorporates workflow and network management capabilities and provides web access to multiple databases via a standard browser; and

·   Visual Help Desk or Visual HD, a web-based help desk and call center solution operating on the IBM Lotus Domino platform.

18

The Company offers its enterprise products through perpetual licenses, term licenses and subscription pricing models. Subscriptions automatically renew unless terminated with 90 days notice following the first year of the subscription term. The subscription arrangement includes software, maintenance and unspecified future upgrades including major version upgrades. The subscription renewal rate is the same as the initial subscription rate. During the three months ended June 30, 2012 and 2011, subscription revenues were approximately $75,000 and $78,000, respectively. During the nine months ended June 30, 2012 and 2011, subscription revenues were approximately $229,000 and $228,000, respectively.

CRITICAL ACCOUNTING POLICIES

In the preparation of financial statements and other financial data, management applies certain accounting policies to transactions that, depending on choices made by management, can result in different outcomes. In order for a reader to understand the following information regarding the financial performance and condition of the Company, an understanding of those accounting policies is important. Certain of those policies are comparatively more important to the Company’s financial results and condition than others. The policies that the Company believes are most important for a reader’s understanding of the financial information provided in this report are described below.

·   Revenue Recognition, Allowance for Bad Debts and Returns Reserve

·   Income Taxes

·   Capitalized Software Development Costs

·   Valuation of Intangible Assets and Other Long-Lived Assets

·   Accounting for Share-Based Compensation

During the nine months ended June 30, 2012, there were no significant changes in the Company’s critical accounting policies. See Note 1 to the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in its Annual Report on Form 10-K for the year ended September 30, 2011 for additional information about these critical accounting policies, as well as a description of the Company’s other significant accounting policies.

RESULTS OF OPERATIONS

The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. The operating results for any period should not be considered indicative of the results expected for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

	Three Months Ended		Nine Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
REVENUE:
Software licenses	66%	54%	66%	54%
Maintenance	29%	35%	28%	35%
Professional services	5%	11%	6%	11%
Total revenue	100%	100%	100%	100%
COSTS AND EXPENSES:
Cost of software licenses	7%	12%	9%	13%
Cost of maintenance and services	10%	15%	10%	15%
Sales and marketing	45%	34%	45%	33%
Engineering and product development	10%	14%	10%	14%
General and administrative	18%	21%	18%	26%
Total costs and expenses	90%	96%	92%	101%
INCOME (LOSS) FROM OPERATIONS	10%	4%	8%	-1%
Interest (expense) income and other income, net	-2%	0%	-1%	0%
INCOME (LOSS) BEFORE INCOME TAXES	8%	4%	7%	-1%
Provision (benefit) for income taxes	0%	-1%	0%	0%
NET INCOME (LOSS)	8%	5%	7%	-1%

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Three Months Ended June 30, 2012 Compared to

Three Months Ended June 30, 2011

Total Revenues

The following table presents total revenue, total revenue increase (decrease) and percentage change in total revenue for the three months ended June 30, 2012 and 2011:

	Three Months Ended
	June 30,				Increase			Percentage
	2012		2011		(Decrease)			Change
			(In thousands)
Software licenses	$	4,699	$	2,400	$	2,299			96	%
Maintenance		2,106		1,527		579			38	%
Professional services		368		486		(118	)		-24	%
Total revenue	$	7,173	$	4,413	$	2,760			63	%

Software license revenue for the three months ended June 30, 2012 was $4,699,000 or approximately 66% of total revenue, as compared to $2,400,000, or approximately 54% of total revenue for the three months ended June 30, 2011. The increase in software license revenue of $2,299,000 for the three months ended June 30, 2012 consists of an $2,314,000 increase in Report Analytics Solutions (including Monarch, Monarch Data Pump, Monarch Enterprise Server, Monarch RMS, Datawatch Dashboards, Monarch Report Manager on Demand and iMergence products) and a $15,000 decrease in Business Service Management Solutions (including Visual QSM and Visual HD products). The Company attributes the increase in software license revenue to its new product positioning and the investments the Company has made in its sales and marketing organization which has resulted in both increased desktop and enterprise license sales during the quarter.

Maintenance revenue for the three months ended June 30, 2012 was $2,106,000 or approximately 29% of total revenue, as compared to $1,527,000, or approximately 35% of total revenue for the three months ended June 30, 2011. The increase in maintenance revenue of $579,000 consists of a $616,000 increase in Report Analytics Solutions offset by a $37,000 decrease in Business Service Management Solutions. The overall increase in maintenance revenue is primarily attributable to increased maintenance on the Monarch product line.

Professional services revenue for the three months ended June 30, 2012 was $368,000 or approximately 5% of total revenue, as compared to $486,000, or approximately 11% of total revenue for the three months ended June 30, 2011. The decrease in professional services revenue of $118,000 consists of a $79,000 decrease in Business Service Management Solutions and a $39,000 decrease in Report Analytics Solutions.

Costs and Operating Expenses

The following table presents costs of sales and operating expenses, increase (decrease) in costs of sales and operating expenses and percentage changes in costs of sales and operating expenses for the three months ended June 30, 2012 and 2011:

	Three Months Ended
	June 30,				Increase			Percentage
	2012		2011		(Decrease)			Change
	(In thousands)
Cost of software licenses	$	509	$	530	$	(21	)		-4	%
Cost of maintenance and services		668		655		13			2	%
Sales and marketing		3,244		1,513		1,731			114	%
Engineering and product development		730		600		130			22	%
General and administrative		1,289		921		368			40	%
Total costs and operating expenses	$	6,440	$	4,219	$	2,221			53	%

20

The decrease in cost of software licenses of $21,000, or approximately 4%, is primarily due to lower software amortization costs associated with previously capitalized software and a reduction of royalty costs attributable to the acquisition of intellectual property underlying the Company’s Monarch Report Analytics platform on March 30, 2012. As a result of this acquisition, the Company is no longer charging royalty expense to cost of software licenses but is amortizing the purchase price of the intellectual property to cost of software licenses. See additional information regarding the amortization of the intellectual property in Note 2 to the Company’s condensed consolidated financial statements.

The increase in cost of maintenance and services of $13,000, or approximately 2%, is primarily due to higher wages and employee-related costs as compared to the same period last year.

The increase in sales and marketing expenses of $1,731,000, or approximately 114%, is due to increased promotional, lead generation and consulting costs as well as higher wages, commissions and other employee-related costs attributable to increased headcount as compared to the same period last year.

The increase in engineering and product development expenses of $130,000, or approximately 22%, is primarily attributable to higher wages and other employee-related costs due to increased headcount offset by lower external consulting costs as compared to the same period last year.

The increase in general and administrative expenses of $368,000, or 40%, is primarily attributable to higher severance costs, stock compensation and other employee-related costs as well as an increase in consulting costs as compared to the same period last year.

Interest (expense) income and other income, net includes primarily the following two components: interest income (expense); and gains (losses) on foreign currency transactions. Interest expense for the three months ended June 30, 2012 was $165,000 which relates to interest charged pursuant to the Company’s subordinated note payable with MCRC and its revolving line of credit with SVB which were both entered into on March 30, 2012. There was no interest expense during the three months ended June 30, 2011. Gain (loss) on foreign currency transactions for the three months ended June 30, 2012 was a loss of approximately $11,000 as compared to a gain of $1,000 for the three months ended June 30, 2011.

Income tax expense for the three months ended June 30, 2012 was $9,000 as compared to an income tax benefit of $18,000 for the three months ended June 30, 2011. Income tax expense for the three months ended June 30, 2012 includes $10,000 related to estimated federal alternative minimum taxes, offset by $7,000 in estimated state tax adjustments. Income tax benefit for the three months ended June 30, 2011 is primarily attributable to estimated state tax adjustments. Additionally, income tax expense for both periods includes a $6,000 provision for uncertain tax positions relative to foreign taxes. At June 30, 2012, the Company had U.S. federal tax loss carryforwards of approximately $5.8 million which expire at various dates through and until 2031 as well as significant state and foreign net operating loss carryforwards.

Net income for the three months ended June 30, 2012 was $548,000 as compared to net income of $213,000 for the three months ended June 30, 2011.

Nine months Ended June 30, 2012 Compared to

Nine months Ended June 30, 2011

Total Revenues

The following table presents total revenue, total revenue increase (decrease) and percentage change in total revenue for the nine months ended June 30, 2012 and 2011:

	Nine Months Ended
	June 30,				Increase			Percentage
	2012		2011		(Decrease)			Change
			(In thousands)
Software licenses	$	13,182	$	7,063	$	6,119			87	%
Maintenance		5,683		4,569		1,114			24	%
Professional services		1,126		1,415		(289	)		-20	%
Total revenue	$	19,991	$	13,047	$	6,944			53	%

21

Software license revenue for the nine months ended June 30, 2012 was $13,182,000 or approximately 66% of total revenue, as compared to $7,063,000, or approximately 54% of total revenue for the nine months ended June 30, 2011. The increase in software license revenue of $6,119,000 for the nine months ended June 30, 2012 consists of an $6,113,000 increase in Report Analytics Solutions (including Monarch, Monarch Data Pump, Monarch Enterprise Server, Monarch RMS, Datawatch Dashboards, Monarch Report Manager on Demand and iMergence products) and a $6,000 increase in Business Service Management Solutions (including Visual QSM and Visual HD products). The Company attributes the increase in software license revenue to its new product positioning and the investments the Company has made in its sales and marketing organization which has resulted in both increased desktop and enterprise license sales as compared to last fiscal year.

Maintenance revenue for the nine months ended June 30, 2012 was $5,683,000 or approximately 28% of total revenue, as compared to $4,569,000, or approximately 35% of total revenue for the nine months ended June 30, 2011. The increase in maintenance revenue of $1,114,000 consists of a $1,176,000 increase in Report Analytics Solutions offset by a $62,000 decrease in Business Service Management Solutions. The increase in maintenance revenue is primarily attributable to increased maintenance on the Monarch product line.

Professional services revenue for the nine months ended June 30, 2012 was $1,126,000 or approximately 6% of total revenue, as compared to $1,415,000, or approximately 11% of total revenue for the nine months ended June 30, 2011. The decrease in professional services revenue of $289,000 consists of a $189,000 decrease in Report Analytics Solutions and a $100,000 decrease in Business Service Management Solutions.

Costs and Operating Expenses

The following table presents costs of sales and operating expenses, increase in costs of sales and operating expenses and percentage changes in costs of sales and operating expenses for the nine months ended June 30, 2012 and 2011:

	Nine Months Ended
	June 30,						Percentage
	2012		2011		Increase		Change
	(In thousands)
Cost of software licenses	$	1,743	$	1,661	$	82		5	%
Cost of maintenance and services		2,019		1,941		78		4	%
Sales and marketing		9,041		4,219		4,822		114	%
Engineering and product development		2,048		1,883		165		9	%
General and administrative		3,469		3,436		33		1	%
Total costs and operating expenses	$	18,320	$	13,140	$	5,180		39	%

The increase in cost of software licenses of $82,000, or approximately 5%, is primarily due to amortization costs related to the Company’s acquisition of intellectual property underlying its Monarch Report Analytics platform on March 30, 2012 offset by lower software amortization costs associated with previously capitalized software.

The increase in cost of maintenance and services of $78,000, or approximately 4%, is primarily due to higher commissions resulting from increased sales and other employee-related costs as compared to the same period last year.

The increase in sales and marketing expenses of $4,822,000, or approximately 114%, is attributable to higher wages and employee-related costs due to increased headcount, higher commissions attributable to increased sales and higher marketing program-related costs as well as increased external consulting costs as compared to the same period last year.

22

The increase in engineering and product development expenses of $165,000, or approximately 9%, is primarily due to higher wages and other employee-related costs offset by lower consulting costs as compared to the same period last year.

The increase in general and administrative expenses of $33,000, or approximately 1%, is primarily attributable to higher professional services, legal and consulting costs and employee-related costs which were partially offset by $641,000 of severance costs incurred last year in connection with a restructuring by the Company to align its sales and marketing operations with the Company’s new business strategy.

Interest (expense) income and other income, net includes primarily the following two components: interest income (expense); and gains (losses) on foreign currency transactions. Net interest expense for the nine months ended June 30, 2012 was approximately $166,000 as compared to net interest income of $2,000 for the nine months ended June 30, 2011.  Interest expense for the nine months ended June 30, 2012 was $169,000 which relates to interest charged pursuant to the Company’s subordinated note payable with MCRC and its revolving line of credit with SVB which were both entered into on March 30, 2012. Gain (loss) on foreign currency transactions for the nine months ended June 30, 2012 was a loss of approximately $118,000 as compared to a gain of $55,000 for the nine months ended June 30, 2011. The foreign currency loss for the nine months ended June 30, 2012 was attributable to the settlement of intercompany account balances due to the dissolution of one of the Company’s foreign subsidiaries and the repatriation of international funds to the US required by the Company’s line of credit facility which was entered into on March 30, 2012. Additionally, the foreign currency gains (losses) recorded in both periods were partially due to the repayment of intercompany loans between the Australian and UK subsidiaries.

Income tax expense for the nine months ended June 30, 2012 was $75,000 as compared to $34,000 for the nine months ended June 30, 2011. Income tax expense for the nine months ended June 30, 2012 includes $30,000 related to estimated federal alternative minimum taxes and $26,000 related to estimated state taxes. Income tax expense for the nine months ended June 30, 2011 includes $11,000 related to estimated state taxes and $4,000 related to estimated federal alternative minimum taxes. Additionally, income tax expense for both periods includes a $19,000 provision for uncertain tax positions relative to foreign taxes.

Net income for the nine months ended June 30, 2012 was $1,311,000 as compared to net loss of $69,000 for the nine months ended June 30, 2011.

OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

The Company leases various facilities and equipment in the U.S. and overseas under non-cancelable operating leases that expire through 2016. The lease agreements generally provide for the payment of minimum annual rentals, pro rata share of taxes, and maintenance expenses. Rental expense for all operating leases was approximately $105,000 and $82,000 for the three months ended June 30, 2012 and 2011, respectively, and $327,000 and $246,000 for the nine months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012, the Company’s contractual obligations include minimum rental commitments under non-cancelable operating leases, long-term debt obligations and other liabilities related to uncertain tax positions as follows (in thousands):

			Less than						More than
Contractual Obligations:	Total		1 Year		1-3 Years		3-5 Years		5 Years
Operating Lease Obligations	$	823	$	295	$	360	$	168	$	—
Long-term Debt Obligations	$	4,000	$	—	$	867	$	1,600	$	1,533
Other Liabilities	$	194	$	—	$	—	$	—	$	194

23

Prior to the acquisition of intellectual property disclosed in Note 2 to the Company’s condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Royalty expense included in cost of software licenses was approximately $21,000 and $413,000 for the three months ended June 30, 2012 and 2011, respectively, and $1,116,000 and $1,126,000 for the nine months ended June 30, 2012 and 2011, respectively. As a result of the acquisition of the intellectual property, the Company will no longer be required to pay royalties related to its Monarch Report Analytics platform, exclusive of one final payment representing the amount that would have been due for the 30 day period ended April 30, 2012 had the closing of the acquisition not previously occurred. The final royalty payment related to the Monarch Report Analytics platform was made in July 2012.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. If necessary, the Company would provide for the estimated cost of warranties based on specific warranty claims and claim history. However, the Company has never incurred significant expense under its product or service warranties. As a result, the Company believes its exposure related to these warranty agreements is minimal. Accordingly, there are no liabilities recorded for warranty claims as of June 30, 2012.

The Company enters into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company generally agrees to indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2012.

Certain of the Company’s agreements also provide for the performance of services at customer sites. These agreements may contain indemnification clauses, whereby the Company will indemnify the customer from any and all damages, losses, judgments, costs and expenses for acts of its employees or subcontractors resulting in bodily injury or property damage. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that would enable it to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2012.

As permitted under Delaware law, the Company has agreements with its directors whereby the Company will indemnify them for certain events or occurrences while the director is, or was, serving at the Company’s request in such capacity. The term of the director indemnification period is for the later of ten years after the date that the director ceases to serve in such capacity or the final termination of proceedings against the director as outlined in the indemnification agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company’s director and officer insurance policy would enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes its exposure related to these indemnification agreements is minimal. The Company has no liabilities recorded for these potential obligations as of June 30, 2012.

24

LIQUIDITY AND CAPITAL RESOURCES

Management believes that its current cash balances and cash generated from operations will be sufficient to meet theCompany’s cash needs for working capital and anticipated capital expenditures for at least the next twelve months. At June 30, 2012, the Company had $7,836,000 of cash and equivalents, a decrease of $548,000 from September 30, 2011. This decrease is principally attributable to the acquisition of intellectual property totaling $8,541,000 offset by $4.0 million of borrowing under a subordinated note and $1.5 million borrowing on the Company’s revolving line of credit, all of which occurred on March 30, 2012.  For additional information, see Notes 2 and 4 to the Company’s condensed consolidated financial statements.

At June 30, 2012, the Company had working capital of approximately $3,453,000 as compared to working capital of $5,423,000 at September 30, 2011. The Company expects cash flows from operations to remain positive as it anticipates profitability in the future. However, if the Company’s cash flow from operations were to decline significantly, it may need to consider reductions to its operating expenses. The Company does not anticipate additional cash requirements to fund significant growth or the acquisition of additional complementary technology or businesses. However, if in the future, such expenditures are anticipated or required, the Company may need to seek additional financing by issuing equity or obtaining credit facilities to fund such requirements. There can be no assurance that the Company will be able to issue additional equity or obtain a new credit facility at attractive prices or rates, or at all.

The Company had net income of approximately $1,311,000 for the nine months ended June 30, 2012 as compared to a net loss of approximately $69,000 for the nine months ended June 30, 2011. During the nine months ended June 30, 2012 and 2011, approximately $2,492,000 and $953,000, respectively, of cash was provided by the Company’s operations. During the nine months ended June 30, 2012, the main source of cash from operations was net income adjusted for depreciation and amortization and share-based compensation expense as well as increases in accounts payable, accrued expenses and other liabilities and deferred revenue.

Net cash used in investing activities for the nine months ended June 30, 2012 of $8,790,000 is primarily related to the acquisition of intellectual property from Math Strategies as well as the purchase of property and equipment and capitalized software development costs. The intellectual property was acquired pursuant to an Option Purchase Agreement with Math Strategies which gave the Company the option to purchase the intellectual property rights for a formula price based on a multiple of the aggregate royalties paid to Math Strategies by the Company for the four fiscal quarters preceding the exercise of the option.

Net cash provided by financing activities for the nine months ended June 30, 2012 of $5,655,000 is primarily related to cash received from the issuance of a $4.0 million long-term subordinated note and the borrowing of $1.5 million under a $2.0 million revolving credit facility as well as cash received from the exercise of stock options.

On March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with a private investment company. The terms of the Note and Warrant Purchase Agreement include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. Additionally, beginning on March 31, 2014 and on the last day of each month thereafter until the maturity date, the Company will make principal payments totaling $66,667. The Company is required under this agreement to maintain certain interest coverage and leverage ratios.

On March 30, 2012, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with a bank which established a $2.0 million revolving line of credit facility and borrowed $1.5 million under the Loan Agreement on that date. The Loan Agreement terminates on March 29, 2014. On that date, the principal amount of all advances under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor of 3.25%. The Company can borrow under the revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the Loan Agreement requires that the Company maintain certain net asset and net income ratios. The Company’s obligations under the line of credit facility are secured by substantially all of the Company’s assets other than intellectual property.

Management believes that the Company’s current operations have not been materially impacted by the effects of inflation.

25

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

At June 30, 2012, the Company did not participate in or hold any derivative financial instruments or commodity instruments. The Company holds no investment securities that possess significant market risk.

Primary Market Risk Exposures

The Company’s primary market risk exposure is foreign currency exchange rate risk. The Company’s exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of its international subsidiaries are almost exclusively conducted in their respective local currencies, and dollar advances to the Company’s international subsidiaries, if any, are usually considered to be of a long-term investment nature. Accordingly, the majority of currency movements are reflected in the Company’s other comprehensive income (loss). There are, however, certain situations where the Company will invoice customers in currencies other than its own. Such gains or losses from operating activity, whether realized or unrealized, are reflected in interest income and other income (expense), net in the condensed consolidated statements of operations. Currently, the Company does not engage in foreign currency hedging activities.

Item 4.  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

The principal executive officer and principal financial officer, with the participation of the Company’s management, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a−15(e) and 15d−15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period.

(b) Changes in Internal Controls.

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is occasionally involved in legal proceedings and other claims arising out of its operations in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows.

Item 1A.  Risk Factors

In addition to the other information set forth in this report, the reader should carefully consider the factors discussed in Part I, Item 1A under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, which could materially affect its business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known or that it currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. 

Item 6.  Exhibits

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

27

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 thereunto duly authorized on August 14, 2012.

DATAWATCH CORPORATION

/s/ Michael A. Morrison

Michael A. Morrison

President, Chief Executive Officer, and

Director (Principal Executive Officer)

/s/ Murray P. Fish

Murray P. Fish

Chief Financial Officer

(Principal Financial Officer)

28

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Michael A. Morrison, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Datawatch Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2012
	/s/ Michael A. Morrison
	Michael A. Morrison
	President, Chief Executive Officer
	and Director

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Murray P. Fish, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Datawatch Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2012
	/s/ Murray P. Fish
	Murray P. Fish
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Datawatch Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Morrison, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael A. Morrison

Michael A. Morrison

Chief Executive Officer

August 14, 2012

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Datawatch Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Murray P. Fish, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Murray P. Fish

Murray P. Fish

Chief Financial Officer

August 14, 2012

XML

Shareholders' Equity (Summary Of The Company's Stock Option Plans) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Jun. 30, 2012
Shareholders' Equity [Abstract]
Number of Options Outstanding, beginning balance	459,662
Weighted Average Exercise Price, beginning balance	$ 3.46
Number of Options Outstanding, Options Granted
Weighted-Average Exercise Price, Options Granted
Number of Options Outstanting, Options Canceled	(1,000)
Weighted-Average Exercise Price, Options Canceled	$ 2.68
Number of Options Outstanding, Options Exercised	(92,705)
Weighted -Average Exercise Price, Options Exercised	$ 2.54
Number of Options Outstanding, ending balance	365,957
Weighted Average Exercise Price, ending balance	$ 3.70
Weighted-Average Remaining Contractual Term, ending balance	4 years 4 months 17 days
Aggregate Intrinsic Value, ending balance	$ 3,368
Number of Options Outstanding, Vested or expected to vest	352,339
Weighted-Average Exercise Price, Vested or expected to vest	$ 3.69
Weighted-Average Remaining Contractula Term, Vested or expected to vest	4 years 3 months 29 days
Aggregate Intrinsic Value, Vested or expected to vest	3,246
Number of Options Outstanding, Exercisable	229,777
Weighted-Average Exercise Price, Exercisable	$ 3.56
Weighted-Average Remaining Contractual Term, Exercisable	3 years 7 months 13 days
Aggregate Intrinsic Value, Exercisable	$ 2,145

XML

Financing Arrangements (Schedule of future principal payments on subortinated note) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012
Financing Arrangements [Abstract]
Remainder of fiscal 2012
2013
2014	467
2015	800
2016	800
2017	800
Thereafter	1,133
Total estimated future amortization expense	$ 4,000

XML

Summary Of Significant Accounting Policies (Schedule of Revenue by Major Customers) (Details)	3 Months Ended		9 Months Ended		12 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Sep. 30, 2011
Ingram Micro Inc [Member]
Percentage of total revenue	1.00%	11.00%	4.00%	14.00%
Percentage of total accounts receivable					14.00%
Life Boat Distribution [Member]
Percentage of total revenue	22.00%	21.00%	13.00%	16.00%
Percentage of total accounts receivable			29.00%		18.00%

XML

Basic And Diluted Net Income (Loss) Per Share (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Basic And Diluted Net Income (Loss) Per Share [Abstract]
Potentially dilutive shares		12,473		141,826
Potentially dilutive restricted stock units	25,599	2,335	9,560	29,588
Potentially dilutive warrants			62,792

XML

Shareholder's Equity (Schedule Of Share-Based Compensation Expense Categories) (Details) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Share-based compensation expense	$ 227,000	$ 81,000	$ 560,000	$ 145,000
Sales And Marketing [Member]
Share-based compensation expense	118,000	34,000	317,000	45,000
Engineering And Product Development [Member]
Share-based compensation expense	20,000	3,000	29,000	6,000
General And Administrative [Member]
Share-based compensation expense	$ 89,000	$ 44,000	$ 214,000	$ 94,000

XML

Income Taxes

9 Months Ended

Jun. 30, 2012

Income Taxes [Abstract]

Income Taxes

Note 5 – Income Taxes

During the three and nine months ended June 30, 2012, the Company recorded $9,000 and $75,000, respectively, related to estimated federal alternative minimum taxes, estimated state taxes and uncertain tax positions relative to foreign taxes. During the three months ended June 30, 2011, the Company recorded $18,000 in income tax benefits primarily related to estimated state tax adjustments. During the nine months ended June 30, 2011, the Company recorded $34,000 related to estimated state taxes, estimated federal alternative minimum taxes and uncertain tax positions relative to foreign taxes.

Deferred Tax Assets

The Company’s deferred tax assets include net operating loss carry forwards and tax credits that expire at different times through and until 2031. Significant judgment is required in determining the Company’s provision for income taxes, the carrying value of deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Factors such as future reversals of deferred tax assets and liabilities, projected future taxable income, changes in enacted tax rates and the period over which the Company’s deferred tax assets will be recoverable are considered in making these determinations. Management does not believe the deferred tax assets are more likely than not to be realized and a full valuation allowance has been provided against the deferred tax assets at June 30, 2012 and September 30, 2011. 

Provision for Uncertain Tax Positions

At September 30, 2011, the Company had a $175,000 tax liability related to tax exposures that could result in cash payments, of which approximately $6,000 and $19,000, respectively, were recorded during the three and nine months ended June 30, 2011. The Company increased its tax liability by $6,000 during each of the three month periods ended December 31, 2011, March 31, 2012 and June 30, 2012. During the three and nine months ended June 30, 2012, the Company released a portion of its reserve for uncertain tax positions and recorded a benefit of $2,000 and $7,000, respectively. The Company does not expect its tax liability to change significantly during the next twelve months. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated statements of operations. To date, the Company has not accrued any amounts for interest and penalties associated with this liability as such amounts have been de minimis.

The Company’s unrecognized tax benefits (before consideration of any valuation allowance) represent differences between tax positions taken by the Company in its various consolidated and separate worldwide tax returns and the benefits recognized and measured for uncertain tax positions. This amount also represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The change in the unrecognized tax benefits during the nine months ended June 30, 2012 was as follows (in thousands):

Balance at October 1, 2011	$	850
Additions for prior year tax positions	12
Balance at June 30, 2012	$	862

In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as the United Kingdom, Germany, Australia, Singapore and the United States, and as a result, files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The fiscal years ended September 30, 2008 through September 30, 2010 are generally still open to examination in the jurisdictions listed above.

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Commitments And Contingencies (Details) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Royalty Expense	$ 21,000	$ 413,000	$ 1,116,000	$ 1,126,000
Number of royalty payments remaining, relating to Monarch Report Analytics platform			1
Maximum [Member]
Royalties as percentage of revenue			50.00%
Minimum [Member]
Royalties as percentage of revenue			7.00%

XML

Other Intangible Assets, Net (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Other Intangible Assets, Net [Abstract]
Amortization expense related to intangible assets	$ 52,000	$ 108,000	$ 167,000	$ 492,000

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Acquisition Of Intellectual Property (Schedule Of Future Amortization Expense Related To Intellectual Property) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Acquired Finite-Lived Intangible Assets [Line Items]
Remainder of fiscal 2012	$ 60
2013	235
2014	193
2015	179
2016	110
2017	13
Total estimated future amortization expense	853	878
Intellectual Property [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Remainder of fiscal 2012	431
2013	1,723
2014	1,723
2015	1,723
2016	1,723
2017	853
Total estimated future amortization expense	$ 8,176

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Segment Information (Schedule Of Revenues By Product Lines Percentages) (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Total percent of product line	100.00%	100.00%	100.00%	100.00%
Report Analytics Solutions [Member]
Percent of revenue by product line	96.00%	91.00%	95.00%	91.00%
Business Service Management Solutions [Member]
Percent of revenue by product line	4.00%	9.00%	5.00%	9.00%

XML

Other Intangible Assets, Net (Schedule Of Other Intangible Assets By Major Class) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2012	Sep. 30, 2011
Finite-Lived Intangible Assets [Line Items]
Identified Intangible Assets, Gross Carrying Amount	$ 4,754	$ 4,612
Identified Intangible Assets, Accumulated Amortization	3,901	3,734
Identified Intangible Assets, Net Carrying Amount	853	878
Capitalized Software [Member]
Finite-Lived Intangible Assets [Line Items]
Identified Intangible Assets, Weighted Average Useful Life in Years	2 years
Identified Intangible Assets, Gross Carrying Amount	2,716	2,662
Identified Intangible Assets, Accumulated Amortization	2,677	2,648
Identified Intangible Assets, Net Carrying Amount	39	14
Patents [Member]
Finite-Lived Intangible Assets [Line Items]
Identified Intangible Assets, Weighted Average Useful Life in Years	20 years
Identified Intangible Assets, Gross Carrying Amount	160	160
Identified Intangible Assets, Accumulated Amortization	63	57
Identified Intangible Assets, Net Carrying Amount	97	103
Customer Lists [Member]
Finite-Lived Intangible Assets [Line Items]
Identified Intangible Assets, Weighted Average Useful Life in Years	10 years
Identified Intangible Assets, Gross Carrying Amount	1,790	1,790
Identified Intangible Assets, Accumulated Amortization	1,153	1,029
Identified Intangible Assets, Net Carrying Amount	637	761
Loan Acquisition Costs [Member]
Finite-Lived Intangible Assets [Line Items]
Identified Intangible Assets, Weighted Average Useful Life in Years	4 years
Identified Intangible Assets, Gross Carrying Amount	88
Identified Intangible Assets, Accumulated Amortization	8
Identified Intangible Assets, Net Carrying Amount	$ 80

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Other Intangible Assets, Net (Schedule Of Future Intangible Assets) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Other Intangible Assets, Net [Abstract]
Remainder of fiscal 2012	$ 60
2013	235
2014	193
2015	179
2016	110
2017	13
Thereafter	63
Total estimated future amortization expense	$ 853	$ 878

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Financing Arrangements

9 Months Ended

Jun. 30, 2012

Financing Arrangements [Abstract]

Financing Arrangements

Note 4 – Financing Arrangements

Subordinated Note and Warrants

In connection with the acquisition of intellectual property disclosed in Note 2 to the Company’s condensed consolidated financial statements, on March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with Massachusetts Capital Resource Company (“MCRC”), the terms of which include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note issued to MCRC has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. The Company is also required under the MCRC agreement to maintain certain interest coverage and leverage ratios.

Future principal payments related to the subordinated note are as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	-
2013		-
2014		467
2015		800
2016		800
2017		800
Thereafter		1,133
Total future principal payments	$	4,000

The warrants issued to MCRC are exercisable at any time prior to the later of the repayment in full of the MCRC note or February 28, 2019 at a purchase price per share of $11.54, which is equal to the average closing price of the Company’s common stock for the 45 trading days prior to the issuance of the warrants on March 30, 2012. The number of shares issuable upon exercise of the warrants is subject to adjustment in connection with stock splits and other events impacting the Company’s common stock generally, however, the warrants do not provide the holder with any anti-dilution protection.

The Company accounted for the borrowing under the Note and Warrant Purchase Agreement in accordance with the guidance prescribed in the Financial Accounting Standards Board Accounting Standard Codification Topic 470-20, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“ASC 470-20”). In accordance with ASC 470-20, the value of the stock purchase warrants is considered an Original Issue Discount (“OID”) which is required to be amortized over the life of the note as interest expense with a corresponding credit to notes payable.The fair value of the warrants on March 30, 2012, as determined under the Accounting Standard Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) was approximately $1.1 million which is included in Additional Paid in Capital in the Company’s condensed consolidated balance sheets at June 30, 2012. The unamortized debt discount at June 30, 2012 was $1,056,000 which will be amortized to interest expense over the life of the subordinated note which is sevenyears. During the three and nine months ended June 30, 2012, interest expense related to the warrants was approximately $39,000 and $40,000, respectively.

Revolving Line of Credit

Also in connection with the intellectual property acquisition, on March 30, 2012, the Company entered into a $2.0 million revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan and Security Agreement with SVB. On March 30, 2012, the Company borrowed $1.5 million under this revolving credit facility. The revolving line of credit under the SVB facility terminates on March 29, 2014. On that date, the principal amount of all advances then outstanding under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor under the SVB agreement of 3.25%. The Company can borrow under the SVB revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the SVB facility requires that the Company maintain certain net asset and net income ratios. The Company’s obligations under the SVB facility are secured by substantially all of the Company’s assets other than intellectual property.

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Financing Arrangements (Narrative) (Details) (USD $)	9 Months Ended		3 Months Ended	9 Months Ended
	Jun. 30, 2012	Mar. 30, 2012	Jun. 30, 2012 Note Warrant [Member]	Jun. 30, 2012 Note Warrant [Member]
Subsidiary, Sale of Stock [Line Items]
Warrant for stock options	185,000
Debt instrument amount	$ 4,000,000	$ 4,000,000
Subordinated note maturity date	Feb. 28, 2019
Rate of subordinated note	10.00%
Share Price	$ 11.54
Trading period prior to the issuance of the warrants	45 days
Fair value of warrants	1,100,000
Life of subordinated note	7 years
Unamortized debt discount	1,056,000
Interest expense			39,000	40,000
Line of credit facility, maximum borrowing capacity	2,000,000	2,000,000
Line of Credit Facility, Amount Outstanding	$ 1,500,000	$ 1,500,000
Floating interest rate on outstanding revolving line of credit	1.50%
Interest rate floor on the SVB agreement	3.25%

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Stockholders' Equity (Schedule Of Restricted Stock Unit Information) (Details)	9 Months Ended
	Jun. 30, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options Outstanding, beginning balance	459,662
Number of Options Outstanding, Options Granted
Number of Options Outstanting, Options Canceled	(1,000)
Number of Options Outstanding, Options Vested	352,339
Number of Options Outstanding, Vested or expected to vest	352,339
Number of Options Outstanding, ending balance	365,957
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options Outstanding, beginning balance	294,344
Number of Options Outstanding, Options Granted	176,900
Number of Options Outstanting, Options Canceled	(4,002)
Number of Options Outstanding, Options Vested	(65,828)
Number of Options Outstanding, Vested or expected to vest	(65,828)
Number of Options Outstanding, ending balance	401,414

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
CURRENT ASSETS:
Cash and equivalents	$ 7,836	$ 8,384
Accounts receivable, less allowances for doubtful accounts and sales returns of $121 and $148, respectively	4,934	2,966
Inventories	51	49
Prepaid expenses	477	528
Total current assets	13,298	11,927
NONCURRENT ASSETS:
Property and equipment, net	288	270
Acquired intellectual property, net	8,176
Other intangible assets, net	853	878
Other long-term assets	299	59
Total assets	22,914	13,134
Liabilities, Current [Abstract]
Line of credit	1,500
Accounts payable	698	879
Accrued expenses	2,295	1,802
Deferred revenue	5,352	3,823
Total current liabilities	9,845	6,504
LONG-TERM LIABILITIES:
Note payable, long-term	2,944
Deferred revenue, long-term	280	113
Other liabilities	194	175
Total long-term liabilities	3,418	288
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $.01; 20,000,000 shares authorized; issued, 6,285,017 shares and 6,175,978 shares, respectively; outstanding, 6,270,771 shares and 6,161,732 shares, respectively	63	62
Additional paid-in capital	26,365	24,476
Accumulated deficit	(15,547)	(16,858)
Accumulated other comprehensive loss	(1,090)	(1,198)
Stockholders' equity before treasury stock	9,791	6,482
Less treasury stock, at cost, 14,246 shares	(140)	(140)
Total shareholders' equity	9,651	6,342
Total liabilities and shareholders' equity	$ 22,914	$ 13,134

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Segment Information (Schedule Of Revenues By Geographic Location) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Sep. 30, 2011
Total Revenue	$ 7,173	$ 4,413	$ 19,991	$ 13,047
Total Operating Income (Loss)	733	194	1,671	(93)
Non-current Assets	9,616		9,616		1,207
Domestic [Member]
Total Revenue	6,491	3,542	17,728	10,536
Total Operating Income (Loss)	1,030	216	2,231	(84)
Non-current Assets	9,543		9,543		1,139
International [Member]
Total Revenue	869	1,060	2,881	3,120
Total Operating Income (Loss)	(297)	(22)	(560)	(9)
Non-current Assets	73		73		68
Intercompany Eliminations [Member]
Total Revenue	$ (187)	$ (189)	$ (618)	$ (609)

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Acquisition Of Intellectual Property

9 Months Ended

Jun. 30, 2012

Acquisition Of Intellectual Property [Abstract]

Acquisition Of Intellectual Property

Note 2 – Acquisition of Intellectual Property

On March 30, 2012, the Company acquired the intellectual property which consisted primarily of the source code underlying its Monarch Report Analytics platform pursuant to an Option Purchase Agreement dated as of April 29, 2004 by and among the Company, Personics Corporation, Raymond J. Huger and Math Strategies, as amended (the “Option Agreement”). Under the formula contained in the Option Agreement, the purchase price paid for the intellectual property assets was $8,541,000 which was calculated based on a multiple of the aggregate royalties paid to Math Strategies by the Company for the four fiscal quarters preceding the exercise of the option. Additionally, the Company capitalized approximately $75,000 in closing costs and adjustments pursuant to a Supplemental Agreement dated March 30, 2012 between the Company and Raymond J. Huger. The intellectual property assets will be amortized to cost of software licenses using the straight-line method over the estimated life of the asset, which is five years. Amortization expense related to the intellectual property assets for the three and nine months ended June 30, 2012 was $431,000 and $440,000, respectively. The estimated future amortization expense related to the intellectual property is as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	431
2013		1,723
2014		1,723
2015		1,723
2016		1,723
2017		853
Total estimated future amortization expense	$	8,176

The purchase was funded in part through the issuance by the Company of a $4.0 million subordinated note and warrants for 185,000 shares of Company common stock to Massachusetts Capital Resource Company (“MCRC”), pursuant to a Note and Warrant Purchase Agreement entered into with MCRC as of March 30, 2012, and through the borrowing of $1.5 million under a new $2.0 million revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan and Security Agreement entered into with SVB as of March 30, 2012. See additional financing arrangement disclosures in Note 4 to the Company’s condensed consolidated financial statements.

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Income Taxes (Schedule Of Unrecognized Tax Benefits) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2012
Income Taxes [Abstract]
Beginning Balance	$ 850
Additions for prior year tax positions	12
Ending Balance	$ 862

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Comprehensive Income (Loss) (Tables)

9 Months Ended

Jun. 30, 2012

Comprehensive Income (Loss) [Abstract]

Schedule Of Comprehensive Income (Loss)

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
		(In thousands)
Net income (loss)	$	548	$	213	$	1,311	$	(69)
Other comprehensive income (loss):
Foreign currency translation adjustments		18		(2)		108		(54)
Comprehensive income (loss)	$	566	$	211	$	1,419	$	(123)

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Shareholders' Equity (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 227,000	$ 81,000	$ 560,000	$ 145,000
Option vesting period, years			3 years
Period from grant date in which options start to vest			3 months
Weighted-average fair value of options		$ 2.89		$ 2.16
Total intrinsic value of options	61,000	538,000	670,000	663,000
Proceeds from exercise of stock options	9,000		235,000	388,000
Unrecognized compensation costs related to non-vested stock option arrangments	280,000		280,000
Dividend yield				0.00%
Annualized estimated forfeiture rate			10.00%
Number of consecutive days for vesting period			20 days
Vesting condition price per share			$ 10
Weighted-average period for RSUs expense			2 years 4 months 24 days
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Option vesting period, years			3 years
Total number of unvested RSUs			401,414
RSU vesting rate	33.33%		33.33%
Fair value of RSUs			1,198,000	662,000
Weighted-average fair value per share RSUs			$ 6.77	$ 3.88
Restricted stock compensation expense	185,000	43,000	431,000	72,000
Total unrecognized compensation cost	$ 2,200,000		$ 2,200,000
Restricted Stock Units (RSUs) [Member] | Fifth Anniversary [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting condition, shares			209,171
Vesting condition price per share			$ 10
Restricted Stock Units (RSUs) [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration period from grant date			10 years
Restricted Stock Units (RSUs) [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration period from grant date			7 years
Restricted Stock Units (RSUs) [Member] | $10 Per Share Market Price [Member] | Fourth Anniversary [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting condition, shares			136,400
Vesting condition price per share			$ 10
Restricted Stock Units (RSUs) [Member] | $17.50 Per Share Market Price [Member] | Fourth Anniversary [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting condition, shares			20,500
Vesting condition price per share			$ 17.50

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Summary Of Significant Accounting Policies (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended			0 Months Ended	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Sep. 30, 2011	Dec. 06, 2010 Ingram Micro Inc [Member]	Jun. 30, 2012 United Health Group [Member]	Jun. 30, 2012 E & Y Global Services Limited [Member]	Jun. 30, 2012 Maximum [Member] Software and Software Development Costs [Member]	Jun. 30, 2012 Minimum [Member] Software and Software Development Costs [Member]
Summary of Significant Accounting Policies [Line Items]
License Sales To Distributors And Resellers As Percentage Of Total Revenue	34.00%	44.00%	31.00%	42.00%
Product warranty period			30 days
Money back guarantee period			30 days
Number Of Major Customers			2
Additional customer representing a significant portion of revenues							1
Percentage of revenue by major customer							9.00%	13.00%
Percent of direct sales to customer							7.00%
Percent of sales to customer through reseller							2.00%
Distribution agreement termination period						90 days
Finite-Lived Intangible Asset, Useful Life									24 months	18 months
Capitalized software development costs	$ 39,000		$ 39,000		$ 14,000
Capitalized software development costs related to new products			$ 54,000

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Other Intangible Assets, Net

9 Months Ended

Jun. 30, 2012

Other Intangible Assets, Net [Abstract]

Other Intangible Assets, Net

Note 3 – Other Intangible Assets, Net

Other intangible assets, net, were comprised of the following as of June 30, 2012 and September 30, 2011:

	Weighted	June 30, 2012						September 30, 2011
	Average	Gross				Net		Gross				Net
Identified Intangible	Useful Life	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
Asset	in Years	Amount		Amortization		Amount		Amount		Amortization		Amount
			(in thousands)
Capitalized software	2	$	2,716	$	2,677	$	39	$	2,662	$	2,648	$	14
Patents	20		160		63		97		160		57		103
Customer lists	10		1,790		1,153		637		1,790		1,029		761
Loan acquisition costs	4		88		8		80		-		-		-
Total		$	4,754	$	3,901	$	853	$	4,612	$	3,734	$	878

For the three months ended June 30, 2012 and 2011, amortization expense related to intangible assets was $52,000 and $108,000, respectively. For the nine months ended June 30, 2012 and 2011, amortization expense related to intangible assets was $167,000 and $492,000, respectively.

The estimated future amortization expense related to amortizing intangible assets as of June 30, 2012 is as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	60
2013		235
2014		193
2015		179
2016		110
2017		13
Thereafter		63
Total estimated future amortization expense	$	853

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Condensed Consolidated Statements Of Operations (USD $) Share data in Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
REVENUE:
Software licenses	$ 4,699,000	$ 2,400,000	$ 13,182,000	$ 7,063,000
Maintenance	2,106,000	1,527,000	5,683,000	4,569,000
Professional services	368,000	486,000	1,126,000	1,415,000
Total revenue	7,173,000	4,413,000	19,991,000	13,047,000
COSTS AND EXPENSES:
Cost of software licenses	509,000	530,000	1,743,000	1,661,000
Cost of maintenance and services	668,000	655,000	2,019,000	1,941,000
Sales and marketing	3,244,000	1,513,000	9,041,000	4,219,000
Engineering and product development	730,000	600,000	2,048,000	1,883,000
General and administrative	1,289,000	921,000	3,469,000	3,436,000
Total costs and expenses	6,440,000	4,219,000	18,320,000	13,140,000
INCOME (LOSS) FROM OPERATIONS	733,000	194,000	1,671,000	(93,000)
Interest income and other income (expense), net	(176,000)	1,000	(285,000)	58,000
INCOME (LOSS) BEFORE INCOME TAXES	557,000	195,000	1,386,000	(35,000)
Provision for income taxes	9,000	(18,000)	75,000	34,000
NET INCOME (LOSS)	$ 548,000	$ 213,000	$ 1,311,000	$ (69,000)
Net income (loss) per share-Basic	$ 0.09	$ 0.04	$ 0.21	$ (0.01)
Net income (loss) per share-Diluted	$ 0.08	$ 0.03	$ 0.20	$ (0.01)
Weighted-Average Shares Outstanding-Basic	6,288	6,077	6,224	5,999
Weighted-Average Shares Outstanding-Diluted	6,775	6,278	6,653	5,999

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Acquisition of Intellectual Property (Tables) (Intellectual Property [Member])

9 Months Ended

Jun. 30, 2012

Intellectual Property [Member]

Acquired Finite-Lived Intangible Assets [Line Items]

Schedule Of Future Amortization Expense Related To Intellectual Property

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	431
2013		1,723
2014		1,723
2015		1,723
2016		1,723
2017		853
Total estimated future amortization expense	$	8,176

XML

Document And Entity Information	9 Months Ended
	Jun. 30, 2012	Aug. 08, 2012
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2012
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2012
Entity Registrant Name	DATAWATCH CORP
Entity Central Index Key	0000792130
Current Fiscal Year End Date	--09-30
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,337,222

XML

Other Intangible Assets, Net (Tables)

9 Months Ended

Jun. 30, 2012

Acquired Finite-Lived Intangible Assets [Line Items]

Schedule Of Other Intangible Assets By Major Class

	Weighted	June 30, 2012						September 30, 2011
	Average	Gross				Net		Gross				Net
Identified Intangible	Useful Life	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
Asset	in Years	Amount		Amortization		Amount		Amount		Amortization		Amount
			(in thousands)
Capitalized software	2	$	2,716	$	2,677	$	39	$	2,662	$	2,648	$	14
Patents	20		160		63		97		160		57		103
Customer lists	10		1,790		1,153		637		1,790		1,029		761
Loan acquisition costs	4		88		8		80		-		-		-
Total		$	4,754	$	3,901	$	853	$	4,612	$	3,734	$	878

Other Intangible Assets [Member]

Acquired Finite-Lived Intangible Assets [Line Items]

Schedule Of Future Intangible Assets

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	60
2013		235
2014		193
2015		179
2016		110
2017		13
Thereafter		63
Total estimated future amortization expense	$	853

XML

Condensed Consolidated Statements Of Cash Flows (USD $)	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 1,311,000	$ (69,000)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	698,000	653,000
Provision for doubtful accounts and sales returns	26,000	9,000
Loss on disposition of fixed assets	1,000
Share-based compensation	560,000	145,000
Amortization of warrants	40,000
Changes in operating assets and liabilities:
Accounts receivable	(1,995,000)	(455,000)
Inventories	(2,000)	(17,000)
Prepaid expenses and other assets	(185,000)	(124,000)
Accounts payable, accrued expenses and other liabilities	333,000	378,000
Deferred revenue	1,705,000	433,000
Cash provided by operating activities	2,492,000	953,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and fixtures	(117,000)	(72,000)
Proceeds from sale of equipment	1,000
Purchase of intellectual property	(8,616,000)
Capitalized software development costs	(54,000)
Decrease in restricted cash		18,000
Increase in other assets	(4,000)	(32,000)
Cash used in investing activities	(8,790,000)	(86,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	235,000	388,000
Advances on line of credit	1,500,000
Proceeds from issuance of long-term debt	4,000,000
Debt issuance costs	(80,000)
Cash provided by financing activities	5,655,000	388,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS	95,000	(46,000)
(DECREASE) INCREASE IN CASH AND EQUIVALENTS	(548,000)	1,209,000
CASH AND EQUIVALENTS, BEGINNING OF PERIOD	8,384,000	7,053,000
CASH AND EQUIVALENTS, END OF PERIOD	7,836,000	8,262,000
SUPPLEMENTAL INFORMATION:
Income taxes paid	51,000	32,000
Interest paid	$ 120,000

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Basic And Diluted Net Income (Loss) Per Share

9 Months Ended

Jun. 30, 2012

Basic And Diluted Net Income (Loss) Per Share [Abstract]

Basic And Diluted Net Income (Loss) Per Share

Note 8 - Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the impact, when dilutive, of the exercise of stock options and the vesting of restricted stock units using the treasury stock method. Diluted net loss per share for the nine months ended June 30, 2011 is the same as basic net loss per share as the potentially dilutive securities are all anti-dilutive.

There were no potentially dilutive common stock options for the three or nine months ended June 30, 2012. Potentially dilutive common stock options aggregating 12,473 shares and 141,826 shares for the three and nine months ended June 30, 2011, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. Potentially dilutive restricted stock units aggregating 25,599 shares and 2,335 shares for the three months ended June 30, 2012 and 2011, respectively, and 9,560 shares and 29,588 shares for the nine months ended June 30, 2012 and 2011, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. There were no potentially dilutive warrants for the three months ended June 30, 2012. Potentially dilutive warrants aggregating 62,792 shares for the nine months ended June 30, 2012 have been excluded from the computation of diluted net income per share because their inclusion would be anti-dilutive.

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Comprehensive Income (Loss)

9 Months Ended

Jun. 30, 2012

Comprehensive Income (Loss) [Abstract]

Comprehensive Income (Loss)

Note 7 - Comprehensive Income (Loss)

The following table sets forth the reconciliation of net income (loss) to comprehensive income (loss):

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
		(In thousands)
Net income (loss)	$	548	$	213	$	1,311	$	(69)
Other comprehensive income (loss):
Foreign currency translation adjustments		18		(2)		108		(54)
Comprehensive income (loss)	$	566	$	211	$	1,419	$	(123)

Accumulated other comprehensive loss reported in the condensed consolidated balance sheets consists solely of foreign currency translation adjustments.

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Segment Information (Tables)

9 Months Ended

Jun. 30, 2012

Segment Information [Abstract]

Schedule Of Revenues By Product Lines Percentages

	Three Months Ended		Nine Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
Report Analytics Solutions (including Monarch, Monarch Data Pump, Monarch Enterprise Server, Monarch RMS, Datawatch Dashboards, Monarch Report Manager on Demand and iMergence)	96%	91%	95%	91%
Business Service Management Solutions (including Visual QSM and Visual HD)	4%	9%	5%	9%
Total	100%	100%	100%	100%

Schedule Of Revenues By Geographic Location

					Intercompany
	Domestic		International		Eliminations		Total
		(In thousands)
Total Revenue
Three months endedJune 30, 2012	$	6,491	$	869	$	(187)	$	7,173
Three months endedJune 30, 2011	$	3,542	$	1,060	$	(189)	$	4,413
Nine months endedJune 30, 2012	$	17,728	$	2,881	$	(618)	$	19,991
Nine months endedJune 30, 2011	$	10,536	$	3,120	$	(609)	$	13,047
Total Operating Income (Loss)
Three months endedJune 30, 2012	$	1,030	$	(297)	$	-	$	733
Three months endedJune 30, 2011	$	216	$	(22)	$	-	$	194
Nine months endedJune 30, 2012	$	2,231	$	(560)	$	-	$	1,671
Nine months endedJune 30, 2011	$	(84)	$	(9)	$	-	$	(93)
Non-current Assets
At June 30, 2012	$	9,543	$	73	$	-	$	9,616
At September 30, 2011	$	1,139	$	68	$	-	$	1,207

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Financing Activities (Tables)

9 Months Ended

Jun. 30, 2012

Financing Arrangements [Abstract]

Schedule of future principal payments on subortinated note

Fiscal Years Ended September 30,
Remainder of fiscal 2012	$	-
2013		-
2014		467
2015		800
2016		800
2017		800
Thereafter		1,133
Total future principal payments	$	4,000

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Summary Of Significant Accounting Policies (Policy)

9 Months Ended

Jun. 30, 2012

Summary Of Significant Accounting Policies [Abstract]

Basis Of Presentation And Principals Of Consolidation

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Datawatch Corporation (the “Company”) and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 filed with the SEC. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2011, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation with no impact on net income or earnings per share.

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, useful lives of property and equipment, and the valuation of net deferred tax assets, acquired intellectual property, other intangible assets and share-based awards.

Revenue Recognition

Revenue Recognition

Revenue allocated to software products, specified upgrades and enhancements is recognized upon delivery of the related product, upgrades or enhancements. Revenue is allocated by vendor specific objective evidence (“VSOE”) of fair value to post-contract customer support (primarily maintenance) and is recognized ratably over the term of the support, and revenue allocated using VSOE to service elements (primarily training and consulting) is recognized as the services are performed. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements.

The Company licenses its software products directly to end-users, through value added resellers and through distributors. Sales to distributors and resellers accounted for approximately 34% and 44%, respectively, of total sales for the three months ended June 30, 2012 and 2011, and 31% and 42%, respectively, of total sales for the nine months ended June 30, 2012 and 2011. Revenue from the sale of all software products (when separately sold) is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. Both types of the Company’s software product offerings are “off-the-shelf” as such term is customarily defined. The Company’s software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations by the Company.

Datawatch software products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to the software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the professional services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and do not involve modification or customization of the software or any other unusual acceptance clauses or terms. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the period of support (generally one year). Such deferred amounts are recorded as part of deferred revenue in the Company’s condensed consolidated balance sheets.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. The Company also offers a 30 day money-back guarantee on its Monarch product sold directly to end-users. Additionally, the Company provides its distributors with stock-balancing rights. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors and resellers, which the Company monitors frequently.

Share-Based Compensation

Share-Based Compensation

All share-based awards, including grants of employee stock options and restricted stock units, are recognized in the financial statements based on their fair value at date of grant.

The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 6 to the Company’s condensed consolidated financial statements.

Concentration Of Credit Risks And Major Customers

Concentration of Credit Risks and Major Customers

The Company licenses its products and services to U.S. and non-U.S. distributors and other software resellers, as well as to end users, under customary credit terms. Two customers, Ingram Micro, Inc. and Lifeboat Distribution, individually accounted for the following percentages of total revenue and accounts receivable for the periods indicated:

	Percentage of total		Percentage of total
	revenue for the three		revenue for the nine		Percentage of total
	months ended		months ended		accounts receivable at
	June 30,		June 30,		June 30,	September 30,
	2012	2011	2012	2011	2012	2011
Ingram Micro, Inc.	1%	11%	4%	14%	-	14%
Lifeboat Distribution	22%	21%	13%	16%	29%	18%

The Company licenses to Lifeboat Distribution under a distribution agreement which automatically renews for successive one-year terms unless terminated. On December 6, 2011, the Company exercised a 90 day notice provision under a distribution agreement with Ingram Micro, Inc. to terminate its relationship with that distributor. The termination was effective March 6, 2012. Effective March 7, 2012, Lifeboat Distribution became the sole North American distributor for the Company’s Monarch Report Analytics platform. In addition to the customers listed above, one additional customer, United Health Group, individually accounted for approximately 9% of total revenue for the nine months ended June 30, 2012, which included 7% of sales directly to United Health Group and 2% of sales to United Health Group through a reseller. Additionally, one other customer, E&Y Global Services Limited, individually accounted for approximately 13% of total accounts receivable at June 30, 2012. Other than these customers, no other customer constitutes a significant portion (more than 10%) of revenues or accounts receivable for the periods presented. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are provided for anticipated doubtful accounts and sales returns based on management’s review of receivables, inventory held at distributors and historical trends.

Capitalized Software Development Costs

Capitalized Software Development Costs

The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to engineering and product development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life of the product (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally 18 to 24 months. The net amount of capitalized software development costs was approximately $39,000 and $14,000 at June 30, 2012 and September 30, 2011, respectively. During the nine months ended June 30, 2012, the Company capitalized approximately $54,000 of software development costs related to products developed in fiscal year 2012. The Company did not capitalize any software development costs during the nine months ended June 30, 2011.

Other Intangible Assets

Other Intangible Assets

Other intangible assets consist of internally developed software, patents and customer lists acquired through business combinations. The values allocated to the majority of these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in cost of software licenses. The values allocated to customer relationships are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in sales and marketing expenses. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

Income Taxes

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits. Valuation allowances are recorded to reduce the net deferred tax assets to amounts the Company believes are more likely than not to be realized.

The Company follows the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Cash And Equivalents

Cash and Equivalents

Cash and equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original maturities of 90 days or less. The Company’s cash equivalents are carried at fair value, which 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. The Company classifies the inputs used to measure fair value into the following hierarchy:

·Level 1 – Observable inputs such as quoted prices in active markets;

·Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table represents information about the Company’s cash equivalents measured at fair value on a recurring basis at June 30, 2012 (in thousands):

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Balance at June 30, 2012
Money market funds	$	2,234	$	2,234	$	-	$	-
Balance at September 30, 2011
Money market funds	$	2,233	$	2,233	$	-	$	-

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Commitments And Contingencies

9 Months Ended

Jun. 30, 2012

Commitments And Contingencies [Abstract]

Commitments And Contingencies

Note 9 - Commitments and Contingencies

Prior to the acquisition of intellectual property disclosed in Note 2 to these condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Royalty expense included in cost of software licenses was approximately $21,000 and $413,000, for the three months ended June 30, 2012 and 2011, respectively, and $1,116,000 and $1,126,000, for the nine months ended June 30, 2012 and 2011, respectively. The Company is not obligated to pay any minimum amounts for royalties.As a result of the acquisition of the intellectual property, the Company is no longer required to pay royalties related to its Monarch Report Analytics platform, exclusive of one final payment representing the amount that would have been due for the 30 day period ended April 30, 2012 had the closing of the acquisition not previously occurred. The final royalty payment related to the Monarch Report Analytics platform was made in July 2012.

From time to time, the Company is subject to claims and may be party to actions that arise in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations.

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Segment Information

9 Months Ended

Jun. 30, 2012

Segment Information [Abstract]

Segment Information

Note 10 - Segment Information

The Company has determined that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.

The following table presents information about the Company’s revenue by product lines:

	Three Months Ended		Nine Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
Report Analytics Solutions (including Monarch, Monarch Data Pump, Monarch Enterprise Server, Monarch RMS, Datawatch Dashboards, Monarch Report Manager on Demand and iMergence)	96%	91%	95%	91%
Business Service Management Solutions (including Visual QSM and Visual HD)	4%	9%	5%	9%
Total	100%	100%	100%	100%

The Company conducts operations in the U.S. and internationally. The following table presents information about the Company’s geographic operations:

					Intercompany
	Domestic		International		Eliminations		Total
		(In thousands)
Total Revenue
Three months endedJune 30, 2012	$	6,491	$	869	$	(187)	$	7,173
Three months endedJune 30, 2011	$	3,542	$	1,060	$	(189)	$	4,413
Nine months endedJune 30, 2012	$	17,728	$	2,881	$	(618)	$	19,991
Nine months endedJune 30, 2011	$	10,536	$	3,120	$	(609)	$	13,047
Total Operating Income (Loss)
Three months endedJune 30, 2012	$	1,030	$	(297)	$	-	$	733
Three months endedJune 30, 2011	$	216	$	(22)	$	-	$	194
Nine months endedJune 30, 2012	$	2,231	$	(560)	$	-	$	1,671
Nine months endedJune 30, 2011	$	(84)	$	(9)	$	-	$	(93)
Non-current Assets
At June 30, 2012	$	9,543	$	73	$	-	$	9,616
At September 30, 2011	$	1,139	$	68	$	-	$	1,207

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Summary Of Significant Accounting Policies (Tables)

9 Months Ended

Jun. 30, 2012

Summary Of Significant Accounting Policies [Abstract]

Schedule of Revenue by Major Customers

	Percentage of total		Percentage of total
	revenue for the three		revenue for the nine		Percentage of total
	months ended		months ended		accounts receivable at
	June 30,		June 30,		June 30,	September 30,
	2012	2011	2012	2011	2012	2011
Ingram Micro, Inc.	1%	11%	4%	14%	-	14%
Lifeboat Distribution	22%	21%	13%	16%	29%	18%

Schedule cash equivalents measured at fair value on a recurring basis

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Balance at June 30, 2012
Money market funds	$	2,234	$	2,234	$	-	$	-
Balance at September 30, 2011
Money market funds	$	2,233	$	2,233	$	-	$	-

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Income Taxes (Narrative) (Details) (USD $)	3 Months Ended				9 Months Ended
	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Sep. 30, 2011
Income Taxes [Abstract]
Provision for income taxes	$ 9,000			$ (18,000)	$ 75,000	$ 34,000
Tax liability for uncertain tax postions	6,000	6,000	6,000		19,000
Potential cash payments related to cash exposures							175,000
Benefit for uncertain tax position	$ 2,000				$ 7,000

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Shareholders' Equity (Tables)

9 Months Ended

Jun. 30, 2012

Shareholders' Equity [Abstract]

Schedule Of Share-Based Compensation Expense Categories

	Three months ended June 30,				Nine months ended June 30,
	2012		2011		2012		2011
		(In thousands)
Sales and marketing	$	118	$	34	$	317	$	45
Engineering and product development		20		3		29		6
General and administrative		89		44		214		94
	$	227	$	81	$	560	$	145

Key Assumptions Use In Option Value Calculations

2011

Expected life5 years

Expected volatility66.26 – 67.32%

Weighted-average volatility66.56%

Risk free interest rate1.49 – 2.38%

Dividend yield0.0%

Summary Of The Company's Stock Option Plans

	Number of Options Outstanding		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value $(000)
Outstanding, October 1, 2011	459,662		$	3.46
Granted	–		–
Canceled	(1,000	)	2.68
Exercised	(92,705	)	2.54
Outstanding, June 30, 2012	365,957		$	3.70	4.38	$ 3,368
Vested or expected to vest, June 30, 2012	352,339		$	3.69	4.33	$ 3,246
Exercisable, June 30, 2012	229,777		$	3.56	3.62	$ 2,145

Schedule Of Restricted Stock Unit Information

	Number of
	RSUs
	Outstanding
Outstanding, October 1, 2011	294,344
Granted	176,900
Canceled	(4,002	)
Vested	(65,828	)
Outstanding, June 30, 2012	401,414

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Summary Of Significant Accounting Policies (Cash Equivalents Measured At Fair Value On A Recurring Basis) (Details) (Money Market Funds [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Cash and Cash Equivalents [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	$ 2,234	$ 2,233
Quoted Prices In Active Markets For Identical Assets, Level 1 [Member]
Cash and Cash Equivalents [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	2,234	2,233
Significan Other Observable Inputs, Level 2 [Member]
Cash and Cash Equivalents [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure
Significant Unobservable Inputs, Level 3 [Member]
Cash and Cash Equivalents [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure

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Comprehensive Income (Loss) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Comprehensive Income (Loss) [Abstract]
Net income (loss)	$ 548	$ 213	$ 1,311	$ (69)
Foreign currency translation adjustments	18	(2)	108	(54)
Comprehensive income (loss)	$ 566	$ 211	$ 1,419	$ (123)

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Summary Of Significant Accounting Policies

9 Months Ended

Jun. 30, 2012

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Datawatch Corporation (the “Company”) and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 filed with the SEC. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2011, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation with no impact on net income or earnings per share.

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, useful lives of property and equipment, and the valuation of net deferred tax assets, acquired intellectual property, other intangible assets and share-based awards.

Revenue Recognition

Revenue allocated to software products, specified upgrades and enhancements is recognized upon delivery of the related product, upgrades or enhancements. Revenue is allocated by vendor specific objective evidence (“VSOE”) of fair value to post-contract customer support (primarily maintenance) and is recognized ratably over the term of the support, and revenue allocated using VSOE to service elements (primarily training and consulting) is recognized as the services are performed. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements.

The Company licenses its software products directly to end-users, through value added resellers and through distributors. Sales to distributors and resellers accounted for approximately 34% and 44%, respectively, of total sales for the three months ended June 30, 2012 and 2011, and 31% and 42%, respectively, of total sales for the nine months ended June 30, 2012 and 2011. Revenue from the sale of all software products (when separately sold) is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. Both types of the Company’s software product offerings are “off-the-shelf” as such term is customarily defined. The Company’s software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations by the Company.

Datawatch software products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to the software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the professional services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and do not involve modification or customization of the software or any other unusual acceptance clauses or terms. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the period of support (generally one year). Such deferred amounts are recorded as part of deferred revenue in the Company’s condensed consolidated balance sheets.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. The Company also offers a 30 day money-back guarantee on its Monarch product sold directly to end-users. Additionally, the Company provides its distributors with stock-balancing rights. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors and resellers, which the Company monitors frequently.

Share-Based Compensation

All share-based awards, including grants of employee stock options and restricted stock units, are recognized in the financial statements based on their fair value at date of grant.

The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 6 to the Company’s condensed consolidated financial statements.

Concentration of Credit Risks and Major Customers

The Company licenses its products and services to U.S. and non-U.S. distributors and other software resellers, as well as to end users, under customary credit terms. Two customers, Ingram Micro, Inc. and Lifeboat Distribution, individually accounted for the following percentages of total revenue and accounts receivable for the periods indicated:

	Percentage of total		Percentage of total
	revenue for the three		revenue for the nine		Percentage of total
	months ended		months ended		accounts receivable at
	June 30,		June 30,		June 30,	September 30,
	2012	2011	2012	2011	2012	2011
Ingram Micro, Inc.	1%	11%	4%	14%	-	14%
Lifeboat Distribution	22%	21%	13%	16%	29%	18%

The Company licenses to Lifeboat Distribution under a distribution agreement which automatically renews for successive one-year terms unless terminated. On December 6, 2011, the Company exercised a 90 day notice provision under a distribution agreement with Ingram Micro, Inc. to terminate its relationship with that distributor. The termination was effective March 6, 2012. Effective March 7, 2012, Lifeboat Distribution became the sole North American distributor for the Company’s Monarch Report Analytics platform. In addition to the customers listed above, one additional customer, United Health Group, individually accounted for approximately 9% of total revenue for the nine months ended June 30, 2012, which included 7% of sales directly to United Health Group and 2% of sales to United Health Group through a reseller. Additionally, one other customer, E&Y Global Services Limited, individually accounted for approximately 13% of total accounts receivable at June 30, 2012. Other than these customers, no other customer constitutes a significant portion (more than 10%) of revenues or accounts receivable for the periods presented. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are provided for anticipated doubtful accounts and sales returns based on management’s review of receivables, inventory held at distributors and historical trends.

Capitalized Software Development Costs

The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to engineering and product development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life of the product (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally 18 to 24 months. The net amount of capitalized software development costs was approximately $39,000 and $14,000 at June 30, 2012 and September 30, 2011, respectively. During the nine months ended June 30, 2012, the Company capitalized approximately $54,000 of software development costs related to products developed in fiscal year 2012. The Company did not capitalize any software development costs during the nine months ended June 30, 2011.

Other Intangible Assets

Other intangible assets consist of internally developed software, patents and customer lists acquired through business combinations. The values allocated to the majority of these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in cost of software licenses. The values allocated to customer relationships are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in sales and marketing expenses. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits. Valuation allowances are recorded to reduce the net deferred tax assets to amounts the Company believes are more likely than not to be realized.

The Company follows the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Cash and Equivalents

Cash and equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original maturities of 90 days or less. The Company’s cash equivalents are carried at fair value, which 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. The Company classifies the inputs used to measure fair value into the following hierarchy:

·Level 1 – Observable inputs such as quoted prices in active markets;

·Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table represents information about the Company’s cash equivalents measured at fair value on a recurring basis at June 30, 2012 (in thousands):

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Balance at June 30, 2012
Money market funds	$	2,234	$	2,234	$	-	$	-
Balance at September 30, 2011
Money market funds	$	2,233	$	2,233	$	-	$	-

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”(“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This standard also expands the disclosure requirements particularly for level 3 fair value measurements. This standard is effective on a prospective basis for reporting periods beginning on or after December 15, 2011. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under this standard, an entity can elect to present items of net income and other comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating what impact, if any, this standard will have on its condensed consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 supersedes certain paragraphs in ASU 2011-05 which pertain to how, when and where reclassification adjustments out of accumulated other comprehensive income are presented. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating what impact, if any, this standard will have on its condensed consolidated financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity to make a qualitative assessment of whether it is not more likely than not that indefinite-lived intangible assets are impaired before calculating the fair value of the assets. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, although early adoption is permitted. The Company does not expect the adoption of this standard to have a material effect on the Company's financial position, results of operations or cash flows.

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Shareholders' Equity

9 Months Ended

Jun. 30, 2012

Shareholders' Equity [Abstract]

Shareholders' Equity

Note 6 – Shareholders’ Equity

Share-based compensation expense for the three months ended June 30, 2012 and 2011 was $227,000 and $81,000, respectively, and $560,000 and $145,000 for the nine months ended June 30, 2012 and 2011, respectively, as included in the following expense categories:

	Three months ended June 30,				Nine months ended June 30,
	2012		2011		2012		2011
		(In thousands)
Sales and marketing	$	118	$	34	$	317	$	45
Engineering and product development		20		3		29		6
General and administrative		89		44		214		94
	$	227	$	81	$	560	$	145

The Company’s stock compensation plans provide for the granting of restricted stock units and either incentive or non-qualified stock options to employees and non-employee directors. Options and restricted stock units are subject to terms and conditions determined by the Compensation and Stock Committee of the Board of Directors. Options generally vest over a three year period beginning three months from the date of grant and expire either seven or ten years from the date of grant. Restricted stock units generally vest annually over a three year period. Through April 25, 2011, restricted stock units and stock options were granted under the 2006 Equity Compensation and Incentive Plan and thereafter under the 2011 Equity Compensation and Incentive Plan.

Stock Options

The Company uses the Black-Scholes option-pricing model to calculate the fair value of options on the date of grant. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate and dividend yield. No options were granted under the stock option plans for the three or nine months ended June 30, 2012. The weighted-average fair value of options granted under the stock option plans for the three and nine months ended June 30, 2011 was $2.89and $2.16, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2012 and 2011 was approximately $61,000 and $538,000, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2012 and 2011 was approximately $670,000 and $663,000, respectively. Total cash received from option exercises during the three and nine months ended June 30, 2012 was $9,000 and $235,000, respectively. As of June 30, 2012, there was $280,000 of total unrecognized compensation cost related to non-vested stock option arrangements, which is expected to be recognized over a weighted-average period of 1.83 years.

Many of the assumptions used in the determination of compensation expense are judgmental and highly volatile. The table below indicates the key assumptions used in the option valuation calculations for options granted in the nine months ended June 30, 2011:

2011

Expected life5 years

Expected volatility66.26 – 67.32%

Weighted-average volatility66.56%

Risk free interest rate1.49 – 2.38%

Dividend yield0.0%

The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which are obtained from public data sources. The risk-free interest rate is equal to the historical U.S. Treasury zero-coupon bond rate with a remaining term equal to the expected life of the option. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than estimated.

The following table summarizes information about the Company’s stock option plans for the nine months ended June 30, 2012.

	Number of Options Outstanding		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value $(000)
Outstanding, October 1, 2011	459,662		$	3.46
Granted	–		–
Canceled	(1,000	)	2.68
Exercised	(92,705	)	2.54
Outstanding, June 30, 2012	365,957		$	3.70	4.38	$ 3,368
Vested or expected to vest, June 30, 2012	352,339		$	3.69	4.33	$ 3,246
Exercisable, June 30, 2012	229,777		$	3.56	3.62	$ 2,145

Restricted Stock Units

The Company periodically grants awards of restricted stock units (“RSU”) to each of its non-employee directors and some of its management team and employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested at June 30, 2012 was 401,414. Each RSU vests at the rate of 33.33% on each of the first through third anniversaries of the grant date with final vesting of the most recent grants scheduled to occur in June 2015. Included in the total number of RSUs unvested at June 30, 2012 are 209,171 RSUs which are subject to a further vesting condition that the Company’s common stock must trade at a price greater than $10 per share on a national securities exchange for a period of twenty consecutive days on or prior to the fifth anniversary of the grant date, 136,400 RSUs with the same $10 per share market price vesting condition on or prior to the fourth anniversary of the grant date and 20,500 RSUs with a $17.50 per share market price vesting condition on or prior to the fourth anniversary of the grant date. The Company’s common stock satisfied the $10 per share market price vesting condition in the quarters ended March 31, 2012 and June 30, 2012. For such RSUs, the Company performed fair value analysis using the Monte Carlo option-pricing model. The fair value related to the RSUs was calculated based primarily on the average stock price of the Company’s common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development and general and administrative expense. The fair values of the RSUs granted in the nine months ended June 30, 2012 and 2011, respectively, were approximately $1,198,0000 (or $6.77 weighted-average fair value per share) and $662,000 (or $3.88 weighted-average fair value per share). The Company recorded compensation expense related to RSUs of approximately $185,000 and $43,000 for the three months ended June 30, 2012 and 2011, respectively, and $431,000 and $72,000 for the nine months ended June 30, 2012 and 2011, respectively. These amounts are included in the total share-based compensation expense disclosed above. As of June 30, 2012, there was approximately $2.2 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.4 years.

The following table presents RSU information for the nine months ended June 30, 2012:

	Number of
	RSUs
	Outstanding
Outstanding, October 1, 2011	294,344
Granted	176,900
Canceled	(4,002	)
Vested	(65,828	)
Outstanding, June 30, 2012	401,414

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Acquisition Of Intellectual Property (Narrative) (Details) (USD $)	3 Months Ended	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	Mar. 30, 2012
Acquisition Of Intellectual Property [Abstract]
Software licenses useful life		5 years
Purchase price of intellectual property	$ 8,541,000	$ 8,541,000	$ 8,541,000
Capitalized closing costs and adjustments	75,000	75,000
Amortization expense on intellectual property	431,000	440,000
Debt instrument amount	4,000,000	4,000,000	4,000,000
Warrant for stock options	185,000	185,000
Line of Credit Facility, Amount Outstanding	1,500,000	1,500,000	1,500,000
Line of credit facility, maximum borrowing capacity	$ 2,000,000	$ 2,000,000	$ 2,000,000

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Shareholder's Equity (Key Assumptions Use In Option Value Calculations) (Details)	9 Months Ended
	Jun. 30, 2011
Shareholders' Equity [Abstract]
Expected life	5 years
Expected volatility, Minimum	66.26%
Expected volatility, maximum	67.32%
Weighted-average volatility	66.56%
Risk free interest rate, minimum	1.49%
Risk free interest rate, maximum	2.38%
Dividend yield	0.00%

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Income Taxes (Tables)

9 Months Ended

Jun. 30, 2012

Income Taxes [Abstract]

Schedule Of Unrecognized Tax Benefits

Balance at October 1, 2011	$	850
Additions for prior year tax positions	12
Balance at June 30, 2012	$	862