10-Q 1 a5689715.txt AFFINITY TECHNOLOGY GROUP, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2008 Commission file number: 0-28152 Affinity Technology Group, Inc. (Exact name of registrant as specified in its charter) Delaware 57-0991269 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Affinity Technology Group, Inc. 1310 Lady Street, Suite 601 Columbia, SC 29201 (Address of principal executive offices) (Zip code) (803) 758-2511 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [_] Accelerated Filer [_] Non-Accelerated Filer [_] Smaller Reporting Company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 47,142,398 shares of Common Stock, $0.0001 par value, as of May 1, 2008. AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 4 Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16 ITEM 4. Controls and Procedures 16 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 17 ITEM 1A. Risk Factors 17 ITEM 6. Exhibits 17 Signature 18 2 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements in this report (including Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not descriptions of historical facts, such as statements about the Company's future prospects and cash requirements, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by words such as "may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "intend," "continue" and similar expressions, although some forward-looking statements may be expressed differently. Actual results may vary due to risks and uncertainties, including the recent adverse ruling of the Federal Appeals Court in its patent litigation as discussed in this report, which, combined with the Company's very limited capital resources, has threatened the viability of the Company's business as a going concern and may make it difficult or impossible to raise additional capital in amounts sufficient to permit it to continue operations or pursue further legal options for vindicating its patent claims; the risk that the Company may lose all or part of the claims covered by its patents as a result of challenges to its patents; the risk that its patents may be subject to additional reexamination by the U.S. Patent and Trademark Office or challenges by third parties; the results of ongoing litigation, including the recent adverse ruling of the Federal Appeals Court in the Company's patent litigation; and, unanticipated costs and expenses affecting the Company's cash position. Additionally, the Company's petition to the South Carolina Supreme Court relating to its lawsuit with Temple Ligon was denied. As a result, a judgment will be entered against the Company of $382,148, plus accrued interest. The Company does not have the cash resources to pay this judgment. If the Company is not able to raise additional capital to fund its ongoing operations and patent infringement litigation expenses or is unable to resolve or postpone the judgment in the Temple Ligon matter in a manner which will alleviate the payment of more than an insignificant amount of cash in the near term, it would, for reasons in addition to the other reasons discussed above, likely be forced to implement alternatives under consideration for for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. Moreover, there can be no assurance that the Company will prevail on its claims of patent infringement against third parties or that such claims will result in the award of monetary damages to the Company. These and other factors discussed in the Company's filings with the Securities and Exchange Commission, including the information set forth in Part I, Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2007, may cause actual results to differ materially from those anticipated. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The Company undertakes no ongoing obligation to update any forward-looking statements if it learns that any such forward-looking statements or the underlying assumptions are incorrect. As used in this report, unless the context otherwise requires, the terms "we," "our," "us" (or similar terms), the "Company" or "Affinity" include Affinity Technology Group, Inc. and its subsidiaries, except that when used with reference to common stock or other securities described herein and in describing the positions held by management of the Company, the term includes only Affinity Technology Group, Inc. 3 Part I. Financial Information Item 1. Financial Statements Affinity Technology Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

See accompanying notes to Condensed Consolidated Financial Statements. 4 Affinity Technology Group, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

5 Affinity Technology Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements. 6 Notes to Condensed Consolidated Financial Statements 1. The Company - Going Concern Affinity Technology Group, Inc., (the "Company") was formed to develop and market technologies that enable financial institutions and other businesses to provide consumer financial services electronically with reduced or no human intervention. Products and services previously offered by the Company include its DeciSys/RT loan processing system, which automated the processing and consummation of consumer financial services transactions; the Affinity Automated Loan Machine (the "ALM"), which allowed an applicant to apply for and, if approved, obtain a loan in as little as ten minutes; the Mortgage ALM, which allowed an applicant to apply for a mortgage loan; e-xpertLender, which permitted a financial institution to make automated lending decisions through its call centers and branches; iDEAL, which permitted automobile lenders to make automobile lending decisions for loan applications originated at automobile dealers; and rtDS, which permitted lenders to deliver credit decisions to applicants over the Internet. Due to capital constraints, the Company has suspended all efforts to further develop, market and operate these products and services. The Company's last processing contract terminated in late 2002, and the Company has no plans in the near term to engage in further sales or other activities related to its products or services, other than to attempt to license certain of the patents that it owns. Currently, the Company's business activities consist exclusively of attempting to enter into license agreements with third parties to license the Company's rights under certain of its patents and in pursuing patent litigation in an effort to protect this intellectual property and obtain recourse against alleged infringement of these patents. To date, the Company has generated substantial operating losses and has been required to use a substantial amount of cash resources to fund its operations. At March 31, 2008, the Company had cash and cash equivalents of $35,391 and a working capital deficit of $4,440,398. The Company has generally been unable to enter into licensing agreements with potential licensees of its patents upon terms that are acceptable and has sought recourse through litigation with alleged infringers of its patents. The Company's lawsuits against the alleged infringers have been dismissed by the United States District Court for the District of South Carolina located in Columbia, South Carolina (the "Columbia Federal Court"), and its appeal to the United States Court of Appeals for the Federal Circuit (the "Federal Appeals Court") resulted in a claim construction of the term "remote interface" that is unfavorable. Accordingly, unless the Company is able to secure a reversal of the Federal Appeals Court's construction of the term "remote interface" in a very short period of time, the Company believes its business and the value of its patents will likely be materially and adversely affected and that it will likely be unable to access new capital resources sufficient to allow it to pursue enforcement of its remaining patent rights or to continue operations. The Company can give no assurances that it will be able to secure a reversal of the Federal Appeals Court's construction of the term "remote interface" or that it will be able to raise additional capital or generate capital from its patent licensing business at all or in amounts sufficient to continue its business in its present form or at all. Additionally, the Company has convertible notes outstanding in the aggregate principal amount of $3,140,666 and interest accrued thereon of $398,489. The notes become due in August and September 2008. The general provisions of these notes are explained at Note 6. The Company does not currently have, or expect to have, the capital resources to pay either principal or accrued interest on these notes when they become due, unless unforeseen positive developments in the Company's patent litigation or sources of capital emerge in the very near future. The near exhaustion of the Company's cash resources, coupled with the adverse developments concerning its patent litigation, the proximity of the maturity of its convertible notes and its litigation with Temple Ligon, as described below, continues to threaten the viability of its business as a going concern and may force it in the near future to implement one or more alternatives, including the possibility of filing for bankruptcy protection or selling its patents, under consideration for winding down its business. The Company and its founder, Jeff Norris, were defendants in a lawsuit filed by Temple Ligon on November 30, 1996 in the Court of Common Pleas for the County of Richland in Columbia, South Carolina. Mr. Ligon claimed, among other things, that Affinity and Mr. Norris breached an agreement to give him a 1% equity interest in Affinity in consideration of services Mr. Ligon claims to have performed in 1993 and 1994 in conjunction with the formation of Affinity, and sought monetary damages of $5,463,000. This lawsuit initially resulted in a jury verdict against us of $68,000. However, Mr. Ligon subsequently requested and was granted a new trial. In January 2004, this lawsuit resulted in another jury verdict against us of $382,148. In connection with the litigation and the resulting jury verdict, the Company filed post-trial motions with the trial court in which, among other things, it claimed that the jury verdict should be set aside. On July 23, 2004, the trial judge granted the Company's motions, set aside the jury verdict, and ordered entry of a judgment in favor of the Company. The plaintiff appealed the trial judge's ruling to the South Carolina Court of Appeals (the "South Carolina Appeals Court"). On October 30, 2006, the South Carolina Appeals Court reversed the trial judge's decision and reinstated the jury verdict of $382,148. The Company's petition to the South Carolina Appeals Court for a rehearing of this case was denied, and it petitioned the South Carolina Supreme Court to hear this case and to grant it relief from this ruling. In October 2007, the Company was notified that the South Carolina Supreme Court had denied its petition to hear this case. Accordingly, the Company has no further legal recourse and a judgment will be entered against it of $382,148, plus accrued interest. At this time, the Company does not have the cash resources to pay this judgment. The Company will continue to evaluate its options to resolve or postpone any payments related to this matter; however, if it is required to pay more than an insignificant amount in connection with this judgment in the near term, it would, for reasons in addition to the other reasons discussed above, likely be forced to implement one or more alternatives under consideration for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. 7 Management's plans with respect to addressing the matters discussed above are to request the Federal Appeals Court to reconsider its ruling that was adverse to the Company, or alternatively, to grant to the Company an en banc hearing before all the members of the Federal Appeals Court in which the Company would attempt to have the adverse ruling reversed. If the Company were to succeed in these efforts, it would then to attempt to secure additional capital resources to continue its patent infringement lawsuits. There is substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from this uncertainty. However, management believes that any adjustments to reflect the possible future effects on the recoverability and classification of assets and amounts of liabilities would not materially change the Company's financial position. 2. Basis of Presentation The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at December 31, 2007 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal, recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. In accordance with management's oversight of the Company's operations, the Company conducts its business in one industry segment - financial services technology (see Note 7). 3. New Accounting Standards The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company: In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurement," effective for our fiscal year beginning January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements, but simplifies and codifies related guidance within GAAP. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Company does not expect this pronouncement to have a material impact on its financial statements. 8 In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"), which gives companies the option to measure eligible financial assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impacts, if any, of adopting this pronouncement. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No. 160"), an amendment of Accounting Research Bulletin No. 51, which establishes new standards governing the accounting for and reporting on noncontrolling interests ("NCIs") in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of the SFAS No. 160 indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent's ownership interest that leave control intact be treated as equity transactions, rather than a step acquisition or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. SFAS No. 160 also requires changes to certain presentation and disclosure requirements. SFAS No. 160 is effective beginning January 1, 2009. The Company is currently evaluating the impact and disclosure implications of SFAS No. 160 but does not expect it to have a significant impact, if any, on its financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company's consolidated financial statements upon adoption. 4. Stock Based Compensation The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payments" (SFAS 123R), on January 1, 2006. This statement requires the Company to recognize the cost of employee and director services received in exchange for the stock options it has awarded. Under SFAS 123R the Company is required to recognize compensation expense over an award's vesting period based on the award's fair value at the date of grant. The Company elected to adopt SFAS 123R on a modified prospective basis. In July 2006, the Company granted to its management and directors 4,350,000 stock options. All options granted were at or above the market value at the date of grant. The grant date fair value of stock options granted was $1,136,000. Of the stock options granted, 1,616,666 vested as of the grant date. The fair value of these options, $425,333, was recognized as compensation expense as of the date of grant. The remaining 2,733,334 options with a fair value of $710,667 vest over a two year period. During the three month period ended March 31, 2008 the Company granted no stock options or other instruments under share-based arrangements. Total compensation expense associated with stock options, including expense related to options granted before January 1, 2006, during the three month period ended March 31, 2008 was $44,592. 9 Using the Black-Scholes option-pricing model, the fair value at the date of grant for the options underlying the expense the Company recognized was estimated using the following assumptions: expected volatility, 132% to 138%; risk free rate of return, 1.99% to 4.82%; dividend yield, 0%; and expected option life, 3 years. The Black-Scholes and other option pricing models were developed for use in estimating fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. The Company's employee stock options have characteristics significantly different than those of traded options, and changes in the subjective assumptions can materially affect the fair value estimate. Accordingly, in management's opinion, these existing models may not necessarily provide a reliable single measure of the fair value of employee stock options. 5. Net Loss Per Share of Common Stock Net loss per share of Common Stock amounts presented on the face of the consolidated statements of operations have been computed based on the weighted average number of shares of Common Stock outstanding in accordance with the SFAS No. 128, "Earnings Per Share." Stock warrants and stock options were not included in the calculation of diluted loss per share because the Company has experienced operating losses in all periods presented and, therefore, the effect would be anti-dilutive. 6. Convertible Notes In 2002, the Company initiated a convertible note program under which it was authorized to issue up to $1,500,000 principal amount of its 8% convertible secured notes (the "notes"). In April 2006, the convertible note program was amended to allow the Company to issue up to $3,000,000 of its notes. Prior to August 2006, the Company had issued an aggregate of $1,575,336 principal amount of notes under this program, including notes with an aggregate principal amount of $536,336 that have been converted into shares of the Company's common stock. These notes bear interest at 8%, are convertible into the Company's common stock at a conversion rate of $.20 per share (for notes issued prior to the April 2006 amendment to the program) or $.50 per share (for notes issued in May 2006), and are secured by the Company's equity interest in decisioning.com, Inc., which owns the Company's patent portfolio. Principal and interest under these notes generally become payable in full on the second anniversary of the date on which these notes were issued. However, under the terms of the notes, the full amount of principal and interest under all notes may be declared immediately due and payable in certain events, including bankruptcy or similar proceedings involving the Company, a default in the payment of principal and interest under any note, or a change in control of the Company. From June 2004 through August 2006, the Company was in default regarding payment of principal and interest due under certain of the notes. Accordingly, the full amount of principal and interest outstanding under all notes was payable at the option of all noteholders. In August 2006, the Company and the holders of all outstanding notes entered into an amended and restated note purchase agreement under which such holders agreed to extend the maturity date of such notes by exchanging them (including all interest accrued thereon) for new two-year notes due in August 2008 in the aggregate principal amount of $1,268,027. Under the amended note purchase agreement, the Company may issue notes in the aggregate principal amount of up to $5,000,000 (including the notes issued to current noteholders, as described in the preceding sentence) having an exercise price determined by the Company and each investor at the time of issuance. The new notes issued in August 2006 have the same terms as the old notes exchanged therefor, except that the new notes will mature in August 2008. Of the new notes issued, notes with a principal amount of $1,115,068 are convertible into shares of the Company's common stock at $.20 per share, and notes with a principal amount of $152,959 are convertible into shares of the Company's common stock at $.50 per share. The new notes include a note in the principal amount of $166,863 issued to the Company's Chief Executive Officer and a note in the principal amount of $122,115 issued to a subsidiary of The South Financial Group. The South Financial Group Foundation, a non-profit foundation established by the South Financial Group, owns approximately 10% of the Company's outstanding capital stock. 10 In September 2006, The Company sold additional convertible notes in the aggregate principal amount of $1,905,000. The terms of these notes are the same as the notes previously issued by the Company, except that they may be converted into the Company's common stock at a rate of $.42 per share. 7. Segment Information The Company conducts its business within one industry segment - financial services technology. To date, all revenues generated have been from transactions with North American customers. 8. Commitments and Contingent Liabilities The Company and its founder, Jeff Norris, were defendants in a lawsuit filed by Temple Ligon on November 30, 1996 in the Court of Common Pleas for the County of Richland in Columbia, South Carolina. Mr. Ligon claimed, among other things, that the Company and Mr. Norris breached an agreement to give him a 1% equity interest in the Company in consideration of services Mr. Ligon claims to have performed in 1993 and 1994 in conjunction with the formation of the Company, and sought monetary damages of $5,463,000. This lawsuit initially resulted in a jury verdict against the Company of $68,000. However, Mr. Ligon subsequently requested and was granted a new trial. In January 2004, this lawsuit resulted in another jury verdict against the Company of $382,148. In connection with the litigation and the resulting jury verdict, the Company filed post-trial motions with the trial court in which, among other things, it claimed that the jury verdict should be set aside. On July 23, 2004, the trial judge granted the Company's motions, set aside the jury verdict, and ordered entry of a judgment in favor of the Company. The plaintiff appealed the trial judge's ruling to the South Carolina Court of Appeals (the "Appeals Court"). On October 30, 2006, the Appeals Court reversed the trial judge's decision and reinstated the jury verdict of $382,148. The Company's petition to the Appeals Court for a rehearing of the case was denied, and the Company petitioned the South Carolina Supreme Court to hear the case and to grant the Company relief from this ruling. In October 2007, the Company was notified that the South Carolina Supreme Court had denied its petition to hear this case. Accordingly, the Company has no further legal recourse, and a judgment will be entered against the Company of $382,148, plus accrued interest. At this time, the Company does not have the cash resources to pay this judgment. The Company will continue to evaluate its options to resolve or postpone any payments related to this matter; however, if the Company is required to pay more than an insignificant amount in connection with this judgment in the near term, it would, for reasons in addition to those discussed in Note 1, likely be forced to implement one or more alternatives under consideration for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Affinity Technology Group, Inc. was formed to develop and market technologies that enable financial institutions and other businesses to provide consumer financial services electronically with reduced or no human intervention. Products and services previously offered by us include our DeciSys/RT loan processing system, which automated the processing and consummation of consumer financial services transactions; the Affinity Automated Loan Machine (the ALM), which allowed an applicant to apply for and, if approved, obtain a loan in as little as ten minutes; the Mortgage ALM, which allowed an applicant to apply for a mortgage loan; e-xpertLender, which permitted a financial institution to make automated lending decisions through its call centers and branches; iDEAL, which permitted automobile lenders to make automobile lending decisions for loan applications originated at automobile dealers; and rtDS, which permitted lenders to deliver credit decisions to applicants over the Internet. Due to capital constraints, we have suspended all efforts to further develop, market and operate these products and services. Our last processing contract terminated in late 2002, and we have no plans in the near term to engage in further sales or other activities related to our products or services, other than to attempt to license certain of the patents that we own. Currently, our business activities consist exclusively of attempting to enter into license agreements with third parties to license our rights under certain of our patents and in pursuing patent litigation in an effort to protect our intellectual property and obtain recourse against alleged infringement of our patents. Accordingly, our prospects are wholly dependent on these efforts to finance and execute a sustainable patent licensing program. Recent Developments in Patent Litigation Through our wholly-owned subsidiary, decisioning.com, we have been engaged in several patent infringement lawsuits against Federated Department Stores, Ameritrade Holding Corporation and HSBC, the progression and history of which are discussed more fully below. In December 2006, we received several adverse rulings from the United States District Court for the District of South Carolina located in Columbia, South Carolina (the "Columbia Federal Court"). The rulings resulted from a Markman hearing, which are specific to patent lawsuits, and generally involve the interpretation and definition of a patent's claim terms which have a direct bearing on the determination of infringement. The adverse rulings involved the Columbia Federal Court's interpretation and definition of several claim terms that were adverse to us. As a result of the adverse rulings the Columbia Federal Court dismissed our pending lawsuits based on summary judgment motions filed by the defendants. We appealed the Columbia Federal Court's dismissal of our lawsuits to the United States Court of Appeals for the Federal Circuit (the "Federal Appeals Court"). In our appeal, we requested that the Federal Appeals Court reverse three of the Columbia Federal Court's Markman rulings and grant to us more favorable interpretations and definitions related to certain claim terms in our patents that we disputed. We argued our case before the Federal Appeals Court on December 3, 2007. As we previously disclosed, on May 7, 2008, the Federal Appeals Court issued its opinion and revised the Columbia Federal Court's definitions of all the disputed claim terms. The Federal Appeals Court revised the terms "verify the applicant's identity" and "compare...and..." in the manner requested by and favorable to us. However, in a split decision (2-1), the Federal Appeals Court revised the term "remote interface" in a manner unfavorable to us by ruling that a remote interface as used in U.S. Patent No. 6,105,007 C1, our patent which covers the automated establishment of financial accounts, is limited to systems that are publicly accessible and does not include a personal computer owned by a consumer. As a result of the Federal Appeals Court's definition of the term "remote interface," the Federal Appeals Court upheld the Columbia Federal Court's dismissal of our lawsuit against Federated and remanded our lawsuits against Ameritrade and HSBC back to the Columbia Federal Court. However, due to the limitation of the term "remote interface" in U.S. Patent No. 6,105,007 C1, our current lawsuits against Ameritrade and HSBC only encompass systems they may use which are publicly accessible or which infringe U.S. Patent No. 5,870,721 C1, our first loan processing patent. We believe that the level of infringement associated with such systems as used by Ameritrade and HSBC, as well as the financial services industry in general, are insignificant compared to systems used to automate the establishment of financial and credit accounts that are remotely accessed by a personal computer owned by a consumer. Therefore, unless we can obtain a reversal of the Federal Appeals Court's definition of the term "remote interface," we believe that the scope of our patents will be significantly and materially limited. As more fully explained below, our capital resources are nearing exhaustion, which we believe will preclude our ability to pursue our cases against Ameritrade and HSBC unless unforeseen positive developments in our patent litigation or sources of capital emerge in the very near future. 12 We intend to file a request, within a matter of days, with the Federal Appeals Court to reconsider its construction of the term "remote interface" or, alternatively, to grant us an "en banc" hearing before all members of the Federal Appeals Court to hear our case and grant us a favorable definition of the term "remote interface." We have been advised by legal counsel that reconsideration of issued opinions or the granting of en banc hearings is rare. Even if we are successful in obtaining a hearing in which the Federal Appeals Court agrees to reconsider its ruling or, alternatively, to grant us an en banc hearing, we do not believe that our existing cash resources will be sufficient to enable us to complete the process, and, if successful, to complete the prosecution of our lawsuits against the alleged infringers. Our capital resources are nearing exhaustion, and we believe it is unlikely in our current posture that we will be able to access new capital resources in a manner sufficient to allow us to pursue an extended process to obtain reconsideration of, or recourse from, the Federal Appeals Court's adverse construction of the term "remote interface." Moreover, if we are not successful in our attempt to have the construction of the term "remote interface" reversed in a very short period of time, we believe that it is unlikely that we will be able to access new capital resources sufficient to allow us to enforce our remaining patents due to the significant limitation of our patent rights as discussed above and the expense of pursuing enforcement through litigation. Accordingly, we believe that the adverse ruling of the Federal Appeals Court, coupled with our very limited capital resources, has seriously threatened the viability of our business as a going concern. Therefore, in conjunction with our attempts to secure a reversal of the Federal Appeals Court's recent adverse decision, we are evaluating our available strategic alternatives, including the possibility of filing for bankruptcy protection, selling assets or otherwise winding down our business. We can give no assurances that in the near future we will not be forced to pursue one or more of these alternatives. Background - Patent Portfolio and Enforcement In conjunction with our product development activities, we applied for and obtained three patents. We have been granted two patents covering our fully-automated loan processing systems (U.S. Patent Nos. 5,870,721 C1 and 5,940,811 C1). In August 2000, the U.S. Patent and Trademark Office ("PTO") issued to us a patent covering the fully-automated establishment of a financial account including credit accounts (U.S. Patent No. 6,105,007 C1). All of these patents have been subject to reexamination by the PTO as a result of challenges to such patents by third parties. On January 28, 2003, we received a Reexamination Certificate (U. S. Patent No. 5,870,721 C1) from the PTO which formally concluded the reexamination of U. S. Patent No. 5,870,721. On December 20, 2005, we received a Reexamination Certificate (U.S. Patent No. 5,940,811 C1) from the PTO, which formally concluded the reexamination of U.S. Patent No. 5,940,811. On July 25, 2006, we received a Reexamination Certificate (U.S. Patent No. 6,105,007 C1) from the PTO, which formally concluded the reexamination of U.S. Patent No. 6,105,007 and which indicated that the reexamination resulted in the full allowance of all the claims of this patent. It is possible that third parties may bring additional actions to contest all or some of our patents. We can give no assurances that we will not lose all or some of the claims covered by our existing patents. In June 2003, we filed a lawsuit against Federated Department Stores, Inc. ("Federated"), and certain of its subsidiaries alleging that Federated infringed one of our patents (U. S. Patent No. 6,105,007). In September 2003, we filed a similar lawsuit against Ameritrade Holding Corporation and its subsidiary, Ameritrade, Inc. (collectively "Ameritrade"), alleging infringement of the same patent. Both lawsuits were filed in the United States District Court in Columbia, South Carolina (the "Columbia Federal Court"), and both sought unspecified damages. In 2004, at the request of Federated and Ameritrade, the PTO determined to reexamine U.S. Patent No. 6,105,007. As a result of the reexamination of U.S. Patent No. 6,105,007, we, jointly with Federated and Ameritrade, requested the Columbia Federal Court to stay the lawsuits against Federated and Ameritrade pending resolution of the reexamination of U. S. Patent No. 6,105,007. In March 2006, we were notified that the PTO had concluded the reexamination of U.S. Patent No. 6,105,007 and that such reexamination resulted in the full allowance of all the claims of this patent. As a result of the completion of the PTO's reexamination of U.S. Patent No. 6,105,007, the stay of these lawsuits against Federated and Ameritrade was automatically lifted, and the lawsuits proceeded. 13 In November 2003, Household International, Inc. ("Household") filed a declaratory judgment action against us in the United States District Court in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint Household requested the Delaware Federal Court to rule that Household was not infringing any of the claims of our patents (U.S. Patent No. 5,870,721 C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. We filed counterclaims against Household claiming that Household infringed U. S. Patent No. 5,870,721 C1, No. 5,940,811, and No. 6,105,007. We also filed a motion with the Delaware Federal Court to transfer the case to the Columbia Federal Court. In April 2004, the Delaware Federal Court granted our motion to transfer the case to Columbia Federal Court. As a result of the reexamination of U.S. Patent No. 6,105,007, we, jointly with Household, requested and received a stay of the Household action from the Columbia Federal Court pending the resolution of the PTO's reexamination of U.S. Patent No. 6,105,007. As discussed above, the PTO subsequently concluded the reexamination of U.S. Patent No. 6,105,007. Accordingly, the stay of this lawsuit was automatically lifted, and the lawsuit proceeded. In accordance with the patent infringement lawsuits with Federated, TD Ameritrade (formerly Ameritrade) and HSBC (formerly Household), as described above, a "Markman Hearing" was held in December 2006. Markman hearings are proceedings under U.S. patent law in which plaintiffs and defendants present their arguments to the court as to how they believe the patent claims - which define the scope of the patent holder's rights under the patent - should be interpreted for purposes of determining at trial whether the patents have been infringed. For purposes of the Markman hearing, the Federated, TD Ameritrade and HSBC cases were consolidated into one hearing and held by the Columbia Federal Court. As a result of the Markman proceedings the Columbia Federal Court interpreted and construed the meaning of numerous claim terms which bear on the scope of our patents. Although most claim terms were construed in a manner we believe are favorable, the trial judge interpreted and construed certain claim terms, most notably those related to the term "remote interface" as claimed in our second loan processing patent (U.S. Patent No. 5,940,811 C1) and our financial account patent (U.S. Patent No. 6,105,007 C1), in a manner unacceptable and unfavorable to us. In these patents, the Court interpreted and construed "remote interface" to mean computer equipment, including personal computer equipment, that is not owned by a consumer. The Court applied no such limitation in construing the term "remote interface" under our first loan processing patent (U.S. Patent No. 5,870,721 C1). Subsequent to the Markman ruling, Federated, Ameritrade and HSBC filed summary judgment motions with the Columbia Federal Court requesting that the lawsuits be dismissed. In March 2007, the Columbia Federal Court granted the summary judgment motions filed by Federated and Ameritrade and in April 2007 it granted the summary judgment motions filed by HSBC. Accordingly, our lawsuit with each of the defendants was dismissed. The basis of the Columbia Federal Court's rulings stemmed from the interpretation and application of certain claim terms the Court interpreted and defined as part of the Markman Hearing, as discussed above. Further, as more fully discussed above under the caption, "Recent Developments in Patent Litigation," our appeal of the Columbia Federal Court's interpretation and application of the term "remote interface" to the Federal Appeals Court failed to secure us a favorable interpretation of that term. Other Matters In addition, we and our founder, Jeff Norris, were defendants in a lawsuit filed by Temple Ligon on November 30, 1996 in the Court of Common Pleas for the County of Richland in Columbia, South Carolina. Mr. Ligon claimed, among other things, that Affinity and Mr. Norris breached an agreement to give him a 1% equity interest in Affinity in consideration of services Mr. Ligon claims to have performed in 1993 and 1994 in conjunction with the formation of Affinity, and sought monetary damages of $5,463,000. This lawsuit initially resulted in a jury verdict against us of $68,000. However, Mr. Ligon subsequently requested and was granted a new trial. In January 2004, this lawsuit resulted in another jury verdict against us of $382,148. In connection with the litigation and the resulting jury verdict, we filed post-trial motions with the trial court in which, among other things, we claimed that the jury verdict should be set aside. On July 23, 2004, the trial judge granted our motions, set aside the jury verdict, and ordered entry of a judgment in favor of us. The plaintiff appealed the trial judge's ruling to the South Carolina Court of Appeals (the "South Carolina Appeals Court"). On October 30, 2006, the South Carolina Appeals Court reversed the trial judge's decision and reinstated the jury verdict of $382,148. Our petition to the South Carolina Appeals Court for a rehearing of this case was denied, and we petitioned the South Carolina Supreme Court to hear this case and to grant us relief from this ruling. In October 2007, we were notified that the South Carolina Supreme Court had denied our petition to hear this case. Accordingly, we have no further legal recourse and a judgment will be entered against us of $382,148, plus accrued interest. At this time, we do not have the cash resources to pay this judgment. We will continue to evaluate our options to resolve or postpone any payments related to this matter; however, if we are required to pay more than an insignificant amount in connection with this judgment in the near term, we would, for reasons in addition to those described above relating to our patent litigation, likely be forced to implement one or more alternatives under consideration for winding down our business, which may include offering our patents for sale or filing for bankruptcy protection. 14 Critical Accounting Policies We apply certain accounting policies, which are critical in understanding our results of operations and the information presented in our condensed consolidated financial statements. We consider critical accounting policies to be those that require more significant judgments and estimates in the preparation of our financial statements, the most critical of which pertains to the valuation reserve on net deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that we estimate is more likely than not to be realized. As of March 31, 2008 and December 31, 2007, we recorded a valuation allowance that reduced our deferred tax assets to zero. As of March 31, 2008, there have been no material changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2007. Results of Operations Revenues Patent license revenue. We recognized $8,333 for the three month periods ended March 31, 2008 and 2007, respectively. All of our patent licensing revenues are related to a license agreement entered into in 1999, which is renewable every three years. Costs and Expenses Cost of Revenues. Cost of revenues for the three month periods ended March 31, 2008 and 2007 were $833, respectively. Cost of revenues consists of commissions paid to our patent licensing representatives. General and Administrative Expenses. General and administrative expenses totaled $172,171 for the three month period ended March 31, 2008, as compared to $395,992 for the corresponding period in 2007. The decrease for the three month period ended March 31, 2008, as compared to the corresponding period of 2007 is primarily related to a decrease in professional fees related to legal and other expenses associated with our patent litigation and a decrease in the amount of stock-based compensation expense. Interest expense. Interest expense for the three month periods ended March 31, 2008 and 2007, was $62,813. Interest expense is related to the Company's convertible notes, which accrue interest at 8%. There was no change in interest expense during the three month period ended March 31, 2008 compared to the corresponding period in 2007 because no new notes have been issued since September 2006 and no notes have been converted since 2006. Liquidity and Capital Resources We have generated net losses of $73,649,579 since our inception and have financed our operations primarily through net proceeds from our initial public offering in May 1996 and cash generated from operations and other financing transactions. Net proceeds from our initial public offering were $60,088,516. 15 Other financing transactions we have entered include the issuance of convertible notes, the terms of which are explained in Note 6 to our consolidated financial statements included herein in Part I. Item 1, "Financial Statements." At March 31, 2008, the aggregate convertible note principal amount outstanding was $3,140,666 and interest accrued thereon was $398,489. Of the total aggregate note principal outstanding, notes in the principal amount of $1,235,666 become due in August 2008 and notes in the principal amount of $1,905,000 become due in September 2008. Our failure to pay these notes according to their terms when due would constitute a default that could enable the holders of these notes to declare the entire amounts thereunder due and payable. In addition, certain other events, including the filing of bankruptcy or similar proceedings by or against the Company, would also constitute a default that would permit the holders of these notes to declare all amounts thereunder due and payable. We do not currently have, or expect to have, the capital resources to pay either principal or accrued interest on these notes when they become due, unless unforeseen positive developments in our patent litigation or sources of capital emerge in the very near future. Net cash used by operations during the three months ended March 31, 2008 was $14,826, compared to $425,516 used by operations for the same period in 2007. The decrease in cash used during the three month period ended March 31, 2008 compared to the corresponding period in 2007 was due to several factors. First, our expenses associated with our patent lawsuits were minimal during the first three months of 2008 compared to the corresponding period in 2007. As discussed more fully above in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" our patent lawsuits were reactivated in 2006 and we received an adverse ruling in late in 2006. As a result, we incurred expenses in the first three months of 2007 associated with the preparation of our appeal of the ruling and, additionally, paid other associated litigation expenses which were incurred in late 2006, but not paid until 2007. In addition, both our employees have deferred all of their base salaries since January 1, 2008. At March 31, 2008, cash and liquid investments were $35,391, as compared to $50,217 at December 31, 2007. At March 31, 2008, our working capital deficit was $4,440,398 as compared to a deficit of $4,257,741 at December 31, 2007. To date, we have generated substantial operating losses and have been required to use a substantial amount of cash resources to fund our operations. We generally have been unable to enter into licensing agreements with potential licensees upon terms that are acceptable to us and, as discussed above, we have sought recourse through litigation with alleged infringers of our patents. The near exhaustion of our cash resources, coupled with the adverse developments described above in connection with our patent litigation, the proximity of the maturity of our convertible notes, and our litigation with Temple Ligon, continues to threaten the viability of our business as a going concern and may force us in the near future to implement one or more alternatives under consideration for winding down our business. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company does not believe that its current business exposes it to significant market risk for changes in interest rates. Item 4. Controls and Procedures The Company has carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2008, in recording, processing, summarizing and reporting information required to be disclosed by the Company (including consolidated subsidiaries) in the Company's Exchange Act filings. There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 16 Part II. Other Information Item 1. Legal Proceedings See Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" for updated information regarding our patent litigation and the Temple Ligon 1awsuit. Item 1A. Risk Factors In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or results of operations. Item 6. Exhibits

17 SIGNATURE 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. Affinity Technology Group, Inc. By: /s/ Joseph A. Boyle ------------------- Joseph A. Boyle Chairman, President, Chief Executive Officer and Chief Financial Officer (principal executive and financial officer) Date: May 20, 2008 18 EXHIBIT INDEX Exhibit 31 Rule 13a-14(a) 15d-14(a) Certifications Exhibit 32 Section 1350 Certifications 19

AFFINITY TECHNOLOGY GROUP INC 10-Q