================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(MARK ONE)

   [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 [NO FEE REQUIRED]
        FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001 OR

   [_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
        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                             (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)

                                175 CABOT STREET
                                    SUITE 503
                           LOWELL, MASSACHUSETTS 01854
                     ---------------------------------------
                     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)


        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 978-441-2200

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK $0.01 PAR VALUE
                          ----------------------------
                                (TITLE OF CLASS)

     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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     Aggregate market value of voting stock held by non-affiliates: $2,933,716
(computed by reference to the last sales price of such common stock on December
12, 2001 as reported in the National Association of Security Dealers
consolidated trading index).

     Number of shares of common stock outstanding at December 12, 2001:
2,555,984

     Documents Incorporated By Reference

Registrant intends to file a definitive Proxy Statement pursuant to Regulation
14A within 120 days of the end of the fiscal year ended September 30, 2001.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.

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<PAGE>
                                     PART I

ITEM 1. BUSINESS
----------------

GENERAL

     Datawatch Corporation (the "Company" or "Datawatch"), founded in 1985, is a
provider of enterprise reporting, business intelligence, report mining, data
transformation and service center software products that help organizations
increase productivity, reduce costs and gain competitive advantages. Datawatch
products are used in more than 20,000 companies, institutions and government
agencies worldwide.

     The Company is a Delaware corporation, with executive offices located at
175 Cabot Street, Lowell, Massachusetts 01854 and the Company's telephone number
is (978) 441-2200.

     In 2001, the Company sold its wholly owned subsidiary, Guildsoft Limited
("Guildsoft"). Guildsoft was a component of the Company with clearly
distinguishable operations and cash flows and because Guildsoft's activities are
now entirely eliminated from ongoing operations and the Company will have no
continuing involvement with Guildsoft's operations, the Company has presented
Guildsoft as a discontinued operation in all periods presented herein.

PRODUCTS

Monarch - Datawatch is best known for its popular desktop report mining and
business intelligence application called Monarch. More than 350,000 copies of
Monarch have been sold, with localized versions in English, French, German and
Spanish. Monarch transforms structured text files (reports, statements, etc.)
into a live database that users can sort, filter, summarize, graph and export to
other applications such as MS Excel or Access. Monarch Professional Edition lets
users extract and work with data in HTML files, databases, spreadsheets and ODBC
sources as well as reports. The Company's Redwing product lets users extract
text and tables from Adobe PDF documents.

Monarch|ES - Monarch|ES is Datawatch's web-enabled business information portal,
providing complete report management, business intelligence and content
management, and the ability to analyze data within reports, all using just a web
browser. Monarch|ES allows organizations to quickly and easily deliver business
intelligence and decision support, derived from existing reporting systems, with
no new programming or report writing. Monarch|ES automatically archives report
data and binary documents in an enterprise report and document warehouse and
provides users a unified point of entry to view, analyze and share information
over the Internet.

Monarch Data Pump - The Company's Monarch Data Pump product is a unique 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 existing reports in a
variety of formats, including Excel, via email.

Q|Service Management - The Company's help desk and asset management software is
a market leader in Europe, with one of the largest installed bases among
products that compete in the internal help desk market. In 2001, the Company
introduced Q|Service Management ("Q|SM"), a major new release of the Company's
Service Management software. Q|SM is a fully internet-enabled solution that can
scale from a basic help desk system to a full service center solution that
incorporates workflow and network management capabilities and provides web
access to multiple databases while enabling customers to interact via a standard
browser. Q|SM also provides advanced service level management capabilities,
integrated change management features, business process automation tools and one
of the industry's easiest to learn and use interfaces.

VorteXML - Datawatch's new desktop VorteXML software converts existing,
structured ASCII/ANSI text documents (such as reports, invoices, log files,
etc.), or HTML, into valid XML on an ad hoc, programming-free basis. VorteXML's
ability to simplify the transformation of complex business documents and HTML
into valid XML dramatically speeds up and reduces the cost of implementing
enterprise XML systems or putting legacy output on the web. In early 2002,
VorteXML will be available in a server edition to automate the process of data
transformation and delivery.
                                        2
<PAGE>
PRICING

     The Company's desktop products are sold under single and multi-user
licenses. A single user license for Monarch Standard Edition is priced at $635.
Multi-user licenses for Monarch Standard Edition are priced at $250 to $399 per
user, depending upon the number of users. A single user license for Monarch
Professional Edition is priced at $765. Multi-user licenses for Monarch
Professional Edition are priced at $375 to $529 per user, depending upon the
number of users. A single user license for Monarch Data Pump Personal Edition is
priced at $2,495. A single user license for Redwing is priced at $579. A
five-user license is priced at $2,199.

     The Company's report enterprise and service center products are sold under
server-based licenses in addition to named-user and concurrent-user licenses. An
entry-level Monarch|ES system is priced at approximately $50,000. Typical
configurations are priced in the range of $65,000 to $250,000. Server editions
of Monarch Data Pump are typically priced at approximately $7,500 per server. An
entry-level Q|SM system is priced at approximately $20,000. Typical
configurations sell in the range of $20,000 to $150,000. Maintenance agreements,
training and implementation services are sold separately.

MARKETING AND DISTRIBUTION

     Datawatch markets its products through a variety of channels in order to
gain broad market exposure and to satisfy the needs of its customers. Datawatch
believes that some customers prefer to purchase products through
service-oriented resellers, while others buy on the basis of price, purchase
convenience, and/or immediate delivery.

     The Company is engaged in active direct sales of its products to end-users,
including repeat and add-on sales to existing customers and sales to new
customers. Datawatch utilizes direct mail, the Internet, telemarketing and
direct personal selling to generate its sales.

     Datawatch uses a variety of marketing programs to create demand for its
products. These programs include advertising, cooperative advertising with
reseller partners, direct mail, exhibitor participation in industry shows,
executive participation in press briefings, Internet-based marketing and
on-going communication with the trade press.

     The Company offers certain of its resellers the ability to return obsolete
versions of its products and slow-moving products for credit. Based on its
historical experience relative to products sold to these distributors, the
Company believes that its exposure to such returns is minimal. It has provided a
provision for such estimated returns in the financial statements.

     Datawatch warrants the physical disk media and printed documentation for
its products to be free of defects in material and workmanship for a period of
60 to 90 days from the date of purchase depending on the product. Datawatch also
offers a 30 day money-back guarantee on certain of its products sold directly to
end-users. Under the guarantee, customers may return purchased products within
the 30 days for a full refund if they are not completely satisfied. To date, the
Company has not experienced any significant product returns under its money-back
guarantee.

     During fiscal 2001, one distributor represented approximately 14% of the
Company's net sales. No other customer accounted for more than 10% of the
Company's net sales in fiscal 2001. Datawatch sells its products outside of the
U.S. directly through the sales force of its wholly owned subsidiary, Datawatch
International Limited ("Datawatch International") and through international
resellers. Such international sales represented approximately 46%, 43% and 49%
of the Company's net sales for fiscal 2001, 2000 and 1999, respectively. See
Note 12 to Consolidated Financial Statements which appear elsewhere in this
Annual Report on Form 10-K.

RESEARCH AND DEVELOPMENT

     The Company believes that timely development of new products and
enhancements to its existing products is essential to maintain strong positions
in its markets. Datawatch intends to continue to invest sizeable effort in
research and product development, particularly in the area of computing
technology trends and the Internet. The Company's

                                        3
<PAGE>
product development efforts are primarily focused on the Monarch|ES Enterprise
Reporting products and Q|Service Management ("Q|SM") products and their related
core technologies. Additional efforts are devoted to the expansion of the
feature set of the Monarch product and enhancing the functionality of its XML
tool, VorteXML, which automates the process of generating XML output from
reports or structured text input.

     Datawatch's product development efforts are conducted through in-house
software development engineers and by external developers. External developers
are compensated either through royalty payments based on product sales levels
achieved or under contracts based on services provided. Datawatch has
established long-term relationships with several development engineering firms,
providing flexibility, stability and reliability in its development process.

     Datawatch's product managers work closely with developers, whether
independent or in-house, to define product specifications. The initial concept
for a product originates from this cooperative effort. The developer is
generally responsible for coding the development project. Datawatch's product
managers maintain close technical control over the products, giving the Company
the freedom to designate which modifications and enhancements are most important
and when they should be implemented. The product managers and their staff work
in parallel with the developers to produce printed documentation, on-line help
files, tutorials and installation software. In some cases, Datawatch may choose
to subcontract a portion of this work on a project basis to third-party
suppliers under contracts. Datawatch personnel also perform extensive quality
assurance testing for all products and coordinate external beta test programs.

     Datawatch has a contractual agreement with the independent developer of
Monarch and VorteXML which requires that source code be placed into escrow. The
principal developer for these products is also bound by contractual commitments
which require the developer's continuing involvement in product maintenance and
enhancement. The Company has been granted exclusive worldwide rights to Monarch
and VorteXML with a stated term expiring in the year 2009. Monarch and VorteXML
are trademarks of Datawatch Corporation. Datawatch also has a contractual
agreement with the independent developer of Q|SM which requires his continued
involvement in product maintenance for a period of 5 years. The developer has
agreed to provide these services in exchange for a minimal royalty based on net
sales.

     Other Datawatch products have been developed through in-house software
development or by independent software engineers hired under contract. Datawatch
maintains source code and full product control for these products, which include
the Monarch Data Pump (Personal and Server Editions), Monarch|ES, and Q|SM
products.

BACKLOG

     The Company's software products are generally shipped within three business
days of receipt of an order. Accordingly, the Company does not believe that
backlog for its products is a meaningful indicator of future business. The
Company does maintain a backlog of services related to its Monarch|ES and Q|SM
business. While this services backlog will provide future revenue to the
Company, the Company believes that it should not considered a meaningful
indicator of future business.

COMPETITION

     The software industry is highly competitive and is characterized by rapidly
changing technology and evolving industry standards. Datawatch competes with a
number of companies including Peregrine, Actuate, Quest and others which have
substantially greater financial, marketing and technological resources than the
Company. Competition in the industry is likely to intensify as current
competitors expand their product lines and as new competitors enter the market.

PRODUCT PROTECTION

     Although Datawatch does not generally own patents on its software
technologies, it relies on a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect its rights in its products. Despite these precautions,
unauthorized parties may attempt to copy aspects of Datawatch's products or to
obtain and use information that Datawatch regards as proprietary. Patent
protection is not considered crucial to Datawatch's success. Datawatch believes

                                        4
<PAGE>

that, because of the rapid pace of technological change in the software
industry, the legal protections for its products are less significant than the
knowledge, ability and experience of its employees and developers, the frequency
of product enhancements and the timeliness and quality of its support services.
Datawatch believes that none of its products, trademarks and other proprietary
rights infringe on the proprietary rights of third parties, but there can be no
assurance that third parties will not assert infringement claims against it or
its developers in the future.

PRODUCTION

     Production of Datawatch's products involves the duplication of floppy and
compact disks, and the printing of user manuals, packaging and other related
materials. Floppy disk duplication is performed in-house with high-capacity disk
duplication equipment, and is occasionally supplemented with duplication
services performed by non-affiliated subcontractors. High volume compact disk
duplication is performed by non-affiliated subcontractors, while low volume
compact disk duplication is performed in-house. Printing work is also performed
by non-affiliated subcontractors. To date, Datawatch has not experienced any
material difficulties or delays in production of its software and related
documentation and believes that, if necessary, alternative production sources
could be secured at a commercially reasonable cost.


































                                        5
<PAGE>
EMPLOYEES

     As of September 30, 2001, Datawatch had 98 full-time employees, including
31 engaged in marketing, sales, and customer service; 21 engaged in product
consulting and training; 10 engaged in product management, development and
quality assurance; 6 engaged in technical support; 27 providing general,
administrative, accounting, and IT functions; and 3 engaged in software
production and warehousing.

     The Company believes that its future success may depend on its ability to
continue to attract and retain highly-skilled technical, marketing and
management personnel, who are in great demand. The Company currently has written
agreements with each of its employees prohibiting disclosure of confidential
information to anyone outside of the Company, both during and subsequent to
employment. These agreements also require disclosure to the Company of ideas,
discoveries or inventions relating to or resulting from the employee's work for
the Company, and assignment to the Company of all proprietary rights to such
matters.

ITEM 2. PROPERTIES
------------------

     The Company is currently headquartered in a 24,553 square foot leased
office building in Lowell, Massachusetts. The lease expires in January 2006. The
Company also maintains small offices in California, Connecticut, Illinois, and
Georgia.

     The Company also leases approximately 6,000 square feet of office space in
Kings Langley, Hertfordshire, England, which expires in January 2009 with a
termination option in December 2002, and maintains small offices in Germany,
France and Australia.

ITEM 3. LEGAL PROCEEDINGS
-------------------------

     The Company is not a 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

     A special meeting of stockholders of Datawatch Corporation was held on July
23, 2001 to consider and vote on a proposal to amend the Company's Restated
Certificate of Incorporation to effect a reverse stock split of the shares of
the Company's issued and outstanding common stock at a ratio to be determined by
the Board of Directors, in its sole discretion, such that when multiplied by the
closing price of the common stock on the business day preceding the Special
Meeting of Stockholders results in a product between $1.50 and $2.00 per share,
inclusive, but which ratio shall not to exceed one for six, whereby one (1)
share of common stock will be issued in exchange for not more than six (6)
shares of common stock then issued and outstanding. (The ratio approved by
action of the Board of Directors was that one (1) share would be issued for
every four and one-half (4.5) shares of common stock issued and outstanding.)
Any fractional shares which resulted form this exchange were rounded up and
exchanged for one (1) whole share of common stock. The proposal was approved and
adopted by the stockholders with 9,446,326 voting in favor, 310,812 voting
against, and 14,775 abstaining.

                                        6
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT

     The names, ages and titles of the executive officers of the Company as of
December 12, 2001 are as follows:

Robert W. Hagger      53   President, Chief Executive Officer and Director
John H. Kitchen, III  46   Senior Vice President for Channel Products
H. Calvin G. MacKay   57   Senior Vice President for Enterprise Software
Alan R. MacDougall    53   Vice President of Finance, Chief Financial Officer,
                           Treasurer and Assistant Secretary
Linda E. Lammi        48   Vice President of Development and Technical Services

Officers are elected by, and serve at the discretion of, the Board of Directors.

     ROBERT W. HAGGER, President, Chief Executive Officer and Director. Mr.
Hagger assumed the positions of President, Chief Executive Officer and Director
on July 9, 2001. Prior thereto, and since November 1, 1997, Mr. Hagger was
Senior Vice President of International Operations of the Company. Prior to that
and since March 1997, Mr. Hagger was Managing Director of the Company's
wholly-owned subsidiary Datawatch International Limited. Prior to joining
Datawatch, from 1993 to March 1997, Mr. Hagger was founder and Managing Director
of Insight Strategy Management Ltd. Prior to that he was Managing Director of
Byrne Fleming Ltd.

     JOHN H. KITCHEN, III, Senior Vice President for Channel Products. Mr.
Kitchen assumed the position of Senior Vice President for Channel Products on
July 9, 2001. Prior thereto, and since July 2000, Mr. Kitchen was the Company's
Vice President of Marketing. Prior to July 2000, and since March 1998, Mr.
Kitchen was the Company's Director of Marketing. Prior to that, Mr. Kitchen was
a marketing consultant to the Company.

     H. CALVIN G. MACKAY, Senior Vice President for Enterprise Software. Mr.
MacKay assumed the position of Senior Vice President for Enterprise Software on
July 9, 2001 and was elected an executive officer of the Company on December 1,
2001. Prior thereto, and since January 2001, Mr. MacKay was a marketing and
sales consultant to the Company's wholly-owned subsidiary, Datawatch
International Limited. Prior to January 2001, and since December 1998, Mr.
MacKay acted as an advisor and consultant to several technology companies. From
June 1996 to October 1998, Mr. MacKay served as Principal of Renior and
Rembrandt Consulting Ltd., a management consulting firm, and as the Chief
Executive Officer of the firm's South East Asia operations.

     ALAN R. MACDOUGALL, Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary. Mr. MacDougall assumed the positions of Vice
President of Finance, Chief Financial Officer Treasurer and Assistant Secretary
on December 16, 2000. Prior thereto, and since October 1997, Mr. MacDougall was
the Company's Corporate Controller. Prior to October 1997, and since June 1994,
Mr. MacDougall was the Company's Director of Operations.

     LINDA E. LAMMI, Vice Present of Development and Technical Services. Ms.
Lammi assumed the position of Vice President of Development and Technical
Services on May 16, 1999. Prior thereto, and since March 1995, Ms. Lammi was the
Company's Director of Technical Services.




                                        7
<PAGE>
                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
-------------------------------------------------------------------------
     MATTERS
     -------
     In October 2001, the Company issued a warrant to purchase up to 49,669
shares of Common Stock at an exercise price per share of $1.51, subject to
adjustment as described in the warrant, to Silicon Valley Bank in consideration
for Silicon Valley Bank's entering into certain loan modification agreements
with the Company. No underwriter was involved in the foregoing issuance. Such
issuance was made by the Company in reliance upon an exemption from the
registration provisions of the Securities Act of 1933 set forth in Section 4(2)
thereof as a transaction by an issuer not involving a public offering.

     The Registrant's common stock is listed and traded on the Nasdaq National
Market under the symbol DWCH. The range of high and low prices during each
fiscal quarter for the last two fiscal years is set forth below:

                For the Year Ended           Common Stock
                September 30, 2001         High       Low
                -------------------------------------------
                4th Quarter                2.610      1.000
                3rd Quarter                3.915      1.620
                2nd Quarter                6.751      1.688
                1st Quarter                7.032      1.266

                For the Year Ended           Common Stock
                September 30, 2000         High       Low
                -------------------------------------------
                4th Quarter               10.689      4.922
                3rd Quarter               16.877      5.063
                2nd Quarter               33.472      8.438
                1st Quarter               29.534      2.813

     There are approximately 158 shareholders of record as of December 12, 2001.
The Company believes that the number of beneficial holders of common stock
exceeds 2,500.

     The Company has not paid any cash dividends and it is anticipated that none
will be declared in the foreseeable future. The Company intends to retain future
earnings, if any, to provide funds for the operation, development and expansion
of its business.

ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

     The following table sets forth selected consolidated financial data of the
Company for the periods indicated. The selected consolidated financial data for
and as of the end of the years in the five-year period ended September 30, 2001
are derived from the Consolidated Financial Statements of the Company. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes which appears elsewhere in this
Annual Report on Form 10-K.

     In 2001, the Company sold its wholly owned subsidiary, Guildsoft Limited
("Guildsoft"). Guildsoft was a component of the Company with clearly
distinguishable operations and cash flows and because Guildsoft's activities are
now entirely eliminated from ongoing operations and the Company will have no
continuing involvement with Guildsoft's operations, the Company has presented
Guildsoft as a discontinued operation in all periods presented herein.

                                        8
<PAGE>
<TABLE><CAPTION>
Statements of Operations Data
Years Ended September 30,     2001         2000         1999         1998         1997
                          ---------------------------------------------------------------
<S>                       <C>          <C>          <C>          <C>          <C>
Net Sales
  PC-based Products       $18,402,655  $22,473,837  $23,598,040  $22,299,352  $23,663,584
  Macintosh-based Products       --           --           --        172,254    6,052,298
                          ---------------------------------------------------------------
Net Sales                  18,402,655   22,473,837   23,598,040   22,471,606   29,715,882

Costs and Expenses         23,720,327   23,434,504   27,769,247   32,782,443   31,708,162
Income (Loss) from
  Operations               (5,317,672)    (960,667)  (4,171,207) (10,310,837)  (1,992,280)
Gain on Sale of Product
  Line                           --           --           --     15,431,253         --
Income (Loss) from
  Continuing Operations   $(5,385,051) $(1,002,097) $(3,716,637)  $4,882,807  $(2,104,275)
Discontinued Operations
  Income (Loss) from
  Guildsoft operations, net  (143,856)      12,468     (130,544)    (178,811)     108,842
Gain on sale of Guildsoft     413,013         --           --           --           --
                          ---------------------------------------------------------------
Income (Loss) from
  Discontinued Operations $   269,157  $    12,468  $  (130,544) $  (178,811) $   108,842

Net Income (Loss)         $(5,115,894) $  (989,629) $(3,847,181) $ 4,703,996  $(1,995,433)

Net Income (Loss) per
  Common Share - Basic    $     (2.13) $     (0.48) $     (1.89) $      2.33  $     (0.99)
Net Income (Loss) per
  Common Share - Diluted  $     (2.13) $     (0.48) $     (1.89) $      2.27  $     (0.99)

Balance Sheet Data
  September 30,               2001         2000         1999         1998         1997
                          ---------------------------------------------------------------
Total Assets              $ 9,423,984  $13,572,817  $14,780,755  $18,332,215  $16,146,645
Working Capital               596,136    4,339,237    4,838,234    8,503,428    4,451,821
Long-Term Obligations            --           --            354       44,190    1,399,089
Shareholders' Equity      $ 2,985,289  $ 6,866,891  $ 7,817,707  $11,636,482  $ 6,924,849
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
        RESULTS OF OPERATIONS
        ---------------------
     The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of
Datawatch and its subsidiaries which appear elsewhere in this Annual Report on
Form 10-K.

GENERAL

      Datawatch Corporation (the "Company" or "Datawatch") is engaged in the
design, development, manufacture, marketing, and support of business computer
software primarily for the Windows-based market. Its products address the
enterprise reporting, business intelligence, data replication and help desk
markets.

      Datawatch's principal products are: Monarch, a report mining and business
intelligence application that lets users extract and manipulate data from ASCII
report files or HTML files produced on any mainframe, midrange, client/server or
PC system; Monarch|ES, a web-enabled business information portal, allows an
organization to quickly deliver business intelligence and decision support
derived from existing reporting systems with no new programming or report
writing; 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 via email; Q|Service Management ("Q|SM"), an
integrated help desk and asset management software with advanced service level
management capabilities, integrated change management features, business process
automation tools and unique user-interface that promotes ease-of-use and
ease-of-learning; VorteXML, a new data transformation product for the emerging
XML market which converts existing, structured ASCII/ANSI text documents or HTML
into valid XML on an ad hoc, programming-free basis; and Redwing, a plug-in for
Adobe Acrobat that lets users extract text and tables from Adobe PDF documents.

                                        9
<PAGE>
RESULTS OF OPERATIONS

               FISCAL YEAR ENDED SEPTEMBER 30, 2001 AS COMPARED TO
               ---------------------------------------------------
                      FISCAL YEAR ENDED SEPTEMBER 30, 2000
                      ------------------------------------

     Net sales from continuing operations for the fiscal year ended September
30, 2001 were $18,403,000 which represents a decrease of $4,071,000 or
approximately 18% from the net sales of $22,474,000 for the fiscal year ended
September 30, 2000. In fiscal 2001, Monarch sales decreased by 21% when compared
to fiscal 2000 which accounts for a decrease in total net sales of approximately
12%. Sales of the Monarch product to the Company's largest distributor decreased
by approximately 40% during the past 12 months even though sales of the product
by this distributor increased by approximately 4% during this period. The
Company believes that further inventory reductions by this distributor are
possible, but based on the current significantly reduced stock levels, future
sales by the Company to this distributor will more closely match the
distributor's sales of the Company's products. Decreasing sales to this
distributor account for approximately a 13% decrease in Monarch sales and
approximately a 7% of the decrease in total net sales. Also, net sales for the
fiscal year ended September 30, 2000 include a one-time sale of paid-up OEM
licenses totaling $520,000. This accounts for a decrease in Monarch sales of
approximately 4% and a decrease in total net sales of approximately 2%. The
Company attributes the balance of the decrease in Monarch product to a reduction
in corporate spending due to a slowing worldwide economy.

     In fiscal 2001, Q|SM sales decreased by 19% which accounts for a decrease
in total net sales of approximately 6%. Approximately 95% of the Company's Q|SM
sales came from international operations that conduct business in local
currencies. Foreign exchange movements can have a significant impact on the
translation of financial statements, even though such movements have no cash
impact on the Company. During fiscal 2001 the dollar was significantly stronger
against these local currencies when compared to fiscal 2000 resulting in a
decrease of approximately 7% in Q|SM sales and approximately 2% in total net
sales. The Company attributes the balance of the decrease in Q|SM sales to a
reduction in corporate spending due to a slowing worldwide economy.

     In both fiscal 2001 and 2000, Monarch and Monarch|ES products accounted for
approximately 70% of net sales and Q|SM products accounted for approximately 30%
of net sales.

     Cost of sales for the fiscal year ended September 30, 2001 were $3,401,000
or approximately 18% of net sales. Cost of sales for the fiscal year ended
September 30, 2000 were $3,560,000 or approximately 16% of net sales. During the
fourth quarter of fiscal 2001 the Company recorded an amount of $265,000 in
additional royalties expense resulting from the refinement of the Company's
estimated royalty obligations. This additional royalty expense increased cost of
sales by approximately 1% of net sales. The remaining increase in cost of sales
resulted primarily from increased amortization of capitalized development and
purchased software costs as a result of the Company's release of the new version
on Monarch|ES in the fourth quarter of fiscal 2001.

     Engineering and product development expenses were $2,002,000 for the fiscal
year ended September 30, 2001, which represents a increase of $165,000 or
approximately 9% from $1,837,000 for the fiscal year ended September 30, 2000.
This increase is primarily the result of increased staffing levels in product
development required to support the release of Q|SM and a major version release
of Monarch|ES. During fiscal 2001, the company capitalized $803,000 in software
development costs. This compares to $197,000 capitalized in fiscal 2000. The
increase in capitalized costs is due to the development of the Q|SM product and
the new major version of Monarch|ES.

     Selling, general and administrative expenses were $17,554,000 for the
fiscal year ended September 30, 2001, which represents a decrease of $483,000 or
approximately 3% from $18,037,000 for the fiscal year ended September 30, 2000.
As is the case with sales, approximately 50% of the Company's selling, general
and administrative expenses are attributable to international subsidiaries that
conduct business in their local currencies. Over the past 12 months the dollar
has significantly strengthened against these local currencies, resulting in a
comparative reduction of approximately 8% for international selling, general,
and administrative expenses when stated in dollars. This accounts for a 2%
reduction in total selling, general and administrative expenses.

     During the fourth quarter of fiscal 2001, the Company approved and
completed a corporate-wide restructuring plan in an effort to reduce costs and
centralize administrative operations. The restructuring plan resulted in charges

                                       10
<PAGE>
for severance benefits and related costs for 42 terminated employees of
approximately $763,000. Approximately $377,000 of the restructuring charges were
paid in fiscal 2001 with approximately $386,000 (primarily for severance for a
former officer of the Company) accrued and payable through January 2005.

     As a result of the foregoing, the loss from continuing operations for the
year ended September 30, 2001 was $5,385,000, which compares to a loss from
operations of $1,002,000 for the year ended September 30, 2000. The Company
recorded a benefit for income taxes of $25,000 in fiscal 2001 due to tax refunds
received in the year. In fiscal 2001 and 2000, no benefit for income taxes was
recorded on losses incurred owing to the Company's conclusion that the
realization of its net operating loss carryforwards was not more likely than not
to occur.

     In September 2001 Datawatch sold the operations of Guildsoft Limited, a
United Kingdom distribution subsidiary, to a third party. The sale resulted in
gross proceeds of approximately $1,179,000 and a gain of approximately $413,000.
The operations of Guildsoft Limited have been reflected as a discontinued
operation in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144 (See Notes 1 and 2 of the Consolidated Financial Statements
included elsewhere herein). Income from discontinued operations for the year
ended September 30, 2001 was $269,000 which compares to income from discontinued
operations of $12,000 for the year ended September 30, 2000.

     Net loss for the year ended September 30, 2001 was $5,116,000, which
compares to a net loss of $990,000 for the year ended September 30, 2000.


               FISCAL YEAR ENDED SEPTEMBER 30, 2000 AS COMPARED TO
               ---------------------------------------------------
                      FISCAL YEAR ENDED SEPTEMBER 30, 1999
                      ------------------------------------

     Net sales for the fiscal year ended September 30, 2000 were $22,474,000
which represents a decrease of $1,124,000 or approximately 5% from the net sales
of $23,598,000 for the fiscal year ended September 30, 1999. Net sales for
fiscal 1999 included a non-recurring licensing and development fee of $740,000
received from Adobe for integration of certain technology from the Company's
Redwing product into Adobe Acrobat. Exclusive of the fiscal 1999 Adobe sales,
net sales decreased by $384,000 or approximately 2% in fiscal 2000. This
decrease is the result of a decrease in sales of the Company's Q|SM products in
fiscal 2000 as compared to fiscal 1999. In fiscal 2000 and 1999 respectively,
Monarch and Monarch|ES products accounted for approximately 70% and 62% of net
sales and Q|SM products accounted for approximately 30% and 38% of net sales.

     Cost of sales for the fiscal year ended September 30, 2000 were $3,560,000
or approximately 16% of net sales. Cost of sales for the fiscal year ended
September 30, 1999 were $3,984,000 or approximately 17% of net sales. Included
in the fiscal 1999 cost of sales were $420,000 of non-recurring costs paid to a
third-party developer for a one-time customization of the Company's Redwing
product. Excluding these costs, fiscal 1999 cost of sales, would have been
$3,564,000 or approximately 15% of net sales. The fiscal 2000 increase in cost
of goods sold as a percentage of net sales results from the increase in
percentage of net sales from the Monarch and Monarch|ES product lines which
produce lower margins.

     Engineering and product development expenses were $1,837,000 for the fiscal
year ended September 30, 2000, which represents a decrease of $549,000 or
approximately 23% from $2,386,000 for the fiscal year ended September 30, 1999.
This decrease does not imply that the Company's development efforts slowed but
is reflective of a reduction of expenditures for development efforts undertaken
by developers under contract to the Company and for the internal quality
assurance personnel for the Company's Monarch|ES and Q|SM products.

     Selling, general and administrative expenses were $18,037,000 for the
fiscal year ended September 30, 2000, which represents a decrease of $2,713,000
or approximately 13% from $20,750,000 for the fiscal year ended September 30,
1999. Included in the expenses for fiscal 1999 were approximately $571,000 of
non-recurring legal expenses associated with litigation which was settled in
fiscal 1999. Excluding these fees, fiscal 1999 selling, general and
administrative expenses would have been $20,179,000 and, accordingly, selling,
general and administrative expenses, decreased by $2,142,000 or approximately
11% in fiscal 2000. This decrease is primarily due to the reduction of personnel
in the Company's worldwide operations pursuant to a restructuring during the
fourth quarter of fiscal 1998 and the third quarter of fiscal 1999, as well as a
decrease in promotional activities associated with the Company's Monarch
product.
                                       11
<PAGE>

     As a result of the foregoing the Company recorded a loss from continuing
operations for the fiscal year ended September 30, 2000 of $1,002,000, which
compares to a loss from continuing operations of $3,717,000 for the fiscal year
ended September 30, 1999. The Company did not record any benefit for income
taxes in fiscal 2000 on the net loss from operations as management believes it
is unlikely that such benefit would be realized. During fiscal 1999, the Company
recorded an income tax benefit of approximately $412,000 on the net loss from
operations up to the amount of recoverable tax refunds as that amount was likely
to be realized.

     During fiscal 1999, the Company approved and completed restructuring plans
to centralize, in the United States, the quality assurance efforts for its
Quetzal|SC product and further reduce costs and focus resources on key areas of
the business. The restructuring plans resulted in charges in severance benefits
and related costs for 31 terminated employees. These charges, totaling
approximately $649,000, were fully paid. There was no change in the initial
estimate in subsequent periods.

     Income from discontinued operations for the year ended September 30, 2000
was $12,000 which compares to a loss from discontinued operations of $131,000
for the year ended September 30, 1999.

     Net loss for fiscal 2000 was $990,000, which compares to a net loss of
$3,847,000 for fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

     The Company incurred net losses in each of the three years in the period
ended September 30, 2001. In addition, the Company used approximately $388,000,
$156,000 and $3,865,000 of cash in operations during 2001, 2000 and 1999,
respectively. Working capital decreased by approximately $3,743,000 during the
fiscal year ended September 30, 2001, primarily as a result of the loss recorded
in fiscal 2001. During the fiscal year ended September 30, 1999 and the fourth
quarter of the fiscal year ended September 30, 2001, management took a series of
steps to reduce operating expenses and to restructure operations in response to
the net losses. See Note 3 to the Consolidated Financial Statements included
elsewhere herein for a further discussion of the reductions in the workforce as
well as other restructuring actions taken to reduce operating expenses.

     The Company has two line of credit agreements, one domestic and the other
international, with a single bank. As of September 30, 2001 and 2000, advances
on the Company's two credit lines amounted to $635,000 and $960,0000,
respectively. Borrowings under the credit lines bear interest at the bank's
prime rate plus 1% (7% and 10.5% at September 30, 2001 and 2000, respectively)
and are collateralized by substantially all assets. The international credit
line is guaranteed up to 90% by the Export-Import Bank of the United States. The
credit lines contain customary covenants which require, among other items, the
Company maintain a minimum level of consolidated tangible net worth. As of
September 30, 2001, the Company was in default on its covenant to maintain the
minimum level of consolidated tangible net worth. Due to the covenant default,
no additional borrowings were available to the Company as of September 30, 2001.

     On October 30, 2001 and December 19, 2001, the Company entered into amended
and restated domestic and international credit lines for a period to expire on
October 1, 2002 under similar terms and conditions, except for a reduction in
the consolidated tangible net worth covenant, and the renewed credit lines will
bear interest at the bank's prime rate plus 2%. The Company is in compliance
with the tangible net worth covenant of the renewed lines. The renewed domestic
credit line provides for maximum borrowings of the lesser of $1,000,000 or 70%
of defined eligible receivables and the renewed international credit line
provides for maximum borrowings of the lessor of $500,000 or 80% of defined
eligible receivables.

     Management believes that through a combination of the restructuring actions
taken in fiscal 2001, the proceeds from the sale of Guildsoft and the amended
and restated lines of credit, the Company will have sufficient liquidity through
at least September 30, 2002 to fund its cash requirements.

                                       12
<PAGE>
     Management believes that the Company's current operations are not
materially impacted by the effects of inflation.

RECENT ACCOUNTING PRONOUNCEMENTS

     In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions relating to the
disposal of a component of a business of Accounting Principles Board Opinion
("APB") No. 30. In the fourth quarter of 2001, the Company elected to adopt the
provisions of SFAS No. 144. In accordance with the provisions of SFAS No. 144,
Guildsoft is considered a discontinued operation, and prior years' financial
statements have been reclassified to present Guildsoft on that basis. In June
2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." These pronouncements provide guidance on
how to account for the acquisition of businesses and intangible assets,
including goodwill, which arise from such activities. SFAS No.141 affirms that
only one method of accounting may be applied to a business combination, the
purchase method. SFAS No. 141 also provides guidance on the allocation of
purchase price to the assets acquired. SFAS No. 142 provides that goodwill
resulting from business combinations no longer be amortized to expense, but
rather requires an annual assessment of impairment and, if necessary,
adjustments to the carrying value of goodwill. Adoption of these pronouncements
is not expected to have a significant effect on the Company's consolidated
financial statements.

RISK FACTORS

     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 Report on
Form 10-Q that are not historical facts (including, but not limited to
statements contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Part I of this Report on Form
10-Q relating to liquidity and capital resources) may constitute forward looking
statements and are made under the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. 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 below and within this Report on Form 10-Q, as
well as the accuracy of the Company's internal estimates of revenue and
operating expense levels. The following discussion of the Company's risk factors
should be read in conjunction with the financial statements contained herein and
related notes thereto. Such factors, among others, may have a material adverse
effect upon the Company's business, results of operations and financial
condition.

Fluctuations in Quarterly Operating Results

     The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, and delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software products
are generally shipped as orders are received. As a result, net sales in any
quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
significant variations in operating results from quarter to quarter. Because of
these factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that the
Company will not experience such variations in operating results in the future
or that such variations will not have a material adverse effect on the Company's
business, financial condition or results of operation.

Weakening of World Wide Economic Conditions and the Computer Software Market May
Result in Lower Revenue Growth Rates or Decreased Revenues

                                       13
<PAGE>

     The revenue growth and profitability of the Company's business depends on
the overall demand for computer software and services, particularly in the
markets in which it competes. Because the Company's sales are primarily to major
corporate customers, its business also depends on general economic and business
conditions. A softening of demand for computer software and services, caused by
a weakening of the economy in the United States or abroad, may result in lower
revenue growth rates, decreased revenues or reduced profitability. In addition,
recent terrorist attacks against the United States, and the United States
military response to these attacks, have added to economic and political
uncertainty which may adversely affect worldwide demand for computer software
and services and result in significant fluctuations in the value of foreign
currencies. In a weakened economy, the Company cannot be assured that it will be
able to effectively promote future growth in its software and services revenues
or restore profitability.

Dependence on Principal Products

     In fiscal 2001, Monarch and Monarch|ES products and Q|Service Management
products accounted for approximately 70% and 30%, respectively, of the Company's
net sales. The Company is wholly dependent on Monarch, Monarch|ES and Q|Service
Management products. As a result, any factor adversely affecting sales of either
of these products could have a material adverse effect on the Company. The
Company's future financial performance will depend in part on the successful
introduction of its new and enhanced versions of these products and development
of new versions of these and other products and subsequent acceptance of such
new and enhanced products. In addition, competitive pressures or other factors
may result in significant price erosion that could have a material adverse
effect on the Company's business, financial condition or results of operations.

International Sales

     In 2001, 2000 and 1999, international sales accounted for approximately
46%, 43% and 49%, respectively, of the Company's net sales. The Company
anticipates that international sales will continue to account for a significant
percentage of its net sales. A significant portion of the Company's net sales
will therefore be subject to risks associated with international sales,
including unexpected changes in legal and regulatory requirements, changes in
tariffs, exchange rates and other barriers, political and economic instability,
possible effects of war and acts of terrorism, difficulties in account
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations, difficulties in
protecting the Company's intellectual property overseas, seasonality of sales
and potentially adverse tax consequences.













                                       14
<PAGE>
Acquisition Strategy

     Although the Company has no current acquisition plans, it has addressed and
may continue to address the need to develop new products, in part, through the
acquisition of other companies. Acquisitions involve numerous risks including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience and where competitors in such markets have
stronger market positions, and the potential loss of key employees of the
acquired company. Achieving and maintaining the anticipated benefits of an
acquisition will depend in part upon whether the integration of the companies'
business is accomplished in an efficient and effective manner, and there can be
no assurance that this will occur. The successful combination of companies in
the high technology industry may be more difficult to accomplish than in other
industries.

Dependence on New Introductions; New Product Delays

     Growth in the Company's business depends in substantial part on the
continuing introduction of new products. The length of product life cycles
depends in part on end-user demand for new or additional functionality in the
Company's products. If the Company fails to accurately anticipate the demand
for, or encounters any significant delays in developing or introducing, new
products or additional functionality on its products, there could be a material
adverse effect on the Company's business. Product life cycles can also be
affected by the introduction by suppliers of operating systems of comparable
functionality within their products. The failure of the Company to anticipate
the introduction of additional functionality in products developed by such
suppliers could have a material adverse effect on the Company's business. In
addition, the Company's competitors may introduce products with more features
and lower prices than the Company's products. Such increase in competition could
adversely affect the life cycles of the Company's products, which in turn could
have a material adverse effect on the Company's business.

     Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.

Rapid Technological Change

     The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change. The
ability of the Company to grow will depend on its ability to successfully update
and improve its existing products and market and license new products to meet
the changing demands of the marketplace and that can compete successfully with
the existing and new products of the Company's competitors. There can be no
assurance that the Company will be able to successfully anticipate and satisfy
the changing demands of the personal computer software marketplace, that the
Company will be able to continue to enhance its product offerings, or that
technological changes in hardware platforms or software operating systems, or
the introduction of a new product by a competitor, will not render the Company's
products obsolete.

                                       15
<PAGE>
Competition in the PC Software Industry

     The software market for personal computers is highly competitive and
characterized by continual change and improvement in technology. Several of the
Company's existing and potential competitors, including Peregrine, Actuate,
Quest, and others, have substantially greater financial, marketing and
technological resources than the Company. No assurance can be given that the
Company will have the resources required to compete successfully in the future.

Dependence on Proprietary Software Technology

     The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no assurance
that such steps will be adequate to deter misappropriation of such technology.

Reliance on Software License Agreements

     Substantially all of the Company's products incorporate third-party
proprietary technology which is generally licensed to the Company on an
exclusive, worldwide basis. Failure by such third-parties to continue to develop
technology for the Company and license such technology to the Company could have
a material adverse effect on the Company's business and results of operations.

Indirect Distribution Channels

     The Company sells a significant portion of its products through resellers,
none of which are under the direct control of the Company. The loss of major
resellers of the Company's products, or a significant decline in their sales,
could have a material adverse effect on the Company's operating results. There
can be no assurance that the Company will be able to attract or retain
additional qualified resellers or that any such resellers will be able to
effectively sell the Company's products. The Company seeks to select and retain
resellers on the basis of their business credentials and their ability to add
value through expertise in specific vertical markets or application programming
expertise. In addition, the Company relies on resellers to provide post-sales
service and support, and any deficiencies in such service and support could
adversely affect the Company's business.

Volatility of Stock Price

     As is frequently the case with the stocks of high technology companies, the
market price of the Company's common stock has been, and may continue to be,
volatile. Factors such as quarterly fluctuations in results of operations,
increased competition, the introduction of new products by the Company or its
competitors, expenses or other difficulties associated with assimilating
companies acquired by the Company, changes in the mix of sales channels, the
timing of significant customer orders, and macroeconomic conditions generally,
may have a significant impact on the market price of the stock of the Company.
Any shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the market
price of the Company's common stock in any given period. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations,
which have particularly affected the market price for many high technology
companies and which, on occasion, have appeared to be unrelated to the operating
performance of such companies.

Notice of Potential Delisting

     On March 30, 2001 the Company announced that it had received a notice from
The Nasdaq Stock Market, Inc. that the Company's Common Stock failed to comply
with the $1.00 minimum bid price requirement for continued listing on The Nasdaq
National Market as set forth in marketplace Rule 4450(a)(5), and that the
Company's Common Stock is, therefore, subject to delisting from The Nasdaq
National Market. Management presented the Company's plan to regain compliance
with the minimum bid price requirement to the Nasdaq Listing Qualifications
Panel and, on May 30, 2001, the Listing Qualifications Panel's notified the
Company that it had determined to continue listing the Company's common stock on

                                       16
<PAGE>
the Nasdaq National Market, provided that on or before July 31, 2001, the
Company's Common Stock evidenced a closing bid price of at least $1.00 per share
and, immediately thereafter, a closing bid price of at least $1.00 for a minimum
of ten consecutive trading days and that the Company remained in compliance with
all other requirements for continued listing on The Nasdaq National Market.

     Effective as of the close of business on July 23, 2001 the Company effected
a 1-for-4.5 reverse stock split. Since July 24, 2001, the Company's Common Stock
has evidenced a closing bid price in excess of $1.00 per share, demonstrating
compliance with the minimum bid price requirement. However, the Company has not
maintained compliance with the continued listing requirement for market value of
public float of $5 million.

     In response to the extraordinary market conditions which resulted from the
tragedies of September 11, 2001, Nasdaq declared an emergency moratorium on the
enforcement of the minimum bid price and market value of public float
requirements. This moratorium is scheduled to expire on January 2, 2002. As of
the date of this filing, the Company is not in compliance with the market value
of public float requirement. Further, the company is not in compliance with the
$4 million net tangible asset requirement and there can be no assurance that the
Company will remain in compliance with all of the other requirements for
continued listing on The Nasdaq National Market. If the Company does not achieve
compliance with the market value of public float and net tangible asset
requirements, it will likely become subject to a delisting action by the Nasdaq
National Market. In the event that the Company's shares are delisted, the
Company will attempt to have its Common Stock traded on The Nasdaq SmallCap
Market or, if for any reason it is unable to have its Common Stock traded on The
Nasdaq SmallCap Market, on the NASD OTC Bulletin Board; however, delisting of
the Common Stock from the Nasdaq National Market may materially impair the
ability of stockholders to buy and sell shares of the Common Stock and could
have an adverse effect on the market price of, and the efficiency of the trading
market for, the Common Stock. In addition, the delisting of the Common Stock
could significantly impair the Company's ability to raise capital in the public
markets should it desire to do so in the future.


ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
---------------------------------------------------------------------

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

     At September 30, 2001, the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. The Company holds no
investment securities that would require disclosure of market risk.










                                       17
<PAGE>
Primary Market Risk Exposures.

     The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilizes U.S.
dollar denominated borrowings to fund its operational needs through its working
capital line of credit agreements. The lines, which currently bear an interest
rate of prime plus 2% (8% at September 30, 2001), are subject to annual renewal.
Had the interest rates under the lines of credit been 10% greater or lesser than
actual rates, the impact would not have been material in the Company's
consolidated financial statements for the period ended September 30, 2001. As of
September 30, 2001, the Company had approximately $635,000 in outstanding
borrowings under working capital lines.

     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. Therefore, the majority of currency movements are reflected in the
Company's other comprehensive income. There are, however, certain situations
where the Company will invoice customers in currencies other than its own. Such
gains or losses, whether realized or unrealized, are reflected in income. These
have not been material in the past nor does management believe that they will be
material in the future. Currently the Company does not engage in foreign
currency hedging activities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

     The information required by this item is set forth in Item 14(a) under the
captions "Consolidated Financial Statements" and "Consolidated Financial
Statement Schedule" as a part of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
        FINANCIAL DISCLOSURE
        --------------------

     Not Applicable.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------

     Information with respect to Directors may be found under the caption
"Election of Directors" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders for the fiscal year ended September 30,
2001. Such information is incorporated herein by reference. Information with
respect to the Company's executive officers may be found under the caption
"Executive Officers of the Registrant" appearing in Part I of this Annual Report
on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

     The information set forth under the caption "Compensation and Other
Information Concerning Directors and Officers" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal
year ended September 30, 2001 is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

     The information set forth under the caption "Principal Holders of Voting
Securities" appearing in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders for the fiscal year ended September 30, 2001 is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

     The information set forth under the caption "Certain Transactions"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders for the fiscal year ended September 30, 2001 is incorporated herein
by reference.

                                       18
<PAGE>
                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
------------------------------------------------------------------------

     The following documents are filed as part of this report:

(A)  1.  CONSOLIDATED FINANCIAL STATEMENTS

         Independent Auditors' Report
         Consolidated Balance Sheets as of September 30, 2001 and 2000
         Consolidated Statements of Operations for the Years Ended September
         30, 2001, 2000 and 1999.
         Consolidated Statements of Changes in Shareholders' Equity for the
         Years Ended September 30, 2001, 2000 and 1999.
         Consolidated Statements of Cash Flows for the Years Ended September 30,
         2001, 2000 and 1999.
         Notes to Consolidated Financial Statements

     2.  FINANCIAL STATEMENT SCHEDULE

         Schedule VIII Valuation and Qualifying Accounts

         All other schedules are omitted as the required information is not
         applicable or is included in the financial statements or related notes.

         The Independent Auditors' Report included with the Consolidated
         Financial Statements under Item 14(a)1 above contains the Independent
         Auditors' Report on the Consolidated Financial Statement Schedule.

     3.  LIST OF EXHIBITS

EX. NO                          DESCRIPTION
-------  -----------------------------------------------------------------------
(1) 3.1  Restated Certificate of Incorporation of the Registrant (Exhibit 3.2)
    3.2  Certificate of Amendment of Restated Certificate of Incorporation of
         the Registrant (filed herewith)
(1) 3.3  By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1  Specimen certificate representing the Common Stock (Exhibit 4.4)
(6) 4.2  Warrant to Purchase Stock issued to Silicon Valley Bank, dated January
         17, 2001 (Exhibit 4.1)
    4.3  Warrant to Purchase Stock issued to Silicon Valley Bank, dated October
         30, 2001 (filed herewith)
(1)10.1* 1987 Stock Plan (Exhibit 10.7)
(1)10.2* Form of Incentive Stock Option Agreement of the Registrant (Exhibit
         10.8)
(1)10.3* Form of Nonqualified Stock Option Agreement of the Registrant (Exhibit
         10.9)
(1)10.4  Software Development and Marketing Agreement by and between Personics
         Corporation and Raymond Huger, dated January 19, 1989 (Exhibit 10.12)
(4)10.5  Commercial Security Agreement between Datawatch Corporation and Silicon
         Valley Bank doing business as Silicon Valley East, dated November 1,
         1994 (Exhibit 10.6)
(4)10.6  Commercial Security Agreement between Personics Corporation and Silicon
         Valley Bank doing business as Silicon Valley East, dated November 1,
         1994 (Exhibit 10.7)

                                       19
<PAGE>
(2)10.7* 1996 Non-Employee Director Stock Option Plan, as amended on December
         10, 1996 (Exhibit 10.30)
(2)10.8* 1996 International Employee Non-Qualified Stock Option Plan (Exhibit
         10.31)
(3)10.9  Promissory Note, dated February 12, 1997, by and between Datawatch
         Corporation, Personics Corporation and Silicon Valley Bank (Exhibit
         10.2).
   10.10*1996 Stock Plan as amended as of March 16, 2001 (filed herewith)
(4)10.11 Lease, dated August 31, 2000, by and between Fortune Wakefield, LLC and
         Datawatch Corporation (Exhibit 10.27)
(5)10.12 Indemnification Agreement between Datawatch Corporation and James Wood,
         dated January 12, 2001 (Exhibit 10.1)
(5)10.13 Indemnification Agreement between Datawatch Corporation and Richard de
         J. Osborne, dated January 12, 2001 (Exhibit 10.2)
(6)10.14 Registration Rights Agreement between Silicon Valley Bank and Datawatch
         Corporation, dated January 17, 2001 (Exhibit 10.1)
   10.15 Amendment No. 1 to Registration Rights Agreement, dated October 30,
         2001, by and between Silicon Valley Bank and Datawatch Corporation
         (filed herewith)
(6)10.16 Export-Import Bank of the United States Working Capital Guarantee
         Program Borrower Agreement, dated January 17, 2001, by and among
         Datawatch Corporation, Datawatch International Limited, Datawatch
         Europe Limited, Guildsoft Limited and Silicon Valley Bank in favor of
         Export-Import Bank of the United States (Exhibit 10.2)
(6)10.17 First Loan Modification Agreement (EXIM Line), dated January 17,
         2001, by and among Datawatch Corporation, Datawatch International
         Limited, Datawatch Europe Limited, Guildsoft Limited and Silicon Valley
         Bank, doing business as Silicon Valley East, in favor of Export-Import
         Bank of the United States (Exhibit 10.4)
(6)10.18 Revolving Promissory Note (Export-Import Line), dated January 17, 2001,
         by and among Datawatch Corporation, Datawatch International Limited,
         Datawatch Europe Limited, Guildsoft Limited and Silicon Valley Bank
         (Exhibit 10.5)
(6)10.19 Supplemental Deed of Guarantee, dated January 17, 2001, by and between
         Datawatch International Limited and Silicon Valley Bank  (Exhibit 10.6)
(6)10.20 Supplemental Deed of Guarantee, dated January 17, 2001, by and between
         Datawatch Europe Limited and Silicon Valley Bank (Exhibit 10.7)
(6)10.21 Assignment and Consulting Agreement, effective June 30, 2000, by and
         between Datawatch Corporation and Russell Ryan, also doing business as
         Edge IT (Exhibit 10.9)
(7)10.22 Form of Indemnification Agreement between Datawatch Corporation and
         each of its Non-Employee Directors (Exhibit 10.1)
(7)10.23*Advisory Agreement, dated April 5, 2001, by and between Datawatch
         Corporation and Richard de J. Osborne (Exhibit 10.2)
   10.24*Executive Agreement, dated July 9, 2001, between the Company and Robert
         W. Hagger (filed herewith)
   10.25*Management Transition Agreement, dated July 6, 2001, between the
         Company and Bruce R. Gardner (filed herewith)
   10.26 Amended and Restated Loan and Security Agreement, dated October 30,
         2001, between Datawatch Corporation and Silicon Valley Bank (filed
         herewith)
   10.27 Intellectual Property Security Agreement, dated October 30, 2001 by and
         between Datawatch Corporation and Silicon Valley Bank (filed herewith)
   10.28 Amended and Restated Export-Import Bank Loan and Security Agreement,
         dated December 19, 2001, by and among Datawatch Corporation, Datawatch
         International Limited, Datawatch Europe Limited and Silicon Valley Bank
         (filed herewith)

                                       20
<PAGE>
   10.29 Revolving Promissory Note, dated December 19, 2001, by and between
         Datawatch Corporation, Datawatch International Limited, Datawatch
         Europe Limited and Silicon Valley Bank (filed herewith)
   10.30 Export-Import Bank of the United States Working Capital Guarantee
         Program Borrower Agreement, dated December 19, 2001, by and among
         Datawatch Corporation, Datawatch International Limited, Datawatch
         Europe Limited and Silicon Valley Bank in favor of Export-Import Bank
         of the United States (filed herewith)
   21.1  Subsidiaries of the Registrant (filed herewith)
   23.1  Consent of Independent Auditors (filed herewith)
--------------------------------------------------------------------------------
 *   Indicates a management contract or compensatory plan or contract.
(1)  Previously filed as an exhibit to Registration Statement 33-46290 on Form
     S-1 and incorporated herein by reference (the number given in parenthesis
     indicates the corresponding exhibit in such Form S-1).
(2)  Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
     for the fiscal year ended September 30, 1996 and incorporated herein by
     reference (the number given in parenthesis indicates the corresponding
     exhibit in such Form 10-K).
(3)  Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-Q for the quarter ended March 31, 1997 and incorporated herein by
     reference (the number in parenthesis indicates the corresponding exhibit in
     such Form 10-Q).
(4)  Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
     for the fiscal year ended September 30, 2000 and incorporated herein by
     reference (the number given in parenthesis indicates the corresponding
     exhibit in such Form 10-K).
(5)  Previously filed as an exhibit to Registrant's Current Report on Form 8-K
     dated February 2, 2001 and incorporated herein by reference (the number in
     parenthesis indicates the corresponding exhibit in such Form 8-K).
(6)  Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-Q for the quarter ended December 31, 2001 and incorporated herein by
     reference (the number in parenthesis indicates the corresponding exhibit in
     such Form 10-Q).
(7)  Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-Q for the quarter ended March 31, 2001 and incorporated herein by
     reference (the number in parenthesis indicates the corresponding exhibit in
     such Form 10-Q).

(B)  REPORTS ON FORM 8-K

     The Company filed a Report on Form 8-K with the Securities and Exchange
     Commission on July 23, 2001, which reported: the Company had entered into
     an agreement to sell its United Kingdom distribution subsidiary, Guildsoft
     Limited; and, the approval, at a special meeting of the shareholders held
     on July 23, 2001, an amendment to the Company's restated certificate of
     incorporation to effect a 1-for-4.5 reverse stock split of the Company's
     common stock.

                                       21
<PAGE>


(C)  EXHIBITS

     The Company hereby files as exhibits to this Annual Report on Form 10-K
     those exhibits listed in Item 14(a)3 above.


(D)  FINANCIAL STATEMENT SCHEDULES

     The Company hereby files as financial statement schedules to this Annual
     Report on Form 10-K the Consolidated Financial Statement Schedules listed
     in Item 14(a)2 above which are attached hereto.











































                                       22
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.


                                         Datawatch Corporation

Date: December 28, 2001                  By: /s/ Robert W. Hagger
                                             ----------------------------
                                             Robert W. Hagger
                                             President, Chief Executive Officer
                                             and Director


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


SIGNATURE                    TITLE                             DATE

/s/ Robert W. Hagger         President, Chief Executive        December 28, 2001
-------------------------    Officer and Director
Robert W. Hagger             (Principal Executive Officer)


/s/ Alan R. MacDougall       Vice President Finance, Chief     December 28, 2001
-------------------------    Financial Officer, Treasurer
Alan R. MacDougall           and Assistant Secretary
                             (Principal Financial and
                             Accounting Officer)

/s/ Richard de J. Osborne    Chairman of the Board             December 28, 2001
-------------------------
Richard de J. Osborne


/s/ Jerome Jacobson          Director                          December 28, 2001
-------------------------
Jerome Jacobson


/s/ Terry W. Potter          Director                          December 28, 2001
-------------------------
Terry W. Potter


/s/ David T. Riddiford       Director                          December 28, 2001
-------------------------
David T. Riddiford


/s/ James Wood               Director                          December 28, 2001
-------------------------
James Wood


                                       23
<PAGE>













DATAWATCH CORPORATION
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2001 and 2000
and for Each of the Three Years in the Period
Ended September 30, 2001

Independent Auditors' Report
<PAGE>

DATAWATCH CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS
--------------------------------------------------------------------------------


                                                                            PAGE

INDEPENDENT AUDITORS' REPORT                                                  1

CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2001 and 2000
   AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 2001:

   Consolidated Balance Sheets                                                2

   Consolidated Statements of Operations                                      3

   Consolidated Statements of Shareholders' Equity                            4

   Consolidated Statements of Cash Flows                                      5

   Notes to Consolidated Financial Statements                                 6
<PAGE>

INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
Datawatch Corporation
Lowell, Massachusetts

We have audited the accompanying consolidated balance sheets of Datawatch
Corporation (the "Company") and subsidiaries as of September 30, 2001 and 2000,
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended September
30, 2001. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Datawatch Corporation and
subsidiaries as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

/s/ Deloitte & Touche LLP

Boston, Massachusetts
November 16, 2001

                                       1
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
<TABLE><CAPTION>
---------------------------------------------------------------------------------------------------------

ASSETS                                                                       2001                 2000
<S>                                                                     <C>                  <C>
CURRENT ASSETS:
  Cash and equivalents                                                  $  1,568,691         $  1,695,832
  Short-term investments                                                        --                348,121
  Accounts receivable, less allowances for doubtful accounts and
   sales returns of approximately $562,000 in 2001 and
   $588,000 in 2000                                                        4,255,809            7,662,454
  Inventories                                                                230,878              395,291
  Prepaid expenses and other                                                 853,332              943,465
                                                                        ------------         ------------
           Total current assets                                            6,908,710           11,045,163
                                                                        ------------         ------------
PROPERTY AND EQUIPMENT:
  Office furniture and equipment                                           3,180,156            3,592,708
  Manufacturing and engineering equipment                                    336,609              212,891
                                                                        ------------         ------------
                                                                           3,516,765            3,805,599

  Less accumulated depreciation and amortization                          (2,491,996)          (2,635,005)
                                                                        ------------         ------------
           Net property and equipment                                      1,024,769            1,170,594
                                                                        ------------         ------------

OTHER ASSETS:
  Capitalized software development costs, net                              1,085,039              651,104
  Excess of cost over net assets of acquired companies, net                     --                411,216
  Other                                                                      405,466              294,740
                                                                        ------------         ------------
          Total other assets                                               1,490,505            1,357,060
                                                                        ------------         ------------

TOTAL                                                                   $  9,423,984         $ 13,572,817
                                                                        ============         ============

LIABILITIES AND SHAREHOLDERS' EQUITY                                         2001                 2000

CURRENT LIABILITIES:
  Accounts payable                                                      $  1,556,286         $  2,064,501
  Accrued expenses                                                         1,965,911            1,589,423
  Deferred revenue                                                         2,155,377            2,092,002
  Borrowings under credit lines                                              635,000              960,000
                                                                        ------------         ------------
           Total current liabilities                                       6,312,574            6,705,926
                                                                        ------------         ------------
ACCRUED SEVERANCE, less current portion                                      126,121                 --
                                                                        ------------         ------------
COMMITMENTS AND CONTINGENCIES
  (Notes 1, 3, 6, 7 and 8)

SHAREHOLDERS' EQUITY:
  Preferred stock, par value $.01- authorized,
    1,000,000 shares; none issued                                               --                   --
  Common stock, par value $.01- authorized,
    20,000,000 shares; issued, 2,547,795 shares and
    2,090,882 shares in 2001 and 2000, respectively;
    outstanding, 2,540,672 shares and 2,083,759
    shares in 2001 and 2000, respectively                                     25,478               20,909
  Additional paid-in capital                                              21,495,497           20,239,128
  Accumulated deficit                                                    (17,782,258)         (12,666,364)
  Accumulated other comprehensive loss                                      (613,040)            (586,394)
                                                                        ------------         ------------
                                                                           3,125,677            7,007,279

  Less treasury stock, at cost - 7,123 shares                               (140,388)            (140,388)
                                                                        ------------         ------------
          Total shareholders' equity                                       2,985,289            6,866,891
                                                                        ------------         ------------
TOTAL                                                                   $  9,423,984         $ 13,572,817
                                                                        ============         ============
</TABLE>

See notes to consolidated financial statements.

                                        2

<PAGE>

DATAWATCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
<TABLE><CAPTION>
----------------------------------------------------------------------------------------------------------

                                                        2001                 2000                 1999
<S>                                                 <C>                  <C>                  <C>
NET SALES
  License                                           $ 12,835,252         $ 16,954,696         $ 18,560,159
  Services                                             5,567,403            5,519,141            5,037,881
                                                    ------------         ------------         ------------
           Net sales                                  18,402,655           22,473,837           23,598,040
                                                    ------------         ------------         ------------
COSTS AND EXPENSES:
  Cost of sales                                        3,400,761            3,560,471            3,984,618
  Engineering and product development                  2,002,039            1,837,289            2,386,256
  Selling, general and administrative                 17,554,206           18,036,744           20,749,606
  Restructuring and centralization costs                 763,321                 --                648,767
                                                    ------------         ------------         ------------
           Total costs and expenses                   23,720,327           23,434,504           27,769,247
                                                    ------------         ------------         ------------
LOSS FROM OPERATIONS                                  (5,317,672)            (960,667)          (4,171,207)

INTEREST EXPENSE                                        (135,505)            (153,071)            (135,562)

INTEREST INCOME AND OTHER                                 43,515              123,298              171,203

FOREIGN CURRENCY TRANSACTION
  GAINS (LOSSES)                                            (389)             (11,657)               7,299

BENEFIT FOR INCOME TAXES                                  25,000                 --                411,630
                                                    ------------         ------------         ------------
LOSS FROM CONTINUING OPERATIONS                       (5,385,051)          (1,002,097)          (3,716,637)
                                                    ------------         ------------         ------------
DISCONTINUED OPERATIONS:
  Income (loss) from Guildsoft operations               (143,856)              12,468             (130,544)
  Gain on sale of Guildsoft                              413,013                 --                   --
                                                    ------------         ------------         ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS               269,157               12,468             (130,544)
                                                    ------------         ------------         ------------
NET LOSS                                            $ (5,115,894)        $   (989,629)        $ (3,847,181)
                                                    ============         ============         ============
INCOME (LOSS) PER SHARE - Basic and Diluted:
  Continuing operations                             $      (2.24)        $      (0.49)        $      (1.83)
  Discontinued operations                                   0.11                 0.01                (0.06)
                                                    ------------         ------------         ------------
NET LOSS PER SHARE - Basic and Diluted              $      (2.13)        $      (0.48)        $      (1.89)
                                                    ============         ============         ============

WEIGHTED-AVERAGE NUMBER OF
  SHARES OUTSTANDING - Basic and Diluted               2,399,132            2,059,629            2,035,848
                                                    ============         ============         ============
</TABLE>
See notes to consolidated financial statements.


                                        3
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
<TABLE><CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

                                                                                ADDITIONAL
                                                      COMMON STOCK               PAID-IN                  TREASURY STOCK
                                                 SHARES           AMOUNT         CAPITAL              SHARES          AMOUNT
<S>                                            <C>            <C>              <C>                    <C>         <C>
BALANCE, OCTOBER 1, 1998                       2,040,188      $     20,402     $ 19,895,288           (7,123)     $   (140,388)
  Stock options exercised                          9,070                91           40,726             --                --
  Comprehensive loss:
    Translation adjustments                         --                --               --               --                --
    Net loss                                        --                --               --               --                --
                                               ---------      ------------     ------------           ------      ------------
           Total comprehensive loss

BALANCE, SEPTEMBER 30, 1999                    2,049,258            20,493       19,936,014           (7,123)         (140,388)
  Stock options exercised                         41,624               416          303,114             --                --
  Comprehensive loss:
    Translation adjustments                         --                --               --               --                --
    Net loss                                        --                --               --               --                --
                                               ---------      ------------     ------------           ------      ------------
           Total comprehensive loss

BALANCE, SEPTEMBER 30, 2000                    2,090,882            20,909       20,239,128           (7,123)         (140,388)
  Sale of common stock, net of $79,148
   of related costs                              416,667             4,167        1,079,185             --                --
  Issuance of common stock for services           39,912               399          100,011             --                --
  Stock options exercised                            334                 3              840             --                --
  Issuance of warrant                               --                --             76,333             --                --
  Comprehensive loss:
    Translation adjustments                         --                --               --               --                --
    Net loss                                        --                --               --               --                --
                                               ---------      ------------     ------------           ------      ------------
           Total comprehensive loss

BALANCE, SEPTEMBER 30, 2001                    2,547,795      $     25,478     $ 21,495,497           (7,123)     $   (140,388)
                                               =========      ============     ============           ======      ============
</TABLE>
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999 (CONTINUED)
<TABLE><CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                ACCUMULATED
                                                                   OTHER
                                              ACCUMULATED      COMPREHENSIVE    COMPREHENSIVE
                                                DEFICIT            LOSS              LOSS            TOTAL

<S>                                         <C>               <C>               <C>               <C>
BALANCE, OCTOBER 1, 1998                    $ (7,829,554)     $   (309,266)                       $ 11,636,482
  Stock options exercised                           --                --                                40,817
  Comprehensive loss:
    Translation adjustments                         --             (12,411)     $    (12,411)          (12,411)
    Net loss                                  (3,847,181)             --          (3,847,181)       (3,847,181)
                                            ------------      ------------      ------------      ------------
           Total comprehensive loss                                             $ (3,859,592)
                                                                                ============
BALANCE, SEPTEMBER 30, 1999                  (11,676,735)         (321,677)                          7,817,707
  Stock options exercised                           --                --                               303,530
  Comprehensive loss:
    Translation adjustments                         --            (264,717)     $   (264,717)         (264,717)
    Net loss                                    (989,629)             --            (989,629)         (989,629)
                                            ------------      ------------      ------------      ------------
           Total comprehensive loss                                             $ (1,254,346)
                                                                                ============
BALANCE, SEPTEMBER 30, 2000                  (12,666,364)         (586,394)                          6,866,891
  Sale of common stock, net of $79,148
   of related costs                                 --                --                             1,083,352
  Issuance of common stock for services             --                --                               100,410
  Stock options exercised                           --                --                                   843
  Issuance of warrant                               --                --                                76,333
  Comprehensive loss:
    Translation adjustments                         --             (26,646)     $    (26,646)          (26,646)
    Net loss                                  (5,115,894)             --          (5,115,894)       (5,115,894)
                                            ------------      ------------      ------------      ------------

           Total comprehensive loss                 --                --        $ (5,142,540)             --
BALANCE, SEPTEMBER 30, 2001                 $(17,782,258)     $   (613,040)     ============      $  2,985,289
                                            ============      ============                        ============
</TABLE>

See notes to consolidated financial statements.

                                       4
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
<TABLE><CAPTION>
----------------------------------------------------------------------------------------------------------------------------------

                                                                                       2001              2000              1999
<S>                                                                                <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                         $(5,115,894)      $  (989,629)      $(3,847,181)
  Adjustments to reconcile net loss to cash used in
    operating activities:
      Depreciation and amortization                                                  1,022,343         1,108,231         1,151,719
      Amortization of interest on short-term investments                                  --              (4,290)         (121,003)
      Gain on sale of Guildsoft                                                       (413,013)             --                --
      Loss on disposition of equipment                                                  10,412            33,290             2,825
      Stock-based compensation                                                         114,479              --                --
      Changes in current assets and liabilities, net of disposal of Guildsoft:
        Accounts receivable                                                          3,250,903          (567,806)       (1,535,541)
        Inventories                                                                    100,039            (3,341)           96,117
        Prepaid expenses and other                                                     112,119          (277,873)          918,675
        Accounts payable and accrued expenses                                          466,108           (78,928)       (1,026,772)
        Deferred revenue                                                                64,159           623,988           496,608
                                                                                   -----------       -----------       -----------
           Cash used in operating activities                                          (388,345)         (156,358)       (3,864,553)
                                                                                   -----------       -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of equipment and fixtures                                                  (515,270)         (419,544)         (410,920)
  Proceeds from sale of equipment                                                       26,739            20,603            14,885
  Proceeds from sale of short-term investments                                         348,121         2,950,549         7,979,405
  Purchase of short-term investments                                                      --          (1,814,682)       (5,942,690)
  Net proceeds from sale of Guildsoft                                                  665,137              --                --
  Capitalized software development costs                                              (763,370)         (197,057)         (468,354)
  Other assets                                                                        (101,431)          (13,112)         (117,133)
                                                                                   -----------       -----------       -----------
           Cash (used in) provided by investing activities                            (340,074)          526,757         1,055,193
                                                                                   -----------       -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common stock, net of related costs                   1,083,352              --                --
  Net proceeds from exercise of stock options                                              843           303,530            40,817
  Principal payments on long-term obligations                                             (317)          (39,603)         (145,460)
  (Payments) borrowings under credit lines - net                                      (325,000)         (353,705)        1,063,705
  Restricted cash                                                                     (147,435)         (143,299)             --
                                                                                   -----------       -----------       -----------
           Cash provided by (used in) financing activities                             611,443          (233,077)          959,062
                                                                                   -----------       -----------       -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS                                (10,165)         (125,975)          (40,473)
                                                                                   -----------       -----------       -----------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS                                           (127,141)           11,347        (1,890,771)

CASH AND EQUIVALENTS, BEGINNING OF YEAR                                              1,695,832         1,684,485         3,575,256
                                                                                   -----------       -----------       -----------
CASH AND EQUIVALENTS, END OF YEAR                                                  $ 1,568,691       $ 1,695,832       $ 1,684,485
                                                                                   ===========       ===========       ===========
SUPPLEMENTAL INFORMATION:
  Interest paid                                                                    $   135,131       $   145,355       $   135,562
                                                                                   ===========       ===========       ===========

  Income taxes paid (refunds received)                                             $   (25,000)      $  (231,000)      $      --
                                                                                   ===========       ===========       ===========
NONCASH INVESTING AND FINANCING ACTIVITIES -
  Issuance of 39,912 shares of common stock for services and software              $   100,410
                                                                                   ===========
  Issuance of a warrant                                                            $    76,333
                                                                                   ===========
</TABLE>
See notes to consolidated financial statements.

                                       5
<PAGE>

DATAWATCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        NATURE OF BUSINESS - Datawatch Corporation (the "Company") develops,
        markets and distributes commercial software products. The Company also
        provides a wide range of consulting services, including implementation
        and support of its software products.

        OPERATIONS - As shown in the consolidated financial statements, the
        Company incurred net losses in each of the three years in the period
        ended September 30, 2001. In addition, the Company used approximately
        $388,000, $156,000 and $3,865,000 of cash in operations during 2001,
        2000 and 1999, respectively. During the fiscal year ended September 30,
        1999 and the fourth quarter of the fiscal year ended September 30, 2001,
        management took a series of steps to reduce operating expenses and to
        restructure operations in response to the net losses. See Note 3 for a
        further discussion of the reductions in the workforce as well as other
        restructuring actions taken to reduce operating expenses.

        At September 30, 2001, the Company was not in compliance with the
        covenants associated with its lines of credit (see Note 8). Effective
        October 30, 2001 and December 19, 2001, the Company entered into amended
        and restated bank credit lines for a period to expire on October 1,
        2002. These amended and restated credit lines contain more favorable
        financial covenants and provide for available borrowings of up to $1.5
        million, based on formulas.

        Management continues to implement plans intended to control operating
        expenses and capital expenditures as well as plans to manage accounts
        payable and accounts receivable to enhance cash flows. The Company is
        also considering new debt or equity financing alternatives as well as
        the disposition of certain lines of business that are no longer
        considered to be consistent with the Company's long-term strategies. As
        discussed in Note 2, in 2001, the Company sold its wholly owned
        subsidiary, Guildsoft Limited. ("Guildsoft").

        Management believes that through a combination of the restructuring
        actions taken in 2001, the proceeds from the sale of Guildsoft and the
        amended and restated lines of credit, the Company will have sufficient
        liquidity through at least September 30, 2002 to fund its cash
        requirements.

        PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
        include the accounts of Datawatch Corporation and its wholly owned
        subsidiaries. All significant intercompany balances and transactions
        have been eliminated in consolidation. Guildsoft was a component of the
        Company with clearly distinguishable operations and cash flows and
        because Guildsoft's activities are now entirely eliminated from ongoing
        operations and the Company will have no continuing involvement with
        Guildsoft's operations, the Company has presented Guildsoft as a
        discontinued operation in all periods presented herein.

        ACCOUNTING ESTIMATES - The preparation of the Company's consolidated
        financial statements in conformity with accounting principles generally
        accepted in the United States of America requires management to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the
        date of the consolidated financial statements and the reported amounts
        of revenue and expenses during the reporting period. Actual results
        could differ from those estimates.

                                       6
<PAGE>

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

        REVENUE RECOGNITION - Revenue from the sale of software products is
        generally recognized at the time of shipment, providing there are no
        uncertainties surrounding product acceptance, the fee is fixed and
        determinable, collection is considered probable, persuasive evidence of
        the arrangement exists and there are no significant obligations
        remaining. For enterprise solutions products, the Company applies the
        residual method in determining revenue from license sales.

        Revenue from implementation, integration, training and consulting
        services is recognized as the services are performed. Revenue from
        post-contract customer support services is deferred and recognized
        ratably over the contract period (generally one year). Post-contract
        customer support includes technical support and rights to unspecified
        software upgrades and enhancements on a when-and-if available basis.

        The Company's software products are sold under warranty against certain
        defects in material and workmanship for a period of 30 to 60 days from
        the date of purchase. Software products sold directly to end users
        include a guarantee under which such customers may return products
        within 30 to 60 days for a full refund. The Company offers its resellers
        the ability to return obsolete versions of its products and slow-moving
        products for refund or credit. Reserves are provided for potential
        returns under these arrangements based upon historical experience and
        anticipated exposures.

        CASH AND EQUIVALENTS - Cash and equivalents include cash on hand, cash
        deposited with banks, and highly liquid debt securities with remaining
        maturities of 90 days or less when purchased.

        SHORT-TERM INVESTMENTS - Short-term investments at September 30, 2000
        consisted of United States Treasury Bills and commercial paper with
        relatively short-term maturities (less than one year from the date of
        purchase) for which the carrying value approximated market value.

        RESTRICTED CASH - Cash restricted for designated purposes amounted to
        $291,000 and $143,000 at September 30, 2001 and 2000, respectively, and
        is included with other long-term assets in the accompanying consolidated
        balance sheets.

        CAPITALIZED SOFTWARE DEVELOPMENT COSTS - The Company capitalizes certain
        software development costs as well as purchased software upon achieving
        technological feasibility of the related products. For the years ended
        September 30, 2001, 2000 and 1999, the Company capitalized $496,000, $0
        and $0, respectively, of software development costs. For the years ended
        September 30, 2001, 2000 and 1999, the Company purchased and capitalized
        software amounting to approximately $307,000, $197,000, and $468,000,
        respectively. Software development costs incurred and software purchased
        prior to achieving technological feasibility are charged to research and
        development expense as incurred. Commencing upon initial product
        release, capitalized costs are amortized to cost of sales using the
        straight-line method over the estimated life (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),
        generally 12 to 36 months. For the years ended September 30, 2001, 2000
        and 1999, amortization of these costs was approximately $358,000,
        $337,000 and $267,000, respectively.

        ADVERTISING AND PROMOTIONAL MATERIALS - Advertising costs are expensed
        as incurred and amounted to approximately $450,000, $517,000 and
        $475,000 in 2001, 2000 and 1999, respectively. Direct mail/direct
        response costs are expensed as the associated revenue is recognized. The
        amortization period is based on historical results of previous mailers
        (generally three to six months from the date of the mailing). Direct
        mail expense was approximately $1,155,000, $846,000 and $1,682,000 in
        2001, 2000 and 1999, respectively. At September 30, 2001 and 2000,
        deferred direct mail/direct response costs were approximately $52,000
        and $186,000, respectively, and are included under the caption "prepaid
        expenses and other" in the accompanying consolidated balance sheets.

                                       7
<PAGE>

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

        CONCENTRATION OF CREDIT RISKS AND MAJOR CUSTOMERS - The Company sells
        its products and services to U.S. and non-U.S. dealers and other
        software distributors, as well as to end users, under normal credit
        terms. One customer individually accounted for 14%, 18% and 17% of net
        sales in 2001, 2000 and 1999, respectively. This same customer accounted
        for 21% and 34% of outstanding trade receivables as of September 30,
        2001 and 2000, respectively. Other than this customer, no base of
        customers in one geographic area constitutes a significant portion of
        sales. 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.

        INVENTORIES - Inventories consist of software components - primarily
        software manuals, diskettes and retail packaging materials. Inventories
        are valued at the lower of cost (first-in, first-out) method or market.

        PROPERTY AND EQUIPMENT - Purchased equipment and fixtures are recorded
        at cost. Leased equipment accounted for as capital leases is recorded at
        the present value of the minimum lease payments required during the
        lease terms. Costs for computer software developed or obtained for
        internal use are capitalized when specific criteria are met.
        Depreciation and amortization are provided using the straight-line
        method over the estimated useful lives of the related assets or over the
        terms, if shorter, of the related leases. Useful lives and lease terms
        range from three to five years. The cost and the related accumulated
        amortization of equipment leased under capital lease agreements were
        approximately $666,000 and $666,000 at September 30, 2001, respectively,
        and $687,000 and $683,000 at September 30, 2000, respectively.
        Amortization expense was approximately $4,000, $48,000 and $149,000 for
        the years ended September 30, 2001, 2000 and 1999, respectively.

        INCOME TAXES - Deferred income taxes are provided for the net 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.

        EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES - The excess of
        cost over net assets of acquired companies relates to the acquisition of
        Guildsoft (Note 2) and has been amortized on a straight-line basis over
        its estimated life of seven years. Accumulated amortization as of
        September 30, 2000 was $2,503,000. In 2001, the Company sold this
        operation as part of its 2001 Restructuring Plan (Notes 2 and 3).

        LONG-LIVED ASSETS - The Company, using its best estimates based on
        reasonable and supportable assumptions and projections, reviews for
        impairment long-lived assets and certain identifiable intangibles to be
        held and used whenever events or changes in circumstances indicate that
        the carrying amount of its assets might not be recoverable and has
        concluded no financial statement adjustment is required.

        In August 2001, the Financial Accounting Standards Board ("FASB") issued
        Statement of Financial Accounting Standards ("SFAS") No. 144,
        "Accounting for the Impairment or Disposal of Long-Lived Assets," which
        supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
        Assets and for Long-Lived Assets to Be Disposed Of," and the accounting
        and reporting provisions relating to the disposal of a component of a
        business of Accounting Principles Board Opinion ("APB") No. 30. In the
        fourth quarter of 2001, the Company elected to adopt the provisions of
        SFAS No. 144. In accordance with the provisions of SFAS No. 144,
        Guildsoft is considered a discontinued operation, and prior years'
        financial statements have been reclassified to present Guildsoft on that
        basis.

                                       8
<PAGE>

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

        ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The
        Company adopted the provisions of SFAS No. 133, "Accounting for
        Derivative Instruments and Hedging Activities," on October 1, 2000. The
        new standard requires that all companies record derivatives on the
        balance sheet as assets or liabilities, measured at fair value. Adoption
        had no material impact on the Company's consolidated financial
        statements.

        FAIR VALUE DISCLOSURE - The carrying amounts of cash and equivalents,
        short-term investments, accounts receivable, accounts payable, accrued
        expenses and deferred revenue approximate fair value because of their
        short-term nature. The carrying amounts of the Company's current and
        long-term obligations approximate fair value.

        EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share reflect the
        weighted-average number of common shares outstanding during each period.
        Diluted earnings (loss) per share reflect the impact, when dilutive, of
        the exercise of options using the treasury stock method. The Company's
        stock options were antidilutive in 2001, 2000 and 1999. Options to
        purchase approximately 17,000, 61,000 and 10,000 shares in 2001, 2000
        and 1999, respectively, were therefore excluded from the treasury stock
        calculation for those years.

        FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS - The financial
        statements of foreign subsidiaries are translated into U.S. dollars in
        accordance with SFAS No. 52, "Foreign Currency Translation." The related
        translation adjustments are reported as a separate component of
        shareholders' equity under the heading "Accumulated Other Comprehensive
        Income (Loss)." Gains and losses resulting from transactions that are
        denominated in currencies other than the U.S. dollar are included in the
        operating results of the Company.

        STOCK-BASED COMPENSATION - The Company accounts for stock option awards
        to employees and directors using the intrinsic value method. The Company
        has not awarded stock options to non-employees. The difference between
        accounting for stock-based compensation under the intrinsic value method
        and the fair value method is disclosed in Note 10.

        OTHER COMPREHENSIVE INCOME (LOSS) - Currently, the only items presented
        in the Company's consolidated financial statements that are considered
        other comprehensive income (loss) are cumulative foreign currency
        translation adjustments, which are recorded as a component in the
        accompanying consolidated statements of shareholders' equity.
        Accumulated other comprehensive loss reported in the accompanying
        consolidated balance sheets consists only of foreign currency
        translation adjustments. Foreign currency translation losses arising
        during 2001, 2000 and 1999 were approximately $27,000, $265,000 and
        ($12,000), respectively.

        STOCK SPLIT - On July 23, 2001, the Board of Directors and stockholders
        approved a 1:4.5 split of the Company's common stock, which was effected
        on July 23, 2001. All share and per share amounts have been
        retroactively restated to reflect the effect of the stock split.

        RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
        conform to the current year presentation.

        RECENT ACCOUNTING PRONOUNCEMENTS - In June 2001, the FASB issued SFAS
        No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
        Intangible Assets." These pronouncements provide guidance on how to
        account for the acquisition of businesses and intangible assets,
        including goodwill, which arise from such activities. SFAS No.141
        affirms that only one method of accounting may be applied to a business
        combination, the purchase method. SFAS No. 141 also provides guidance on
        the allocation of purchase price to the assets acquired. SFAS No. 142
        provides that goodwill

                                       9
<PAGE>

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

        RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) - resulting from business
        combinations no longer be amortized to expense, but rather requires an
        annual assessment of impairment and, if necessary, adjustments to the
        carrying value of goodwill. Adoption of these pronouncements is not
        expected to have a significant effect on the Company's consolidated
        financial statements.

2.      DISCONTINUED OPERATION

        On September 20, 2001, the Company sold the operations of Guildsoft, a
        United Kingdom distribution subsidiary, to a third party, as part of a
        restructuring plan (Note 3). The sale resulted in gross proceeds of
        $1,179,000 and a gain of approximately $413,000. The operations of
        Guildsoft have been reflected as a discontinued operation in all periods
        presented.

        The following is a summary of the carrying amounts of the major classes
        of assets and liabilities included as part of the sale:

        Cash and equivalents                                     $  511,056
        Accounts receivable and other current assets                226,350
        Property and equipment                                       84,311
        Goodwill                                                    288,973
                                                                 ----------
                                                                  1,110,690
        Liabilities                                                 548,112
                                                                 ----------
        Net assets disposed                                      $  562,578
                                                                 ==========

        The following is a summary of financial information pertaining to
        Guildsoft:

                                         2001           2000           1999

        Net sales                    $ 3,137,858    $ 4,405,574    $ 3,573,361
        Income (loss) before taxes      (143,856)        12,468       (130,544)

        The 2001 gain on the sale of Guildsoft represents the net cash proceeds
        received less net assets disposed, professional fees paid in connection
        with the sale, and the write-off of the Company's investment basis in
        Guildsoft, including translation adjustments.

3.      RESTRUCTURING AND CENTRALIZATION COSTS

        During fiscal 1999, the Company approved and completed restructuring
        plans to centralize in the United States the quality assurance efforts
        for its Quetzal/SC product and further reduce costs and focus resources
        on key areas of the business. The restructuring plans resulted in
        charges for severance benefits and related costs for 31 terminated
        employees. These charges, totaling approximately $649,000, have been
        paid. There was no change in the initial estimate in subsequent periods.

        During the fourth quarter of fiscal 2001, the Company approved and
        completed a corporate-wide restructuring plan in an effort to reduce
        costs and centralize administrative operations. The restructuring plan
        resulted in charges for severance benefits and related costs for 42
        terminated employees. Of these charges, totaling approximately $763,000,
        $377,000 has been paid in the quarter and $386,000 has been accrued and
        is expected to be fully paid by January 2005.

                                       10
<PAGE>

4.      INVENTORIES

        Inventories consisted of the following at September 30:

                                                       2001            2000

            Materials                               $222,976        $247,089
            Finished goods                             7,902         148,202
                                                    --------        --------
            Total                                   $230,878        $395,291
                                                    ========        ========

5.      ACCRUED EXPENSES

        Accrued expenses consisted of the following at September 30:

                                                      2001           2000

            Accrued salaries and benefits         $  130,756     $  170,837
            Accrued royalties and commissions        837,562        846,944
            Accrued professional fees                317,713        212,060
            Accrued severance, current portion       259,538           --
            Other                                    420,342        359,582
                                                  ----------     ----------
            Total                                 $1,965,911     $1,589,423
                                                  ==========     ==========

6.      COMMITMENTS

        LEASES - The Company leases various facilities, equipment and
        automobiles in the U.S. and overseas under noncancelable operating
        leases which expire through 2017. 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 $906,000, $912,000 and $956,000 for the years ended
        September 30, 2001, 2000 and 1999, respectively.

        As of September 30, 2001, minimum rental commitments under noncancelable
        operating leases are as follows:

            YEAR ENDING SEPTEMBER 30

            2002                                               $   730,411
            2003                                                   462,825
            2004                                                   339,393
            2005                                                   318,380
            2006                                                   106,451
            Thereafter                                                --
                                                               -----------
            Total minimum lease payments                       $ 1,957,460
                                                               ===========

        ROYALTIES - The Company is also committed to pay royalties relating to
        the sales of certain software products. Royalty expense included in cost
        of sales was approximately $1,925,000, $1,894,000 and $1,637,000 for the
        years ended September 30, 2001, 2000 and 1999, respectively.

                                       11
<PAGE>

7.      LITIGATION

        The Company is not a party to any litigation that management believes
        will have a material adverse effect on the Company's consolidated
        financial statements or its business.

8.      FINANCING ARRANGEMENTS

        LINES OF CREDIT - The Company has two line-of-credit agreements, one
        domestic and the other international, with a single bank (the "credit
        lines"). As of September 30, 2001 and 2000, advances on the Company's
        two credit lines amounted to $635,000 and $960,0000, respectively.
        Borrowings under the credit lines bear interest at the bank's prime rate
        plus 1% (7% and 10.5% at September 30, 2001 and 2000, respectively) and
        are collateralized by substantially all assets. The international credit
        line is guaranteed up to 90% by the Export-Import Bank of the United
        States. The credit lines contain customary covenants which require,
        among other items, the Company maintain a minimum level of consolidated
        tangible net worth. As of September 30, 2001, the Company was in default
        on its covenant to maintain the minimum level of consolidated net worth.
        Due to the covenant default, no additional borrowings were available to
        the Company as of September 30, 2001.

        On October 30, 2001 and December 19, 2001, the Company entered into
        amended and restated domestic and international bank credit lines for a
        period to expire on October 1, 2002 under similar terms and conditions,
        except that the credit lines will bear interest at the bank's prime rate
        plus 2%. The renewed domestic credit line provides for maximum
        borrowings of the lesser of $1,000,000 or 70% of defined eligible
        receivables, and the renewed international credit line provides for
        maximum borrowings of the lessor of $500,000 or 80% of defined eligible
        receivables.

        LETTER OF CREDIT - The Company has an irrevocable standby letter of
        credit with a bank securing performance of a five-year property lease.
        The Company has reserved a cash term deposit in the amount of
        approximately $143,000 to secure the letter of credit. This restricted
        cash balance is included in other long-term assets.

9.      INCOME TAXES

        The (benefit) provision for income taxes consisted of the following for
        the years ended September 30:

                                             2001          2000          1999

        Current:
          Federal                         $ (25,000)    $    --       $(412,000)
          State                                --            --            --
          Foreign                              --            --            --

                                            (25,000)         --        (412,000)

        Deferred:
          Federal                          (567,000)     (547,000)      525,000
          State                            (100,000)      (97,000)      387,000
          Foreign                          (165,000)       96,000        22,000
          Change in valuation allowance     832,000       548,000      (934,000)
                                          ---------     ---------     ---------

                                               --            --            --
                                          ---------     ---------     ---------
        Total                             $ (25,000)    $    --       $(412,000)
                                          =========     =========     =========

                                       12
<PAGE>

9.      INCOME TAXES (CONTINUED)

        At September 30, 2001, the Company had federal tax loss carryforwards of
        approximately $7.1 million, expiring in 2020 and had approximately $7.5
        million in state tax loss carryforwards, which commence expiration in
        2008. An alternative minimum tax credit of approximately $132,000 is
        available to offset future regular federal taxes. Research and
        development credits of approximately $442,000 expire beginning in 2013.
        In addition, tax loss carryforwards in certain foreign jurisdictions
        total approximately $4.2 million.

        The tax effects of significant items comprising the Company's net
        deferred tax position as of September 30 were approximately as follows:

                                                          2001           2000
           Deferred tax liabilities:
              Depreciation and amortization          $  (107,000)   $   (81,000)
              Prepaid expenses                          (108,000)       (69,000)
                                                     -----------    -----------
                                                        (215,000)      (150,000)
                                                     -----------    -----------
           Deferred tax assets:
             Net operating loss carryforwards          3,905,000      2,690,000
             Research and development credits            442,000        404,000
             Accounts and notes receivable reserves      222,000        193,000
             Accrued severence                           154,000           --
             Alternative minimum tax credits             132,000        155,000
             Other                                       131,000        123,000
             Intangible assets                              --          339,000
             Deferred revenue                               --          185,000
                                                     -----------    -----------
                                                       4,986,000      4,089,000
                                                     -----------    -----------
           Total                                       4,771,000      3,939,000

           Valuation allowance                        (4,771,000)    (3,939,000)
                                                     -----------    -----------
           Deferred taxes, net                       $      --      $      --
                                                     ===========    ===========

        The Company has experienced significant losses from operations both
        domestically and internationally over the past several years.
        Accordingly, management does not believe the tax assets are more likely
        than not to be realized. Accordingly, a full valuation allowance has
        been provided. The valuation allowance increased by approximately
        $832,000 in 2001 primarily because of increased net operating loss
        carryforwards, partially offset by a write-off of deferred tax assets
        related to Guildsoft operations (Note 2) and partial expiration of state
        operating loss carryforwards. The valuation allowance increased by
        approximately $548,000 in 2000 primarily due to an increase in deferred
        tax assets related to deferred revenue and credit carryforwards.

                                       13
<PAGE>

9.      INCOME TAXES (CONTINUED)

        The following table reconciles the Company's effective tax rate to the
        federal statutory rate of 34% for the years ended September 30, 2001,
        2000 and 1999:

<TABLE><CAPTION>
                                                                    2001           2000           1999
<S>                                                             <C>            <C>            <C>
           Benefit at federal statutory rate                    $(1,630,000)   $  (336,000)   $(1,785,000)
           Provision of valuation allowance against currently
             generated net operating loss carryforwards           1,598,000        398,000      1,160,000
           Other                                                      7,000        (62,000)       213,000
                                                                -----------    -----------    -----------
           Benefit for income taxes                             $   (25,000)   $      --      $  (412,000)
                                                                ===========    ===========    ===========
</TABLE>

10.     SHAREHOLDERS' EQUITY

        STOCK OPTION PLANS - The Company's two stock option plans described
        below provide for granting of options and other stock rights to purchase
        common stock of the Company to employees, officers, consultants, and
        directors who are not otherwise employees. The options granted are
        exercisable as specified at the date of grant and generally expire five
        to ten years from the date of grant. Generally, options and other stock
        rights are granted at exercise prices not less than fair market value at
        the date of the grant.

        On October 4, 1996, the Company established the 1996 International
        Employee Non-Qualified Stock Option Plan (the "1996 International
        Plan"). Pursuant to this plan, nonqualified options may be granted to
        any employee or consultant of any of the Company's foreign subsidiaries
        through October 4, 2006.

        On December 10, 1996, the Company established the Datawatch Corporation
        1996 Stock Plan (the "1996 Stock Plan") which provides for the granting
        of both incentive stock options and nonqualified options, the award of
        Company common stock, and opportunities to make direct purchases of
        Company common stock (collectively, "Stock Rights"), as determined by a
        committee appointed by the Board of Directors. Options pursuant to this
        plan may be granted through December 10, 2006 and shall vest as
        specified by the Committee.

        Selected information regarding the above stock option plans as of and
        for the year ended September 30, 2001 is as follows:

                                                     SHARES
                                           AUTHORIZED     AVAILABLE FOR
                                           FOR GRANT       FUTURE GRANT

           1996 International Plan           44,444           14,300
           1996 Stock Plan                  366,667           92,136
                                            -------          -------
                                            411,111          106,436
                                            =======          =======

                                       14
<PAGE>

10.     SHAREHOLDERS' EQUITY (CONTINUED)

        The following table is a summary of activity for all of the Company's
        stock option plans:

                                                                     WEIGHTED-
                                                                      AVERAGE
                                                    OPTIONS           EXERCISE
                                                  OUTSTANDING          PRICE

           Outstanding, October 1, 1998             203,149         $    9.27

               Granted                              115,181              5.45
               Canceled                             (39,227)             8.19
               Exercised                             (9,068)             4.50
                                                    -------         ---------
           Outstanding, September, 30, 1999         270,035              8.01

               Granted                               47,738             12.78
               Canceled                             (35,817)             8.28
               Exercised                            (41,592)             7.29
                                                    -------         ---------
           Outstanding, September 30, 2000          240,364              9.05

               Granted                               73,567              2.60
               Canceled                             (63,592)             8.68
               Exercised                               (334)             2.52
                                                    -------         ---------
           Outstanding, September 30, 2001          250,005         $    7.25
                                                    =======         =========
           Exercisable, September 30, 2001          159,502         $    8.76
                                                    =======         =========
           Exercisable, September 30, 2000          129,885         $    9.32
                                                    =======         =========
           Exercisable, September 30, 1999           99,159         $    9.95
                                                    =======         =========




                                       15
<PAGE>


10.     SHAREHOLDERS' EQUITY (CONTINUED)

        The following table sets forth information regarding options outstanding
        at September 30, 2001:

<TABLE><CAPTION>
                              Options Outstanding                                           Options Exercisable
-------------------------------------------------------------------------------          --------------------------
                                              Weighted-Average        Weighted-                            Weighted-
                                                  Remaining            Average                              Average
       Exercise             Number of            Contractual          Exercise                             Exercise
        Prices                Shares            Life (Years)            Price            Shares              Price
<S>  <C>                       <C>                   <C>               <C>              <C>                 <C>
     $      1.10               11,112                10                $ 1.10                --             $  --
       1.80-2.93               49,783                10                  2.67              5,106              2.67
       3.09-4.50               11,302                 9                  3.33              2,182              3.40
       5.06-7.17               70,067                 8                  5.65             59,697              5.62
      7.61-10.97               61,394                 6                  8.78             54,570              8.65
     11.52-15.19               39,235                 7                 13.19             30,835             12.65
     19.41-21.92                4,445                 4                 20.91              4,445             20.91
           31.78                2,667                 5                 31.78              2,667             31.78
                              -------                --                ------            -------            ------
                              250,005                 8                $ 7.25            159,502            $ 8.76
                              =======                ==                ======            =======            ======
</TABLE>

        PRO FORMA DISCLOSURE - As described in Note 1, the Company uses the
        intrinsic method of valuing its stock options to measure compensation
        expense associated with grants of stock options to employees and
        directors. Had the Company recognized compensation for its stock options
        and purchase plans based on the fair value for awards under those plans
        after October 1, 1995, pro forma net loss and pro forma net loss per
        share would have been as follows:

<TABLE><CAPTION>
                                                         YEARS ENDED SEPTEMBER 30,
                                            ------------------------------------------------
                                                  2001             2000             1999
<S>                                         <C>              <C>              <C>
           Pro forma net loss               $  (5,596,153)   $  (1,171,846)   $  (4,248,287)
           Pro forma net loss per share -
             Basic and diluted                      (2.33)           (0.57)           (2.09)
</TABLE>

        The fair values used to compute pro forma net loss and net loss per
        share were estimated on the grant date using the Black-Scholes option
        pricing model with the following assumptions:

                                                     YEARS ENDED SEPTEMBER 30,
                                                     -------------------------
                                                      2001      2000     1999

           Risk-free interest rate                     4.8%      6.2%     5.5%
           Expected life of option grants (years)      3.0       3.0      5.0
           Expected volatility of underlying stock   134.3%    116.3%    75.8%
           Expected dividend payment rate              0.0%      0.0%     0.0%
           Expected forfeiture rate                    0.0%      0.0%     0.0%

        The weighted-average fair value of stock options granted was $1.49,
        $2.61 and $3.56 for the years ended September 30, 2001, 2000 and 1999,
        respectively.

                                       16
<PAGE>

10.     SHAREHOLDERS' EQUITY (CONTINUED)

        STOCK-BASED COMPENSATION - In 2001, the Company issued 39,912 shares of
        common stock with an aggregate fair value of $100,410 to a director for
        services and a third-party for the purchase of software. The fair value
        of the stock issued the director ($60,410) was expensed as the services
        were provided. The fair value of the stock issued the third-party
        ($40,000) was capitalized as purchased software (see Note 1).

        On January 17, 2001, the Company renewed its two line-of-credit
        agreements with a bank (see Note 8), in connection therewith, the
        Company issued the bank a warrant to purchase 15,556 shares of the
        Company's common at an exercise price of $2.25 per share. This warrant
        expires on January 17, 2011. The fair market value of the warrant
        (determined using the Black-Scholes pricing model and the following
        assumptions: 116% volatility, 10 year estimated life and 6.2% risk-free
        interest rate) was determined to be $76,333, which has been recorded as
        an increase in additional paid-in capital and is being amortized as a
        component of interest expense over the one year renewal period.

        On October 30, 2001, the Company again renewed its two line-of-credit
        agreements with the bank (see Note 8), in connection therewith, the
        Company issued the bank a warrant to purchase 49,669 shares of the
        Company's common at an exercise price of $1.51 per share. This warrant
        expires on October 30, 2008. The fair market value of the warrant
        (determined using the Black-Scholes pricing model and the following
        assumptions: 134.3% volatility, 7 year estimated life and 4.8% risk-free
        interest rate) was determined to be $77,000 which has been recorded as
        an increase in additional paid-in capital and is being amortized as a
        component of interest expense over the one year renewal period.

11.     RETIREMENT SAVINGS PLAN

        The Company has a 401(k) retirement savings plan covering substantially
        all of the Company's full-time domestic employees. Under the provisions
        of the plan, employees may contribute a portion of their compensation
        within certain limitations. The Company, at the discretion of the Board
        of Directors, may make contributions on behalf of its employees under
        this plan. Such contributions, if any, become fully vested after five
        years of continuous service. The Company has not made any contributions
        during 2001, 2000 or 1999.

12.     SEGMENT INFORMATION

        The Company has determined that it has only one reportable segment
        meeting the criteria established under SFAS No. 131. The Company's chief
        operating decision maker, as defined (determined to be the Chief
        Executive Officer and the Board of Directors), 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 sales by
        product lines:

                                                Years Ended September 30,
                                                -------------------------
                                                2001       2000      1999

           Monarch and Monarch/ES                70%        70%       62%
           Quetzal/SC                            30         30        38
                                                ---        ---       ---
                                                100%       100%      100%
                                                ===        ===       ===

                                       17
<PAGE>

12.     SEGMENT INFORMATION (CONTINUED)

        The Company's operations are conducted in the U.S. and in Europe
        (principally in the United Kingdom). The following table presents
        information about the Company's continuing geographic operations:

<TABLE><CAPTION>
                                                                  EUROPE
                                                               (PRINCIPALLY
                                               DOMESTIC            U.K.)        ELIMINATIONS        TOTAL
<S>                                           <C>              <C>              <C>               <C>
           Year Ended September 30, 2001
             Net sales                        $11,222,786      $ 8,153,778      $  (973,909)      $18,402,655
             Long-lived assets                  1,943,505          559,769                          2,503,274

           Year Ended September 30, 2000
             Net sales                        $14,356,499      $ 9,332,206      $(1,214,868)      $22,473,837
             Long-lived assets                  1,615,423          808,849                          2,424,272

           Year Ended September 30, 1999
             Net sales                        $12,923,636      $11,284,563      $  (610,159)      $23,598,040
             Long-lived assets                  1,884,875          937,728                          2,822,603
</TABLE>

        Export sales aggregated approximately $4,367,000, $5,137,000 and
        $5,862,000 in 2001, 2000 and 1999, respectively.













                                       18
<PAGE>


13.     QUARTERLY RESULTS (UNAUDITED)

        Supplementary Information - Quarterly Results (Unaudited):

<TABLE><CAPTION>
                                                                 FIRST            SECOND           THIRD           FOURTH
<S>                                                           <C>              <C>              <C>              <C>
           YEAR ENDED SEPTEMBER 30, 2000:
             Net sales                                        $ 5,624,232      $ 5,662,597      $ 5,806,855      $ 5,380,153
             Gross profit                                       4,757,690        4,735,662        4,889,958        4,530,056
             Loss from continuing operations,
              before tax                                         (423,060)        (167,060)          (3,997)        (407,980)
             Loss from continuing operations                     (423,060)        (167,060)          (3,997)        (407,980)
             Income (loss) from discontinued
              operations                                          (14,284)          79,246            7,595          (60,089)

             Net income (loss)                                   (437,344)         (87,814)           3,598         (468,069)

             Income (loss) per share - basic and diluted:
               Continuing operations                          $     (0.21)     $     (0.08)     $     (0.00)     $     (0.20)
               Discontinued operations                        $     (0.01)     $      0.04      $      0.00      $     (0.03)

             Net income (loss) per share -
              basic and diluted                               $     (0.21)     $     (0.04)     $      0.00      $     (0.23)


           YEAR ENDED SEPTEMBER 30, 2001:
             Net sales                                        $ 5,058,912      $ 4,592,965      $ 4,283,481      $ 4,467,297
             Gross profit                                       4,319,704        3,794,611        3,461,548        3,426,031
             Loss from continuing operations,
              before tax                                         (440,020)      (1,189,243)      (1,458,343)      (2,322,445)
             Loss from continuing operations                     (440,020)      (1,189,243)      (1,458,343)      (2,297,445)
             Income (loss) from discontinued
              operations                                          (33,677)         (26,507)         (43,490)         372,831

             Net loss                                            (473,697)      (1,215,750)      (1,501,833)      (1,924,614)

             Income (loss) per share - basic and diluted:
               Continuing operations                          $     (0.21)     $     (0.49)     $     (0.58)     $     (0.91)
               Discontinued operations                        $     (0.02)     $     (0.01)     $     (0.02)     $      0.15

             Net loss per share -
              basic and diluted                               $     (0.23)     $     (0.50)     $     (0.60)     $     (0.76)
</TABLE>

        In the fourth quarter of 2001, the Company recorded an additional amount
        of $265,000 in royalties expense resulting from the refinement of the
        Company's estimated obligations.

                                   * * * * * *
                                  [INSERT FINS]



<PAGE>
                                                                   SCHEDULE VIII
                                                                   -------------

                                  Schedule VIII
                      DATAWATCH CORPORATION & SUBSIDIARIES
                        VALUATION AND QUALIFIED ACCOUNTS

<TABLE><CAPTION>
----------------------------------------------------------------------------------------------------
COLUMN A              COLUMN B                COLUMN C               COLUMN D            COLUMN E
----------------------------------------------------------------------------------------------------
Description          Balance at          Additions Charged to      Deductions from      Balance at
                 Beginning of Period      Expenses (a) Other          Reserves         End of Period
----------------------------------------------------------------------------------------------------
<S>              <C>                    <C>                        <C>                 <C>

Year Ended September 30, 2001
-----------------------------
Allowance-doubtful
 accounts and
 sales returns        $588,439            $554,832  $15,388 (d)     ($596,591)(b)(c)     $562,068
                   ---------------------------------------------------------------------------------
TOTAL                 $588,439            $554,832  $15,388         ($596,591)           $562,068
                   =================================================================================


Year Ended September 30, 2000
-----------------------------
Allowance-doubtful
 accounts and
 sales returns        $467,039            $397,700  $   350 (d)     ($276,650)(b)(c)     $588,439
                   ---------------------------------------------------------------------------------
TOTAL                 $467,039            $397,700  $   350         ($276,650)           $588,439
                   =================================================================================


Year Ended September 30, 1999
-----------------------------
Allowance-doubtful
 accounts and
 sales returns        $352,517            $707,276  $114,589(d)     ($707,343)(b)(c)     $467,039
                   ---------------------------------------------------------------------------------
TOTAL                 $352,517            $707,276  $114,589        ($707,343)           $467,039
                   =================================================================================
</TABLE>

(a)  Current year provision
(b)  Doubtful accounts written off
(c)  Product returns
(d)  Bad debt recoveries
<PAGE>
                                  EXHIBIT INDEX
                                  -------------

EX. NO                             DESCRIPTION
-------  -----------------------------------------------------------------------
(1) 3.1  Restated Certificate of Incorporation of the Registrant (Exhibit 3.2)
    3.2  Certificate of Amendment of Restated Certificate of Incorporation of
         the Registrant (filed herewith)
(1) 3.3  By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1  Specimen certificate representing the Common Stock (Exhibit 4.4)
(6) 4.2  Warrant to Purchase Stock issued to Silicon Valley Bank, dated January
         17, 2001 (Exhibit 4.1)
    4.3  Warrant to Purchase Stock issued to Silicon Valley Bank, dated October
         30, 2001 (filed herewith)
(1)10.1* 1987 Stock Plan (Exhibit 10.7)
(1)10.2* Form of Incentive Stock Option Agreement of the Registrant (Exhibit
         10.8)
(1)10.3* Form of Nonqualified Stock Option Agreement of the Registrant (Exhibit
         10.9)
(1)10.4  Software Development and Marketing Agreement by and between Personics
         Corporation and Raymond Huger, dated January 19, 1989 (Exhibit 10.12)
(4)10.5  Commercial Security Agreement between Datawatch Corporation and Silicon
         Valley Bank doing business as Silicon Valley East, dated November 1,
         1994 (Exhibit 10.6)
(4)10.6  Commercial Security Agreement between Personics Corporation and Silicon
         Valley Bank doing business as Silicon Valley East, dated November 1,
         1994 (Exhibit 10.7)
(2)10.7* 1996 Non-Employee Director Stock Option Plan, as amended on December
         10, 1996 (Exhibit 10.30)
(2)10.8* 1996 International Employee Non-Qualified Stock Option Plan (Exhibit
         10.31)
(3)10.9  Promissory Note, dated February 12, 1997, by and between Datawatch
         Corporation, Personics Corporation and Silicon Valley Bank (Exhibit
         10.2).
   10.10*1996 Stock Plan as amended as of March 16, 2001 (filed herewith)
(4)10.11 Lease, dated August 31, 2000, by and between Fortune Wakefield, LLC and
         Datawatch Corporation (Exhibit 10.27)
(5)10.12 Indemnification Agreement between Datawatch Corporation and James Wood,
         dated January 12, 2001 (Exhibit 10.1)
(5)10.13 Indemnification Agreement between Datawatch Corporation and Richard de
         J. Osborne, dated January 12, 2001 (Exhibit 10.2)
(6)10.14 Registration Rights Agreement between Silicon Valley Bank and Datawatch
         Corporation, dated January 17, 2001 (Exhibit 10.1)
   10.15 Amendment No. 1 to Registration Rights Agreement, dated October 30,
         2001, by and between Silicon Valley Bank and Datawatch Corporation
         (filed herewith)
(6)10.16 Export-Import Bank of the United States Working Capital Guarantee
         Program Borrower Agreement, dated January 17, 2001, by and among
         Datawatch Corporation, Datawatch International Limited, Datawatch
         Europe Limited, Guildsoft Limited and Silicon Valley Bank in favor of
         Export-Import Bank of the United States (Exhibit 10.2)
(6)10.17 First Loan Modification Agreement (EXIM Line), dated January 17,
         2001, by and among Datawatch Corporation, Datawatch International
         Limited, Datawatch Europe Limited, Guildsoft Limited and Silicon Valley
         Bank, doing business as Silicon Valley East, in favor of Export-Import
         Bank of the United States (Exhibit 10.4)
(6)10.18 Revolving Promissory Note (Export-Import Line), dated January 17, 2001,
         by and among Datawatch Corporation, Datawatch International Limited,
         Datawatch Europe Limited, Guildsoft Limited and Silicon Valley Bank
         (Exhibit 10.5)
<PAGE>
(6)10.19 Supplemental Deed of Guarantee, dated January 17, 2001, by and between
         Datawatch International Limited and Silicon Valley Bank  (Exhibit 10.6)
(6)10.20 Supplemental Deed of Guarantee, dated January 17, 2001, by and between
         Datawatch Europe Limited and Silicon Valley Bank (Exhibit 10.7)
(6)10.21 Assignment and Consulting Agreement, effective June 30, 2000, by and
         between Datawatch Corporation and Russell Ryan, also doing business as
         Edge IT (Exhibit 10.9)
(7)10.22 Form of Indemnification Agreement between Datawatch Corporation and
         each of its Non-Employee Directors (Exhibit 10.1)
(7)10.23*Advisory Agreement, dated April 5, 2001, by and between Datawatch
         Corporation and Richard de J. Osborne (Exhibit 10.2)
   10.24*Executive Agreement, dated July 9, 2001, between the Company and Robert
         W. Hagger (filed herewith)
   10.25*Management Transition Agreement, dated July 6, 2001, between the
         Company and Bruce R. Gardner (filed herewith)
   10.26 Amended and Restated Loan and Security Agreement, dated October 30,
         2001, between Datawatch Corporation and Silicon Valley Bank (filed
         herewith)
   10.27 Intellectual Property Security Agreement, dated October 30, 2001 by and
         between Datawatch Corporation and Silicon Valley Bank (filed herewith)
   10.28 Amended and Restated Export-Import Bank Loan and Security Agreement,
         dated December 19, 2001, by and among Datawatch Corporation, Datawatch
         International Limited, Datawatch Europe Limited and Silicon Valley Bank
         (filed herewith)
   10.29 Revolving Promissory Note, dated December 19, 2001, by and between
         Datawatch Corporation, Datawatch International Limited, Datawatch
         Europe Limited and Silicon Valley Bank (filed herewith)
   10.30 Export-Import Bank of the United States Working Capital Guarantee
         Program Borrower Agreement, dated December 19, 2001, by and among
         Datawatch Corporation, Datawatch International Limited, Datawatch
         Europe Limited and Silicon Valley Bank in favor of Export-Import Bank
         of the United States (filed herewith)
   21.1  Subsidiaries of the Registrant (filed herewith)
   23.1  Consent of Independent Auditors (filed herewith)
--------------------------------------------------------------------------------
 *   Indicates a management contract or compensatory plan or contract.
(1)  Previously filed as an exhibit to Registration Statement 33-46290 on Form
     S-1 and incorporated herein by reference (the number given in parenthesis
     indicates the corresponding exhibit in such Form S-1).
(2)  Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
     for the fiscal year ended September 30, 1996 and incorporated herein by
     reference (the number given in parenthesis indicates the corresponding
     exhibit in such Form 10-K).
(3)  Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-Q for the quarter ended March 31, 1997 and incorporated herein by
     reference (the number in parenthesis indicates the corresponding exhibit in
     such Form 10-Q).
(4)  Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
     for the fiscal year ended September 30, 2000 and incorporated herein by
     reference (the number given in parenthesis indicates the corresponding
     exhibit in such Form 10-K).
(5)  Previously filed as an exhibit to Registrant's Current Report on Form 8-K
     dated February 2, 2001 and incorporated herein by reference (the number in
     parenthesis indicates the corresponding exhibit in such Form 8-K).
(6)  Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-Q for the quarter ended December 31, 2001 and incorporated herein by
     reference (the number in parenthesis indicates the corresponding exhibit in
     such Form 10-Q).
(7)  Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-Q for the quarter ended March 31, 2001 and incorporated herein by
     reference (the number in parenthesis indicates the corresponding exhibit in
     such Form 10-Q).