This report may contain "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (including any statements regarding the Company's outlook for fiscal 2009 and beyond). Any forward looking statements are subject to a number of risks and uncertainties. These include, among other risks and uncertainties, whether we will be able to generate sufficient cash flow from our operations or other sources to fund our working capital needs, maintain our existing relationship with our lender, successfully introduce and attain market acceptance of any new products, and attract and retain qualified personnel both in our existing markets and in new territories in an extremely competitive environment, and aging and potential obsolescence of our technologies.

In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. We qualify all of our forward-looking statements by these cautionary statements.

Critical Accounting Policies and Significant Judgments and Estimates

The Securities and Exchange Commission ("SEC") issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require the application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Our significant accounting policies are described in Note B to these financial statements. We believe that the following accounting policies require the application of our most difficult, subjective or complex judgments:

Revenue Recognition

We follow the provisions of Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2) as amended by SOP No. 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions" (SOP 98-9) in recognizing revenue from software transactions. Revenue from software license sales is recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, and a fixed fee and collectability have been determined. We do not provide for a right of return. For multiple element arrangements, total fees are allocated to each of the elements using the residual method set forth in SOP 98-9. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements. Revenue from engineering, consulting and training services is recognized as those services are rendered.

We periodically review the carrying value of all intangible assets (primarily capitalized software costs and other intangible assets) and other long-lived assets. If indicators of impairment exist, we compare the undiscounted cash flows estimated to be generated by those assets over their estimated economic life to the related carrying value of those assets to determine if the assets are impaired. If the carrying value of the asset is greater than the estimated undiscounted cash flows, the carrying value of the assets would be decreased to their fair value through a charge to operations. We do not have any long-lived or intangible assets we consider to be impaired.

Valuation of Goodwill

We follow the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives are amortized over such useful lives.

As of May 31, 2008, we conducted our annual impairment test of goodwill by comparing fair value to the carrying amount of our underlying assets and liabilities. We determined that the fair value exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date. In addition, we do not believe any events or circumstances have occurred subsequent to the annual impairment test of goodwill to warrant an interim impairment analysis.

Estimating Allowances for Doubtful Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results. At February 28, 2009 and May 31, 2008, the allowance for doubtful accounts was $29,000 and $4,000, respectively.

Valuation of Deferred Tax Assets

We regularly evaluate our ability to recover the reported amount of our deferred income taxes, based on several factors, including our estimate of the likelihood of our generating sufficient taxable income in future years during the period over which temporary differences reverse. Our deferred tax assets are currently fully reserved.

Our quarterly revenue and operating results are difficult to predict and fluctuate significantly from quarter to quarter. Our quarterly revenue has fluctuated significantly for several reasons, including, but not limited to, the timing and success of introductions of any new products or product enhancements or those of our competitors; uncertainty created by changes in the market; difficulty in predicting the size and timing of individual orders; competition and pricing; and customer order deferrals as a result of general economic decline. Furthermore, we have often recognized a substantial portion of our product revenues in the last month of a quarter, with these revenues frequently concentrated in the last weeks or days of a quarter. As a result, product revenues in any quarter are substantially dependent on orders booked and shipped in the latter part of that quarter and revenues from any future quarter are not predictable with any significant degree of accuracy. We typically do not experience order backlog. For these reasons, we believe that period-to-period comparisons of our results of operations should not be relied upon as indications of future performance.

Revenues

Total Revenue was approximately $2.2 million and $7.3 million for the three and nine months ended February 28, 2009, respectively, as compared to $2.4 million and $7.7 million for the comparable prior periods (a decrease of approximately $215,000 (8.8%) and $397,000 (5.2%) for the three and nine month periods, respectively).

Product revenue was approximately $437,000 and $1.5 million for the three and nine months ended February 28, 2009, respectively, as compared to $577,000 and $1.5 million for the comparable prior periods (a decrease of approximately $140,000 (24.3%) and unchanged for the three and nine month periods, respectively). The decrease in product revenue for the quarter ended February 28, 2009, as compared to the same period in fiscal 2008, was in all three product lines. The decrease was primarily attributable to customer spending put on hold due to the current economic climate. The table below summarizes product revenue by product line for the third quarter of fiscal 2009, 2008 and 2007:

                    Product Line   Q3 2009   Q3 2008  Q3 2007
                    ProductCenter $     235 $     302 $    273
                    Cadra               189       232      442
                    AMT                  13        43       74
                    Total               437       577      789

Service revenue for each product line consists of consulting revenue and maintenance revenue. Service revenue was approximately $1.8 million and $5.7 million for the three and nine months ended February 28, 2009, respectively, as compared to $1.9 million and $6.1 million for the comparable prior periods (a decrease of approximately $75,000 (4.0%) and $399,000 (6.5%) for the three and nine month periods, respectively). The decrease in total service revenue for the quarter ended February 28, 2009 was mainly attributable to a decrease in ProductCenter and AMT maintenance revenue due to the non renewal of maintenance contracts and the timing of incoming maintenance renewals.

                 Product Line    Q3 2009     Q3 2008     Q3 2007
                 ProductCenter $       988 $     1,051 $     1,182
                 Cadra                 682         653         716
                 AMT                   123         164         164
                 Total               1,793       1,868       2,062

Revenue by Geographic Area - Three Months Ended February 28, 2009 - Revenue generated in the U.S. accounted for 77% and 84% of total revenue for the quarter ended February 28, 2009 and February 29, 2008, respectively. Revenue generated in Europe was 21% and 18% of total revenue for the quarter ended February 28, 2009 and February 29, 2008, respectively. Revenue generated in Asia for the quarter ended February 28, 2009 was 10% of total revenue, as compared to 9% of total revenue for the comparable prior period. During the quarter ended February 28, 2009, revenue from the U.S. decreased by approximately 16%, revenue from Europe increased by approximately 7%, and revenue from Asia increased by approximately 2%, in each case, compared to same quarter in fiscal 2008. The decreased revenue from the U.S. market was primarily a result of delays in the procurement process, non-renewals and timing of incoming maintenance renewals.

Revenue by Geographic Area - Nine Months Ended February 28, 2009 - Revenue generated in the U.S. accounted for 74% and 77% of total revenue for the nine months ended February 28, 2009 and February 29, 2008, respectively. Revenue generated in Europe was 23% and 20% of total revenue for the nine months ended February 28, 2009 and February 29, 2008, respectively. Revenue generated in Asia for the nine months ended February 28, 2009 was 12% of total revenue, as compared to 10% of total revenue for the comparable prior period. During the nine months ended February 28, 2009, revenue from the U.S. decreased by approximately 8%, revenue from Europe increased by approximately 4%, and revenue from Asia increased by approximately 17%, in each case, compared to same period in fiscal 2008. The increase in Asia was primarily attributable to a major customer upgrading to the latest version of Cadra. The decrease in the U.S. market was primarily a result of delays in the procurement process, non-renewals and timing of incoming maintenance renewals.

Gross Margin

Gross margin as a percentage of revenue was 78% and 80% for the three and nine months ended February 28, 2009, as compared to 67% and 69% for the comparable prior periods. The increase in gross margin percentage was primarily due to the decreases in amortization of capitalized software costs, and decreases in the cost of services provided, partially offset by a decrease in total revenue. This decrease in amortization of capitalized software is due to a component of the Cadra software being fully amortized during the quarter ended May 31, 2008.
Thus, this decrease in amortization expense will not continue during the remaining quarters of this fiscal year. The decrease in the cost of services provided was due primarily to a reduction in our professional services staff in latter part of fiscal year 2008. Total revenue for the nine month period ended February 28, 2009 decreased by 5.2%, compared to the same period in 2008.

Research and development expenses ("R&D") were essentially unchanged ($478,000 and $1.4 million for the three and nine months ended February 28, 2009, as compared to $455,000 and $1.4 million in the comparable prior period). We remain committed to improving our technologies and ensuring their compatibility with current operating systems.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $868,000 and $2.7 million for the three and nine months ended February 28, 2009, as compared to $996,000 and $3.2 million for the comparable prior periods (a decrease of approximately $128,000 (12.9%) and $496,000 (15.4%) for the three and nine month periods, respectively). The decrease is due primarily to the reduction in rent expense arising from our relocation in November 2007 to new appropriately sized corporate headquarters, the decrease in the dollar amount of foreign operating expenses due to foreign currency fluctuations and the suspension of the monthly management fee of $44,000, which is subject to reinstatement, as explained in the following paragraph.

Under an agreement with our lender, Greenleaf Capital, among other obligations, we were required to pay an annual management fee of approximately $500,000 (for management advisory services and available debt facilities). Under an amendment of the agreement, effective January 1, 2008, Greenleaf agreed to waive the monthly management fee (approximately $44,000) for a three month period, with such waiver to renew automatically for additional three month periods, unless Greenleaf notifies us in writing at least thirty days prior to expiration of a three month period that it is terminating its waiver. As of this date, we have received no such notice of termination from Greenleaf. Notwithstanding the amendment, we continued to pay Greenleaf $44,000 per month (the amount that was otherwise payable under the Agreement) which was applied as additional principal payments towards the principal amount owing to Greenleaf Capital pursuant to a certain promissory note. This additional payment of $44,000 per month has since been incorporated into the terms of an amended and restated promissory note issued to Greenleaf on March 30, 2009. Thus, while these payments reduced the amounts owing under our debt facilities, suspension of the management fee did not improve our overall cash flow. In addition, if Greenleaf terminates its waiver of the management fee, our operating expenses will increase by approximately $132,000 per quarter.

Amortization of capitalized software and other intangible assets (non-cash expenses) was $101,000 and $304,000 for the three and nine months ended February 28, 2009 as compared to $354,000 and $1.1 million for the comparable prior period (a decrease of $253,000 (71%) and $758,000 (71%), respectively). This decrease in amortization of capitalized software is due to a component of the Cadra software being fully amortized during the quarter ended May 31, 2008. Thus, this decrease in amortization expense will not continue in future quarters.

Interest Expense

Interest expense for the three and nine month periods ended February 28, 2009 was approximately $178,000 and $631,000, as compared to $324,000 and $1.0 million for the comparable prior periods. The decrease in interest expense is primarily attributable to a decrease in the average amount outstanding under our debt facilities and a decrease in the applicable interest rates. Average borrowings decreased to approximately $11.6 million during the current quarter, as compared to $13.4 million for the comparable prior period, and the interest rate on those borrowings decreased to about 6.25% in the current quarter from 9.5% for the comparable prior period. The change in the interest rate on our borrowing in fiscal year 2009 as compared to 2008 is due to a decrease in the prime rate.

Net income for the three and nine months ended February 28, 2009 was $205,000 and $972,000, respectively, as compared to net losses of ($133,000) and ($350,000) for the comparable prior periods. Earnings (loss) per share for the nine months ended February 28, 2009 and February 29, 2008 was $.08 and ($.03), respectively.

Changes in Financial Condition

Accounts receivable decreased $169,000 (12%) from $1.41 million at May 31, 2008 to $1.24 million at February 28, 2009. Deferred maintenance revenue (a current liability) decreased $241,000 (7.2%) from $3.34 million at May 31, 2008 to $3.1 million at February 28, 2009. The decrease in accounts receivable and deferred maintenance revenue was primarily attributable to the timing of maintenance renewals, a decrease in the dollar value of maintenance contracts due to foreign currency fluctuation and a decrease in maintenance renewals related to our legacy product lines.

Liquidity and Capital Resources

As of February 28, 2009 we had cash on hand of $785,000, a decrease of $115,000 from May 31, 2008. The decrease in cash was primarily due to cash used by our financing activities (debt repayments), partially offset by cash flows from our operating activities. Operating activities generated $1.1 million of cash during the first nine months of fiscal year 2009, compared with using $61,000 in cash during the comparable prior period. The $1.2 million increase in cash generated by operating activities was primarily attributable to a $1.3 million increase in net income, a $676,000 decrease in the change (decrease) in accounts receivable, partially offset by a $760,000 decrease in amortization and depreciation expenses and an $189,000 increase in the change (decrease) in accounts payable and accrued expenses. During the nine months ended February 28, 2009, our financing activities used net cash of $1.3 million, compared to using net cash of approximately $448,000 during the comparable prior period.
The $827,000 increase in cash used by our financing activities was attributable to higher repayments of principal. At February 28, 2009, we had an approximate working capital deficit of $3.5 million, compared to a working capital deficit of $3.4 million at May 31, 2008. The approximate $100,000 increase in our working capital deficit was primarily attributable to a $115,000 decrease in cash, a $169,000 decrease in accounts receivable, and a $243,000 increase in the current portion of long term debt, partially offset by a $241,000 decrease in deferred revenue (current liability) and a $59,000 decrease in accounts payable and accrued expenses.

On March 30, 2009, we amended and restated our Term Note and Revolving Credit Note with Greenleaf Capital, Inc. In addition, we granted Greenleaf a security interest in our assets to secure our obligations under the Term Note and Revolving Credit Note. The monthly principal and interest payments under the amended and restated notes are currently approximately $210,000. Of the $11.5 million, $1.8 million is payable by February 28, 2010 and the remaining $9.7 million is payable by March 31, 2010. Historically, Greenleaf has on a quarterly basis extended our line of credit and term note for an additional year. If Greenleaf did not extend the terms of our debt, we would be obligated to pay Greenleaf $11.5 on March 31, 2010, which funds we do not currently have. While we do not believe Greenleaf would decline extending the term of our borrowings, if they were to do so, we would have to seek capital from third parties in order to pay the balance of the borrowings. In the event we were unable to secure the necessary funds, there would be an event of default under our notes and Greenleaf could foreclose on our assets, in which case we would be unable to continue as a going concern. If the terms and conditions of any refinancing were onerous, there would be a material adverse effect on our financial condition and results of operations.

During the remainder of fiscal 2009, we anticipate that we will incur capital expenditures of approximately $10,000 in order to keep our computer systems and peripheral equipment current and compatible with the latest operating systems.

We anticipate that our operating activities will generate positive net cash flow during the fourth quarter of fiscal 2009. However, we cannot ensure that our operating activities will generate positive net cash flow in the future. We believe that the cash on hand together with cash flow from operations and available borrowings under our credit facility will be sufficient for meeting our liquidity and capital resource needs for the next year.

We are dependent on our lender, Greenleaf Capital, for its continued support. We have a strong relationship with Greenleaf, which currently represents our sole source of external financing. Greenleaf is also our largest shareholder, owning approximately 44.6% of our issued and outstanding common stock, and it has been our sole debt provider since 1996.