This report contains forward-looking statements. Forward-looking statements are not historical facts but rather are based on current expectations about our business and industry, as well as our beliefs and assumptions. Words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" and variations and negatives of these words and similar expressions are used to identify forward-looking statements. Statements regarding our expectations for our future business results and financial position, our business strategies and objectives, and trends in our market are forward-looking statements. Forward-looking statements are not guarantees of future performance or events, and are subject to risks, uncertainties and other factors, many of which are beyond our control and some of which we may not even be presently aware. As a result, our future results and other future events or trends may differ materially from those anticipated in our forward-looking statements. Specific factors that might cause such a difference include, but are not limited to, the risks and uncertainties discussed in this Management's Discussion and in the Risk Factors section of this report. We also refer you to the risk factors that are or may be discussed from time to time in our public announcements and filings with the SEC, including our future Forms 8-K, 10-Q and 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our view only as of the date of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report.

Overview

We develop, distribute and license technology that accelerates learning by improving the processing efficiency of the brain. Based on more than 30 years of neuroscience and cognitive research, our family of products improves brain fitness with technology-based exercises that build the cognitive skills required to read and learn effectively. Extensive outcomes research by independent researchers, our founding scientists, school districts and our company demonstrates the rapid and lasting gains achieved through participation in our products. Our products are marketed primarily to K-12 schools in the US, to whom we sell through a direct sales force. To facilitate the use of our products, we offer a variety of on-site and remote professional and technical services, as well as phone, email and web-based support. Since our inception, learners have used our products nearly 1.6 million times and approximately 5,900 schools have purchased at least $10,000 of our product licenses and services. As of March 31, 2009 we had 196 full-time equivalent employees, compared to 223 at December 31, 2008.

In January 2009 we announced a 14% reduction in our workforce which was implemented during the first quarter of 2009.

Business Highlights

We market our Fast ForWord and Reading Assistant products primarily as a reading intervention solution for struggling and special education students and English Language Learners. According to the U.S. Department of Education, in 2007, 33% of fourth graders in the United States had "below basic" reading scores and 67% were not proficient in reading, and between 1992 and 2007 there was only a modest improvement in the proportion of fourth graders performing at the "below basic" level. While our installed base is growing, the approximately 5,900 schools that have purchased at least $10,000 of our product licenses and services represent a small fraction of the approximately 115,000 K-12 schools in the US.

Federal education funds are a critical resource in helping school districts address the needs of the most challenged learners. We believe that a significant proportion of our sales are funded by federal sources, particularly Title One and IDEA (special education) grants. With the passage of the American Recovery and Reinvestment Act (the recent stimulus bill), these two federal sources are together projected to increase from $24.9 billion in the 2008 - 2009 school year to $37 billion in the 2009 - 2010 school year. State funds also provide school districts with funds that are used to purchase our products. However, states continue to forecast shortfalls in their taxation revenues for fiscal 2009 because of the current recession; at least 43 states are facing budget shortfalls for this and/or next fiscal year.

Company Highlights

For the three months ended March 31, 2009, our total revenue decreased by 5% compared to the three months ended March 31, 2008. Product revenue declined by 14% compared to the same period in 2008, mainly because of reductions in license sales. Service and support revenue increased by 4%, mainly due to a higher Progress Tracker revenues resulting from the addition of the Reading Progress Indicator offering during 2008.

For the three months ended March 31, 2009, our total booked sales were essentially flat compared to the same period in 2008. (Booked sales is a non-GAAP financial measure. For more explanation on booked sales, see Revenue below). K-12 sales increased by 15% compared to the three months ended March 31, 2008, and non school sales, including private practice, international and OEM customers, decreased by 51%. The first quarter historically is our smallest booked sales quarter. As we have discussed before, the characteristics of our public school market cause us to have a somewhat long and unpredictable sales cycle. For the three months ended March 31, 2009, we closed seven transactions in excess of $100,000, compared to eight in the first quarter of 2008. One of our major goals is to increase the number of large booked sales, which we believe to be an important indicator of education industry acceptance and critical to achieving our targets. These large transactions frequently require school board approvals and their timing is often difficult to predict.

For the three months ended March 31, 2009, gross margin improved by 2% compared to the three months ended March 31, 2008, mainly due to continued improvements in our service and support margins resulting from cost saving initiatives. Operating expenses decreased by 19%, mostly due to cost savings resulting from our restructuring initiative in January 2009.

We recorded a net loss of $2.9 million for the three months ended March 31, 2009 compared to a net loss of $4.7 million in the same period in 2008.

At March 31, 2009 we had borrowings under our credit line of $2.5 million.

Results of Operations

Revenues

                             Three Months Ended March 31,

(dollars in thousands)      2009          Change       2008

Products                 $     3,971         -14 %    $ 4,629
Service and support            4,653           4 %    $ 4,456

Total revenues           $     8,624          -5 %    $ 9,085

For the three months ended March 31, 2009, our total revenue decreased by 5% compared to the three months ended March 31, 2008. Product revenue declined by 14% compared to the same period in 2008, mainly because of a shift in the current quarter sales mix towards service sales. Service and support revenue increased by 4%, mainly due to higher Progress Tracker revenues resulting from the continuing roll out of the Reading Progress Indicator offering to our installed base.

Booked sales and selling activity: Booked sales is a non-GAAP financial measure that management uses to evaluate current selling activity. We believe that booked sales is a useful metric for investors as well as management because it is the most direct measure of current demand for our products and services. Booked sales equals the total value (net of allowances) of software, services and support invoiced in the period. We record booked sales and deferred revenue when all of the requirements for revenue recognition have been met, other than the requirement that the revenue for software licenses and services has been earned. We use booked sales information for resource allocation, planning, compensation and other management purposes. We believe that revenue is the most comparable GAAP measure to booked sales. However, booked sales should not be considered in isolation from revenues, and is not intended to represent a substitute measure of revenues or any other performance measure calculated under GAAP.

The following reconciliation table sets forth our booked sales, revenues and change in deferred revenue for the three months ended March 31, 2009 and 2008:

                                           Three Months Ended March 31,

(dollars in thousands)                    2009          Change       2008

Booked sales                           $     6,032          2 %    $  5,895
Less revenue                                 8,624         (5 )%      9,085
Other adjustments                              (87 )                      -

Net decrease in deferred revenue            (2,679 )                 (3,190 )

Total deferred revenue end of period   $    17,273        (13 )%   $ 19,765

Booked sales in the K-12 sector increased 15% to $5.5 million during the three months ended March 31, 2009, compared to $4.7 million in the same period in 2008, mainly because of the impact of two large transactions that totaled $2.2 million. The first quarter historically is our lowest booked sales quarter, and may not be predictive of the rest of the year. Booked sales to the K-12 sector for the three months ended March 31, 2009 were 91% of total booked sales, compared to 80% in the same period in 2008.

Booked sales to non-school customers, including both private practice clinicians and international customers, decreased by 51% for the three months ended March 31, 2009 compared to the same period in 2008. This decrease reflects a 32% decline in sales to both our international value added resellers and to private providers, which we attribute to the current economic recession in the United States and abroad. The sales decrease also reflects a decline of $244,000 in OEM revenue related to the Soliloquy product line in the first quarter of 2009 as compared to the same quarter in 2008, and $125,000 in sales to correctional institutions, a market segment to which we no longer focus any resources.

We believe large booked sales transactions are an important indicator of mainstream education industry acceptance and an important factor in reaching our goal of increasing sales force productivity. During the first quarter of 2009, we closed seven sales that had a contract value in excess of $100,000, compared to eight in the same period in 2008. For the three months ended March 31, 2009 and 2008 respectively, approximately 57% and 30% of our booked sales were realized from booked sales over $100,000. Large booked sales include volume and negotiated discounts but the percentage discount applicable to any given transaction will vary and the relative percentage of large booked sales and smaller booked sales in a given quarter may fluctuate. Because we discount product license fees but do not discount service and support fees, product booked sales and revenue are disproportionately affected by discounting. We cannot predict the size and number of large transactions in the future.

Although federal, state and local budget pressures and the current recession make for an uncertain funding environment for our customers, we are optimistic about our growth prospects in the K-12 market. However, achieving our booked sales growth objectives will depend on increasing customer acceptance of our products, which requires us to continue to focus on improving our products' ease of use, their fit with school requirements, and our connection with classroom teachers and administrators. Our K-12 growth prospects are also influenced by factors outside our control including the overall level, certainty and allocation of state, local and federal funding. For a discussion of some of the other important factors that affect our results, see Risk Factors. In addition, the revenue recognized from our booked sales can be unpredictable. Our various license and service packages have substantially differing revenue recognition periods, and it is often difficult to predict which license package a customer will purchase, even when the amount and timing of a sale can be reasonably projected. In addition, the timing of a single large order or its implementation can significantly impact the level of booked sales and revenue at any given time.

Gross Profit and Cost of Revenues


                                                 Three Months Ended March 31,
(dollars in thousands)                             2009                2008

Gross profit on products                      $         3,570     $         4,201
Gross profit margin on products                            90 %                91 %
Gross profit on service and support                     2,457               1,969
Gross profit margin on services and support                53 %                44 %
Total gross profit                            $         6,027     $         6,170
Total gross profit margin                                  70 %                68 %

The overall gross profit margin improved by 2% in the first quarter of 2009 compared to the same period in 2008. The increase in gross margin was driven primarily by improved service and support margins, partially offset by a reduction in the proportion of higher margin product revenue. Service and support revenue growth of 4%, combined with a 12% decrease in service and support costs principally due to headcount reductions, resulted in an increase in the service and support gross margin from 44% to 53%. Higher margin product revenues comprised 46% of total revenues in the three months ended March 31, 2009 compared to 51% in the same period in 2008.

Operating Expenses


                                Three Months Ended March 31,
(dollars in thousands)              2009      Change        2008

Sales and marketing          $     5,443         -22 %  $  6,936
Research and development           1,537         -27 %     2,119
General and administrative         1,940          -3 %     1,996

Total operating expenses     $     8,920         -19 %  $ 11,051

Sales and Marketing Expenses: Sales and marketing expenses consist principally of salaries and incentive compensation paid to employees engaged in sales and marketing activities, travel costs, tradeshows, conferences, and marketing and promotional materials. The decrease in sales and marketing expenses in the three months ended March 31, 2009 compared to the same period in 2008 is primarily due to lower headcount related costs as a result of the restructuring actions taken in January 2009. At March 31, 2009, we had 44 quota-bearing sales personnel compared to 51 at March 31, 2008.

Research and Development Expenses: Research and development expenses principally consist of compensation paid to employees and consultants engaged in research and product development activities and product testing, together with software and equipment costs. Research and development expenses decreased by 27% in the three months ended March 31, 2009 compared to the same period in 2008, due to lower headcount related costs as a result of the restructuring actions taken in January 2009 and the capitalization of approximately $325,000 of costs relating to a new Reading Assistant product where technological feasibility has been established according to the provisions of SFAS 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"

General and Administrative Expenses: General and administrative expenses principally consist of salaries and compensation paid to our executives, accounting staff and other support personnel, as well as travel expenses for these employees, and outside legal and accounting fees. The decrease in general and administrative expenses is due to reduced headcount expenses as a result of the restructuring actions taken in January 2009, partially offset by increased professional fees due to the requirement to be in compliance with the auditors' attestation requirement of Sarbanes-Oxley Act Section 404 in fiscal 2009.

Interest and Other Income, net


                                           Three Months Ended March 31,
(dollars in thousands)                    2009          Change        2008

Interest on invested cash                     11         -85 %           74
Interest expense                              (7 )                        -
Reclassification of service revenue           54         -25 %           72
Posit royalty income                           -                         67
Miscellaneous                                  3         -57 %            7

Interest and other income, net $ 61 -72 % $ 220

In the three months ended March 31, 2009, interest and other income consisted primarily of a reclassification of $54,000 of service and support revenue relating to a customer for whom we are no longer performing services. In the three months ended March 31, 2008, interest and other income consisted primarily of interest earned on our invested cash of $74,000 a reclassification of $72,000 of service and support revenue, and royalty income from Posit Science of $67,000.

Provision for Income Taxes

In the three months ending March 31, 2009, we recorded income tax expense of $29,000. For the three months ended March 31, 2008 we recorded an income tax expense of $3,000. The tax expense for the three months ended March 31, 2009 consists of deferred tax expense relating to the amortization of acquired goodwill. The tax expense for the three months ended March 31, 2008 consists of penalties and interest paid.

Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") provides for the recognition of deferred tax assets if realization of such assets is more likely than not. We have established and continue to maintain a full valuation allowance against our deferred tax assets as we do not believe that realization of those asserts is more likely than not.

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109" ("FIN 48").

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax returns remain open to examination by the appropriate governmental agencies for tax years 2004 to 2008. The federal and state taxing authorities may choose to audit tax returns for tax years beyond the statue of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes. We are not currently under audit in any major tax jurisdiction.

Liquidity and Capital Resources

Our cash, cash equivalents and short term investments were $6.0 million at March 31, 2009, compared to $7.6 million at December 31, 2008.

We expect that during at least the next twelve months our cash flow from operations together with our current cash balances will be our primary source of liquidity and will be sufficient to provide the necessary funds for our operations and capital expenditures. Historically, we have used cash in our operations during the first half of the year and built cash in the second half. This pattern results largely from our seasonally low sales in the first calendar quarter, which reflects our industry pattern, and the time needed to collect on sales made towards the end of the second quarter. We expect that this pattern will continue, and that we will use cash in operations during the first half of 2009. However, we expect that our current cash balances together with the borrowing capacity under our credit line, if required, will be sufficient to fund our operating requirements during the first half of fiscal 2009. Accomplishing this will require us to meet specific booked sales targets. We cannot assure you that we will meet our targets with respect to booked sales, revenues, expenses or operating results.

On January 30, 2009 we amended our existing revolving line of credit agreement with Comerica Bank. The maximum that can be borrowed under the agreement is $5.0 million. The line expires on December 31, 2009.

Borrowing under the line of credit bears interest at a "daily adjusting LIBOR rate". Borrowings under the line are subject to reporting covenants requiring the provision of financial statements to Comerica, and, as amended, financial covenants requiring us to maintain a minimum adjusted quick ratio of 1.15 and net worth not less than negative $2 million. The agreement includes a letter of credit sublimit not to exceed $1.0 million. At March 31, 2009, we have outstanding borrowings of $2.5 million, an outstanding letter of credit for $206,000, and we are in compliance with all our covenants.

If we are unable to achieve sufficient cash flow from operations, we may seek other sources of debt or equity financing, or may be required to further reduce expenses. Further reducing our expenses could adversely affect operations by reducing the resources available for sales, marketing, research or product development. We cannot assure you that we will be able to secure additional debt or equity financing on acceptable terms, if at all.

Net cash used in operating activities for the three months ended March 31, 2009 was $3.7 million versus cash used of $6.3 million during the same period in 2008. This improvement was the result of lower expenses as a result of our January 2009 restructuring actions, higher receivable collections, and the capitalization of Reading Assistant development costs.

Net cash used in investing activities for the three months ended March 31, 2009 was $622,000, due to capital spending and additions to capitalized software. Net cash used in investing activities for the three months ended March 31, 2008 was $10.2 million, due to the acquisition of Soliloquy Learning.

Net cash provided by financing activities for the three months ended March 31, 2009 was $2.8 million, consisting of bank borrowings of $2.5 million and $258,000 from proceeds from the exercise of stock options. Financing activities generated $13,000 for the three months ended March 31, 2008 from proceeds from the exercise of stock options.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations and Commitments

We have a non-cancelable lease agreement for our corporate office facilities. From 2009 through the end of the lease, the base lease payment increases at a compound annual rate of approximately 5%. The lease expires in December 2013. We also have a lease agreement for our Tucson, Arizona office through May 2013 at an average rent of approximately $11,000 per month, and a lease for our Reading Assistant operations in Waltham, Massachusetts for approximately 6,000 square feet at an average monthly rent of approximately $12,000 that expires in September 2011.

We also make royalty payments to the institutions who participated in the original research that produced our initial products. Our minimum royalty payments are $150,000 per year.

Our bank borrowings are repayable before the revolving maturity date of December 31, 2009. Interest is calculated on a daily adjusting LIBOR rate and is paid monthly.

The following table summarizes our obligations at March 31, 2009 and the effects such obligations are expected to have on our liquidity and cash flow in future periods.

(dollars in              Less than 1
thousands)                  year          2-3 years      4-5 years      Thereafter      Total

Contractual
Obligations:
Operating lease
obligations             $       1,268    $     2,622    $     2,198    $          -    $  6,088
Purchase obligations              150            300            300             113    $    863
Repayment of debt               2,500              -              -               -    $  2,500

Total                   $       3,918    $     2,922    $     2,498    $        113    $  9,451

Our purchase order commitments at March 31, 2009 are not material.

Application of Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, assumptions and judgments. We believe that the estimates, assumptions and judgments upon which we rely are reasonable based upon information available to us at the time. The estimates, assumptions and judgments that we make can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, our financial statements would be affected.

We believe that, as discussed in our most recent Report on Form 10-K, the estimates, assumptions and judgments pertaining to revenue recognition, the allowance for doubtful accounts, income taxes, and stock based compensation are the most critical assumptions to understand in order to evaluate our reported financial results. There has been no change to these policies.

In addition, as discussed in Note 8 to the Condensed Financial Statements, in the three months ended March 31, 2009 we capitalized approximately $325,000 of costs relating to a new Reading Assistant product that had reached technological feasibility, pursuant to SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," The rules that govern how development costs are accounted for can have a major impact on our reported financial results. Significant judgment is required in assessing whether and when products have reached technological feasibility. We are also required to use judgment to estimate the net realizable value of the asset by projecting future revenues and cash flows expected to be generated by the products, in order to determine whether the unamortized cost exceed the net realizable value. Moreover, any future changes to our software product offerings could result in write-offs of previously capitalized costs and have a significant impact on our financial results.