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 1.7 million times and approximately 6,000 schools have purchased at least $10,000 of our product licenses and services. As of June 30, 2009 we had 199 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 6,000 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 ("ARRA" - 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, there continues to be uncertainty about and delay in the timing of the release of these ARRA funds to school districts. State funds provide school districts with the majority of their funding, and those funds are also sometimes used to purchase our products. States faced severe budget shortfalls in fiscal 2009 and forecast continuing funding difficulties in 2010. The National Conference of State Legislatures estimates that the cumulative state budget gap was $113.2 billion in fiscal 2009, and in June 2009, forecast a cumulative budget gap for 2010 of $142.6 billion, involving 46 states.

Company Highlights

For the three months ended June 30, 2009, our total revenue decreased by 21% compared to the three months ended June 30, 2008 and for the six months ended June 30, 2009 our total revenue declined 15%. Product revenue declined by 31% and 25% for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008, mainly because of reductions in license sales and the deferral of revenue on transactions that included our new Reading Assistant Expanded Edition product, which we expect to deliver in September 2009. Service and support revenue decreased by 2% in the three months ended June 30, 2009 compared to the three months ended June 30, 2008 and increased by 1% for the six month period.

For the three months and six months ended June 30, 2009, our total booked sales decreased by 10% and 6%, respectively, over the same periods in 2008. (Booked sales is a non-GAAP financial measure. For more explanation on booked sales, see Revenue below). K-12 sales decreased by 8% and 2% in the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008, and non school sales, including private practice, international and OEM customers, decreased by 23% and 30% in the same periods. As we have discussed before, the characteristics of our public school market cause us to have a somewhat long and unpredictable sales cycle, and we believe that this cycle has been further complicated by the uncertainty over and delays in the timing of the release of stimulus funding pursuant to ARRA. For the three months ended June 30, 2009, we closed 25 transactions in excess of $100,000, compared to 31 in the second quarter of 2008. We believe that the decrease in non school sales is primarily caused by adverse economic conditions affecting our customers in both the private practice and international markets.

For the three months and six months ended June 30, 2009, gross margin declined by 1% compared to the same periods in 2008, mainly due to a change in revenue
mix. Operating expenses decreased by 14% and 17% for the three months and six months ended June 30, 2009, respectively, mostly due to cost savings resulting from our restructuring initiative in January 2009.

We recorded a net loss of $314,000 for the three months ended June 30, 2009 compared to a net loss of $438,000 in the same period in 2008. We recorded a net loss of $3.2 million for the six months ended June 30, 2009 compared to a net loss of $5.1 million in the same period in 2008.

We launched our BrainSpark and BrainPro online consumer offerings during the three months ended June 30, 2009, which are marketed directly to parents for use with children at home. Revenues from these offerings were not significant.

At June 30, 2009 we had borrowings under our credit line with Comerica Bank of $2.5 million.

Results of Operations

Revenues

                                Three Months Ended June 30,                    Six Months Ended June 30,
(dollars in thousands)      2009             Change         2008           2009           Change         2008
Products                 $     6,148              -31 %   $   8,907     $   10,120             -25 %   $  13,534
Service and support            4,468               -2 %       4,574          9,121               1 %       9,032
Total revenues           $    10,616              -21 %   $  13,481     $   19,241             -15 %   $  22,566

For the three months ended June 30, 2009, our total revenue decreased by 21% compared to the three months ended June 30, 2008 and for the six months ended June 30, 2009 our total revenue declined 15%. Product revenue declined by 31% and 25% for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008, mainly because of reductions in license sales and the deferral of approximately $1.9 million in product revenue on transactions that included our new Reading Assistant Expanded Edition product, which we expect to deliver in September 2009. The deferred product revenue will be recognized on delivery of the Reading Assistant Expanded Edition to customers. We believe that a number of significant license sales were delayed because of uncertainty over and delays in the release of stimulus funding to school districts in some states. Service and support revenue decreased by 2% in the three months ended June 30, 2009 compared to the three months ended June 30, 2008, largely due to the reduction in OEM revenue, and increased by 1% for the six month period.

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 and six months ended June 30, 2009 and 2008:

                              Three Months Ended June 30,                 Six Months Ended June 30,
(dollars in
thousands)                 2009          Change         2008           2009         Change         2008
Total deferred
revenue beginning of
period                  $   17,273                    $  19,765     $   19,952                   $  22,955
Booked sales                12,961          (10%)        14,337         18,993          (6%)        20,232
Less: revenue               10,616          (21%)        13,481         19,241         (15%)        22,566
Other adjustments           (1,004 )                          -         (1,090 )                         -
Total deferred
revenue end of period   $   18,614          (10%)     $  20,621     $   18,614         (10%)     $  20,621

Booked sales in the K-12 sector decreased by 8% and 2% in the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008, mainly because of uncertainty about and delays in the release of ARRA stimulus funding to school districts in some states. Booked sales to the K-12 sector for the three and six months ended June 30, 2009 were 90% of total booked sales in both periods, compared to 88% and 87% in the equivalent periods in 2008.

Booked sales to non-school customers, including both private practice clinicians and international customers, decreased by 23% and 30% respectively in the three and six month periods ended June 30, 2009 compared to the same period in 2008. We believe that the decrease in non school sales is primarily caused by adverse economic conditions affecting our customers in both the private practice and international markets. The sales decrease also reflects a decline of $408,000 in OEM sales related to the Reading Assistant product line in the six months ended June 30, 2009 as compared to the same period in 2008, because we are no longer focusing on new OEM projects, and $121,000 in sales to correctional institutions, a market segment to which we no longer devote resources.

During the second quarter of 2009, we closed 25 sales that had a contract value in excess of $100,000, compared to 31 in the same period in 2008. For the three months ended June 30, 2009 and 2008 respectively, approximately 59% and 69% 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 June 30, Six Months Ended June 30, (dollars in thousands) 2009 2008 2009 2008 Gross profit on products $ 5,603 $ 8,248 $ 9,174 $ 12,447 Gross profit margin on products 91 % 93 % 91 % 92 % Gross profit on service and support 2,458 2,193 4,915 4,164 Gross profit margin on services and support 55 % 48 % 54 % 46 % Total gross profit $ 8,061 $ 10,441 $ 14,089 $ 16,611 Total gross profit margin 76 % 77 % 73 % 74 %

The overall gross profit margin decreased by 1% in both the three and six months ended June 30, 2009 compared to the same periods in the prior year, mainly due to a change in revenue mix. Higher margin product revenues comprised 58% and 53% of total revenues in the three and six months ended June 30, 2009, respectively, compared to 66% and 60% in the equivalent periods in 2008. Product margins declined in both the three and six months ended June 30, 2009 compared to the prior year, due to the impact of amortization expense arising from the assets acquired from Soliloquy and product costs associated with Reading Assistant. Service and support margins improved principally due to year over year price increases and cost savings resulting from more efficient delivery of services.

Operating Expenses

                                    Three Months Ended June 30,                   Six Months Ended June 30,
(dollars in thousands)          2009            Change         2008           2009           Change         2008
Sales and marketing          $    5,281              -15 %   $   6,196     $   10,724             -18 %   $  13,132
Research and development          1,205              -25 %       1,603          2,742             -26 %       3,722
General and administrative        1,909               -2 %       1,952          3,850              -2 %       3,948
Total operating expenses     $    8,395              -14 %   $   9,751     $   17,316             -17 %   $  20,802

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 and six ended June 30, 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 June 30, 2009, we had 43 quota-bearing sales personnel compared to 53 at June 30, 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 25% and 26% in the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008, due to lower headcount related costs as a result of the restructuring actions taken in January 2009 and the capitalization in the three and six month periods ended June 30, 2009 of approximately $427,000 and $752,000,respectively, 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 primarily due to reduced headcount and consulting expenses as a result of the restructuring actions taken in January 2009.

Interest and Other Income, net

Interest and other income decreased in both the three and six month periods ended June 30, 2009 compared to the prior year periods because of lower reclassifications of service and support revenue relating to a customer for whom we are no longer performing services, less interest on our cash balances, interest expense on our bank loan since January 2009, and the reclassification of royalty income from Posit Science which is now classified as product revenue.

Provision for Income Taxes

In the three and six months ending June 30, 2009, we recorded income tax expense of $36,000 and $66,000 respectively, principally consisting of deferred tax expense relating to the amortization of acquired goodwill and state tax expense. In the three and six months ending June 30, 2008, we recorded income tax expense of $1.2 million, consisting of an increase to our deferred tax asset valuation allowance. We reestablished a full valuation allowance against our deferred tax asset based on our assessment that we no longer met the criteria that the asset will more likely than not be realized.

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.

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 $4.9 million at June 30, 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. 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 next twelve months. 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 June 30, 2009, we have

outstanding borrowings of $2.5 million, an outstanding letter of credit for $206,000, and we are in compliance with all of 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 six months ended June 30, 2009 was $4.2 million versus cash used of $8.8 million during the same period in 2008. This improvement was mainly the result of lower expenses as a result of our January 2009 restructuring actions and the capitalization of Reading Assistant development costs.

Net cash used in investing activities for the six months ended June 30, 2009 was $1.3 million, due to capital spending and additions to capitalized software. Net cash used in investing activities for the six months ended June 30, 2008 was $10.3 million, due to the acquisition of Soliloquy Learning.

Net cash provided by financing activities for the six months ended June 30, 2009 was $2.8 million, consisting of bank borrowings of $2.5 million and $331,000 from proceeds from the exercise of stock options. Financing activities generated $215,000 for the six months ended June 30, 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 June 30, 2009 and the effects such obligations are expected to have on our liquidity and cash flow in future periods.

(dollars in            Less than
thousands)               1 year        2-3 years       4-5 years       Thereafter       Total
Contractual
Obligations:
Operating lease
obligations            $    1,281     $     2,614     $     1,879     $          -     $  5,774
Purchase obligations          150             300             300               75     $    825
Repayment of debt           2,500               -               -                -     $  2,500
Total                  $    3,931     $     2,914     $     2,179     $         75     $  9,099

Our purchase order commitments at June 30, 2009 are not material.

. . .