Any statements made below with respect to our outlook for fiscal year 2010 and beyond represent "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 and are subject to a number of risks and uncertainties, including but not limited to our ability to:

generate, despite declining revenues, sufficient cash flow from our operations or other sources to fund our working capital needs, including our business plan

maintain relationships with our lender

successfully introduce and attain market acceptance of any new products and/or enhancements of existing products

attract and retain qualified personnel

prevent further obsolescence of our technologies

maintain agreements with our critical software vendors

secure renewals of existing software maintenance contracts, as well as contracts with new maintenance customers

secure new business, both from existing and new customers

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 Information Statement. Except as otherwise required by law, SofTech expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein 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. SofTech qualifies all 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.

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.

Valuation of Long-lived and Intangible Assets

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 assets we consider to be impaired.

Valuation of Goodwill

We account for goodwill pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets". This statement requires that goodwill be reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria.

As of May 31, 2009, we conducted our annual impairment test of goodwill by comparing fair value to the carrying amount of the underlying assets and liabilities of its single reporting unit. We determined that the fair value exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date. We concluded that no facts or circumstances arose during the first quarter of fiscal year 2010 to warrant an interim impairment test.

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 August 31, 2009 and May 31, 2009, the allowance for doubtful accounts was $29,000.

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. As of August 31, 2009 and May 31, 2009, our deferred tax assets are fully reserved.

Results of Operations

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; variability in 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 for the quarter ended August 31, 2009 was approximately $2.0 million, as compared to $2.6 million for the comparable prior period (a decrease of approximately $573,000 (22.4%)). We expect this revenue trend to continue until there is significant improvement in economic conditions. If this revenue trend continues, there could be a material adverse effect on our profitability.

Product revenue was approximately $219,000 for the three months ended August 31, 2009, as compared to $540,000 for the comparable prior period (a decrease of approximately $320,000 (59.4%)). The decrease was attributable to revenue decreases in all three product lines and was due to declining sales associated with our legacy product lines and the difficult economic climate, with existing and potential new customers attempting to minimize their expenses, and thus delaying or suspending their procurements. The table below summarizes product revenue by product line for the first quarter of fiscal year 2010, 2009 and 2008:

                    Product Line   Q1 2010   Q1 2009   Q1 2008
                    ProductCenter $     90 $     192 $     134
                    Cadra              117       285       281
                    AMT                 12        63        62
                    Total              219       540       477

Service revenue for each product line consists of consulting revenue and maintenance revenue. Service revenue was approximately $1.8 million for the three months ended August 31, 2009, as compared to $2.0 million for the comparable prior period (a decrease of approximately $252,000 (12.5%)). The decrease in total service revenue for the quarter ended August 31, 2009 was attributable to revenue decreases in all three product lines and was due in part to the economic climate, customers attempting to minimize their expenses, existing customers delaying or suspending consulting engagements and the lack of sufficient new customer orders. These events have had a substantial detrimental impact on the revenue generated from product consulting and maintenance services.

                  Product Line   Q1 2010     Q1 2009     Q1 2008
                  ProductCenter $    943 $     1,070 $     1,252
                  Cadra              707         801         824
                  AMT                112         143         163
                  Total            1,762       2,014       2,239

Revenue by Geographic Area - Three Months Ended August 31, 2009: Revenue generated in the U.S. accounted for 72% of total revenue for the three months ended August 31, 2009, as compared to 77% of total revenue in the comparable prior period. Revenue generated in Europe was 24% of total revenue for the three months ended August 31, 2009, as compared to 25% of total revenue in the comparable prior period. Revenue generated in Asia for the three months ended August 31, 2009 was 8% of total revenue, as compared to 9% of total revenue for the comparable prior period. During the three months ended August 31, 2009, revenue from the U.S decreased by approximately 27%, revenue from Europe decreased by approximately 25%, and revenue from Asia decreased by approximately 37%, in each case, compared to same period in fiscal year 2009. The decrease in all three geographic areas was attributed to the economic climate, customers attempting to minimize their expenses, and customers delaying or suspending orders.

Gross Margin

Gross margin as a percentage of revenue was 80% for the three months ended August 31, 2009, as compared to 81% for the comparable prior period. The gross margin percentage decreased slightly from the prior period, there were decreases in the amortization of capitalized software costs and the cost of services provided, but these decreases were offset by a decrease in total revenue. The decrease in amortization of capitalized software is due to the Cadra software being fully amortized. Total revenue for the three month period ended August 31, 2009 decreased by 22% compared to the same period in fiscal year 2009.

Research and Development Expenses

Research and development expenses ("R&D") were essentially unchanged ($449,000 for the three months ended August 31, 2009, as compared to $444,000 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 $821,000 for the three months ended August 31, 2009, as compared to $953,000 in the comparable prior period, a decrease of 13.9%. The decrease is due primarily to a decline in commission based compensation resulting from lower product revenue and a decrease in recruiting and professional services expenses. We do not expect further decreases in recruiting and professional services expenses.

Amortization of Capitalized Software

Amortization of capitalized software and other intangible assets (non-cash expenses) was $37,000 for the three months ended August 31, 2009 as compared to $101,000 for the comparable prior period (a decrease of $64,000 (63%)). This decrease in amortization of capitalized software is due to AMT software being fully amortized during the quarter ended May 31, 2009. Thus, this decrease in amortization expense will not continue in future quarters.

Interest expense for the three month period ended August 31, 2009 was approximately $151,000, as compared to $230,000 for the comparable prior period.
This decrease in interest expense was primarily attributable to a decrease in the average amount outstanding under our debt facilities and a decrease in the applicable interest rates. Average borrowings were approximately $10.7 million for the quarter ending August 31, 2009, as compared to $12.5 million for the comparable prior period, and the interest rate on those borrowings decreased to about 5.5% in the first quarter of 2009, from 7.25% for the comparable prior period. The change in the interest rate on our borrowings in fiscal year 2010 as compared to 2009 is due to a decrease in the prime rate.

Net income for the three months ended August 31, 2009 was $180,000 as compared to $419,000 for the comparable prior periods. Earnings per share for the three months ended August 31, 2009 and August 31, 2008 was $.01 and $.03, respectively. As previously described, the current economic contraction, as well as declining demand for our Cadra and AMT product lines, is materially and adversely affecting our maintenance and product revenues. We expect that there will be further significant declines in revenue. We are reviewing our business/product strategy and cost structure with a view to mitigate the adverse impact of declining revenue on our financial condition and operating results.

Changes in Financial Condition

Accounts receivable decreased $642,000 (50%) from $1.3 million at May 31, 2009 to $630,000 at August 31, 2009. Deferred maintenance revenue (a current liability) decreased $516,000 (17%) from $3.0 million at May 31, 2009 to $2.5 million at August 31, 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 August 31, 2009 we had cash on hand of $601,000, a decrease of $157,000 from May 31, 2009. The decrease in cash was primarily due to our financing activities using $477,000 (debt repayments), partially offset by $327,000 in cash flows from our operating activities.

Operating activities generated $327,000 of cash during the first three months of fiscal year 2010, compared with $255,000 during the comparable prior period. The $72,000 increase in cash generated by operating activities was primarily attributable to the $205,000 change (reduction) in prepaid expenses, a $195,000 change (decrease) in accounts receivable, partially offset by an approximate $240,000 decrease in net income, a $42,000 change (decrease) in accounts payable and a $39,000 change (decrease) in deferred revenue. During the quarter ended August 31, 2009, our financing activities used net cash of approximately $477,000, compared to approximately $409,000 during the comparable prior period.
The approximate $68,000 increase in cash used by financing activities was attributable to increased debt repayments. At August 31, 2009, we had an approximate working capital deficit of $3.9 million, compared to a working capital deficit of $3.6 million at May 31, 2009. The approximate $300,000 increase in our working capital deficit was primarily attributable to a decrease in cash and accounts receivable of approximately $800,000, partially offset by a decrease in deferred revenue of approximately $500,000.

The aggregate principal amount payable to Greenleaf at August 31, 2009 was $10.6 million. The monthly minimum principal and interest payments are approximately $210,000 on these borrowings. Of the 10.6 million, $1.9 is payable by August 31, 2010 and $8.7 million is payable by September 30, 2010. Historically, Greenleaf has, on a quarterly basis, extended our line of credit and term note for an additional year. If the terms of our debt were not extended, we would be obligated to pay our lender $10.6 million on September 30, 2010, which funds we do not currently have. Thus, if the term of our borrowings were not extended, 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 our lender 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.

In the quarter ended August 31, 2009, we generated $327,000 from operating activities and our intention is to manage the business with a view to achieve positive cash flows from operating activities in fiscal year 2010.

During fiscal year 2010, we anticipate that we will incur capital expenditures of approximately $100,000 in order to keep our computer systems and peripheral equipment current and compatible with the latest operating systems.

We believe that the cash on hand together with anticipated cash flow from operations and available borrowings under our credit facility will be sufficient to meet our liquidity and capital resources needs for the next year.

As previously described, the current economic contraction, as well as declining demand for our Cadra and AMT product lines, is materially and adversely affecting our maintenance and product revenues. We expect that there will be further significant declines in revenue. We are reviewing our business/product strategy and cost structure with a view to mitigate the adverse impact of declining revenue on our financial condition and operating results.