**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934.

**For the Quarterly Period Ended March 31, 2007.**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the transition period from                                    to                                     .**

**CommissionFile Number 0-15935**

**ENTERPRISE INFORMATICS INC.**

(Exact name of registrantas specified in its charter)

| **CALIFORNIA**                   |   | **95-3634089**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**10052 MESA RIDGE COURT,SUITE 100, SAN DIEGO, CA 92121**

(Address of principal executiveoffices and zip code)

**(858) 625-3000**

(Registrants telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

YES       x              NO       o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act  (Check one):

| Large Accelerated Filer o |   | Accelerated  Filer o |   | Non-Accelerated  Filer x |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES       o              NO       x

Numberof shares of Common Stock outstanding at May 15, 2007:  37,144,494

 

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**ITEM 1. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

**ENTERPRISEINFORMATICS INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                           | ** ** | **March 31,  2007** | ** ** | **September 30,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(Unaudited)**          | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                                                                           | ** ** | ** **               | ** ** | ** **                   | ** ** |
| Current assets:                                                                                                                                      |       |                     |       |                         |       |
| Cash                                                                                                                                                 |       | $                        | 749,000    |                         | $          | 95,000 |   |
| Receivables, net                                                                                                                                     |       | 1,036,000                |       | 854,000                      |       |
| Other current assets                                                                                                                                 |       | 191,000                  |       | 190,000                      |       |
| Total current assets                                                                                                                                 |       | 1,976,000                |       | 1,139,000                    |       |
|                                                                                                                                                 |       |                     |       |                         |       |
| Property and equipment, net                                                                                                                          |       | 149,000                  |       | 131,000                      |       |
| Computer software, net                                                                                                                               |       | 373,000                  |       | 425,000                      |       |
| Other assets                                                                                                                                         |       | 5,000                    |       | 28,000                       |       |
| Total assets                                                                                                                                         |       | $                        | 2,503,000  |                         | $          | 1,723,000 |   |
| ** **                                                                                                                                           | ** ** | ** **               | ** ** | ** **                   | ** ** |
| **LIABILITIES AND  SHAREHOLDERS’ DEFICIT**                                                                                                      | ** ** | ** **               | ** ** | ** **                   | ** ** |
| Current liabilities:                                                                                                                                 |       |                     |       |                         |       |
| Accounts payable                                                                                                                                     |       | $                        | 482,000    |                         | $          | 792,000 |   |
| Payable to Spescom Ltd.                                                                                                                              |       | —                   |       | 550,000                      |       |
| Notes and accrued interest payable to  Spescom Ltd.                                                                                                  |       | 675,000                  |       | —                       |       |
| Preferred stock dividend payable to  Spescom Ltd.                                                                                                    |       | 1,056,000                |       | 887,000                      |       |
| Accrued liabilities                                                                                                                                  |       | 1,499,000                |       | 1,446,000                    |       |
| Lease obligations—current portion                                                                                                               |       | 38,000                   |       | 44,000                       |       |
| Deferred revenue                                                                                                                                     |       | 2,901,000                |       | 2,752,000                    |       |
| Series I redeemable preferred stock, par  value $0.01 per share; 2,450 shares authorized; 2,450 shares issued and  outstanding at September 30, 2006 |       | —                   |       | 2,450,000                    |       |
| Total current liabilities                                                                                                                            |       | 6,651,000                |       | 8,921,000                    |       |
|                                                                                                                                                 |       |                     |       |                         |       |
| Notes and accrued interest payable to  Spescom Ltd.                                                                                                  |       | —                   |       | 664,000                      |       |
| Lease obligations                                                                                                                                    |       | 3,000                    |       | 16,000                       |       |
| Total liabilities                                                                                                                                    |       | 6,654,000                |       | 9,601,000                    |       |
|                                                                                                                                                 |       |                     |       |                         |       |
| Shareholders’ deficit:                                                                                                                          |       |                     |       |                         |       |
| Convertible preferred stock, 243,239  remaining shares authorized                                                                                    |       |                     |       |                         |       |
| Series F—par value $1.00 per share;  5,291 shares authorized, issued and outstanding at March 31, 2007  and September 30, 2006        |       | 6,790,000                |       | 6,790,000                    |       |
| Series I—par value $0.01 per share;  2,450 shares authorized; 2,450 shares issued and outstanding at March 31,  2007                  |       | 2,450,000                |       | —                       |       |
| Common stock, no par value, 100,000,000  shares authorized; 37,144,494 shares issued and outstanding at March 31, 2007  and September 30, 2006       |       | 76,515,000               |       | 76,581,000                   |       |
| Common stock warrants                                                                                                                                |       | 1,505,000                |       | 1,505,000                    |       |
| Accumulated other comprehensive loss                                                                                                                 |       | (499,000                 | )          | (441,000                     | )          |
| Accumulated deficit                                                                                                                                  |       | (90,912,000              | )          | (92,313,000                  | )          |
| Total shareholders’ deficit                                                                                                                     |       | (4,151,000               | )          | (7,878,000                   | )          |
| Total liabilities and shareholders’  deficit                                                                                                    |       | $                        | 2,503,000  |                         | $          | 1,723,000 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**ENTERPRISEINFORMATICS INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                                   | ** ** | **For the three months ended  March 31,** | ** ** | **For the six months ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                                           | ** ** | **2006**                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                    |       |                                                               |       |                                                             |       |   |   |   |   |
| Licenses                                                     |       | $                                                                  | 2,282,000  |                                                             | $          | 652,000 |   | $ | 2,672,000 |   | $ | 1,216,000 |   |
| Services and other                                           |       | 1,499,000                                                          |       | 1,408,000                                                        |       | 2,836,000 |   | 2,676,000 |   |
| Total revenues                                               |       | 3,781,000                                                          |       | 2,060,000                                                        |       | 5,508,000 |   | 3,892,000 |   |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Cost of revenues:                                            |       |                                                               |       |                                                             |       |   |   |   |   |
| Licenses                                                     |       | 59,000                                                             |       | 72,000                                                           |       | 97,000 |   | 194,000 |   |
| Services and other                                           |       | 673,000                                                            |       | 721,000                                                          |       | 1,264,000 |   | 1,261,000 |   |
| Total cost of revenues                                       |       | 732,000                                                            |       | 793,000                                                          |       | 1,361,000 |   | 1,455,000 |   |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Gross profit                                                 |       | 3,049,000                                                          |       | 1,267,000                                                        |       | 4,147,000 |   | 2,437,000 |   |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Operating expenses:                                          |       |                                                               |       |                                                             |       |   |   |   |   |
| Research and development                                     |       | 305,000                                                            |       | 282,000                                                          |       | 563,000 |   | 485,000 |   |
| Marketing and sales                                          |       | 581,000                                                            |       | 685,000                                                          |       | 1,041,000 |   | 1,338,000 |   |
| General and administrative                                   |       | 624,000                                                            |       | 353,000                                                          |       | 992,000 |   | 794,000 |   |
| Total operating expenses                                     |       | 1,510,000                                                          |       | 1,320,000                                                        |       | 2,596,000 |   | 2,617,000 |   |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Income (loss) from operations                                |       | 1,539,000                                                          |       | (53,000                                                          | )          | 1,551,000 |   | (180,000 | ) |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Interest and other income                                    |       | —                                                             |       | 4,000                                                            |       | — |   | 4,000 |   |
| Interest and other expense                                   |       | (62,000                                                            | )          | (53,000                                                          | )          | (125,000 | ) | (105,000 | ) |
| Net income (loss) before income taxes                        |       | 1,477,000                                                          |       | (102,000                                                         | )          | 1,426,000 |   | (281,000 | ) |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Provision for income taxes                                   |       | (25,000                                                            | )          | —                                                           |       | (25,000 | ) | — |   |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Net income (loss)                                            |       | 1,452,000                                                          |       | (102,000                                                         | )          | 1,401,000 |   | (281,000 | ) |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Deemed preferred dividend                                    |       | —                                                             |       | (500,000                                                         | )          | — |   | (1,000,000 | ) |
| Net income (loss) available after deemed  preferred dividend |       | 1,452,000                                                          |       | (602,000                                                         | )          | 1,401,000 |   | (1,281,000 | ) |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Cumulative preferred dividends                               |       | (66,000                                                            | )          | (98,000                                                          | )          | (132,000 | ) | (186,000 | ) |
| Net income (loss) available to common  shareholders          |       | $                                                                  | 1,386,000  |                                                             | $          | (700,000 | ) | $ | 1,269,000 |   | $ | (1,467,000 | ) |
|                                                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Earnings (loss) per share:                                   |       |                                                               |       |                                                             |       |   |   |   |   |
| Basic                                                        |       | $                                                                  | 0.04       |                                                             | $          | (0.02 | ) | $ | 0.03 |   | $ | (0.04 | ) |
| Diluted                                                      |       | $                                                                  | 0.02       |                                                             | $          | (0.02 | ) | $ | 0.02 |   | $ | (0.04 | ) |
| Weighted average shares outstanding:                         |       |                                                               |       |                                                             |       |   |   |   |   |
| Basic                                                        |       | 37,144,000                                                         |       | 36,895,000                                                       |       | 37,144,000 |   | 36,857,000 |   |
| Diluted                                                      |       | 82,695,000                                                         |       | 36,895,000                                                       |       | 59,920,000 |   | 36,857,000 |   |
| ** **                                                   | ** ** | ** **                                                         | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement of Comprehensive Income (Loss)**                 | ** ** | ** **                                                         | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                            |       | $                                                                  | 1,452,000  |                                                             | $          | (102,000 | ) | $ | 1,401,000 |   | $ | (281,000 | ) |
| Other Comprehensive income (loss):                           |       |                                                               |       |                                                             |       |   |   |   |   |
| Foreign currency translation adjustment                      |       | 1,000                                                              |       | (14,000                                                          | )          | (58,000 | ) | 20,000 |   |
| Comprehensive  income (loss)                                 |       | $                                                                  | 1,453,000  |                                                             | $          | (116,000 | ) | $ | 1,343,000 |   | $ | (261,000 | ) |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**ENTERPRISE INFORMATICS INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                            | ** ** | **For the six months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                                         | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                                 |       |                                                             |       |   |   |
| Net income (loss)                                                                     |       | $                                                                | 1,401,000  |   | $ | (281,000 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                                                             |       |   |   |
| Depreciation and amortization                                                         |       | 86,000                                                           |       | 73,000 |   |
| Unpaid interest on notes payable                                                      |       | 107,000                                                          |       | 98,000 |   |
| Share-based compensation                                                              |       | 67,000                                                           |       | 92,000 |   |
| Compensation for warrants issued to  consultants                                      |       | —                                                           |       | 40,000 |   |
| Changes in assets and liabilities:                                                    |       |                                                             |       |   |   |
| Receivables, net                                                                      |       | (175,000                                                         | )          | (102,000 | ) |
| Other current assets                                                                  |       | 27,000                                                           |       | (136,000 | ) |
| Accounts payable                                                                      |       | (321,000                                                         | )          | 361,000 |   |
| Payable to Spescom Ltd.                                                               |       | (566,000                                                         | )          | (22,000 | ) |
| Accrued liabilities                                                                   |       | —                                                           |       | (260,000 | ) |
| Deferred revenue                                                                      |       | 102,000                                                          |       | (268,000 | ) |
| Net cash provided (used) in operating  activities                                     |       | 728,000                                                          |       | (405,000 | ) |
|                                                                                  |       |                                                             |       |   |   |
| Cash flows from investing activities:                                                 |       |                                                             |       |   |   |
| Purchases of property and equipment                                                   |       | (51,000                                                          | )          | (40,000 | ) |
| Capitalization of development costs                                                   |       | —                                                           |       | (35,000 | ) |
| Net cash used in investing activities                                                 |       | (51,000                                                          | )          | (75,000 | ) |
|                                                                                  |       |                                                             |       |   |   |
| Cash flows from financing activities:                                                 |       |                                                             |       |   |   |
| Net proceeds from private placement                                                   |       | —                                                           |       | 838,000 |   |
| Payments on capital lease obligations                                                 |       | (19,000                                                          | )          | (21,000 | ) |
| Net cash provided (used) by financing  activities                                     |       | (19,000                                                          | )          | 817,000 |   |
|                                                                                  |       |                                                             |       |   |   |
| Effect of exchange rate changes on cash                                               |       | (4,000                                                           | )          | (2,000 | ) |
|                                                                                  |       |                                                             |       |   |   |
| Net increase in cash                                                                  |       | 654,000                                                          |       | 335,000 |   |
| Cash at beginning of period                                                           |       | 95,000                                                           |       | 285,000 |   |
|                                                                                  |       |                                                             |       |   |   |
| Cash at  end of period                                                                |       | $                                                                | 749,000    |   | $ | 620,000 |   |

 

See Note 2 for supplemental cash flow information.

The accompanying notes are an integral part of theseconsolidated financial statements.

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E**NTERPRISE INFORMATICS INC.CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**Note 1 —Basis of Presentation**

The accompanyingconsolidated financial statements as of March 31, 2007 and for the threeand six months ended March 31, 2007 and 2006 are unaudited. The consolidatedfinancial statements and related notes have been prepared in accordance withgenerally accepted accounting principles applicable to interim periods. In the opinion of management, the consolidated financial statements reflect alladjustments, consisting only of normal recurring adjustments, necessary for afair presentation of the consolidated financial position, operating results andcash flows for the periods presented.

The information containedin the following Condensed Notes to the Consolidated Financial Statements iscondensed from that which would appear in the annual consolidated financialstatements; accordingly, the consolidated financial statements included hereinshould be reviewed in conjunction with the consolidated financial statementsand related notes thereto contained in the Company’s Annual Report on Form 10-Kfor the year ended September 30, 2006, as amended.  It should beunderstood that the accounting measurements at an interim date inherently involvegreater reliance on estimates than at year-end.  The results of operationsfor the interim periods presented are not necessarily indicative of the resultsexpected for the entire year.

**Note 2 —Summary of Significant Accounting Policies**

***Principles of Consolidation***

The consolidatedfinancial statements are prepared using accounting principles generallyaccepted in the United States of America and include the accounts of theCompany and its wholly-owned United Kingdom subsidiary, Enterprise Informatics,Ltd. All significant intercompany balances and transactions have beeneliminated.

***Foreign Currency***

The functional currencyof the Company’s United Kingdom subsidiary is the pound sterling. Assets andliabilities are translated into U.S. dollars at end-of-period exchange rates.Revenues and expenses are translated at average exchange rates in effect forthe period. Net currency exchange gains or losses resulting from suchtranslations are excluded from net income and are accumulated in a separatecomponent of shareholders’ deficit as accumulated other comprehensive income(loss). Gains and losses resulting from foreign currency transactions, whichare not significant, are included in the consolidated statements of operations.

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andalso requires disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting periods. Actual results could differ from those estimates.Significant estimates made by management include revenue recognition estimates,the viability of recognizing deferred income tax assets, capitalized softwarecosts and the valuation of equity instruments, and the allowance for doubtfulaccounts.  Significant changes in these estimates may have a materialimpact on the financial statements.

***Revenue Recognition***

The Company’s revenuesare derived from sales of its document and configuration management systemsthat are primarily composed of software and services, including maintenance,training and consulting services, and third party software and hardware. TheCompany recognizes revenue in accordance with Statement of Position (“SOP”)97-2 “Software Revenue Recognition,”  SOP98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect toCertain Transactions”, Staff Accounting Bulletin (“SAB”) No. 101, updated bySAB’s 103 and 104 “Update of Codification of Staff Accounting Bulletins,” andEmerging Issues Task Force No. 00-21 (“EITF 00-21”) “Accounting for RevenueArrangements with Multiple Deliverables.” Revenue through the Company’s Value Added Resellers (“VARS”) are net ofany VAR discount in accordance with EITF 99-19 “Reporting Revenue Gross as aPrincipal versus Net as an Agent.”

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Software license andthird party product revenues are recognized upon shipment of the product if nosignificant vendor obligations remain and collection is probable. In caseswhere a significant vendor obligation exists, revenue recognition is delayeduntil such obligation has been satisfied. For new software products where ahistorical record has not yet been demonstrated that acceptance is perfunctory,the Company defers recognition of revenue until acceptance hasoccurred.   If an undelivered element of the arrangement exists underthe license arrangement, a portion of revenue is deferred based onvendor-specific objective evidence (VSOE) of the fair value of the undeliveredelement until delivery occurs.  If VSOE does not exist for all undeliveredelements, all revenue is deferred until sufficient evidence exists or allelements have been delivered.  Annual maintenance revenues, which consistof ongoing support and product updates, are recognized on a straight-line basisover the term of the contract. Payments received in advance of performance ofthe related service for maintenance contracts are recorded as deferred revenue.Revenues from training and consulting services are recognized when the servicesare performed and adequate evidence of providing such services is available.Contract revenues for long-term contracts or programs requiring specializedsystems are recognized using the percentage-of-completion method of accounting,primarily based on contract labor hours incurred to date compared with totalestimated labor hours at completion. Provisions for anticipated contract lossesare recognized at the time they become known.

Contracts are billedbased on the terms of the contract. There are no retentions in billed contractreceivables. Unbilled contract receivables relate to revenues earned but notbilled at the end of the period.

The Company considersmany factors when applying accounting principles generally accepted in theUnited States of America related to revenue recognition.  These factorsinclude, but are not limited to:

·                           Theactual contractual terms, such as payment terms, delivery dates, and pricing ofthe various product and service elements of a contract

·                           Availabilityof products to be delivered

·                           Timeperiod over which services are to be performed

·                           Creditworthinessof the customer

·                           Thecomplexity of customizations to the Company’s software required by servicecontracts

·                           Thesales channel through which the sale is made (direct, VAR, distributor, etc.)

·                           Discountsgiven for each element of a contract

·                           Anycommitments made as to installation or implementation of “go live” dates

·                           Acceptancecriteria

Each of the relevant factors is analyzed to determineits impact, individually and collectively with other factors, on the revenue tobe recognized for any particular contract with a customer.  Management isrequired to make judgments regarding the significance of each factor inapplying the revenue recognition standards, as well as whether or not eachfactor complies with such standards.  Any misjudgment or error bymanagement in its evaluation of the factors and the application of thestandards, especially with respect to complex or new types of transactions,could have a material adverse effect on the Company’s future operating results.

***Fair Value of Financial Instruments***

Statement of FinancialAccounting Standards (“SFAS”) No. 107, “Disclosures About Fair Value ofFinancial Instruments”, requires management to disclose the estimated fairvalue of certain assets and liabilities defined by SFAS No. 107 as cash ora contractual obligation that both conveys to one entity a right to receivecash or other financial instruments from another entity, and imposes on theother entity the obligation to deliver cash or other financial instruments tothe first entity. At March 31, 2007 and September 30, 2006, managementbelieves that the carrying amounts of cash and cash equivalents, short-terminvestments, accounts receivable and accounts payable, and accrued expensesapproximate fair value because of the short maturity of these financialinstruments. The Company believes that the carrying value of its loansapproximate their fair values based on current market rates of interest.

***Concentration of Credit Risk***

The Company providesproducts and services to customers in a variety of industries worldwide,including local governments, petrochemicals, utilities, manufacturing andtransportation. Concentration of credit risk with respect to trade receivablesis limited due to the geographic and industry dispersion of the Company’scustomer base. The Company has not experienced significant credit losses on itscustomer accounts. Aker Kvaerner Shared Services AS and Network Rail accountedfor 16% and 14%, respectively, of trade accounts receivable at March 31, 2007as compared to Defense Threat Reductions Agency, Constellation Energy Group,JEA, and Network Rail, which accounted for 25%, 18%, 11% and 11%, respectively,of trade accounts receivable at September 30, 2006.

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A small number ofcustomers have typically accounted for a large percentage of the Company’sannual revenues. Aveva Group accounted for 40% of revenue for the six monthsended March 31, 2007, while Constellation Energy accounted for 15% of revenuefor the six months ended March 31, 2006.  The Company’s reliance onrelatively few customers could have a material adverse effect on the results ofits operations on a quarterly basis.

***Property and Equipment***

Property and equipment isrecorded at cost and depreciated using the straight-line method over usefullives of two to seven years. Leasehold improvements are amortized on astraight-line basis over the shorter of their useful life or the term of therelated lease. Expenditures for ordinary repairs and maintenance are expensedas incurred while major additions and improvements are capitalized.

***Software Development Costs***

Software developmentcosts are capitalized when technological feasibility and marketability of therelated product have been established. Software development costs incurredsolely in connection with a specific contract are charged to cost of revenues. Capitalizedsoftware development costs are amortized on a product-by-product basis,beginning when the product is available for general release to customers.Annual amortization expense is calculated using the greater of the ratio ofeach product’s current gross revenues to the total of current and expectedgross revenues or the straight-line method over the estimated useful life ofthree to five years. There were no software development costs capitalized forthe three or six months ended March 31, 2007, while the amortization expensetotaled $26,000 and $52,000, respectively, for those periods. As of March 31,2007 and September 30, 2006, the balance of software development capitalizedtotaled $513,000 for both dates, with related accumulated amortization of$140,000 and $88,000, respectively.

***Long-lived Assets***

The Company assessespotential impairments to its long-lived assets when there is evidence thatevents or changes in circumstances have made recovery of the assets’ carryingvalue unlikely. An impairment loss would be recognized when the sum of theexpected future net cash flows is less than the carrying amount of the asset.

***Share-Based Payments***

The Company recognizesshare-based compensation expense as required by the Financial AccountingStandards Board (FASB) under the Statement of Financial Accounting StandardsNo.123 (revised 2007), “Share-Based Payments” (FAS 123R).  The Company adopted the provisions of FAS123R on October 1, 2005, the first day of the Company’s fiscal year 2006.Share-based compensation cost is measured at the date of grant using theBlack-Scholes option-pricing model, based on the estimated fair value of theaward, and is recognized as expense over the employee’s requisite serviceperiod. The determination of the fair value of share-based payments on the dateof grant using an option-pricing model is affected by our stock price as wellas stock volatility over the term of the awards, actual and projected employeestock option exercise behaviors, risk-free interest rate and expecteddividends. The Company has no awards with market or performance conditions. Thevaluation provisions of FAS 123R apply to new awards and to awards outstandingon October 1, 2005 and subsequently modified or cancelled.

In April 1996, theCompany adopted its 1996 Stock Incentive Plan (the “1996 Plan”).  The 1996Plan is administered by either the Board of Directors or a committee designatedby the Board to oversee the plan.  The total number of authorized sharesunder the 1996 Plan was 7,425,000.  As of March 31, 2007, options topurchase 4,372,250 shares were outstanding. The 1996 Plan expired as of March 31, 2006 and therefore no furthergrants are available from the 1996 Plan.

In April 2007, theCompany’s shareholders approved the adoption to 2007 Stock Incentive Plan (ther“2007 Plan”).  The 2007 Plan isadministered by either the Board of Directors or a committee designated by theBoard to oversee the plan.  The total number of authorized shares underthe 2007 Plan was 7,500,000.   To date nooptions have been issued under the 2007 Plan.

The option vesting periodunder the 1996 Plan was determined by the Board of Directors or a Stock OptionCommittee and usually provides that 25% of the options granted can be exercised90 days from the date of grant, and thereafter, those options vest andbecome exercisable in additional cumulative annual installments of 25%commencing on the first anniversary of the date of grant. Options granted underthe 1996 Plan are generally due to expire upon the sooner of ten years fromdate of grant, thirty days after termination of services other than by reasonof convenience of the Company, three months after disability, or one year afterthe date of the option holder’s death. The exercise price for such options isequal to the fair market value of the common stock on the date of grant. Options granted to employees under the 1996 Plan were either incentive stockoptions or nonqualified options and only nonqualified options were granted tononemployee directors.

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The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions used forgrants:
| ** **                | ** ** | **For the three months ended  March 31,** | ** ** | **For the six months ended  March 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                                           | ** ** | **2006**                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Dividend Yield            |       | 0                                                                  | %          | 0                                                                | %          | 0 | % | 0 | % |
| Expected  Volatility      |       | 348                                                                | %          | 165                                                              | %          | 348 | % | 165 | % |
| Risk free  interes t rate |       | 4.6                                                                | %          | 4.7                                                              | %          | 4.6 | % | 4.7 | % |
| Expected lives            |       | 10 yrs                                                             |       | 10 yrs                                                           |       | 10 yrs |   | 10 yrs |   |

 

The weighted-averageestimated fair value of employee stock options granted during the three and sixmonths ended March 31, 2007 and March 31, 2006 using the Black-Scholes modelwere as follows:
| ** **                                     | ** ** | **For the three months ended  March 31,** | ** ** | **For the six months ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                                           | ** ** | **2006**                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and development                       |       | $                                                                  | 1,000      |                                                             | $          | 2,000 |   | $ | 3,000 |   | $ | 5,000 |   |
| Marketing and sales                            |       | 8,000                                                              |       | 12,000                                                           |       | 21,000 |   | 30,000 |   |
| General and administrative                     |       | 16,000                                                             |       | 24,000                                                           |       | 43,000 |   | 57,000 |   |
|                                           |       |                                                               |       |                                                             |       |   |   |   |   |
| Share-based  compensation                      |       | $                                                                  | 25,000     |                                                             | $          | 38,000 |   | $ | 67,000 |   | $ | 92,000 |   |
|                                           |       |                                                               |       |                                                             |       |   |   |   |   |
| Basic and  diluted net income (loss) per share |       |                                                               |       |                                                             |       |   |   |   |   |
| Basic                                          |       | $                                                                  | —     |                                                             | $          | — |   | $ | — |   | $ | — |   |
| Diluted                                        |       | $                                                                  | —     |                                                             | $          | — |   | $ | — |   | $ | — |   |

 

A summary of optionactivity under the 1996 Plan as of March 31, 2007, and changes during the sixmonths then ended is presented below:
| **Options**                             | ** ** | **Shares  (000)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding  Options at October 1, 2006 |       | 4,455             |       | $                                       | 0.282      |                                                 |       |                            |       |   |
| Granted                                 |       | —            |       | —                                  |       |                                                 |       |                            |       |
| Exercised                               |       | —            |       | —                                  |       |                                                 |       |                            |       |
| Forfeited or  expired                   |       | (83               | )          | $                                       | 0.531      |                                                 |       |                            |       |   |
| Outstanding at  March 31, 2007          |       | 4,372             |       | $                                       | 0.277      |                                                 | 6.5        |                            | $          | — |   |
| Exercisable at March  31, 2007          |       | 3,640             |       | $                                       | 0.299      |                                                 | 6.0        |                            | $          | — |   |

 

There were no optionsgranted or exercised for the six months ended March 31, 2007.

***Income Taxes***

Current income taxexpense is the amount of income taxes expected to be payable for the currentyear. A deferred income tax asset or liability is established for the expectedfuture consequences resulting from the differences in the financial reportingand tax bases of assets and liabilities. Deferred income tax expense (benefit)is the change during the year in the deferred income tax asset or liability.

Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be “more likely than not” realized in the future based on the Company’scurrent and expected operating results.

8

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***Net Income (Loss) per Common Share***

Basic net income (loss)per common share is computed as net income (loss) divided by the weightedaverage number of common shares outstanding during the year. Diluted net income(loss) per common share is computed as net income (loss) divided by theweighted average number of common shares and potential common shares, using thetreasury stock method, outstanding during the year and assumes conversion intocommon stock at the beginning of each period of all outstanding shares ofconvertible preferred stock, stock options, warrants and other potential commonstock. Computations of diluted net income (loss) per share do not give effectto individual potential common stock for any period in which their inclusionwould be anti-dilutive.

***Statements of Cash Flows***

The following tableprovides supplemental cash flow information:
| ** **                                        | ** ** | **For the six months ended  March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                                         | ** ** | **2006** | ** ** |
| Supplemental cash flow information:               |       |                                                             |       |   |   |
| Interest paid                                     |       | $                                                                | 84,000     |   | $ | 7,000 |   |
|                                              |       |                                                             |       |   |   |
| Non-cash financing and investing  activities:     |       |                                                             |       |   |   |
| Accrued preferred stock dividends                 |       | $                                                                | 132,000    |   | $ | 187,000 |   |
| Warrants issued for services                      |       | —                                                           |       | 40,000 |   |
| Deemed dividend on October 2005 private placement |       | —                                                           |       | 1,000,000 |   |
|                                              |       | $                                                                | 132,000    |   | $ | 1,227,000 |   |

 

**Note 3 —Spescom Ltd. Transactions and Related Parties**

As of March 31, 2007 andSeptember 30, 2006 there were 5,291 shares of Series F Convertible PreferredStock with a stated value of $1,000 per share held by Spescom Ltd., themajority shareholder of the Company. The Series F Convertible Preferred Stockis convertible into common stock, at a stated conversion price of $0.45 pershare subject to certain adjustments.  The conversion is at the option ofSpescom Ltd. through September 30, 2008. The outstanding Series FConvertible Preferred Stock is entitled to receive dividends of 5% of thestated value of $1,000 per share per annum, payable on a quarterly basis in cashor common stock (valued on the basis of the average per share market value onthe 30 trading days immediately prior to the date on which such dividend isdeclared by the Board of Directors).  Unpaid dividends accrue interest atthe rate of 8% per annum.  As of March 31, 2007, unpaid dividends andaccrued interest amounted to $926,000 and $130,000, respectively. As ofSeptember 30, 2006, unpaid dividends and accrued interest amounted to$794,000 and $93,000, respectively.

Related party liabilitiesconsist of the following:
| ** **                                             | ** ** | **March 31,  2007** | ** ** | **September 30,  2006** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Current portion:                                       |       |                     |       |                         |       |
| Payable to  Spescom Ltd. UK                            |       | $                        | —     |                         | $          | 213,000 |   |
| Notes and  accrued interest payable to Spescom Ltd. UK |       | 675,000                  |       | —                       |       |
| Payable to  Spescom Ltd.                               |       | —                   |       | 337,000                      |       |
| Payable to Spescom Ltd. (including Spescom Ltd. UK)    |       | $                        | 675,000    |                         | $          | 550,000 |   |
|                                                   |       |                     |       |                         |       |
| Long term portion:                                     |       |                     |       |                         |       |
| Notes and accrued  interest payable to Spescom Ltd. UK |       | $                        | —     |                         | $          | 664,000 |   |

 

The Company has twoexisting demand notes payable to Spescom Ltd. UK, a wholly owned subsidiary ofSpescom Ltd., for $400,000 and $100,000, each bearing interest rate of 10% perannum.  As of March 31, 2007 and September 30, 2006, the balance owed onthe notes including interest was $675,000 and $664,000, respectively. SpescomLtd. has agreed that it will not

9

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cause Spescom Ltd. UK todemand repayment under the two notes prior to October 1, 2007. Interest expense on the notes for the three months ended March 31, 2007and 2006 was $17,000 and $16,000, respectively, and for the six months ended March31, 2007 and 2006 was $34,000 and $32,000, respectively. These notes arecollateralized by a security interest in favor of both Spescom Ltd. and SpescomLtd. UK in respect of all the Company’s assets. In November 2005, the Company’s wholly owned subsidiary, EnterpriseInformatics Ltd. agreed to guarantee certain loan obligations of Spescom Ltd.which totaled $1.2 million as of March 31, 2007 and $3.2 million as ofSeptember 30, 2006.  The proceeds of these loans had been used by SpescomLtd. in prior years to provide working capital to the Company. The guarantee issecured by the assets of Enterprise Informatics Ltd. which totaled $1,036,000as of March 31, 2007.

Under a royaltyarrangement beginning in fiscal 2004, Spescom Ltd. resold the Company’ssoftware and maintenance services in South Africa. In February 2006 the royaltyarrangement with Spescom Ltd. was terminated and the Company entered into a newreseller arrangement with a third party company, DocQnet International, for theSouth African market. There was no royalty revenue recognized under the royaltyagreement with Spescom Ltd. for the three or six months ended March 31, 2007,while $34,000 and $117,000, respectively, was recognized during the three andsix months ended March 31, 2006.  AtSeptember 30, 2006 the Company owed $337,000 to Spescom Ltd. primarily forcertain marketing and business development projects performed by Spescom Ltd.for the Company along with assistance provided by Spescom Ltd.in raisingworking capital during fiscal 2005. Interest accrued on the balance owed at a rate of 11%.  As of March 31, 2007, the Company had paidoff the entire payable to Spescom Ltd. including accrued interest of $6,000.

Prior to February 10,2006, Spescom Ltd. UK provided certain administrative and accounting functionsfor the Company’s United Kingdom subsidiary.  The Company was billed amonthly fee by Spescom Ltd. UK for reimbursement of certain costs in the UnitedKingdom including the office facilities, all accounting and human resourcesservices, and certain corporate marketing activities. As of February 10, 2006,Spescom Ltd. no longer provided administrative or accounting function and theCompany’s UK subsidiary was relocated to another facility.  For the three and six months ended March 31,2007 there were no administrative fees as compared to $83,000 and $226,000 forthe same periods in 2006.  Theadministrative fee charged by Spescom Ltd. UK for the three and six monthsended March 31, 2006 included office rent of $48,000 and $132,000,respectively.   At March 31, 2007, the Company had no payable due toSpescom Ltd. UK for administrative fees or rent, while at September 30, 2006,the Company had a payable to Spescom Ltd. UK of $213,000, which was paid infull in October 2006.  In 1999, as partof an agreement to sell a 60% interest in its United Kingdom subsidiary toSpescom Ltd., the lease for the United Kingdom office facility was to beassigned to Spescom Ltd. UK; however, the landlord did not grant its consent tothe assignment and as such Spescom Ltd. UK has paid the lease for the entireoffice directly to the landlord.  The lease expired on March14, 2006.  The landlord has claimed that the Company owes certaindilapidation payments under the lease. The Company has disputed such claims and believes there will be nomaterial effect once resolved.

Spescom Ltd. and theCompany have entered into a license agreement pursuant to which Spescom Ltd.has licensed to the Company the right to use the name “Spescom” and to use atrademark owned by Spescom Ltd. related to certain computer software. TheCompany will not pay any royalties to Spescom Ltd. in connection with thislicense. The license is for an indefinite term, but is terminable by eitherparty upon 60 days prior written notice. Under the license agreement, SpescomLtd. has agreed to indemnify and hold harmless the Company and its directors,officers, employees and agents against liabilities arising from any claimbrought against the Company that alleges that Spescom Ltd.’s or the Company’suse of the licensed trademark infringes the rights of any third party, providedthat the Company is in material compliance with the provisions of the licenseagreement.  In April 2007, theshareholders of the Company approved an amendment to the Company’s Articles ofIncorporation changing the Company’s name to Enterprise Informatics Inc.  The Company plans to no longer use the name “SpescomSoftware”.

**Note 4 —Receivables**

A summary of receivablesand allowance for doubtful accounts as of March 31, 2007 and September 30, 2006are as follows:
| ** **                             | ** ** | **March 31,  2007** | ** ** | **September 30,  2006** | ** ** |
|----------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Receivables  consist of:               |       |                     |       |                         |       |
| Receivables                            |       | $                        | 1,053,000  |                         | $          | 767,000 |   |
| Unbilled receivables                   |       | 3,000                    |       | 96,000                       |       |
|                                   |       | 1,056,000                |       | 863,000                      |       |
| Less: allowance  for doubtful accounts |       | (20,000                  | )          | (9,000                       | )          |
|                                   |       | $                        | 1,036,000  |                         | $          | 854,000 |   |

 

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**Note 5 — Reconciliation of Net Income (Loss) andShares Used in Per Share Computations:**
| ** **                                           | ** ** | **For three months ended  March 31,** | ** ** | **For six months ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                  | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income  (loss) available for common shareholders |       | $                                                         | 1,386,000  |                                                    | $          | (700,000 | ) | $ | 1,269,000 |   | $ | (1,467,000 | ) |
|                                                 |       |                                                      |       |                                                    |       |   |   |   |   |
| Earnings (Loss)  per share:                          |       |                                                      |       |                                                    |       |   |   |   |   |
| Basic                                                |       | $                                                         | 0.04       |                                                    | $          | (0.02 | ) | $ | 0.03 |   | $ | (0.04 | ) |
| Diluted                                              |       | $                                                         | 0.02       |                                                    | $          | (0.02 | ) | $ | 0.02 |   | $ | (0.04 | ) |
|                                                 |       |                                                      |       |                                                    |       |   |   |   |   |
| Weighted average  shares outstanding:                |       |                                                      |       |                                                    |       |   |   |   |   |
| Basic                                                |       | 37,144,000                                                |       | 36,895,000                                              |       | 37,144,000 |   | 36,857,000 |   |
| Diluted                                              |       | 82,695,000                                                |       | 36,895,000                                              |       | 59,920,000 |   | 36,857,000 |   |

 

Basic net income (loss)per share is computed using the weighted average number of common sharesoutstanding during the period.  Contingently issued shares are included inthe computation of basic net income (loss) per share when the relatedconditions are satisfied.  Diluted net income (loss) per share is computedusing the weighted average number of common shares and potentially dilutivesecurities outstanding during the period.  Potentially dilutive securitiesconsist of contingently issued shares, the common shares issuable uponconversion of preferred stock or convertible debt and shares issuable upon theexercise of stock options and common stock warrants.  Potentially dilutivesecurities are excluded from the computation if their effect is anti-dilutive.

As of March 31, 2007, atotal of 4,372,000 stock options and 6,727,000 common stock warrants wereexcluded from the diluted net income (loss) per share calculation, as theireffect would be anti-dilutive. As of March 31, 2006, a total of 6,390,000 stockoptions, 7,644,000 common stock warrants and, 5,291 and 2,450 shares of SeriesF and Series I Convertible Preferred Stock, respectively, were excluded fromthe diluted net income (loss) per share calculation, as their effect would beanti-dilutive.

**Note 6 —Segment and Geographic Information**

The Company has onebusiness segment, which consists of the development and sale of a suite ofintegrated document, configuration and records management softwareproducts.   Revenues by customer locationand identifiable assets from continuing operations are as follows:
| ** **                       | ** ** | **For the three months ended  March 31,** | ** ** | **For the six months ended  March 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                                           | ** ** | **2006**                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| United States                    |       | $                                                                  | 756,000    |                                                             | $          | 1,305,000 |   | $ | 1,999,000 |   | $ | 2,421,000 |   |
| Europe, primarily United Kingdom |       | 2,992,000                                                          |       | 407,000                                                          |       | 3,425,000 |   | 986,000 |   |
| Other International              |       | 33,000                                                             |       | 348,000                                                          |       | 84,000 |   | 485,000 |   |
|                             |       | $                                                                  | 3,781,000  |                                                             | $          | 2,060,000 |   | $ | 5,508,000 |   | $ | 3,892,000 |   |

 
| ** **                                       | ** ** | **March 31,  2007** | ** ** | **September 30,  2006** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Identifiable assets from continuing  operations: |       |                     |       |                         |       |
| United States                                    |       | $                        | 1,467,000  |                         | $          | 1,440,000 |   |
| Europe, United Kingdom                           |       | 1,036,000                |       | 283,000                      |       |
|                                             |       | $                        | 2,503,000  |                         | $          | 1,723,000 |   |

 

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**Note 7— Redeemable and Convertible Preferred Stock**

*October2005 Private Placement*

On October 25, 2005, theCompany completed a private placement issuing 1,950 shares of Series HConvertible Preferred Stock (“Series H Preferred Stock”) and warrants for thepurchase of 925,926 common shares in exchange for cash of $500,000 and 1,450shares of previously issued Series G Convertible Preferred Stock. The commonstock warrants have an exercise price of $0.27 per share and expireOctober 25, 2008. In connection with this transaction, the 1,450 shares ofSeries G Convertible Preferred Stock then outstanding were cancelled bythe Company. Expenses relating to the transaction totaled $64,000 primarilyrelating to legal and accounting fees. In accordance with EITF 00-27 “Applicationof Issue No 98-5 to Certain Convertible Instruments,” the Company calculated,using the Black—Scholes method, the intrinsic value of the convertibleinstruments issued and determined that there was a deemed preferred dividendequal to the gross proceeds received of $500,000.  In March 2006 the Company completed a privateplacement exchanging all of the Series H Preferred Stock for Series IConvertible Preferred Stock.  See March2006 Private Placement below.

The shares of Series HPreferred Stock issued were convertible into common stock at the conversionrate in effect at the time of conversion.  The conversion price per shareof the Series H Preferred Stock was equal to 85% of the market price (thevolume weighted average price of the Company’s common stock during the fiveimmediately preceding trading days), provided that in no event shall theconversion price exceed a ceiling price of $0.40 per share, or be less than afloor price which varies with the aggregate gross revenues of the Companyduring the last four fiscal quarters for which revenues have been reported bythe Company prior to such time, but which will not be lower than $0.0725 pershare and not higher than $0.16 per share. The Series H Preferred Stock accrued dividends at 6.75% of the statedvalue of $1,000 per share per annum.  OnMarch 31, 2006 the Company issued 325,966 shares of common stock in payment ofdeclared Series H Preferred Stock dividends of $44,000 based on a fair marketvalue of $0.13 per share.

The terms of the October2005 financing also provided for a second closing to have occurred no laterthan January 20, 2006, under which the Company would issue an additional 500shares of Series H Preferred Stock and additional warrants for the purchase of925,926 common shares in exchange for cash of $500,000. The obligations of thepurchasers to consummate the second closing were subject to certain conditions,including that the closing price of the Company’s common stock would be $0.16or greater for 20 consecutive trading days. This stock price condition was notsatisfied and the second closing was not completed.

*March2006 Private Placement*

On March 10, 2006,the Company completed a private placement issuing 2,450 shares of Series IConvertible Preferred Stock (“Series I Preferred Stock”) and warrants,expiring March 10, 2009, to purchase 925,926 shares of common stock at$0.27 per share in exchange for cash $500,000 and 1,950 shares of the Company’sSeries H Convertible Preferred Stock, which have been cancelled. Expensesrelating to the transaction totaled $98,000 primarily relating to legal andaccounting fees. In accordance with EITF 00-27 “Application of Issue No. 98-5to Certain Convertible Instruments,” the Company calculated, using theBlack—Scholes method, the intrinsic value of the convertible instruments issuedand determined that there was a deemed preferred dividend equal to the grossproceeds received of $500,000.  Pursuantto the terms of the financing, the Company filed a registration statement onApril 7, 2006 for the common shares issuable under the Series I Preferred Stockand related warrants, which became effective on July 10, 2006.

Each share of Series IPreferred Stock is convertible into a number of shares of common stockdetermined by dividing $1,000 by the conversion price per share in effect atthe time of conversion, provided that a holder of Series I Preferred Stock mayat any given time convert only that number of shares of Series I PreferredStock so that, upon conversion, the aggregate beneficial ownership of theCompany’s common stock of such holder and all persons affiliated with suchholder is not more than 9.99% of the Company’s common stock then outstanding.The conversion price per share is equal to 85% of the market price (thevolume-weighted average price of the Company’s common stock during the fiveimmediately preceding trading days, subject to adjustment), provided that in noevent shall the conversion price exceed a ceiling price of $0.21 per share, orbe less than a floor price of $0.0725 per share.

The Certificate ofDetermination for the Series I Preferred Stock provides that, if theCompany  has not entered into a bindingagreement to consummate a consolidation, merger, reclassification of the stockof the Company (subject to certain exceptions), or disposition of all orsubstantially all of the assets of the Company on or before April 30,2006, the holders of Series I Preferred Stock may, by the vote not laterthan December 31, 2006 of at least two-thirds of the then-outstandingshares of Series I Preferred Stock, elect to have all of the outstanding sharesof Series I Preferred Stock redeemed by the Company. In that event, theCompany would be obligated to redeem the Series I Preferred Stock at anamount equal to $1,000 per share plus all declared but unpaid dividends. TheCertificate of Determination further provides that, if such election were madeand the Company were to lack sufficient funds available to redeem theSeries I Preferred Stock in accordance with applicable law, the holders ofSeries I 

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Preferred Stock as aclass would be entitled to elect the smallest number of directors of theCompany constituting a majority of the authorized number of directors.  As of April 30, 2006 the Company had notentered into a binding agreement to consummate a consolidation, merger,reclassification of the stock of the Company or disposition of all orsubstantially all of the assets of the Company. However, the holders of the Series I Preferred Stock as of December 31,2006 and as of the date of this filing have not notified the Company of anyelection to redeem the Series I Preferred Stock.  Under FAS 150 “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity” andEITF D-98 “Classification and Measurement of Redeemable Securities” and since abinding agreement was not entered into by April 30, 2006, the Company hadclassified the fair value of the Series I Preferred Stock to liabilities as theCompany might have been obligated to repay all the proceeds received.  Since the holders of Series I Preferred Stockhave not notified the Company of a vote to redeem the Series I Preferred Stock,the Series I Preferrd Stock is no longer considered redeemable and has beenreclassified as equity.

Each holder ofSeries I Preferred Stock is entitled to a liquidation preference equal tothe greater of (i) $1,000 per share plus declared but unpaid dividends pershare and (ii) the amount such holder would be entitled to receive had suchholder’s shares been converted into shares of common stock immediately prior tothe distribution in accordance with the terms of the Series I PreferredStock.  Commencing on the issuance dateof the Series I Preferred Stock, the Series I Preferred Stock is entitled toreceive dividends of 6.75% of the stated value of $1,000 per share per annum,only payable until the registration statement for the common stock underlyingthe Series I Preferred Stock is declared effective by the Securities andExchange Commission.  That registrationstatement was declared effective by the Securities and Exchange Commission onJuly 10, 2006.

*Series FConvertible 5% Preferred Stock*

On September 30,2003, the Company issued 5,291 shares of Series F Convertible PreferredStock (the “Series F Preferred Stock”) with a stated value of $1,000 pershare in consideration of the cancellation of $5,291,000 of its debt owed toSpescom Ltd. and its subsidiary (See Note 3).  The Series F PreferredStock is convertible into the Company’s common stock at a stated conversionprice of $0.45 per share, subject to certain adjustments to preventdilution, representing a total of 11,757,778 shares of the Company’scommon stock.  Such conversion may occur at the option of the holder untilSeptember 30, 2008.  On that date, any outstanding Series FPreferred Stock not previously converted will be converted automatically.

The Series FPreferred Stock is entitled to a liquidation preference equal to $1,000 pershare, plus accrued but unpaid dividends per share and interest on all accruedbut unpaid dividends.  The Series F Preferred Stock is also entitledto receive dividends of 5% of the stated value of $1,000 per share per annum,payable on a quarterly basis in cash or common stock (valued on the basis ofthe average per share market value on the 30 trading days immediately prior tothe date on which such dividend is declared by the Board of Directors). Unpaid dividends accrue interest at the rate of 8% per annum.  As ofDecember 31, 2006 and  September30, 2006, unpaid dividends were $860,000 and $794,000, respectively, andrelated accrued interest amounted to $111,000 and $93,000, respectively. As part of the transaction, Spescom Ltd. and its U.K. subsidiary receivedcertain demand and piggyback registration rights with respect to the commonstock underlying the Series F Preferred Stock.  Each holder of theshares of Series F Preferred Stock is entitled to the number of votes equal tothe number of shares of common stock to which such holder would beentitled  upon conversion of the sharesof Series F Preferred Stock held by such holder on all matters submitted to thevote of the holders of common stock, and votes as a class with the holders ofcommon stock.  In a change of control, merger or sale, the Series FPreferred Stock holders would preserve their conversion rights and would beentitled to the same number and amount of shares immediately prior to suchtransaction.

**Note 8— Shareholders’ Deficit**

*November2004 Private Placement*

On November 5, 2004, theCompany completed a financing arrangement whereby the Company issued 2,200shares of our Series G Preferred Stock along with 2,750,000 common stockwarrants for gross proceeds of $2,200,000. The Series G Preferred Stock wasconvertible into common stock at a price equal to 85% of the volume weightedaverage price of the Company’s common stock during the five trading daysimmediately preceding the conversion date; however, the conversion price couldbe no higher than $0.40 per share and no lower than $0.30 per share. The2,750,000 warrants have an exercise price of $0.44 per share and expireNovember 5, 2007. The Company incurred $418,000 in expenses related to thetransaction and issued 825,000 common stock warrants to an investmentconsulting firm. The 825,000 warrants were comprised of 550,000 warrants withan exercise price of $0.40 per share which expire November 5, 2009 and 275,000warrants with an exercise price of $0.44 per share which expired on November 5,2007. In connection with the financing, the Company recorded a beneficialconversion of $2,200,000 on the Series G Preferred Stock as a deemed dividendfor the three months ended December 31, 2004. During fiscal 2005, 750 shares ofthe Series G Preferred Stock were converted into 2,428,000 shares of commonstock. As part of the private placement in October 2005 the Company exchangedthe 1,450 remaining shares of Series G Preferred Stock for 1,450 shares ofSeries H Preferred Stock. Those 1,450 shares of Series H Preferred Stock wereexchanged for Series I Preferred Stock in March 2006. The shares of theSeries G and H Preferred Stock have been cancelled by the Company. (SeeNote 7)

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*Issuanceof Warrants to Investor Relations Firm*

During November 2005, theCompany entered into a six-month engagement with an investment relations firmto develop and implement a marketing program to promote financial market andinvestor awareness for the Company. Under the engagement agreement, theinvestor relations firm was entitled to receive, every month the agreement iseffective, a warrant, expiring three years from the date of issuance, topurchase 50,000 shares of the Company’s common stock  at an exercise price of $0.10 per share for atotal of 300,000 shares over the six-month contract. In addition, theinvestment relations firm was entitled under the agreement to a one timeperformance warrant to purchase 500,000 shares of the Company’s common stock at$0.25 per share, which would vest if, during the term of the agreement, thevolume weighted-average price of the Company’s common stock were to exceed$0.50 for five consecutive days. On March 31, 2006, the Company issued to theinvestor relations firm a warrant, expiring on the third anniversary of itsdate of issuance, for the purchase of 300,000 shares of the Company’s commonstock at an exercise price of $0.10 per share. The investor relations firmagreed to accept that warrant for 300,000 shares in lieu of all of the warrantsissuable to the investor relations firm as monthly compensation during thesix-month term of the agreement and in lieu of the performance warrant.  Under EITF 96-19 the fair value of thewarrant to purchase 300,000 shares of common stock was determined to be $39,000and has been expensed ratably over the six month term of the engagementagreement.

**Note 9 —Recent Pronouncements**

In July 2006, the FASBissued FIN 48, “Accounting for Uncertainty in Income Taxes” whichprescribes a recognition threshold and measurement process for recording in thefinancial statements uncertain tax positions taken or expected to be taken in atax return. Additionally, FIN 48 provides guidance on derecognition,classification, accounting in interim periods and disclosure requirements foruncertain tax positions. The accounting provisions of FIN 48 will beeffective for us beginning October 1, 2007. The Company is in the processof determining the effect, if any, the adoption of FIN 48 will have on ourfinancial statements.

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”)No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”).SFAS 159 expands the use of fair value accounting but does not affect existingstandards which require assets or liabilities to be carried at fair value.Under SFAS 159, a company may elect to use fair value to measure accounts andloans receivable, available-for-sale and held-to-maturity securities, equitymethod investments, accounts payable, guarantees and issued debt. Othereligible items include firm commitments for financial instruments thatotherwise would not be recognized at inception and non-cash warrantyobligations where a warrantor is permitted to pay a third party to provide thewarranty goods or services. If the use of fair value is elected, any upfrontcosts and fees related to the item must be recognized in earnings and cannot bedeferred, e.g., debt issue costs. The fair value election is irrevocable andgenerally made on an instrument-by-instrument basis, even if a company hassimilar instruments that it elects not to measure based on fair value. At theadoption date, unrealized gains and losses on existing items for which fairvalue has been elected are reported as a cumulative adjustment to beginningretained earnings. Subsequent to the adoption of SFAS 159, changes in fairvalue are recognized in earnings. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The Company has not determined theimpact, if any, the adoption of SFAS 159 will have on its financial positionand results of operations.

**Note 10 — Subsequent Events**

OnApril 24, 2007 the Company held its annual meeting of shareholders.  At the meeting, the shareholders approvedthree proposals. The shareholders approved a proposal to adopt the Company’s2007 Stock Incentive Plan (the “2007 Plan”). The total number of authorizedshares under the 2007 Plan is 7,500,000.  In addition, the shareholdersapproved a proposal to amend the Company’s Articles of Incorporation toincrease the number of shares of authorized common stock from 100,000,000 to200,000,000.  Lastly the shareholders also approved a proposal toamend the Company’s Articles of Incorporation to change the name of the Companyto Enterprise Informatics Inc. from Spescom Software Inc.

In May2007 the Company settled a dispute arising from claim by Cappello Capital Corp.,a former investment advisor to the Company, that a commission was owed inconnection with the license agreement the Company signed with Aveva Solutions Limitedin October 2006.  Effective May 9, 2007the Company agreed to pay Cappello $50,000 and issue to that firm an option topurchase 500,000 shares of the Company’s common stock at an exercise price of$0.10 per share.  The option expires onMay 31, 2017. Under the terms of the option agreement during the first yearfrom the date of issuance the Company has the right to repurchase the optionfor $25,000.  As of March 31, 2007the Company had accrued $100,000 for this claim under SFAS No. 5“Accounting for Contingencies.”

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward-LookingStatements**

*Thisreport contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. These forward-looking statements are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom historical results or anticipated results, including those set forth under“Certain Factors That May Affect Future Results” below and elsewhere in,or incorporated by reference into, this report.*

*Insome cases, you can identify forward-looking statements by terms such as “may,”“intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “anticipate,”“estimate,” “predict,” “potential,” or the negative of these terms, and similarexpressions are intended to identify forward-looking statements. When used inthe following discussion, the words “believes,” “anticipates” and similarexpressions are intended to identify forward-looking statements. Suchstatements are subject to certain risks and uncertainties, which could causeactual results to differ materially from those projected. Readers are cautionednot to place undue reliance on these forward-looking statements, which speakonly as of the date hereof. The forward-looking statements in this report arebased upon management’s current expectations and belief, which managementbelieves are reasonable.  These statements represent our estimates andassumptions only as of the date of this Quarterly Report on Form 10-Q, and weundertake no obligation to publicly release the result of any revisions tothese forward-looking statements, which may be made to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

*Thefollowing discussion should be read in conjunction with the SelectedConsolidated Financial Data and the Consolidated Financial Statements,including the Notes thereto.*

**OVERVIEW**

The Company develops,markets and supports*e*B, itsintegrated suite of collaborative document, configuration and recordsmanagement software solutions. The*e*Bsuite enables organizations in a broad range of industries to create, capture,store, manage, share and distribute critical business information regardingtheir customers, products, assets and processes in an efficient manner. The*e*B suite also enables them to maintaincomplete, up-to-date information about the configuration of their products, assetsand infrastructures so that they can achieve operational excellence andcompliance with regulatory requirements.*e*Bprovides the capabilities of an Enterprise Content Management (ECM)/ElectronicDocument Management (EDM) System, but extends these capabilities by alsomanaging the “things” that the content/documents relate to such as products,assets , functions, processes, requirements, projects, organizations,locations, work orders, etc. As a result,*e*Bcan be used to manage the lifecycle of physical items (e.g. products, equipmentor assets), and the requirements (e.g. functional, safety, performance,environmental, etc.) that govern them. It enables intelligent relationships tobe defined between these items thereby creating an interdependency model. As aresult, the effects of any change on requirements, documents and items can bedetermined, and change can be managed to effectively ensure informationintegrity. In particular,*e*Benables organizations with extensive and complex physical infrastructures toefficiently identify, classify, structure, link, and manage documents, physicalitems, and requirements throughout their lifecycles and ensure that conformancebetween these is maintained by means of an automated change process.

Our revenues in the threeand six months ended March 31, 2007 increased by 250%  and 120%, respectively, from the same periodsin the prior fiscal year primarily due to one large software license sale soldto Aveva Solutions Limited, while there was no similar large license salesduring the same period in the prior year.  The Company’s license revenue fluctuates from quarter to quarter asreflected by the increase in license sales during the current quarter.

Our revenues are derivedfrom licenses of our software to our customers, services that we provide undermaintenance support contracts and our non-maintenance services, consistingprimarily of design studies, system implementation and training. Of our totalrevenues for the three months ended March 31, 2007, license revenues accountedfor 60%, maintenance services revenues accounted for 21% and non-maintenanceservices represented 19%, while, of our total revenue for the six months endedMarch 31, 2007, license revenue accounted for 49%, maintenance service revenueaccounted for 28% and non-maintenance services represented 23%.

Many of our customers arelocated outside the United States, with foreign-originated revenues accountingfor 80% and 37% of revenues for the three months ended March 31, 2007 and 2006,respectively, and 64% and 38% of revenue for the six months ended March 31,2007 and 2006, respectively. Our revenue for the three and six months endedMarch 31, 2007 reflected a foreign currency gain of $83,000 and $154,000,respectively, as compared to last year due to the increasing value of theBritish pound to the dollar.

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While revenues increasedduring the three and six months ended March 31, 2007, our cost of revenuesdecreased by 8% and 6%, respectively, when compared to the same period in theprior fiscal year primarily as a result of lower third party scanning costrelated to two large projects. Our operating expenses increased by 14% for thethree months ended March 31, 2007 when compared to the same period of the priorfiscal year due to higher legal and accounting fees related to public filingsand commission expenses relating to the license sale.   Our operating expenses decreased by 1% forthe six months ended March 31, 2007 when compared to the same period of theprior fiscal year due to lower personnel and related costs resulting from thereduction in staff, primarily due to restructuring, in the marketing and salesgroup.

At March 31, 2007, ourprincipal sources of liquidity consisted of $749,000 of cash, compared to$95,000 at September 30, 2006. During the six months ended March 31, 2007, wereceived $2,000,000 from a large license and development transaction with AvevaSolutions Limited.

**CRITICALACCOUNTING POLICIES**

The consolidatedfinancial statements are prepared in conformity with accounting principlesgenerally accepted in the United States of America. As such, management isrequired to make judgments, estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. The significant accounting policies which are most criticalto aid in fully understanding and evaluating reported financial results includethe following:

***Revenue Recognition***

The Company’s revenuesare derived from sales of its document and configuration management systemsthat are primarily composed of software and services, and include maintenance,training and consulting services, and third party software and hardware. TheCompany recognizes revenue in accordance with Statement of Position (“SOP”)97-2 “Software Revenue Recognition,”  SOP98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect toCertain Transactions”, Staff Accounting Bulletin (“SAB”) No. 101, updated bySAB’s 103 and 104 “Update of Codification of Staff Accounting Bulletins,” andEmerging Issues Task Force No. 00-21 (“EITF 00-21”) “Accounting for RevenueArrangements with Multiple Deliverables.” Revenue through the Company’s Value Added Resellers (“VARS”) are net ofany VAR discount in accordance with EITF 99-19 “Reporting Revenue Gross as aPrincipal versus Net as an Agent.”

Software license andthird party product revenues are recognized upon shipment of the product if nosignificant vendor obligations remain and collection is probable. In caseswhere a significant vendor obligation exists, revenue recognition is delayeduntil such obligation has been satisfied. For new software products where ahistorical record has not yet been demonstrated that acceptance is perfunctory,the Company defers recognition of revenue until acceptance has occurred. If anundelivered element of the arrangement exists under the license arrangement, aportion of revenue is deferred based on vendor-specific objective evidence (VSOE)of the fair value of the undelivered element until delivery occurs.  IfVSOE does not exist for all undelivered elements, all revenue is deferred untilsufficient evidence exists or all elements have been delivered.  Annualmaintenance revenues, which consist of ongoing support and product updates, arerecognized on a straight-line basis over the term of the contract. Paymentsreceived in advance of performance of the related service for maintenancecontracts are recorded as deferred revenue. Revenues from training andconsulting services are recognized when the services are performed and adequateevidence of providing such services is available. Contract revenues forlong-term contracts or programs requiring specialized systems are recognizedusing the percentage-of-completion method of accounting, primarily based oncontract labor hours incurred to date compared with total estimated labor hoursat completion. Provisions for anticipated contract losses are recognized at thetime they become known.

Contracts are billedbased on the terms of the contract. There are no retentions in billed contractreceivables. Unbilled contract receivables relate to revenues earned but notbilled at the end of the period.

The Company considersmany factors when applying accounting principles generally accepted in theUnited States of America related to revenue recognition.  These factorsinclude, but are not limited to:

·                                  Theactual contractual terms, such as payment terms, delivery dates, and pricing ofthe various product and service elements of a contract

·                                  Availabilityof products to be delivered

·                                  Timeperiod over which services are to be performed

·                                  Creditworthinessof the customer

·                                  Thecomplexity of customizations to the Company’s software required by servicecontracts

·                                  Thesales channel through which the sale is made (direct, VAR, distributor, etc.)

·                                  Discountsgiven for each element of a contract

·                                  Anycommitments made as to installation or implementation of “go live” dates

·                                  Acceptancecriteria

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Each of the relevantfactors is analyzed to determine its impact, individually and collectively withother factors, on the revenue to be recognized for any particular contract witha customer.  Management is required to make judgments regarding thesignificance of each factor in applying the revenue recognition standards, aswell as whether or not each factor complies with such standards.  Anymisjudgment or error by management in its evaluation of the factors and theapplication of the standards, especially with respect to complex or new typesof transactions, could have a material adverse effect on the Company’s futureoperating results.

***Software Development Costs***

Software developmentcosts are capitalized when technological feasibility and marketability of therelated product have been established. Software development costs incurredsolely in connection with a specific contract are charged to cost of revenues.Capitalized software costs are amortized on a product-by-product basis,beginning when the product is available for general release tocustomers.   Annual amortization expense is calculated using thegreater of the ratio of each product’s current gross revenues to the total ofcurrent and expected gross revenues or the straight-line method over theestimated useful life of three to five years.

***Allowance for Doubtful Accounts***

The Company sells itsproducts directly to end-users, generally requiring a significant up-frontpayment and remaining terms appropriate for the creditworthiness of thecustomer. The Company also sells its products to VARs and other softwaredistributors generally under terms appropriate for the creditworthiness of theVAR or distributor. The Company retains no continuing obligations on sales toVARs.  Receivables from customers are generally unsecured. The Companycontinuously monitors its customer account balances and actively pursuescollections on past due balances. The Company maintains an allowance fordoubtful accounts which is comprised of a general reserve based on historicalcollections performance plus a specific reserve for certain known customercollections issues. If actual bad debts are greater than the reservescalculated based on historical trends and known customer issues, the Companymay be required to book additional bad debt expense which could have a materialadverse effect on our business, results of operations and financial conditionfor the periods in which such additional expense occurs.

***Share-Based Payments***

The Company recognizesshare-based compensation expense as required by the Financial AccountingStandards Board (FASB) under the Statement of Financial Accounting StandardsNo.123 (revised 2004), “Share-Based Payments” (FAS 123R).  The Company adopted the provisions of FAS123R on October 1, 2005, the first day of the Company’s fiscal year 2006.Share-based compensation cost is measured at the date of grant using theBlack-Scholes option-pricing model, based on the estimated fair value of theaward, and is recognized as expense over the employee’s requisite serviceperiod. The determination of the fair value of share-based payments on the dateof grant using an option-pricing model is affected by our stock price as wellas stock volatility over the term of the awards, actual and projected employeestock option exercise behaviors, risk-free interest rate and expecteddividends. The Company has no awards with market or performance conditions. Thevaluation provisions of FAS 123R apply to new awards and to awards outstandingon October 1, 2005 and subsequently modified or cancelled.

**RESULTSOF OPERATIONS**

The following table setsforth the condensed consolidated statement of operations expressed as apercentage of total revenue for the periods indicated:

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| ** **                                          | ** ** | **For the three months ended  March 31,** | ** ** | **For the six months ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                                           | ** ** | **2006**                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                           |       |                                                               |       |                                                             |       |   |   |   |   |
| Licenses                                            |       | 60                                                                 | %          | 32                                                               | %          | 49 | % | 31 | % |
| Services and other                                  |       | 40                                                                 | %          | 68                                                               | %          | 51 | % | 69 | % |
| Total revenues                                      |       | 100                                                                | %          | 100                                                              | %          | 100 | % | 100 | % |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Cost of revenues:                                   |       |                                                               |       |                                                             |       |   |   |   |   |
| Licenses                                            |       | 2                                                                  | %          | 3                                                                | %          | 2 | % | 5 | % |
| Services and other                                  |       | 18                                                                 | %          | 35                                                               | %          | 23 | % | 32 | % |
| Total cost of revenues                              |       | 19                                                                 | %          | 38                                                               | %          | 25 | % | 37 | % |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Gross profit                                        |       | 81                                                                 | %          | 62                                                               | %          | 75 | % | 63 | % |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Operating expenses:                                 |       |                                                               |       |                                                             |       |   |   |   |   |
| Research and development                            |       | 8                                                                  | %          | 14                                                               | %          | 10 | % | 12 | % |
| Marketing and sales                                 |       | 15                                                                 | %          | 34                                                               | %          | 19 | % | 34 | % |
| General and administrative                          |       | 17                                                                 | %          | 17                                                               | %          | 18 | % | 21 | % |
| Total operating expenses                            |       | 40                                                                 | %          | 65                                                               | %          | 47 | % | 67 | % |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Income (loss) from operations                       |       | 41                                                                 | %          | (3                                                               | )%         | 28 | % | (4 | )% |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Interest and other                                  |       | (2                                                                 | )%         | (2                                                               | )%         | (2 | )% | (3 | )% |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Net income (loss) before income taxes               |       | 38                                                                 | %          | (5                                                               | )%         | 26 | % | (7 | )% |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Provision for income taxes                          |       | —                                                             |       | —                                                           |       | — |   | — |   |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Net income (loss)                                   |       | 38                                                                 | %          | (5                                                               | )%         | 26 | % | (7 | )% |
|                                                |       |                                                               |       |                                                             |       |   |   |   |   |
| Deemed dividend                                     |       | —                                                             |       | (24                                                              | )%         | — |   | (26 | )% |
| Cumulative preferred dividends                      |       | (2                                                                 | )%         | (5                                                               | )%         | (2 | )% | (5 | )% |
| Net income (loss) available to common  shareholders |       | 75                                                                 | %          | (39                                                              | )%         | 50 | % | (45 | )% |

 

**Revenues**

*LicenseRevenues*(in thousands)
| ** **                    | ** ** | **For the three months ended  March 31,** | ** ** | ** ** | ** ** | **For the six months ended  March 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **2007**                                                           | ** ** | **2006**   | ** ** | **Change**                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| License revenues              |       | $                                                                  | 2,282      |       | $          | 652                                                              |       | 250        | %          | $ | 2,672 |   | $ | 1,216 |   | 120 | % |
| Percentage of total  revenues |       | 60                                                                 | %          | 32         | %          |                                                             |       | 49         | %          | 31 | % |   |   |
|                               |            |                                                                    |            |            |            |                                                                  |            |            |            |  |  |  |  |  |  |  |  |

 

License revenuesincreased by $1,630,000, or 250%, to $2,282,000 from $652,000 for the threemonths ended March 31, 2007 when compared to the same period a year ago due toa large license sale for $2,000,000 to Aveva Solutions Limited, offsetprimarily by decreased license sales to JEA of $200,000 and ConstellationEnergy Group of $132,000.  Licenserevenues increased by $1,456,000, or 120%, from $1,216,000 to $2,672,000 forthe six months ended March 31, 2007 when compared to the same period a year agodue to a large license sale for $2,000,000 to Aveva Solutions Limited and$108,000 to existing customer Nuclear Fuel Services, and offset by lower licensesales to Florida Power and Light of $269,000 and Constellation Energy Group of$191,000.  The Company’s license revenuesfluctuate from quarter to quarter, which is reflected by the increase inlicense sales in the current quarter. During the same quarter in the prior yearthere were no similar size sales.

We anticipate that thedemand for our products will increase if overall economic conditions continueto strengthen leading to an increase in overall demand for enterprise document,configuration and records management software solutions.  The Company’slicense revenues can fluctuate from quarter to quarter, based on the timing ofcustomer orders due to the long sales cycle and changes in customers’ internalplans of the rollout of software licenses.

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Although the Company hashistorically generated the majority of its revenues from its direct salesforce, the Company has also established a network of third-party VARs, systemintegrators and OEMs who build and sell systems (with components or complete systemsprovided by the Company) that address specific customer needs within variousindustries, including those targeted directly by the Company.  Salesthrough indirect channels for the three and six months ended March 31,2007 amounted to $95,000, or 3%, and $222,000, or 4%, respectively, compared to$348,000, or 17%, and $520,000, or 13%, respectively, for the same periods inthe prior year.

A small number ofcustomers have typically accounted for a large percentage of the Company’sannual revenues. Aveva Solutions Limited accounted for 57% of revenue for thethree months ended March 31, 2007, while Constellation Energy Group, DocQnetInternational, and JEA accounted for 18%, 13% and 11%, respectively, for thethree months ended March 31, 2006.  Forthe six months ended March 31, 2007, Aveva Solutions Limited accounted for 40%of revenue, while Constellation Energy Group accounted for 15% for the sixmonths ended March 31, 2006.  The Company’sreliance on relatively few customers could have a material adverse effect onthe results of its operations on a quarterly basis.

*Servicesand Other Revenues*(in thousands)
| ** **                    | ** ** | **For the three months ended  March 31,** | ** ** | ** ** | ** ** | **For the six months ended  March 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **2007**                                                           | ** ** | **2006**   | ** ** | **Change**                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Services and  other revenues  |       | $                                                                  | 1,499      |       | $          | 1,408                                                            |       | 6          | %          | $ | 2,836 |   | $ | 2,676 |   | 6 | % |
| Percentage of total  revenues |       | 40                                                                 | %          | 68         | %          |                                                             |       | 51         | %          | 69 | % |   |   |
|                               |            |                                                                    |            |            |            |                                                                  |            |            |            |  |  |  |  |  |  |  |  |

 

Services and otherrevenues are comprised of maintenance and non-maintenance services. Non-maintenance services typically relate to business process studies,implementation of systems and training which vary with the level of licenserevenues while maintenance revenue is primarily dependent on customers renewingtheir annual maintenance support contracts.

Services and otherrevenues increased $91,000, or 6%, from $1,408,000 to $1,499,000 for the threemonths ended March 31, 2007 compared to the same period a year ago. Thenon-maintenance portion of service revenue increased slightly by $39,000, or 6%from $685,000 to $724,000 primarily due to more expansion services during thecurrent quarter.   Also in this quarter, maintenance revenueincreased $52,000, or 7% from $723,000 to $775,000, primarily due to theincrease in software license sales in fiscal year 2006.

Services and otherrevenues increased $160,000, or 6%, from $2,676,000 to $2,836,000 for the sixmonths ended March 31, 2007 compared to the same period a year ago. Thenon-maintenance portion of service revenue increased slightly by $71,000, or 6%from $1,221,000 to $1,292,000 primarily due to more expansion and otherservices, while maintenance revenue increased $89,000, or 6% from $1,455,000 to$1,544,000, when compared to the same period a year ago primarily due to theincrease in software license sales in fiscal year 2006.

We anticipate thatservice and other revenues will fluctuate primarily due to sales to newcustomers because they require more services that typically include a businessprocess study, integration with other business systems and training.  Inaddition, service and other revenues will continue to fluctuate from quarter toquarter based on the timing of customer orders.

**Cost ofRevenues**

*Cost ofLicense Revenues*(in thousands)
| ** **                   | ** ** | **For the three months ended  March 31,** | ** ** | ** ** | ** ** | **For the six months ended  March 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **2007**                                                           | ** ** | **2006**   | ** ** | **Change**                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Cost of license revenues     |       | $                                                                  | 59         |       | $          | 72                                                               |       | (18        | )%         | $ | 97 |   | $ | 194 |   | (50 | )% |
| Percentage of total revenues |       | 2                                                                  | %          | 3          | %          |                                                             |       | 2          | %          | 5 | % |   |   |
|                              |            |                                                                    |            |            |            |                                                                  |            |            |            |  |  |  |  |  |  |  |  |

 

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Cost of license revenuesconsists of costs associated with reselling third-party products andamortization of capitalized software development costs.

Cost of license revenuesdecreased by $13,000, or 18%, from $72,000 to $59,000 for the three monthsended March 31, 2007 compared to the same period a year ago.  Thedecrease is primarily due to a decrease in the proportion of license revenuebeing attributed to third-party software products, which typically have ahigher associated cost than the Company’s own proprietary software.  The decrease in third-party costs and theincrease in license revenue from the large license sale to Aveva SolutionsLimited during the quarter resulted in an increase in the gross profit percentageof license revenues to 97% for the three months ended March 31, 2007 ascompared to 89% for the same period a year ago.

Cost of license revenuesdecreased by $97,000, or 50%, from $194,000 to $97,000 for the six months endedMarch 31, 2007 compared to the same period a year ago.  The decreaseis primarily due to a decrease in the proportion of license revenue beingattributed to third-party software products, which typically have a higherassociated cost than the Company’s own proprietary software.  The decrease in third-party costs and theincrease in license revenue from the large license sale to Aveva SolutionsLimited during the quarter resulted in an increase in the gross profitpercentage of license revenues to 96% for the six months ended March 31, 2007as compared to 84% for the same period a year ago.

We expect the cost oflicense revenues to fluctuate based on fluctuations in license revenues and incustomer requirements for third-party software products since the cost ofmeeting these customer requirements have the largest impact on cost of licenserevenues.

*Cost ofServices and Other Revenues*(in thousands)
| ** **                          | ** ** | **For the three months ended  March 31,** | ** ** | ** ** | ** ** | **For the six months ended  March 31,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                                           | ** ** | **2006**   | ** ** | **Change**                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Cost of services and other revenues |       | $                                                                  | 673        |       | $          | 721                                                              |       | (7         | )%         | $ | 1,264 |   | $ | 1,261 |   | 0 | % |
| Percentage  of total revenues       |       | 18                                                                 | %          | 68         | %          |                                                             |       | 23         | %          | 69 | % |   |   |
|                                     |            |                                                                    |            |            |            |                                                                  |            |            |            |  |  |  |  |  |  |  |  |

 

Cost of services andother revenues consists primarily of personnel-related costs in providingconsulting services, training to customers and support.  It also includescosts associated with reselling third-party hardware and maintenance, whichincludes telephone support costs.

Cost of services andother revenues decreased $48,000, or 7%, from $721,000 to $673,000 for thethree months ended March 31, 2007 compared to the same period a yearago.  The decrease was primarily due to lower third party scanning andother services for two large customer projects.   As a result of the reduction in costs, thegross profit from services and other revenue as a percentage of services andother revenues increase to 55% for the three months ended March 31, 2007as compared to 49% for the same period a year ago.

Cost of services andother revenues remained relatively flat, increasing slightly from $1,261,000 to$1,264,000 for the six months ended March 31, 2007 compared to the sameperiod a year ago.  Although cost of services and other revenue decreasedby $142,000 due to lower third party scanning and other services for two largecustomer projects, the decrease was offset by an increase in personnel relatedcost with development staff working on more customer projects.   The gross profit from services and otherrevenue as a percentage of services and other revenues increased to 55% for thesix months ended March 31, 2007 as compared to 53% for the same period ayear ago.

We expect the cost ofservices and other revenues to fluctuate in absolute dollar amounts and as apercentage of total revenues as the related service revenue fluctuates.

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**OperatingExpenses**

*Researchand Development*(in thousands)
| ** **                        | ** ** | **For the three months ended  March 31,** | ** ** | ** ** | ** ** | **For the six months ended  March 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2007**                                                           | ** ** | **2006**   | ** ** | **Change**                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Research and development expenses |       | $                                                                  | 305        |       | $          | 282                                                              |       | 8          | %          | $ | 563 |   | $ | 485 |   | 16 | % |
| Percentage of total revenues      |       | 8                                                                  | %          | 14         | %          |                                                             |       | 10         | %          | 12 | % |   |   |
|                                   |            |                                                                    |            |            |            |                                                                  |            |            |            |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses consist of salaries and benefits for software developers as well as anallocation of corporate expenses, calculated on the basis of headcount, such ascorporate insurance, facilities, telephone and other.

Research and developmentexpenses increased $23,000, or 8%, from $282,000 to $305,000 for the threemonths ended March 31, 2007 compared to the same period a yearago. Research and development expenses increased $78,000, or 16%, from$485,000 to $563,000 for the six months ended March 31, 2007.  The increase for both periods was due tohigher personnel and related costs, a result of more developers working onresearch and development projects during the current quarter versus customerprojects.

We believe that continuedinvestment in research and development is a critical factor in maintaining ourcompetitive position and we expect research and development costs to remain atthe current levels in absolute dollar amounts in the next several quarters.

*Marketingand Sales*(in thousands)
| ** **                     | ** ** | **For the three months ended  March 31,** | ** ** | ** ** | ** ** | **For the six months ended  March 31,** | ** ** | ** ** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2007**                                                           | ** ** | **2006**   | ** ** | **Change**                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Marketing & sales expenses |       | $                                                                  | 581        |       | $          | 685                                                              |       | (15        | )%         | $ | 1,041 |   | $ | 1,338 |   | (22 | )% |
| Percentage of total revenues   |       | 15                                                                 | %          | 34         | %          |                                                             |       | 19         | %          | 34 | % |   |   |
|                                |            |                                                                    |            |            |            |                                                                  |            |            |            |  |  |  |  |  |  |  |  |

 

Marketing and salesexpenses consist of salaries, cost of benefits, sales commissions and otherexpenses related to the direct sales force, as well as allocation of overallcorporate expenses, calculated on the basis of headcount, related to items suchas corporate insurance, facilities, telephone and other.

Marketing and salesexpenses decreased $104,000, or 15%, from $685,000 to $581,000 for the threemonths ended March 31, 2007 compared to the same period a year ago. The decrease in marketing and sales expenses is a result of lower personnel andrelated expenses of $204,000 with fewer employees currently in the department,primarily due to restructuring, when compared to the same period a yearago.  This decrease was offset by commissionexpense of $100,000 relating to the license sale to the Aveva Solutions Limited.

Marketing and salesexpenses decreased $297,000, or 22%, from $1,338,000 to $1,041,000 for the sixmonths ended March 31, 2007 compared to the same period a year ago. The decrease in marketing and sales expenses is a result of lower personnelrelated expenses of $397,000 with fewer employees currently in the department,primarily due to restructuring, when compared to the same period a year ago.  This decrease was offset by commissionexpense of $100,000 relating to the license sale to the Aveva Solutions Limited.

We expect marketing andsales expense to decrease in absolute dollar amounts and as a percentage oftotal revenue in the current fiscal year.

*Generaland Administrative*(in thousands)
| ** **                          | ** ** | **For the three months ended  March 31,** | ** ** | ** ** | ** ** | **For the six months ended  March 31,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                                           | ** ** | **2006**   | ** ** | **Change**                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| General and administrative expenses |       | $                                                                  | 624        |       | $          | 353                                                              |       | 77         | %          | $ | 992 |   | $ | 794 |   | 25 | % |
| Percentage of total revenues        |       | 17                                                                 | %          | 17         | %          |                                                             |       | 18         | %          | 21 | % |   |   |
|                                     |            |                                                                    |            |            |            |                                                                  |            |            |            |  |  |  |  |  |  |  |  |

 

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General andadministrative expenses consist primarily of personnel costs for finance,information technology, human resources and general management, as well asoutside professional services and an allocation of overall corporate expenses,calculated on the basis of headcount, such as corporate insurance, facilities,telephone and other.

General andadministrative expenses increased by $271,000, or 77%, from $353,000 to$624,000 for the three months ended March 31, 2007 compared to the sameperiod a year ago.  The increase was due to higher legal and accountingfees of $194,000 in connection with public filings, personnel and related costof $38,000, and in other miscellaneous expenses of $39,000.

General and administrativeexpenses increased by $198,000, or 25%, from $794,000 to $992,000 for the sixmonths ended March 31, 2007 compared to the same period a year ago. The increase was due to higher legal and accounting fees of $180,000 inconnection with public filings and other miscellaneous expenses of $18,000.

We expect that generaland administrative expenses will remain relatively constant in absolutedollars.

**InterestExpense and Other Expense**

Interest expense andother expense consists primarily of fixed interest obligations on ouroutstanding debt to Spescom Ltd. as well as interest paid on capital leaseobligations.  Interest expense was $53,000 for both three month periodsended March 31, 2007 and March 31, 2006.  Interest expense was$115,000 for the six months ended March 31, 2007, while interest expense was$105,000 for the six months ended March 31, 2006.  The increase is due primarily to increaseddebt balances owed to Spescom Ltd. on outstanding notes payable as well asinterest on accrued preferred dividends. For the three and six months ended March 31, 2007, other expenseconsists of approximately $10,000 of losses on foreign translations adjustmentsfrom our United Kingdom subsidiary.

**DeemedPreferred Dividends**

In October 2005, theCompany completed a financing arrangement whereby the Company issued 1,950shares of our Series H Preferred Stock along with 925,926 common stockwarrants for gross proceeds of $500,000 and the exchange and cancellation of1,450 shares of Series G Convertible Preferred Stock. In accordance withEITF 00-27 “Application of Issue No 98-5 to Certain Convertible Instruments,”the Company calculated using the Black—Scholes method the intrinsic value ofthe convertible instruments issued and determined that there was a deemed preferreddividend equal to the gross proceeds received of $500,000.

In March 2006 the Companycompleted another financing arrangement whereby the Company issued 2,450 sharesof Series I Convertible Preferred Stock along with 925,926 common stockwarrants for gross proceeds of $500,000 and the exchange and cancellation of1,950 shares of Series H Convertible Preferred Stock. In accordance withEITF 00-27 “Application of issue No 98-5 to Certain Convertible Instruments,”the Company calculated using the Black—Scholes method the intrinsic value ofthe convertible instruments issued and determined that there was a deemedpreferred dividend equal to the gross proceeds received of $500,000.

In fiscal 2005 theCompany also had a deemed dividend in connection with a financing arrangementwhereby the Company issued 2,200 shares of Series G Convertible PreferredStock along with 2,750,000 common stock warrants for gross proceeds of$2,200,000. The Company calculated using the Black—Scholes method the intrinsicvalue of the convertible instruments issued and determined that there was adeemed preferred dividend equal to the gross proceeds received of $2,200,000.

**PreferredDividends**

The outstanding Series FConvertible Preferred Stock was entitled to receive dividends of 5% of thestated value of $1,000 per share per annum, payable on a quarterly basis incash or common stock (valued on the basis of the average per share market valueon the 30 trading days immediately prior to the date on which such dividend isdeclared by the Board of Directors).  Cumulative preferred dividendsearned for both three month periods ended March 31, 2007 and March 31, 2006were $66,000, while cumulative preferred dividends earned for both six monthperiods ended March 31, 2007 and March 31, 2006 were $132,000.  Unpaid dividends accrue interest at the rateof 8% per annum.  As of March 31, 2007, unpaid dividends and accruedinterest amounted to $926,000 and $131,000, respectively.

The outstanding Series IConvertible Preferred Stock “Series I Preferred Stock” was entitled to receivedividends of 6.75% of the stated value of $1,000 per share per annum, payableon a monthly basis in cash or common stock accrued through the July 10, 2006effective date of the registration statement filed by the Company that includedthe common stock issuable under the Series I Preferred Stock (“Series IPreferred Stock”).  Cumulative preferreddividends earned for fiscal 2006 were $46,000. Unpaid dividends did not accrue interest.  As of March 31, 2007, unpaid dividends amounted to $46,000.

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Prior to the exchange onMarch 10, 2006 of all the outstanding Series H Convertible Preferred Stock (“SeriesH Preferred Stock”) for Series I Preferred Stock, the Series H Preferred Stockwas entitled to receive dividends of 6.75% of the stated value of $1,000 pershare per annum, payable monthly in arrears on the last day of each month basedon the number of shares of Series H Preferred Stock outstanding as of the firstday of each such month.  For fiscal year2006 dividends on the Series H Preferred Stock totaled $44,000 and there was noSeries H Preferred Stock outstanding during the prior year.  A total of 325,966 shares of common stockwere issued on March 31, 2006 based on a $0.13 per share fair market price inpayment of Series H Preferred Stock dividends due as of March 10, 2006, whenthe Series H Preferred Stock was exchanged for Series I Preferred Stock.

The outstanding Series GConvertible Preferred Stock (the “Series G Preferred Stock”) was entitled toreceive dividends of 5% of the stated value of $1,000 per share per annum,payable monthly in arrears on the last day of each month based on the number ofshares of Series G Preferred Stock outstanding as of the first day of each suchmonth until the common shares under the Series G Preferred Stock wasregistered.  Prior to the associated registration statement being declaredeffective in March 2005 by the Securities and Exchange Commission, the Companyissued 82,050 shares of common stock with a value of $37,000 as a dividend onthe Series G Preferred Stock.  In connection with the Series G PreferredStock financing in November 2004, the Company recorded a beneficial conversionof $2,200,000 as a preferred deemed dividend, as discussed above.

**LIQUIDITYAND CAPITAL RESOURCES**

At March 31, 2007, ourprincipal sources of liquidity consisted of $749,000 of cash and cashequivalents compared to $95,000 at September 30, 2006. Our liquidity could benegatively impacted by a decrease in demand for our products, which are subjectto rapid technological changes, reductions in capital expenditures by ourcustomers and intense competition, among other factors.

In past years, theCompany has received loans from Spescom Ltd. to meet its obligations.  Theoutstanding balance of its demand notes owed to Spescom Ltd. including interestwas $675,000 at March 31, 2007 as compared to $664,000 at September 30,2006.  Spescom Ltd. has agreed not tocall the notes prior to October 1, 2007.  The Company had a payable to Spescom Ltd. of $550,000 at September 30,2006, which was paid during the six months ended March 31, 2007.

Cash provided byoperating activities was $728,000 during the six months ended March 31, 2007related to the increase in by a net profit for the current fiscal year of$1,426,000, deferred revenue of $102,000 and other current assets of $27,000,offset by reductions in a payable to Spescom Ltd. of $566,000, in accountspayable of $321,000, in accounts receivable of $175,000, and in accruedliabilities of $25,000.  The operatingloss was adjusted for non-cash activities of $260,000 comprised primarily of$86,000 in depreciation and amortization, $67,000 for FAS 123R period chargefor employee stock options, and $107,000 in unpaid interest on notes payable toSpescom Ltd.  We used cash in operatingactivities of $405,000 during the six months ended March 31, 2006 primarilyrelated to a net loss during the six month period of $281,000 and reductions indeferred revenue and accrued liabilities of $268,000 and $260,000,respectively.

Cash used in investingactivities was $51,000 for the six months ended March 31, 2007 for purchases ofproperty and equipment primarily for development services for a new websitedesign.  Our investing activities used$75,000 for the six months ended March 31, 2006 primarily relating to thecapitalization of software development costs associated with the Company’srelease of its*e*B product with anew architecture.

Cash used in financingactivities was $19,000 for the six months ended March 31, 2007 for payments oncapital lease obligations.  Financingactivities provided $817,000 for the six months ended March 31, 2006 primarilyfrom the issuance of preferred stock through a private placement on October 25,2005 and March 10, 2006. (See “October 2005 Private Placement” and “March 2006Private Placement” in Note 7 to the Consolidated Financial Statements forfurther information regarding those private placements.)

The Company believes itscapital requirements will continue to vary greatly from quarter to quarter,depending on, among other things, capital expenditures, fluctuations in itsoperating results, financing activities, and investments and third partyproducts and receivables management.  The Company’s future liquidity willdepend on its ability to generate new system sales of its*e*B product suite in the near term, whichcannot be assured. Management believes that the Company’s current cash andreceivables and cash that may be generated from operations, will be sufficientto meet its short-term needs for working capital for at least the nextyear.  However, the Company may not be able to obtain sufficient orders toenable the Company to continue on a cash flow break-even level, which would benecessary to continue operations in the absence of further financing. Future equity financings, if available to the Company, would be dilutive to theexisting holders of the Company’s common stock.  Future debt financings,if available to the Company, would likely involve restrictive covenants.

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**Off-BalanceSheet Arrangements**

At March 31, 2007 andSeptember 30, 2006, we did not have any relationships with unconsolidatedentities or financial partnerships, including entities often referred to asstructured finance or special purpose entities that would have been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. Therefore, we are not materiallyexposed to any financing, liquidity, market or credit risk that could arise ifwe were engaged in such relationships.

**Inflation**

The Company believes thatinflation has not had a material effect on its operations to date. Although theCompany enters into fixed-price contracts, management does not believe thatinflation will have an adverse material impact on its operations for theforeseeable future, as the Company takes into account expected inflation in itscontract proposals and is generally able to project its costs based onforecasted contract requirements.

**ContractualObligations and Commercial Commitments**

The following summarizesour contractual obligations and other commitments at March 31, 2007, and theeffect such obligations could have on our liquidity and cash flow in futureperiods:
| ** **                                 | ** ** | **Amount of Commitment Expiring by Period** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                                            | ** ** | **Less  Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **Over 5  Years** | ** ** |
| Notes and Accounts Payable to Spescom Ltd. |       | $                                                                    | 675,000    |   | $ | 675,000 |   | — |   | — |   | — |   |
| Lease commitments — Operating Leases  |       | 423,000                                                              |       | 191,000 |   | $ | 164,000 |   | $ | 68,000 |   | — |   |
| Lease commitments — Capital Leases    |       | 41,000                                                               |       | 38,000 |   | 3,000 |   | — |   | — |   |
| Total                                      |       | $                                                                    | 1,139,000  |   | $ | 904,000 |   | $ | 167,000 |   | $ | 68,000 |   | — |   |

 

On January 30, 2007, the Company gave notice to our landlord of ourintent to terminate the lease for our office space located in San Diego,California, effective August 31, 2007.  Management is currently in the process of identifying suitable officespace in the same general area.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**InterestRate Risk**

The Company’s exposure tomarket rate risk for changes in interest rates relates primarily to the Company’sinvestment portfolio.  The Company does not use derivative financialinstruments in its investment portfolio. The Company places its investment withhigh quality issuers and follows internally developed guidelines to limit theamount of credit exposure to any one issuer. Additionally, in an attempt tolimit interest rate risk, the Company follows guidelines to limit the averageand longest single maturity dates. The Company is adverse to principal loss andensures the safety and preservation of its invested funds by limiting default,market and reinvestment risk. As of March 31, 2007 and September 30, 2006,the Company did not have any investments in money market accounts.

**ForeignCurrency Exchange Risk**

The Company’s geographicmarkets are primarily in the United States and Europe, with some sales in otherparts of the world. For the three months ended March 31, 2007, revenuesrecorded in the United States were 20% of total revenues, while revenues fromEurope and other locations were 80% of total revenues. This compares to 63% and37% for the same period a year ago. For the six months ended March 31, 2007,revenues recorded in the United States were 36% of total revenues, and revenuesfrom Europe and other locations were 64% of total revenues. This compares to 62%and 38% for the same period a year ago.

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Revenues from our UnitedKingdom subsidiary can fluctuate from quarter to quarter based on the timing ofcustomer orders.  The increase in revenue for the six months ended March31, 2007 versus the same period in the prior year was increased by a foreigncurrency gain of $154,000 due to a weaker dollar value compared to the Britishpound.  Changes in foreign currency rates, the condition of localeconomies, and the general volatility of software markets may result in ahigher or lower proportion of foreign revenues in the future. Although theCompany’s operating and pricing strategies take into account changes in exchangerates over time, future fluctuations in the value of foreign currencies mayhave a material adverse effect on the Company’s business, operating results andfinancial condition.

**ITEM 4. CONTROLSAND PROCEDURES**

The Company carried outan evaluation under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of March 31, 2007 pursuant to ExchangeAct Rule 13a-15. Based upon that evaluation, we have concluded that as ofMarch 31, 2007, the Company’s disclosure controls and procedures are effectivein ensuring that information required to be disclosed by the Company in thereports that it files or submits under the Securities Exchange Act 1934 is (i)recorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms and (ii)accumulated and communicated to the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

During the last fiscalquarter, there was no change in the Company’s internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

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**PART II. OTHERINFORMATION**

**ITEM 1 — LEGALPROCEEDINGS**

The Company is involvedfrom time to time in litigation arising in the normal course of business.Management believes that any liability with respect to such routine litigation,individually or in the aggregate, is not likely to be material to the Company’sconsolidated financial position or results of operations.

**ITEM 2 —UNREGISTERED SALES OF EQUITY SECURITIES**

On May 9, 2007, aspart of the settlement of a dispute with Cappello Capital Corp. arising fromthat firm’s claim that a commission was owed in connection with the October2006 license agreement with Aveva Solutions Limited, the Company issued toCappello Capital Corp. an option to purchase 500,000 shares of the Company’scommon stock at an exercise price of $0.10 per share. The option expires on May31, 2017. Under the terms of the option agreement, during the first year fromdate of issuance the Company has the right to repurchase the option for$25,000. (See Note 10 to the Consolidated Financial Statements for additionalinformation regarding settlement of the dispute.) The Company believes that theissuance of the option was and expects that any issuance of the Company’scommon stock upon exercise of the option will be exempt from the registrationrequirements of the Securities Act by virture of Section 4(2) thereofand/or Regulation D promulgated thereunder. The Company believes that CappelloCapital Corp. is an “accredited investor” as defined in Regulation D and/or hassuch knowledge and experience in financial and business matters that it wascapable of evaluating the merits and risks associated with its acquisition ofthe option.

**ITEM 4 —SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

The Company’s annualmeeting of shareholders was held on April 24, 2007. At the meeting, theshareholders approved three proposals. The shareholders approved a proposal toadopt the Company’s 2007 Stock Incentive Plan (the “2007 Plan”). The totalnumber of authorized shares under the 2007 Plan is 7,500,000. The proposal wasapproved with 29,301,229 votes cast for, 474,928 votes cast against, 344,427abstentions and 18,781,688 broker non-votes. In addition, the shareholdersapproved a proposal to amend the Company’s Articles of Incorporation toincrease the number of shares of authorized common stock from 100,000,000 to200,000,000. The proposal was approved with 38,999,331 votes cast for,1,384,091 votes cast against, 12,745 abstentions and no broker non-votes. Theshareholders also approved a proposal to amend the Company’s Articles ofIncorporation to change the name of the Company to Enterprise Informatics Inc.from Spescom Software Inc. The proposal was approved with 30,043,752 votes castfor, 67,947 votes cast against, 8,885 abstentions and 18,781,688 broker non-votes.

In addition, at themeeting, the shareholders approved the election of the following individuals asdirectors who will hold office until the next annual meeting: Alan Kiraly,Michael Silverman, D. Ross Hamilton, Hilton Issacman, James P. Myer, Larry D.Unruh. On average the directors received 39,960,049 votes cast for, 436,118votes against and 8,506,105 broker non-votes.

**ITEM 6— EXHIBITS**

| 3.1    |   | Registrant’s Articles  of Incorporation, as amended                                                                                                                                             |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                 |   |
| 4.1    |   | Option Agreement between  the Registrant and Cappello Capital Corp., dated May 9, 2007                                                                                                               |   |
|   |   |                                                                                                                                                                                                 |   |
| 31.1   |   | Certification by the  Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |   |
|   |   |                                                                                                                                                                                                 |   |
| 31.2   |   | Certification by the  Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |   |
|   |   |                                                                                                                                                                                                 |   |
| 32.1   |   | Certification by the  Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.       |   |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Signature       | ** ** | **Title**                                    | ** ** | **Date**          |
|-----------------|------------|----------------------------------------------|------------|-------------------|
| ** **      | ** ** | ** **                                   | ** ** | ** **        |
| /s/ Alan Kiraly |       | Director and Chief Executive Officer         |       | May 15, 2007 |
| Alan Kiraly     |       | (Principal Executive Officer)                |       |              |
|            |       |                                         |       |              |
|            |       |                                         |       |              |
| /s/ John W. Low |       | Chief Financial Officer and Secretary        |       | May 15, 2007      |
| John W. Low     |       | (Principal Financial and Accounting Officer) |       |              |

 

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