**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**
| **ý** |   | **QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|------------|--------|-----------------------------------------------------------------------------------------------|

 

**For the Quarterly Period EndedDecember 31, 2003.**

 

**OR**

 
| **o** |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|----------------------------------------------------------------------------------------------------|

 

**For the transition period from                                    to                                     .**

 

**Commission File Number 0-15935**

 

**SPESCOMSOFTWARE INC.**

(Exact name of registrant as specified in itscharter)

 

| **CALIFORNIA**                                                   |   | **95-3634089**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **10052 MESA RIDGE COURT, SUITE 100, SAN DIEGO, CA 92121**       |
| (Address of principal executive offices and  zip code)           |
|                                                             |   |                                  |
| **(858) 625-3000**                                               |
| (Registrants telephone number, including  area code)             |

 

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

 
| YES |   | ý |   | NO  o |
|-----|--------|--------|--------|------------|

 

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

 
| YES |   | o |   | NO |   | ý |
|-----|--------|---|--------|----|--------|--------|

 
| Number of shares of Common Stock outstanding at February 10,  2004:  ** 33,949,343** |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |
| Number of Sequentially Numbered Pages: **24**                                                       |

 

 

----

 

**SPESCOM SOFTWARE INC.**

 

**INDEX**

 
| **PART I.** | **FINANCIAL INFORMATION**                                                                   |   |
|-------------|---------------------------------------------------------------------------------------------|--------|
|        |                                                                                        |   |
| Item 1.     | Financial Statements                                                                        |   |
|        |                                                                                        |   |
|        | Consolidated Balance Sheets                                                                 |   |
|        |                                                                                        |   |
|        | Consolidated Statements of Operations                                                       |   |
|        |                                                                                        |   |
|        | Consolidated Statements of Cash Flows                                                       |   |
|        |                                                                                        |   |
|        | Condensed Notes to the Consolidated  Financial Statements                                   |   |
|        |                                                                                        |   |
| Item 2.     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|        |                                                                                        |   |
| Item 3.     | Quantitative and Qualitative Disclosures  About Market Risk                                 |   |
|        |                                                                                        |   |
| Item 4.     | Controls and Procedures                                                                     |   |
|        |                                                                                        |   |
| PART II.    | OTHER INFORMATION                                                                           |   |
|        |                                                                                        |   |
| Item 1.     | Legal Proceedings                                                                           |   |
|        |                                                                                        |   |
| Item 4.     | Submission of Matters to a Vote of Security  Holders                                        |   |
|        |                                                                                        |   |
| Item 6.     | Exhibits and Reports on Form 8-K                                                            |   |

 

2

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**ITEM1.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**SPESCOMSOFTWARE INC.CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                  |   | **December 31,  2003** |       | **September 30,  2003** |       |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------------------------|------------|
|                                                                                                                                  |   | **(Unaudited)**             |       |                         |       |
| **ASSETS**                                                                                                                            |   |                        |       |                         |       |
| Current assets:                                                                                                                       |   |                        |       |                         |       |
| Cash and cash equivalents                                                                                                             |   | $                           | 73,000     |                         | $          | 333,000 |   |
| Receivables, net                                                                                                                      |   | 1,548,000                   |       | 423,000                      |       |
| Other current assets                                                                                                                  |   | 119,000                     |       | 169,000                      |       |
| Total current assets                                                                                                                  |   | 1,740,000                   |       | 925,000                      |       |
|                                                                                                                                  |   |                        |       |                         |       |
| Property and equipment, net                                                                                                           |   | 180,000                     |       | 213,000                      |       |
| Computer software, net                                                                                                                |   | 43,000                      |       | 63,000                       |       |
| Other assets                                                                                                                          |   | 29,000                      |       | 29,000                       |       |
| Total assets                                                                                                                          |   | $                           | 1,992,000  |                         | $          | 1,230,000 |   |
|                                                                                                                                  |   |                        |       |                         |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                        |   |                        | ** ** |                         | ** ** |
| Current liabilities:                                                                                                                  |   |                        |       |                         |       |
| Accounts payable                                                                                                                      |   | $                           | 671,000    |                         | $          | 405,000 |   |
| Payable to Spescom                                                                                                                    |   | 146,000                     |       | 46,000                       |       |
| Preferred stock dividend payable to Spescom                                                                                           |   | 66,000                      |       | —                       |       |
| Accrued liabilities                                                                                                                   |   | 1,186,000                   |       | 1,080,000                    |       |
| Note and accrued interest payable to  Spescom                                                                                         |   | 1,119,000                   |       | —                       |       |
| Lease obligations– current portion                                                                                               |   | 22,000                      |       | 23,000                       |       |
| Deferred revenue                                                                                                                      |   | 1,830,000                   |       | 2,018,000                    |       |
| Fair value of equity instruments redeemable  for common stock                                                                         |   | 1,160,000                   |       | 1,233,000                    |       |
| Total current liabilities                                                                                                             |   | 6,200,000                   |       | 4,805,000                    |       |
|                                                                                                                                  |   |                        |       |                         |       |
| Notes and accrued interest payable to  Spescom                                                                                        |   | —                      |       | 504,000                      |       |
| Lease obligations                                                                                                                     |   | 57,000                      |       | 62,000                       |       |
| Total liabilities                                                                                                                     |   | 6,257,000                   |       | 5,371,000                    |       |
|                                                                                                                                  |   |                        |       |                         |       |
| Convertible preferred stock, $1,000 stated  value, 1,000,000 shares authorized; 5,291 shares issued and outstanding in  2004 and 2003 |   | 6,790,000                   |       | 6,790,000                    |       |
|                                                                                                                                  |   |                        |       |                         |       |
| Shareholders’ deficit:                                                                                                           |   |                        |       |                         |       |
| Common stock, no par value, 40,000,000  shares authorized; 33,929,343 and 30,841,590 issued and outstanding in 2004  and 2003         |   | 73,690,000                  |       | 73,676,000                   |       |
| Common stock warrants                                                                                                                 |   | 278,000                     |       | 278,000                      |       |
| Accumulated other comprehensive loss                                                                                                  |   | (443,000                    | )          | (294,000                     | )          |
| Accumulated deficit                                                                                                                   |   | (84,580,000                 | )          | (84,591,000                  | )          |
| Total shareholders’ deficit                                                                                                      |   | (11,055,000                 | )          | (10,931,000                  | )          |
|                                                                                                                                  |   |                        |       |                         |       |
| Total liabilities and shareholders’ deficit                                                                                      |   | $                           | 1,992,000  |                         | $          | 1,230,000 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

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**SPESCOMSOFTWARE INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

 
|                                                                           |   | **For the three months ended  December 31,** |      |
|--------------------------------------------------------------------------------|--------|---------------------------------------------------|-----------|
|                                                                           |   | **2003**                                          |      | **2002** |   |
| Revenues:                                                                      |   |                                              |      |   |   |
| Licenses                                                                       |   | $                                                 | 1,119,000 |   | $ | 921,000 |   |
| Services and other                                                             |   | 1,006,000                                         |      | 1,368,000 |   |
| Total revenues                                                                 |   | 2,125,000                                         |      | 2,289,000 |   |
|                                                                           |   |                                              |      |   |   |
| Cost of revenues:                                                              |   |                                              |      |   |   |
| Licenses                                                                       |   | 101,000                                           |      | 275,000 |   |
| Services and other                                                             |   | 553,000                                           |      | 566,000 |   |
| Total cost of revenues                                                         |   | 654,000                                           |      | 841,000 |   |
|                                                                           |   |                                              |      |   |   |
| Gross profit                                                                   |   | 1,471,000                                         |      | 1,448,000 |   |
|                                                                           |   |                                              |      |   |   |
| Operating expenses:                                                            |   |                                              |      |   |   |
| Research and development                                                       |   | 334,000                                           |      | 351,000 |   |
| Marketing and sales                                                            |   | 605,000                                           |      | 626,000 |   |
| General and administrative                                                     |   | 503,000                                           |      | 408,000 |   |
|                                                                           |   | 1,442,000                                         |      | 1,385,000 |   |
|                                                                           |   |                                              |      |   |   |
| Income from operations                                                         |   | 29,000                                            |      | 63,000 |   |
|                                                                           |   |                                              |      |   |   |
| Interest expense                                                               |   | (23,000                                           | )         | (125,000 | ) |
| Gain on derivative revaluation                                                 |   | 5,000                                             |      | — |   |
|                                                                           |   |                                              |      |   |   |
| Net income (loss)                                                              |   | $                                                 | 11,000    |   | $ | (62,000 | ) |
|                                                                           |   |                                              |      |   |   |
| Basic and diluted net income (loss) per  common share                          |   | $                                                 | 0.00      |   | $ | (0.00 | ) |
|                                                                           |   |                                              |      |   |   |
| Shares used in computing basic and diluted  net income (loss) per common share |   | 33,929,000                                        |      | 30,842,000 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

4

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**SPESCOMSOFTWARE INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

 
|                                                                         |   | **For the three months ended  December 31,** |   |
|------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                         |   | **2003**                                          |   | **2002** |   |
| Cash flows from operating activities:                                        |   |                                              |   |   |   |
| Net income (loss)                                                            |   | $                                                 | 11,000 |   | $ | (62,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                              |   |   |   |
| Depreciation and amortization                                                |   | 57,000                                            |   | 123,000 |   |
| Unpaid interest on notes payable                                             |   | 21,000                                            |   | 111,000 |   |
| Gain on derivative revaluation                                               |   | (5,000                                            | )      | — |   |
| Changes in assets and liabilities:                                           |   |                                              |   |   |   |
| Receivables, net                                                             |   | (1,114,000                                        | )      | 916,000 |   |
| Other current assets                                                         |   | (169,000                                          | )      | 432,000 |   |
| Accounts payable                                                             |   | 258,000                                           |   | (259,000 | ) |
| Payable to Spescom                                                           |   | 98,000                                            |   | — |   |
| Accrued liabilities                                                          |   | 231,000                                           |   | (501,000 | ) |
| Deferred revenue                                                             |   | (240,000                                          | )      | (418,000 | ) |
| Net cash provided by (used in) operating  activities                         |   | (852,000                                          | )      | 342,000 |   |
|                                                                         |   |                                              |   |   |   |
| Cash flows from investing activities:                                        |   |                                              |   |   |   |
| Purchases of property and equipment                                          |   | —                                            |   | (16,000 | ) |
| Purchases of software                                                        |   | —                                            |   | (14,000 | ) |
| Net cash used in investing activities                                        |   | —                                            |   | (30,000 | ) |
|                                                                         |   |                                              |   |   |   |
| Cash flows from financing activities:                                        |   |                                              |   |   |   |
| Proceeds from exercise of stock options                                      |   | 14,000                                            |   | — |   |
| Proceeds from Spescom loans                                                  |   | 600,000                                           |   | — |   |
| Payments on capital lease obligations                                        |   | (6,000                                            | )      | (2,000 | ) |
| Net cash provided by financing activities                                    |   | 608,000                                           |   | (2,000 | ) |
|                                                                         |   |                                              |   |   |   |
| Effect of exchange rate changes on cash                                      |   | (16,000                                           | )      | (5,000 | ) |
|                                                                         |   |                                              |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |   | (260,000                                          | )      | 305,000 |   |
| Cash and cash equivalents at beginning of  period                            |   | 333,000                                           |   | 87,000 |   |
|                                                                         |   |                                              |   |   |   |
| Cash and cash equivalents at end of period                                   |   | $                                                 | 73,000 |   | $ | 392,000 |   |

 

See Note 2 for supplemental cash flow information.

 

The accompanying notes are an integral partof these consolidated financial statements.

 

5

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**SPESCOMSOFTWARE INC.CONDENSED NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

 

**Note 1 - Basis ofPresentation**

 

The accompanying consolidated financial statements as ofDecember 31, 2003 and for the three months ended December 31, 2003and 2002 are unaudited. The consolidated financial statements and related noteshave been prepared in accordance with generally accepted accounting principlesapplicable to interim periods.  In theopinion 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 contained in the following CondensedNotes to the Consolidated Financial Statements is condensed from that whichwould appear in the annual consolidated financial statements; accordingly, theconsolidated financial statements included herein should be reviewed inconjunction with the consolidated financial statements and related notesthereto contained in the Company’s Annual Report on Form 10-K for the yearended September 30, 2003.  Itshould be understood that the accounting measurements at an interim dateinherently involve greater reliance on estimates than at year-end.  The results of operations for the interimperiods presented are not necessarily indicative of the results expected forthe entire year.

 

The Company’s future liquidity depends on its ability to generate newsystem sales of its eB product suite in the near term, which cannot be assured.Failure to generate sufficient system sales to meet the Company’s cash flowneeds can be expected to have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.  The Company’sfinancial position can be a factor in attracting new customers.  In aneffort to strengthen the Company’s financial condition and provide capital forexpanding marketing and sales capabilities, the Company will continue toexplore additional equity or debt financing from third parties.  There canbe no assurance that additional financing will be available or that the termsof such financing will be acceptable to the Company.  The Company believesthat its current cash and receivables, as well as additional cash that may begenerated from operations, will be sufficient to meet its short-term needs for workingcapital. 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.

 

**Note2 – Summary of Significant Accounting Policies**

 

*Principles of Consolidation*

 

The consolidated financial statements are prepared using accountingprinciples generally accepted in the United States of America and include theaccounts of the Company and its wholly-owned United Kingdom subsidiary, SpescomSoftware, Ltd. All significant intercompany balances and transactions have beeneliminated.

 

*Foreign Currency*

 

The functional currency of the Company’s United Kingdom subsidiary isthe pound sterling. Assets and liabilities are translated into U.S. dollars atend-of-period exchange rates. Revenues and expenses are translated at averageexchange rates in effect for the period. Net currency exchange gains or lossesresulting from such translations are excluded from net income and areaccumulated in a separate component of shareholders’ deficit as accumulatedother comprehensive income(loss). Gains and losses resulting from foreigncurrency transactions, which are not significant, are included in theconsolidated statements of operations.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and also requires disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting periods. Actual results could differfrom those estimates. Significant estimates made by management include revenuerecognition estimates, the viability of recognizing deferred income tax assets,capitalized software costs and the valuation of equity instruments, and theallowance for doubtful accounts. Significant changes in these estimates may have a material impact on thefinancial statements.

 

6

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*Revenue Recognition*

 

The Company’s revenues are derived from sales of its document andconfiguration management systems that are primarily composed of software andservices, including maintenance, training and consulting services, and thirdparty software and hardware. The Company recognizes revenue in accordance withStatement of Position (“SOP”) 97-2 “Software Revenue Recognition” and SOP 98-9,“Modification of SOP 97-2, Software Revenue Recognition with Respect to CertainTransactions” and Staff Accounting Bulletin (“SAB”) No. 101.

 

Software license and third party product revenues are recognized uponshipment of the product if no significant vendor obligations remain andcollection is probable. In cases where a significant vendor obligation exists,revenue recognition is delayed until such obligation has been satisfied. Fornew software products where a historical record has not yet been demonstratedthat acceptance is perfunctory, the Company defers recognition of revenue untilacceptance has occurred.   If an undelivered element of thearrangement exists under the license arrangement, a portion of revenue is deferredbased on vendor-specific objective evidence (VSOE) of the fair value of theundelivered element until delivery occurs.  If VSOE does not exist for allundelivered elements, all revenue is deferred until sufficient evidence existsor all elements have been delivered.  Annual maintenance revenues, whichconsist of ongoing support and product updates, are recognized on astraight-line basis over the term of the contract. Payments received in advanceof performance of the related service for maintenance contracts are recorded asdeferred revenue. Revenues from training and consulting services are recognizedwhen the services are performed and adequate evidence of providing suchservices is available. Contract revenues for long-term contracts or programsrequiring specialized systems are recognized using the percentage-of-completionmethod of accounting, primarily based on contract labor hours incurred to datecompared with total estimated labor hours at completion. Provisions foranticipated contract losses are recognized at the time they become known.

 

Contracts are billed based on the terms of the contract. There are noretentions in billed contract receivables. Unbilled contract receivables relateto revenues earned but not billed at the end of the period.

 

The Company considers many factors when applying accounting principlesgenerally accepted in the United States of America related to revenuerecognition.  These factors include, 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

 

Each of the relevant factors is analyzed to determine its impact,individually and collectively with other factors, on the revenue to berecognized 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 the standards,especially with respect to complex or new types of transactions, could have amaterial adverse effect on the Company’s future operating results.

 

*Fair Value of Financial Instruments*

 

Statement of Financial Accounting Standards (“SFAS”) No. 107,“Disclosures About Fair Value of Financial Instruments”, requires management todisclose the estimated fair value of certain assets and liabilities defined bySFAS No. 107 as cash or a contractual obligation that both conveys to oneentity a right to receive cash or other financial instruments from anotherentity, and imposes on the other entity the obligation to deliver cash or otherfinancial instruments to the first entity. At December 31, 2003 andSeptember 30, 2003, management believes that the carrying amounts of cashand cash equivalents, short-term investments, accounts receivable and accountspayable, and accrued expenses approximate fair value because of the shortmaturity of these financial instruments. The Company believes that the carryingvalue of its loans approximate their fair values based on current market ratesof interest.

 

7

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*Concentration of Credit Risk*

 

The Company provides products and services to customers in a variety ofindustries worldwide, including local governments, petrochemicals, utilities,manufacturing and transportation. Concentration of credit risk with respect totrade receivables is limited due to the geographic and industry dispersion ofthe Company’s customer base. The Company has not experienced significant creditlosses on its customer accounts. Constellation Energy Group accounted for 49%of trade accounts receivable at December 31, 2003.

 

A small number of customers have typically accounted for a largepercentage of the Company’s annual revenues. Constellation Energy Groupaccounted for 36% of revenue for the three months ended December 31, 2003,while Network Rail and Bechtel, accounted for 27% and 12%, respectively, ofrevenue for three months ended December 31, 2002.  The Company’s reliance on relatively fewcustomers could have a material adverse effect on the results of its operationson a quarterly basis.

 

*Property and Equipment*

 

Property and equipment is recorded at cost and depreciated using thestraight-line method over useful lives of two to seven years. Leaseholdimprovements are amortized on a straight-line basis over the shorter of theiruseful life or the term of the related lease. Expenditures for ordinary repairsand maintenance are expensed as incurred while major additions and improvementsare capitalized.

 

*Software Development Costs and Purchased Software*

 

Software development costs and purchased software are capitalized whentechnological feasibility and marketability of the related product have beenestablished. Software development costs incurred solely in connection with aspecific contract are charged to cost of revenues. Capitalized software costsare amortized on a product-by-product basis, beginning when the product isavailable for general release to customers. Annual amortization expense iscalculated using the greater of the ratio of each product’s current grossrevenues to the total of current and expected gross revenues or thestraight-line method over the estimated useful life of three to four years. Accumulatedamortization of capitalized software costs was $234,000 and $3,422,000 atDecember 31, 2003 and 2002, respectively. The related amortization expensewas $20,000 and $99,000 for the three months ended December 31, 2003 and2002, respectively.

 

*Long-lived Assets*

 

The Company assesses potential impairments to its long-lived assetswhen there is evidence that events or changes in circumstances have maderecovery of the asset’s carrying value unlikely. An impairment loss would berecognized when the sum of the expected future net cash flows is less than thecarrying amount of the asset.  The Company concluded in fiscal 2003 thatthere were no events or changes in circumstances that would indicate that thecarrying amounts of long-lived assets were impaired.

 

*Derivatives*

 

Under Emerging Issues Task Force (EITF) Issue No. 00-19,*Accounting for Derivative Financial InstrumentsIndex to, and Potentially Settle in, a Company’s Own Stock*, theinitial balance sheet classification of contracts that require net cashsettlement are recorded as assets or liabilities and contracts that requiresettlement in shares are recorded as equity instruments. At each balance sheetdate, the Company reviews contracts and equity instruments that are to besettled in common stock to determine if sufficient common shares are availableto satisfy the maximum number of shares that could be required to net-sharesettle the contracts, among other conditions.  If sufficient common sharesdo not exist, then certain contracts are reclassified as a liability based ontheir fair value.  Changes in fair value are accounted for in theconsolidated statements of operations.

 

*Stock-Based Compensation*

 

The Company measures compensation expense for its stock-based employeecompensation plans using the intrinsic value method and provides pro formadisclosures of net loss and basic and diluted net loss per share as if the fairvalue-based method had been applied in measuring compensation expense. TheCompany applies SFAS No.123,*Accounting forStock-Based Compensation* and Accounting Principles Board OpinionNo. 25 and related Interpretations in accounting for its employeestock-based compensation plan.

 

8

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 No compensation cost was recognized for employee stock optiongrants during 2003 and 2002 based upon the intrinsic value method, which werefixed in nature, as the options were granted at exercise prices equal to fairmarket value on the date of grant. Had compensation cost for the Company’semployee stock-based compensation plan been determined based on the fair valueat the grant dates for awards under the plans consistent with the method ofSFAS No.123, the Company’s net loss and net loss per share would have beenadjusted to the pro forma amounts indicated below:

 
|                                                                                                                                            |   | **For the three months ended  December 31,** |     |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|----------|
|                                                                                                                                            |   | **2003**                                          |     | **2002** |   |
| Net income (loss) used in computing net  loss per share                                                                                         |   |                                              |     |   |   |
| As reported                                                                                                                                     |   | $                                                 | 11,000   |   | $ | (62,000 | ) |
| Subtract: Total stock based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (138,000                                          | )        | (28,000 | ) |
| Pro forma                                                                                                                                       |   | $                                                 | (127,000 | ) | $ | (90,000 | ) |
| Basic and diluted net loss per share                                                                                                            |   |                                              |     |   |   |
| As reported                                                                                                                                     |   | $                                                 | (0.00    | ) | $ | (0.00 | ) |
| Pro forma                                                                                                                                       |   | $                                                 | (0.00    | ) | $ | (0.00 | ) |

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model with the following weightedaverage assumptions used for grants:

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
| Dividend yield          |   | 0        | %      | 0        | %      |
| Expected volatility     |   | 281      | %      | 315      | %      |
| Risk free interest rate |   | 4.27     | %      | 4.03     | %      |
| Expected lives (years)  |   | 10       |   | 10       |   |

 

*Income Taxes*

 

Current income tax expense is the amount of income taxes expected to bepayable for the current year. A deferred income tax asset or liability isestablished for the expected future consequences resulting from the differencesin the financial reporting and tax bases of assets and liabilities. Deferredincome tax expense (benefit) is the change during the year in the deferredincome tax asset or liability. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be “morelikely than not” realized in the future based on the Company’s current andexpected operating results.

 

*Net Income (Loss) per Common Share*

 

Basic net income (loss) per common share is computed as net income(loss) divided by the weighted average number of common shares outstandingduring the year. Diluted net income (loss) per common share is computed as netloss divided by the weighted average number of common shares and potentialcommon shares, using the treasury stock method, outstanding during the year andassumes conversion into common stock at the beginning of each period of alloutstanding shares of convertible preferred stock, stock options, warrants andother potential common stock. Computations of diluted net income (loss) pershare do not give effect to individual potential common stock for any period inwhich their inclusion would be anti-dilutive.

 

*Statements of Cash Flows*

The following table provides supplemental cash flow information: 

 
|                                                                                        |   | **For the three months ended  December 31,** |   |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                        |   | **2003**                                          |   | **2002** |   |
| Supplemental cash flow information:                                                         |   |                                              |   |   |   |
| Interest paid                                                                               |   | $                                                 | 2,000  |   | $ | 1,400 |   |
|                                                                                        |   |                                              |   |   |   |
| Non-cash financing and investing  activities:                                               |   |                                              |   |   |   |
| Expiration of stock options in fair value  of equity instrument redeemable for common stock |   | $                                                 | 67,000 |   | $ | — |   |

 

9

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**Note 3 – RelatedParties Transactions**

 

In September 2003 $5,291,000 of debt owed to Spescom and SpescomUK was converted into preferred stock.  The debt converted was comprisedof the outstanding principal balance of promissory notes plus accrued butunpaid interest as well as accounts payable due to Spescom UK in the amount of$492,000.  On September 30, 2003, the Company issued 5,291 Series FConvertible Preferred Stock to Spescom with a stated value of $1,000 pershare.  The Series F preferred stock are convertible into common stock,beginning 45 days from the issuance date subject to availability of sufficientcommon shares at a stated conversion price of $0.45 per share subject tocertain adjustments.  The conversion is at the option of Spescom throughSeptember 30, 2008.

 

Related party liabilities consist of the following:

 
|                                                           |   | **December 31,  2003** |      | **September  30,  2003** |   |
|----------------------------------------------------------------|--------|-----------------------------|-----------|--------------------------|--------|
|                                                           |   | **(Unaudited)**             |      |                     |   |
| Related party liabilities:                                     |   |                        |      |                     |   |
| Notes and accrued interest payable on  demand —Spescom UK |   | $                           | 1,119,000 |                     | $      | 504,000 |   |
|                                                           |   |                        |      |                     |   |
| Total liabilities                                              |   | $                           | 1,119,000 |                     | $      | 504,000 |   |

 

On November 18, 2003 the Company issued a note payable to SpescomUK with a principal balance of $600,000 bearing interest rate of 5% per annum,with principal payable in two installments of approximately $300,000 plusinterest at January 31, 2004 and March 31, 2004.  Interest expense on the note for the threemonths ended December 31, 2003 amounted to $3,000.  The first payment of $305,000 was made onJanuary 29, 2004 to Spescom UK and the Company expects to make the secondpayment by the March 31, 2004 due date. This note is collateralized by a security interest in favor of SpescomUK in respect of all the Company’s assets.

 

In addition, the Company had two existing demand notes payable toSpescom UK for $400,000 and $100,000, each bearing interest rate of 10% perannum.  Spescom has agreed that it will not cause Spescom UK to demandrepayment under the two notes prior to October 1, 2004.  Interestexpense on the notes was $15,000 and $42,000 for the three months endedDecember 31, 2003 and 2002, respectively. These notes are collateralized by a security interest in favor of SpescomUK in respect of all the Company’s assets.

 

Spescom provides certain administrative and accounting functions forthe Company’s United Kingdom subsidiary.  The Company is billed a monthlyfee by Spescom for reimbursement of certain costs in the United Kingdomincluding the office facilities, all accounting and human resources services,and certain corporate marketing activities.  For the three months endedDecember 31, 2003 and 2002, the administrative fees totaled $140,000 and$151,000, respectively.  The office rent for the Company’s United Kingdomoperations included in the administrative fee totaled $82,000 and $67,000,respectively for the three months ended December 31, 2003 and2002.   At December 31, 2003 and 2002 the Company had a payableto Spescom of $146,000 and $46,000, respectively.  In 1999, as part of anagreement to sell the 60% interest in its United Kingdom subsidiary to Spescom,the lease for the United Kingdom office facility was to be assigned to Spescom;however, the landlord did not grant its consent to the assignment.  Since1999, Spescom has paid the lease for the entire office directly to thelandlord.  The lease expires in March 2006 and has an annual rent of$530,000.  A portion of the office has been subleased to third party tenantsfor an annual rent of $252,000.  The sublease also expiresMarch 2006.

 

Spescom and the Company have entered into a license agreement pursuantto which Spescom has licensed to the Company the right to use the name“Spescom” and to use a trademark owned by Spescom related to certain computersoftware. The Company will not pay any royalties to Spescom in connection withthis license. The license is for an indefinite term, but is terminable byeither party upon 60 days prior written notice. Under the license agreement,Spescom has agreed to indemnify and hold harmless the Company and itsdirectors, officers, employees and agents against liabilities arising from anyclaim brought against the Company that alleges that Spescom’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.

 

10

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**Note 4 – Receivables**

 
|                                        |   | **December 31,  2003** |      | **September 30,  2003** |   |
|---------------------------------------------|--------|-----------------------------|-----------|------------------------------|--------|
|                                        |   | **(Unaudited)**             |      |                         |   |
| **Receivables consist  of:**                |   |                        |      |                         |   |
| Receivables                                 |   | $                           | 1,630,000 |                         | $      | 501,000 |   |
| Less:  allowance for doubtful accounts |   | (82,000                     | )         | (78,000                      | )      |
|                                        |   | $                           | 1,548,000 |                         | $      | 423,000 |   |

 

The Company has collected $1,031,000 of the $1,630,000 balance inaccounts receivable as of January 31, 2004.

 

## **Note 5 –Reconciliation of Net Income (Loss) and Shares Used in Per Share Computations:**

 
|                                                                                                      |   | **For the three months ended  December 31,** |    |
|-----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|---------|
|                                                                                                      |   | **2003**                                          |    | **2002** |   |
|                                                                                                      |   | **(Unaudited)**                                   |    |   |   |
| **Net income (loss):**                                                                                    |   |                                              |    |   |   |
| Net income (loss) as reported                                                                             |   | $                                                 | 11,000  |   | $ | (62,000 | ) |
| Accrual of dividends on convertible  preferred stock                                                      |   | (66,000                                           | )       | — |   |
| Net loss used in computing basic and  diluted net loss per share                                          |   | $                                                 | (55,000 | ) | $ | (62,000 | ) |
|                                                                                                      |   |                                              |    |   |   |
| Shares Used:                                                                                              |   |                                              |    |   |   |
| Weighted average common shares outstanding  used in computing basic and diluted net loss per common share |   | 33,929,000                                        |    | 33,842,000 |   |

 

Employee stock options to acquire 1,534,000 and 54,000 shares of commonstock were outstanding at December 31, 2003 and 2002, respectively.  The shares were not included in thecomputation of diluted earnings per share in 2002 because their effect wasantidilutive.

 

In September 2003, the Company issued an option to purchase2,500,000 shares of common stock to an investment consulting firm involved in aprivate placement and the Company issued 5,291 shares of Series F PreferredStock with a stated value of $1,000 per share which are convertible into theCompany’s common stock at a stated conversion price of $0.45 per sharerepresenting a total of 11,757,778 shares of common stock.  In addition inSeptember 2003, the Company issued warrants to participating investors ofthe private placement to purchase 1,008,335 shares of the Company’s commonstock.  The stock options, warrants and convertible preferred stock wereexcluded from calculations of per share amounts, because their effect would beantidilutive.

 

**Note 6 –Segment and Geographic Information**

 

The Company has one business segment, which consists of the developmentand sale of a suite of integrated document, configuration and recordsmanagement software product.

 

Revenues for the three months ended December 31, 2003 and 2002 bycustomer location are as follows:

 
|                             |   | **2003** |      | **2002** |   |
|----------------------------------|--------|----------|-----------|----------|--------|
| United States                    |   | $        | 1,553,000 |     | $      | 1,315,000 |   |
| Europe, primarily United Kingdom |   | 546,000  |      | 951,000  |   |
| Other International              |   | 26,000   |      | 23,000   |   |
|                             |   | $        | 2,125,000 |     | $      | 2,289,000 |   |

 

**Note 7 - Recent Accounting Pronouncements**

 

In November 2002, the FASB issued FASB Interpretation No. 45(FIN No. 45),*Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*. FIN No. 45 expands on the accountingguidance of FASB Statements No. 5, 57, and 107 and incorporates withoutchange the provisions of FASB Interpretation No. 34, which is beingsuperseded. FIN No. 45 will affect leasing transactions involving residualguarantees, vendor and manufacturer guarantees, and tax and environmentalindemnities. All such guarantees will need to be disclosed in the notes to thefinancial statements starting with the period ending after December 15,2002. Existing guarantees will be grandfathered and will not be recognized onthe balance sheet. The provisions related to recognizing a liability atinception of the guarantee do not apply to product warranties, indemnificationprovisions in our software license arrangements or to guarantees accounted foras derivatives. The initial recognition and measurement provision are effectiveprospectively for

 

11

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guarantees issued or modified on or after December 31, 2002 andthe disclosure requirements apply to guarantees outstanding as ofDecember 31, 2002.  This interpretation did not have a materialeffect on our consolidated financial position or results of operations as wecurrently do not have any guarantees or obligations falling under the scope ofInterpretation No. 45.

 

 In January 2003, the Emerging Issues Task Force (EITF)issued No. 00-21, *Accounting for RevenueArrangements with Multiple Deliverables*. This EITF establishes thecriteria for recognizing revenue in arrangements when several items are bundledinto one agreement. EITF 00-21 does not allow revenue recognition unless thefair value of the undelivered element(s) is available and the element hasstand-alone value to the customer. EITF 00-21 also provides guidance onallocating the total contract revenue to the individual elements based upon theavailable fair value of each deliverable. This interpretation is not expectedto have a material effect on our consolidated financial position orconsolidated results of operations.

 

 In January 2003, the FASB issued Interpretation 46,*Consolidation of Variable Interest Entities.*In general, a variable interest entity is a corporation, partnership, trust, orany other legal structure used for business purposes that either (a) do nothave equity investors with voting rights or (b) have equity investors that donot provide sufficient financial resources for the entity to support itsactivities. Interpretation 46 requires a variable interest entity to beconsolidated by a company if that company is subject to a majority of the riskof loss from the variable interest entity’s activities or entitled to receive amajority of the entity’s residual returns or both. The consolidationrequirements of Interpretation 46 apply immediately to variable interestentities created after January 31, 2003. The consolidation requirementsapply to older entities in the first fiscal year or interim period beginningafter June 15, 2003. Certain of the disclosure requirements apply in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest entity was established.  This interpretation is notexpected to have a material effect on our consolidated financial position orconsolidated results of operations as we currently do not have any variableinterest entities falling within the scope of Interpretation 46.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.”  SFAS No.149 amends and clarifies accounting for derivative instruments, includingcertain derivative instruments embedded in other contracts and for hedgingactivities under SFAS 133, effective for reporting periods ending afterJune 30, 2003.  In particular, SFAS No. 149 clarifies under whatcircumstances a contract within an initial net investment meets thecharacteristic of a derivative and when a derivative contains a financingcomponent that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modifiedafter June 30, 2003.  The adoption of SFAS 149 had a material effecton our consolidated financial position or consolidated results of operations. See Note 9 Derivatives.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  It requires that an issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances).  Many of those instruments were previously classified asequity.  SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on ourconsolidated financial position or consolidated results of operations as wecurrently do not have any financial instruments falling within the scope ofSFAS No. 150.

 

**Note 8 – Comprehensive Loss**

 
|                                           |   | **For the three months ended  December 31,** |     |
|------------------------------------------------|--------|---------------------------------------------------|----------|
|                                           |   | **2003**                                          |     | **2002** |   |
|                                           |   | **(Unaudited)**                                   |     | **(Unaudited)** |   |
| Net income (loss)                              |   | $                                                 | 11,000   |   | $ | (62,000 | ) |
| Other comprehensive loss:                      |   |                                              |     |   |   |
| Foreign currency translation loss  adjustments |   | $                                                 | (149,000 | ) | $ | (48,000 | ) |
| Comprehensive loss                             |   | $                                                 | (138,000 | ) | $ | (110,000 | ) |

 

12

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**Note 9—Derivatives**

 

At September 30, 2003, the Company did not have a sufficientnumber of authorized shares of its common stock to satisfy potential exercisesof 1,108,335 warrants held by investors and 1,150,000 options held bynon-employees.  As a result, the fair value of such equity instruments wasreclassified from shareholders’ deficit to current liabilities.  The fairvalue of the warrants and options was determined using the Black-Scholes modelat the date of reclassification and totaled $1,233,000.  As ofDecember 31, 2003 the total options held by non-employees was reduced by130,000 options from 1,150,000 to 1,020,000 due to the exercise of 50,000options and the expiration of 80,000 options. The Company recognized a gain of $5,000 on the revaluation of theremaining warrants and options as of December 31, 2003   The Company will revalue the warrants andoptions at each reporting date or upon receipt of shareholder approval foradditional authorized common shares.  Changes in fair value will beaccounted for in the statement of operations.

 

**Note 10 – SubsequentEvents**

 

The Annual Meeting of Shareholders was held onJanuary 30, 2004.  At the meeting,the shareholders approved a proposal to amend the Company’s Articles ofIncorporation to increase the number of shares of authorized common stock from40,000,000 to 100,000,000 shares.  As aresult, the Company will now have a sufficient number of shares of common stockauthorized to satisfy potential exercises of 1,108,335 warrants held byinvestors and 1,150,000 options held by non-employees.  In the second quarter the fair value of suchequity instruments of $1,159,000 will be reclassified from current liabilitiesto equity and a gain of $1,000 will be recognized on the revaluation of thewarrants and options to equity.  Inaddition the preferred stock of $6,790,000 will be reclassified to equity frommezzanine equity.

 

The shareholder’s also approved a proposal to amendthe Company’s 1996 Stock Incentive Plan to increase the aggregate number ofshares of common stock reserved for issuance from 2,425,000 to 5,425,000shares.  In addition, the shareholdersapproved a proposal to amend the Company’s Articles of Incorporation to changethe name of the Company to Spescom Software Inc. from Altris Software Inc.

 

13

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF****OPERATIONS**

 
| **Forward –Looking Statements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *This report contains forward-looking  statements within the meaning of Section 27A of the Securities Act of  1933 and Section 21E of the Securities Exchange Act of 1934. These  forward-looking statements are subject to certain risks and uncertainties  that could cause actual results to differ materially from 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.*                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *When used in the following discussion, the  words “believes,” “anticipates” and similar expressions are intended to  identify forward-looking statements. Such statements are subject to certain  risks and uncertainties, which could cause actual results to differ  materially from those projected. Readers are cautioned not to place undue  reliance on these forward-looking statements, which speak only as of the date  hereof. The Company undertakes no obligation to publicly release the result  of any revisions to these forward-looking statements, which may be made to  reflect events or circumstances after the date hereof or to reflect the  occurrence of unanticipated events.* |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *The following discussion should be read in  conjunction with the Selected Consolidated Financial Data and the Consolidated  Financial Statements, including the Notes thereto.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

**Critical Accounting Policies**

 

The consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America. Assuch, management is required to make judgments, estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. The significant accounting policies whichare most critical to aid in fully understanding and evaluating reportedfinancial results include the following:

 

*Revenue Recognition*

 

** **The Companyenters into contractual arrangements with end-users that may include licensingof the Company’s software products, product support and maintenance services,consulting services or various combinations thereof, including the sale of suchproducts or services separately.  The Company recognizes revenue inaccordance with Statement of Position (“SOP”) 97-2 “Software RevenueRecognition” and SOP 98-9, “Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions” and Staff AccountingBulletin (“SAB”)  No. 101.

 

Software license and third party product revenues are recognized uponshipment of the product if no significant vendor obligations remain andcollection is probable. In cases where a significant vendor obligation exists,revenue recognition is delayed until such obligation has been satisfied. For newsoftware products where a historical record has not yet been demonstrated thatacceptance is perfunctory, the Company defers recognition of revenue untilacceptance has occurred. If an undelivered element of the arrangement existsunder the 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 billed based on the terms of the contract. There are noretentions in billed contract receivables. Unbilled contract receivables relateto revenues earned but not billed at the end of the period.

 

The Company considers many factors when applying accounting principlesgenerally accepted in the United States of America related to revenuerecognition.  These factors include, but are not limited to:

 

14

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•                                          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

 

Each of the relevant factors is analyzed to determine its impact,individually and collectively with other factors, on the revenue to berecognized 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.

 

*Allowance for Doubtful Accounts*

 

The Company sells its products directly to end-users, generallyrequiring a significant up-front payment and remaining terms appropriate forthe creditworthiness of the customer. The Company also sells its products toVARs and other software distributors generally under terms appropriate for thecreditworthiness of the VAR or distributor. The Company retains no continuingobligations on sales to VARs. 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.

 

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The following table sets forth the condensed consolidated statement ofoperations expressed as a percentage or total revenue for the periodsindicated:

 
|                           |   | **For  the three months ended  December 31,** |   |
|--------------------------------|--------|----------------------------------------------------|--------|
|                           |   | **2003**                                           |   | **2002** |   |
| Revenues                       |   |                                               |   |   |   |
| Licenses                       |   | 53                                                 | %      | 40 | % |
| Services and other             |   | 47                                                 | %      | 60 | % |
| Total revenues                 |   | 100                                                | %      | 100 | % |
|                           |   |                                               |   |   |   |
| Cost of revenues               |   |                                               |   |   |   |
| Licenses                       |   | 5                                                  | %      | 12 | % |
| Services and other             |   | 26                                                 | %      | 25 | % |
|                           |   | 31                                                 | %      | 37 | % |
|                           |   |                                               |   |   |   |
| Gross profit                   |   | 69                                                 | %      | 63 | % |
|                           |   |                                               |   |   |   |
| Operating expenses:            |   |                                               |   |   |   |
| Research and development       |   | 16                                                 | %      | 15 | % |
| Marketing and sales            |   | 28                                                 | %      | 27 | % |
| General and administrative     |   | 24                                                 | %      | 18 | % |
|                           |   | 68                                                 | %      | 60 | % |
|                           |   |                                               |   |   |   |
| Income (loss) from operations  |   | 1                                                  | %      | 3 | % |
|                           |   |                                               |   |   |   |
| Interest expense               |   | (1                                                 | )%     | (5 | )% |
| Gain on derivative revaluation |   | (3                                                 | )%     | — |   |
|                           |   |                                               |   |   |   |
| Net Income (loss)              |   | (3                                                 | )%     | (2 | )% |

 

**Revenues**

 

*License Revenues*

(in thousands)

 
|                         |   | **2004** |   | **Change** |   | **2003** |   |
|------------------------------|--------|----------|--------|------------|--------|----------|--------|
| License revenues             |   | $        | 1,119  |       | 21     | %        | $      | 921 |   |
| Percentage of total revenues |   | 53       | %      |       |   | 40       | %      |
|                              |        |          |        |            |        |          |        |  |  |

 

License revenues increased by $198,000, or 21%, to $1,119,000 from$921,000 for the three months ended December 31, 2003 compared to the sameperiod a year ago.  The increase was dueprimarily to a sale to a new customer, Constellation Energy Group of $750,000compared to two sales of $369,000 and $250,000 to Network Rail, formerlyRailtrack and Bechtel, respectively in the prior year.  The Company is continuing to see higher salesof the eB product suite as a result of customers expanding their existingsoftware systems and an increase in software orders from new customers inresponse to a higher demand for a comprehensive content management solutionneeded for business process compliance, corporate record keeping and enterprisecollaboration.

 

We anticipate that the demand for our products will continue toincrease if overall economic conditions continue to strengthen leading to anincrease in overall demand for enterprise document, configuration and recordsmanagement software solutions.  TheCompany’s license revenues fluctuate from quarter to quarter, but we haveexperienced and expect to continue to see increased license revenue opportunitiesas more users are deployed throughout existing customer enterprises and as wemake additional sales to new customers.

 

Although the Company has historically generated the majority of itsrevenues from its direct sales force, the Company has also established anetwork of third-party VARs, system integrators and OEMs who build and sellsystems (with components or complete systems provided by the Company) thataddress specific customer needs within various industries, including thosetargeted directly by the Company.  Salesthrough indirect channels for the three months ended December 31, 2003amounted to $110,000 or 5% compared to $20,000, or 1% for the same period inthe prior year.

 

16

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A small number of customers has typically accounted for a largepercentage of the Company’s annual revenues. Constellation Energy Groupaccounted for 36% of revenue for the three months ended December 31, 2003,while.  Network Rail and Bechtelaccounted for 27% and 12%, respectively, of revenue for three months endedDecember 31, 2002.  The Company’sreliance on relatively few customers could have a material adverse effect onthe results of its operations on a quarterly basis.

 

*Service and Other Revenues*

(in thousands)

 
|                         |   | **2004** |   | **Change** |   | **2003** |   |
|------------------------------|--------|----------|--------|------------|--------|----------|--------|
| Service revenues             |   | $        | 1,006  |       | (26    | )%       | $      | 1,368 |   |
| Percentage of total revenues |   | 47       | %      |       |   | 60       | %      |
|                              |        |          |        |            |        |          |        |  |  |

 

Services and other revenues are comprised of maintenance andnon-maintenance services.  Non-maintenance services typically relate tobusiness process studies, implementation of systems and training which varywith the level of license revenues while maintenance revenue is primarilydependent on customers renewing their annual maintenance support contracts.

 

Services and other revenue decreased $362,000, or 26%, from $1,368,000to $1,006,000 for the three months ended December 31, 2003 compared to thesame period a year ago.  Thenon-maintenance portion of service revenue decreased $287,000, or 50% from$568,000 to $281,000.   This decrease isdue to in the prior year the Company was working on three large implementationservice contracts versus in the current quarter there were no large servicecontracts.  Also in this quarter themaintenance revenue decreased $75,000, or 10% from $800,000 to $725,000primarily as a result of customers that decreased their maintenancerequirements consistent with the downsizing of their organizations.

 

As such, we anticipate service and other revenue will fluctuateprimarily due to sales to new customers because they require more services thattypically include a business process study, integration with other businesssystems and training.  In additionservice and other revenues will continue to fluctuate from quarter to quarterbased on the timing of customer orders.

 

**Cost of Revenues**

 

*Cost of License Revenues*

(in thousands)

 
|                           |   | **2004** |   | **Change** |   | **2003** |   |
|--------------------------------|--------|----------|--------|------------|--------|----------|--------|
| Cost of license revenues       |   | $        | 101    |       | (63    | )%       | $      | 275 |   |
| Percentage of license revenues |   | 9        | %      |       |   | 30       | %      |
|                                |        |          |        |            |        |          |        |  |  |

 

Cost of licenses revenues consists of costs associated with resellingthird-party products and amortization of internal software development costs.

 

Cost of license revenue decreased by $174,000, or 63%, from $275,000 to$101,000 for the three months ended December 31, 2003 compared to the sameperiod a year ago.  The decrease is dueto lower third-party software costs of $94,000 due to fewer sales ofthird-party products as a percentage of total sales.  In addition, amortization expense of capitalized software costsdecreased $80,000 as a result of a majority of such costs being fully amortizedin fiscal 2003. The overall decrease in cost of license revenues andincrease in license revenue resulted in an improvement in gross profitpercentage of license revenues to 91% for the three months endedDecember 31, 2003 as compared to 70% for the same period a year ago.  We expect the cost of license revenues tofluctuate based on customer requirements for third-party software productssince these costs have the largest impact on cost of license revenues.

 

17

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*Cost of Services and Other Revenues*

(in thousands)

 
|                                      |   | **2004** |      | **Change** |   | **2003** |   |
|-------------------------------------------|--------|----------|-----------|------------|--------|----------|--------|
| Cost of services and other revenues       |   | $        |  553 |       | (2     | )%       | $      | 566 |   |
| Percentage of services and other revenues |   | 55       | %         |       |   | 41       | %      |
|                                           |        |          |           |            |        |          |        |  |  |

 

Cost of services and other revenues consists primarily ofpersonnel-related costs in providing consulting services, training to customersand support.  It also includes costs associated with reselling third-partyhardware and maintenance, which includes telephone support costs

 

Cost of services and other revenue decreased $13,000, or 2%, from$566,000 to $553,000 for the three months ended December 31, 2003 comparedto the same period a year ago.  The decrease is due to reducedpersonnel-related costs associated with the decrease in services and otherrevenues.  The gross profit from servicesand other revenue as a percentage of services and other revenues decreased to45% for the three months ended December 31, 2003 as compared to 59% forthe same period a year ago due to a 26% decrease in service and other revenueswhile cost of revenues decreased only 2% due to the total number of personneldedicated to customer contracts remained relatively unchanged.  We expect the cost of service and otherrevenues to fluctuate in absolute dollar amounts and as a percentage of totalrevenues as the related service revenue fluctuates.

 

**Operating Expenses**

 

*Research and Development*

(in thousands)

 
|                              |   | **2004** |   | **Change** |   | **2003** |   |
|-----------------------------------|--------|----------|--------|------------|--------|----------|--------|
| Research and development expenses |   | $        | 334    |       | (5     | )%       | $      | 351 |   |
| Percentage of total revenue       |   | 16       | %      |       |   | 15       | %      |
|                                   |        |          |        |            |        |          |        |  |  |

 

Research and development expenses consist of salaries and benefits forsoftware developers as well as an allocation of corporate expenses, calculatedon the basis of headcount, such as corporate insurance, facilities, telephoneand other.

 

Research and development expenses decreased $17,000, or 5%, from$351,000 to $334,000 for the three months ended December 31, 2003 comparedto the same period a year ago.  The decrease was due primarily to theCompany’s ability to reduce office space requirements and move the corporateoffices into a smaller facility which decreased overall facility costs.

 

We believe that continued investment in research and development is acritical factor in maintaining our competitive position and we expect researchand development costs to remain at the current levels in absolute dollaramounts in the next several quarters.

 

*Marketing and Sales*

(in thousands)

 
|                         |   | **2004** |   | **Change** |   | **2003** |   |
|------------------------------|--------|----------|--------|------------|--------|----------|--------|
| Marketing and sales expenses |   | $        | 605    |       | (3     | )%       | $      | 626 |   |
| Percentage of total revenue  |   | 28       | %      |       |   | 27       | %      |
|                              |        |          |        |            |        |          |        |  |  |

 

Marketing and sales expenses consist of salaries, cost of benefits,sales commissions and other expenses related to the direct sales force, as wellas allocation of overall corporate expenses, calculated on the basis ofheadcount, related to items such as corporate insurance, facilities, telephoneand other.

 

Marketing and sales expenses decreased $21,000, or 3%, from $626,000 to$605,000 for the three months ended December 31, 2003 compared to the sameperiod a year ago.  The decrease inmarketing and sales expenses is due to the reduction in cost of approximately$51,000 from performing certain marketing and sales services in-house whichwere previously performed by outside consultants.  The decrease was partially offset by an increase in commissionsof $30,000 relating to the large sale in the quarter to Constellation EnergyGroup.

 

We expect marketing and sales expense to increase in absolute dollaramounts and as a percentage of total revenue as a result of the plannedexpansion of our sales and marketing efforts in the next several quarters.

 

18

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*General and Administrative*

(in thousands)

 
|                                |   | **2004** |   | **Change** |   | **2003** |   |
|-------------------------------------|--------|----------|--------|------------|--------|----------|--------|
| General and administrative expenses |   | $        | 503    |       | 23     | %        | $      | 408 |   |
| Percentage of total revenue         |   | 22       | %      |       |   | 18       | %      |
|                                     |        |          |        |            |        |          |        |  |  |

 

General and administrative expenses consist primarily of personnelcosts for finance, information technology, human resources and generalmanagement, as well as outside professional services and an allocation ofoverall corporate expenses, calculated on the basis of headcount, such ascorporate insurance, facilities, telephone and other.

 

General and administrative expenses increased by $95,000, or 23%, from$408,000 to $503,000 for the three months ended December 31, 2003 comparedto the same period a year ago.  Theincrease was due primarily to increased accounting and legal fees of $87,000for additional work related to a routine SEC review of the Company’s AnnualReport on Form 10-K for the year ended September 30, 2002. In addition,the Company incurred additional expense of $34,000 relating to a new publicrelations firm engaged in September 2003 to elevate the profile of theCompany in the investment community. These increases were offset by reduced facility costs associated withthe move of the corporate offices to a smaller facility.

 

We expect that general and administrative expenses will stay at currentlevels in the next several quarters in absolute dollar amounts due to thecontinued benefits of cost oversight keeping general and administrativeexpenses in line with current revenues.

 

**Interest Expense**

 

Interest expense consists primarily of fixed interest obligations onour outstanding debt to Spescom as well as interest paid on capital leaseobligations.  Interest expense was$23,000 for the three months ended December 31, 2003 as compared to$125,000 for the same period a year ago. The decrease is due to decreased debt balances owed to Spescom due tothe conversion of debt to convertible preferred stock in September 2003.

 

**Liquidity and Capital Resources**

 

At December 31, 2003, the Company’s cash and cash equivalentstotaled $73,000 as compared to $333,000 for the same period a year ago, and itscurrent ratio (current assets divided by current liabilities) was .31 atDecember 31, 2003.

 

For the three months ended December 31, 2003, cash provided byfinancing activities totaled $611,000, primarily from a short-term note payableissued to Spescom. Cash used in operating activities totaled $855,000 primarilyrelates to the increase in receivables from a large sale at the end of thequarter that was not due until January 2004.

 

The Company has received loans from Spescom in the past to meet itsobligations.  The outstanding balance of its loans from Spescom increasedto $1,119,000 at December 31, 2003 from $504,000 at September 30,2003 due to the issuance of a $600,000 short-term note payable toSpescom.  Such loans are secured by all of the assets of the Company.  The short-term note payable is due in twopayments of approximately $300,000 in January 31, 2004 and March 31,2004.  The first payment of $305,000 wasmade on January 29, 2004 to Spescom and the Company expects the secondpayment to be made by the March 31, 2004 due date. The remaining notes aredue in October 2004.  See “Related Party Transactions” below.

 

In fiscal year 2003, Spescom supported the Company’s operations byextending the due dates of notes payable and by converting $5.3 million in debtand other obligations owed to Spescom to preferred stock.  The preferredstock is entitled to receive dividends of 5% of the stated value per share peranum, payable on a quarterly basis in cash or common stock.  The Company has recorded accrued dividendson the preferred stock of $66,000 as of December 31, 2003.  Spescom has stated that it has the abilityand will continue to fund the Company’s operations through October 1,2004, if necessary.  However,  thefunding of such loans may be delayed or prevented by currency exchangeregulations of the Republic of South Africa, under which Spescom is required toapply for and obtain the approval of the South African Reserve Bank beforeproviding any funds to the Company. Spescom is presently unaware of any reasonwhy such Reserve Bank approval should not be given.

 

The Company’s future liquidity depends on its ability to generate newsystem sales of its eB product suite in the near term, which cannot be assured.Failure to generate sufficient system sales to meet the Company’s cash flowneeds can be expected to have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.  The Company’sfinancial position can be a factor in attracting new customers.  In aneffort to strengthen the Company’s financial condition

 

19

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and provide capital for expanding marketing and sales capabilities, theCompany will continue to explore additional equity or debt financing from thirdparties.  There can be no assurance that additional financing will beavailable or that the terms of such financing will be acceptable to the Company. The Company believes that its current cash and receivables, as well asadditional cash that may be generated from operations, will be sufficient tomeet its short-term needs for working capital. However, the Company may not beable to obtain sufficient orders to enable the Company to continue on a cashflow break-even level, which would be necessary to continue operations in theabsence of further financing.

 

**Net Operating Loss Tax Carryforwards**

 

The Company has NOL carryforwards of $35,332,000 and $5,269,000 forfederal and state tax purposes, respectively, which expire over the years 2004through 2022.   Effective September 11, 2002, pursuant toCalifornia revenue and tax code section 24416.3, no net operating lossdeduction would be allowed for any taxable year beginning on or afterJanuary 1, 2002, and before January 1, 2004.  For any suspendedlosses, the carryover period would be extended by one year for losses incurredin tax year beginning on or after January 1, 2002, and beforeJanuary 1, 2003; and by two years for losses incurred in taxable yearsbeginning before January 1, 2002.  The Company has investment andresearch activity credit carryforwards aggregating $328,000, which willsubstantially expire in the years 2004 through 2006.

 

**Certain Factors that May Affect FutureResults**

 

*Foreign Currency*

 

The Company’s geographic markets are primarily in the United States andEurope, with some sales in other parts of the world. For the three months endedDecember 31, 2003, revenues form the United States were 74% of totalrevenues, and revenues from Europe and other locations were 26% of totalrevenues.  This compares to 57% and 43% respectively for the same period ayear ago. Revenues from our United Kingdom subsidiary can fluctuate from quarterto quarter based on the timing of customer orders.  The reduced revenue in the current quarter was partially offsetby a foreign currency gain of $43,000 due to a weakened dollar value comparedto the sterling pound.  Changes inforeign currency rates, the condition of local economies, and the generalvolatility of software markets may result in a higher or lower proportion offoreign revenues in the future. Although the Company’s operating and pricingstrategies take into account changes in exchange rates over time, futurefluctuations in the value of foreign currencies may have a material adverseeffect on the Company’s business, operating results and financial condition.

 

*Inflation*

 

The Company believes that inflation has not had a material effect onits operations to date. Although the Company enters into fixed-price contracts,management does not believe that inflation will have an adverse material impacton its operations for the foreseeable future, as the Company takes into accountexpected inflation in its contract proposals and is generally able to projectits costs based on forecasted contract requirements.

 

**RelatedParties Transactions**

 

In September 2003 $5,291,000 of debt owed to Spescom and SpescomUK was converted into preferred stock.  The debt converted was comprisedof the outstanding principal balance of promissory notes plus accrued butunpaid interest as well as accounts payable due to Spescom UK in the amount of$492,000.  On September 30, 2003, the Company issued 5,291 Series F ConvertiblePreferred Stock to Spescom with a stated value of $1,000 per share.  Theshares of Series F preferred stock are convertible into common stock, beginning45 days from the issuance date subject to availability of sufficient commonshares at a stated conversion price of $0.45 per share subject to certainadjustments.  The conversion is at the option of Spescom throughSeptember 30, 2008.

 

Related party liabilities consist of the following:

 
|                                                           |   | **December 31,  2003** |      | **September  30,  2003** |   |
|----------------------------------------------------------------|--------|-----------------------------|-----------|--------------------------|--------|
|                                                           |   | **(Unaudited)**             |      |                     |   |
| Related party liabilities:                                     |   |                        |      |                     |   |
| Notes and accrued interest payable on  demand —Spescom UK |   | $                           | 1,119,000 |                     | $      | 504,000 |   |
|                                                           |   |                        |      |                     |   |
| Total liabilities                                              |   | $                           | 1,119,000 |                     | $      | 504,000 |   |

 

20

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On November 18, 2003 the Company issued a note payable to SpescomUK with a principal balance of $600,000 bearing interest rate of 5% per annum,with principal payable in two installments of approximately $300,000 plusinterest at January 31, 2004 and March 31, 2004.  Interest expense on the note for the threemonths ended December 31, 2003 amounted to $3,000.  The first payment of $305,000 was made onJanuary 29, 2004 to Spescom UK and the Company expects to make the secondpayment by the March 31, 2004 due date. This note is collateralized by a security interest in favor of SpescomUK in respect of all the Company’s assets.

 

In addition, the Company had two existing demand notes payable toSpescom UK for $400,000 and $100,000, each bearing interest rate of 10% perannum.  Spescom has agreed that it will not cause Spescom UK to demandrepayment under the two notes prior to October 1, 2004.  Interestexpense on the notes was $15,000 and $42,000 for the three months endedDecember 31, 2003 and 2002, respectively. These notes are collateralized by a security interest in favor ofSpescom UK in respect of all the Company’s assets.

 

Spescom provides certain administrative and accounting functions forthe Company’s United Kingdom subsidiary.  The Company is billed a monthlyfee by Spescom for reimbursement of certain costs in the United Kingdomincluding the office facilities, all accounting and human resources services,and certain corporate marketing activities.  For the three months endedDecember 31, 2003 and 2002, the administrative fees totaled $140,000 and$151,000, respectively.  The office rent for the Company’s United Kingdomoperations included in the administrative fee totaled $82,000 and $67,000,respectively for the three months ended December 31, 2003 and 2002.  At December 31, 2003 and 2002 the Company had a payable to Spescom of$146,000 and $46,000, respectively.  In 1999, as part of an agreement tosell the 60% interest in its United Kingdom subsidiary to Spescom, the leasefor the United Kingdom office facility was to be assigned to Spescom; however,the landlord did not grant its consent to the assignment.  Since 1999,Spescom has paid the lease for the entire office directly to thelandlord.  The lease expires in March 2006 and has an annual rent of$530,000.  A portion of the office has been subleased to third partytenants for an annual rent of $252,000.  The sublease also expiresMarch 2006.

 

Spescom and the Company have entered into a license agreement pursuantto which Spescom has licensed to the Company the right to use the name“Spescom” and to use a trademark owned by Spescom related to certain computersoftware. The Company will not pay any royalties to Spescom in connection withthis license. The license is for an indefinite term, but is terminable byeither party upon 60 days prior written notice. Under the license agreement,Spescom has agreed to indemnify and hold harmless the Company and itsdirectors, officers, employees and agents against liabilities arising from anyclaim brought against the Company that alleges that Spescom’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.

 

21

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**CONTRACTUALOBLIGATIONS AND COMMERCIAL COMMITMENTS**

 

The following summarizes our contractual obligations and othercommitments at December 31, 2003, and the effect such obligations couldhave on our liquidity and cash flow in future periods:

 
|                                  |   | **Amount  of Commitment Expiring by Period** |      |
|---------------------------------------|--------|----------------------------------------------|-----------|
|                                  |   | **Less  Than********1 Year**                 |      | **1-3  Years** |   | **4-5  Years** |   | **Over  5  Years** |   | **Total** |   |
| Notes and Accounts Payable to Spescom |   | $                                            | 1,119,000 |   | $ | — |   | $ | — |   | — |   | $ | 1,119,000 |   |
| Lease commitments                     |   | 264,000                                      |      | 809,000 |   | 508,000 |   | — |   | 1,581,000 |   |
| Total                                 |   | $                                            | 1,383,000 |   | $ | 809,000 |   | $ | 508,000 |   | — |   | $ | 2,700,000 |   |

 

**OFF-BALANCE SHEETARRANGEMENTS**

 

At December 31, 2003 and September 30, 2003, we did not haveany other relationships with unconsolidated entities or financial partnerships,including entities often referred to as structured finance or special purposeentities that would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes.  Therefore, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we were engaged in suchrelationships.

 

## **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

**MarketRate Risk**

 

The Company’s exposure to market rate risk for changes in interestrates relates primarily to the Company’s investment portfolio. The Company doesnot use derivative financial instruments in its investment portfolio. TheCompany places its investment with high quality issuers and follows internallydeveloped guidelines to limit the amount of credit exposure to any one issuer.Additionally, in an attempt to limit interest rate risk, the Company followsguidelines to limit the average and longest single maturity dates. The Companyis adverse to principal loss and ensures the safety and preservation of itsinvested funds by limiting default, market and reinvestment risk. The Company’sinvestments include money market accounts, as of December 31, 2003.

 

**ITEM4.    CONTROLS AND PROCEDURES**

 

Within the 90 days prior to the date of this report, the Companycarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Exchange ActRule 13a-14. Based upon that evaluation, we have concluded that theCompany’s disclosure controls and procedures are effective in recording,processing, summarizing and reporting within the time periods specified in theSEC’s rules and forms material information relating to the Company (includingits consolidated subsidiaries) required to be included in the Company’speriodic SEC filings.  There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the Company’s internal controls subsequent to theevaluation date.

 

22

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**PART II.   OTHER INFORMATION**

 

**ITEM 1 – LEGAL PROCEDINGS**

 

The Company is involved from time to time in litigation arising in thenormal course of business. Management believes that any liability with respectto such routine litigation, individually or in the aggregate, is not likely tobe material to the Company’s consolidated financial position or results ofoperations.

 

**ITEM4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The Annual Meeting of Shareholders was held onJanuary 30, 2004.  At the meeting,the shareholders approved three proposals. The shareholders approved a proposalto amend the Company’s 1996 Stock Incentive Plan to increase the aggregatenumber of shares of common stock reserved for issuance from 2,425,000 to5,425,000 shares.  The proposal wasapproved with 22,231,632 voting for, 683,033 voting against and 156,208abstaining.  The shareholders alsoapproved a proposal to amend the Company’s Articles of Incorporation toincrease the number of shares of authorized common stock from 40,000,000 to100,000,000 shares.  The proposal wasapproved with 29,930,478 voting for, 652,144 voting against and 126,944abstaining.  The shareholders alsoapproved a proposal to amend the Company’s Articles of Incorporation to changethe name of the Company to Spescom Software Inc. from Altris Software Inc.   The proposal was approved with 30,464,823voting for, 155,225 voting against and 89,518 abstaining.

 

In addition, at the meeting, the shareholders approvedthe election of the following individuals as directors who will hold officeuntil the next annual meeting:  CarlMostert, D. Ross Hamilton, Hilton Issacman, Johann Leitner, James P. Myers andLarry D. Unruh.

 

**ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K:**
| (a) |   | Exhibits |
|-----|--------|----------|

 
| 3.1*     | Registrant’s Articles of Incorporation, as amended.                                                                                                                                                                   |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                       |
| 3.2*     | Registrant’s Bylaws, as amended.                                                                                                                                                                                      |
|     |                                                                                                                                                                                                                       |
| 10.1 (1) | Lease between The Irvine Company and Spescom  Software Inc., dated February 25, 2001.                                                                                                                                 |
|     |                                                                                                                                                                                                                       |
| 10.2 (2) | 10.0% promissory note due October 15, 2003 in  principal amount of $1,235,076 issued by Spescom Software Inc. to Spescom  Ltd. South Africa on February 15, 2002.                                                |
|     |                                                                                                                                                                                                                       |
| 10.3 (3) | 10.0% promissory note due October 15, 2003 in  principal amount of $1,810,383 issued by Spescom Software Inc. to Spescom  Ltd., a United Kingdom corporation, on February 15, 2002.                              |
|     |                                                                                                                                                                                                                       |
| 10.4 (4) | Security agreement between Spescom Software Inc. and  Spescom Limited, a United Kingdom corporation and Spescom Limited,  a South African corporation and  collectively with Spescom UK dated February 15, 2002. |
|     |                                                                                                                                                                                                                       |
| 10.5 (5) | 10% promissory note due upon demand in principal  amount of $400,000 issued by Spescom Software Inc. to Spescom Ltd., a United  Kingdom corporation, on March 15, 2002.                                               |
|     |                                                                                                                                                                                                                       |
| 10.6 (6) | Security agreement dated March 15, 2002 between  Spescom Software Inc., a California corporation and Spescom Ltd., a United  Kingdom corporation.                                                                     |
|     |                                                                                                                                                                                                                       |
| 10.7 (7) | Pledge agreement executed March 15, 2002 by and  between Spescom Software Inc., a California corporation, Spescom Ltd., a  United Kingdom corporation, and Solomon Ward Seidenwurm & Smith, LLP.                  |
|     |                                                                                                                                                                                                                       |
| 10.8 (8) | 10.0% promissory note due upon demand in principal amount of $500,000  issued by Spescom Software Inc. to Spescom Ltd., a United Kingdom  corporation, on April 19, 2002.                                             |

 

23

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| 10.9 (9) | 10.0% promissory note due upon demand in principal amount of $700,000  issued by Spescom Software Inc. to Spescom Ltd., a United Kingdom  corporation, on May 31, 2002.                                                                                       |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                               |
| 10.10    | 5.0% promissory note due in two payments of $300,000 in principal and  accrued interest on January 31, 2004 and March 31, 2004,  respectively issued by Spescom Software Inc. to Spescom Ltd., a United  Kingdom corporation, on November 18, 2003. |
|     |                                                                                                                                                                                                                                                               |
| 31.1     | Section 302 Certification by Carl Mostert, Chief Executive Officer.                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                               |
| 31.2     | Section 302 Certification by John W. Low, Chief Financial Officer.                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                               |
| 32.1     | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                           |
|     |                                                                                                                                                                                                                                                               |
| 32.2     | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                           |
|     |                                                                                                                                                                                                                                                               |
| (b)      | Reports on Form 8-K.                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                               |
|     | No Reports on Form 8-K have been filed during the first quarter of  the period covered by this report.                                                                                                                                                             |

 

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(1)                                  Incorporatedby reference to Exhibit 10.27 to the Form 10-K filed on November 23, 2001.

(2)                                  Incorporatedby reference to Exhibit 10.28 to the Form 10-Q filed on May 15, 2002.

(3)                                  Incorporatedby reference to Exhibit 10.29 to the Form 10-Q filed on May 15, 2002.

(4)                                  Incorporatedby reference to Exhibit 10.30 to the Form 10-Q filed on May 15, 2002.

(5)                                  Incorporatedby reference to Exhibit 10.31 to the Form 10-Q filed on May 15, 2002.

(6)                                  Incorporatedby reference to Exhibit 10.32 to the Form 10-Q filed on May 15, 2002.

(7)                                  Incorporatedby reference to Exhibit 10.33 to the Form 10-Q filed on May 15, 2002.

(8)                                  Incorporatedby reference to Exhibit 10.34 to the Form 10-Q filed on August 14, 2002.

(9)                                  Incorporatedby reference to Exhibit 10.35 to the Form 10-Q filed on August 14, 2002.

 

*                                         Incorporatedherein by this reference from previous filings with the Securities and ExchangeCommission.

 

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### **SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| **Signature**    |   | **Title** |                                                                                | **Date** |
|------------------|--------|-----------|-------------------------------------------------------------------------------------|----------|
|             |   |      |                                                                                |     |
|             |   |      |                                                                                |     |
| /s/ Carl Mostert |   |      | Director and Chief Executive Officer (Principal  Executive Officer)                 |     | February  13, 2004 |
| Carl Mostert     |
|             |   |      |                                                                                |     |
|             |   |      |                                                                                |     |
| /s/ John W. Low  |   |      | Chief Financial Officer and Secretary (Principal  Financial and Accounting Officer) |     | February 13, 2004 |
| John W. Low      |

 

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