**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x****                     ****QUARTERLY REPORT UNDERSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

**For the Quarterly Period EndedJune 30, 2006.**

**OR**

**o****                        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thetransition period from                                    to                                     .**

**CommissionFile Number 0-15935**

**SPESCOMSOFTWARE INC.**

(Exact name ofregistrant as specified in its charter)

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

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

(Address ofprincipal executive offices and zip code)

**(858)625-3000**

(Registrantstelephone number, including area code)

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

YES          x          NO          o

Indicate by check whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer   o               AcceleratedFiler   o               Non-AcceleratedFiler   x

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

YES          o          NO          x

Number of shares of Common Stock outstanding at August 14,2006:  37,144,494

 

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**ITEM1.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**SPESCOMSOFTWARE INC.**

**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                                                                                 | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(Unaudited)**   | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                            |       |              |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                 |       | $                 | 306,000    |                   | $          | 285,000 |   |
| Receivables, net                                                                                                                                                           |       | 436,000           |       | 613,000                |       |
| Other current  assets                                                                                                                                                      |       | 188,000           |       | 72,000                 |       |
| Total current  assets                                                                                                                                                      |       | 930,000           |       | 970,000                |       |
|                                                                                                                                                                       |       |              |       |                   |       |
| Property and equipment,  net                                                                                                                                               |       | 152,000           |       | 168,000                |       |
| Computer software, net                                                                                                                                                     |       | 451,000           |       | 477,000                |       |
| Other assets                                                                                                                                                               |       | 29,000            |       | 30,000                 |       |
| Total assets                                                                                                                                                               |       | $                 | 1,562,000  |                   | $          | 1,645,000 |   |
|                                                                                                                                                                       |       |              |       |                   |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIT**                                                                                                                            | ** ** | ** **        | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                                                                                       |       |              |       |                   |       |
| Accounts payable                                                                                                                                                           |       | $                 | 622,000    |                   | $          | 374,000 |   |
| Payable to  Spescom Ltd.                                                                                                                                                   |       | 181,000           |       | 213,000                |       |
| Preferred stock  dividend payable to Spescom Ltd.                                                                                                                          |       | 846,000           |       | 568,000                |       |
| Accrued  liabilities                                                                                                                                                       |       | 1,152,000         |       | 1,407,000              |       |
| Lease  obligations– current portion                                                                                                                                   |       | 43,000            |       | 41,000                 |       |
| Notes and  accrued interest payable to Spescom Ltd.                                                                                                                        |       | 992,000           |       | —                 |       |
| Deferred revenue                                                                                                                                                           |       | 2,676,000         |       | 3,026,000              |       |
| Series I  redeemable preferred stock, par value $0.01 per share, 2,450 shares authorized;  2,450 shares issued and outstanding at June 30, 2006                            |       | 2,450,000         |       | —                 |       |
| Total current  liabilities                                                                                                                                                 |       | 8,962,000         |       | 5,629,000              |       |
|                                                                                                                                                                       |       |              |       |                   |       |
| Notes and accrued  interest payable to Spescom Ltd.                                                                                                                        |       | —            |       | 917,000                |       |
| Lease obligations                                                                                                                                                          |       | 25,000            |       | 59,000                 |       |
| Total  liabilities                                                                                                                                                         |       | 8,987,000         |       | 6,605,000              |       |
|                                                                                                                                                                       |       |              |       |                   |       |
| Shareholders’ deficit:                                                                                                                                                |       |              |       |                   |       |
| Convertible  preferred stock, 243,239 remaining shares authorized                                                                                                          |       |              |       |                   |       |
| Series F - par  value $1.00 per share; 5,291 shares authorized, issued and outstanding at June  30, 2006 and September 30, 2005                                            |       | 6,790,000         |       | 6,790,000              |       |
| Series G - par  value $0.01 per share; 1,670 remaining shares authorized; 1,450 shares issued  and outstanding at September 30, 2005                                       |       | —            |       | 1,450,000              |       |
| Common stock, no  par value, 100,000,000 shares authorized; 37,144,494 and 36,818,528 shares  issued and outstanding at June 30, 2006 and September 30, 2005, respectively |       | 76,403,000        |       | 75,938,000             |       |
| Common stock  warrants                                                                                                                                                     |       | 1,784,000         |       | 1,506,000              |       |
| Accumulated  other comprehensive loss                                                                                                                                      |       | (388,000          | )          | (353,000               | )          |
| Accumulated  deficit                                                                                                                                                       |       | (92,014,000       | )          | (90,291,000            | )          |
| Total  shareholders’ deficit                                                                                                                                          |       | (7,425,000        | )          | (4,960,000             | )          |
|                                                                                                                                                                       |       |              |       |                   |       |
| Total liabilities and  shareholders’ deficit                                                                                                                          |       | $                 | 1,562,000  |                   | $          | 1,645,000 |   |

The accompanying notesare an integral part of these consolidated financial statements.

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**SPESCOMSOFTWARE INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                          | ** ** | **For the three months ended  June 30,** | ** ** | **For the nine months ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                                          | ** ** | **2005**                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                           |       |                                                              |       |                                                             |       |   |   |   |   |
| Licenses                                            |       | $                                                                 | 255,000    |                                                             | $          | 149,000 |   | $ | 1,471,000 |   | $ | 503,000 |   |
| Services and other                                  |       | 1,278,000                                                         |       | 1,148,000                                                        |       | 3,954,000 |   | 4,120,000 |   |
| Total revenues                                      |       | 1,533,000                                                         |       | 1,297,000                                                        |       | 5,425,000 |   | 4,623,000 |   |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Cost of  revenues:                                  |       |                                                              |       |                                                             |       |   |   |   |   |
| Licenses                                            |       | 78,000                                                            |       | 62,000                                                           |       | 272,000 |   | 170,000 |   |
| Services and other                                  |       | 542,000                                                           |       | 515,000                                                          |       | 1,803,000 |   | 1,749,000 |   |
| Total cost of  revenues                             |       | 620,000                                                           |       | 577,000                                                          |       | 2,075,000 |   | 1,919,000 |   |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Gross profit                                        |       | 913,000                                                           |       | 720,000                                                          |       | 3,350,000 |   | 2,704,000 |   |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Operating  expenses:                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Research and development                            |       | 289,000                                                           |       | 164,000                                                          |       | 774,000 |   | 684,000 |   |
| Marketing and sales                                 |       | 553,000                                                           |       | 945,000                                                          |       | 1,891,000 |   | 2,683,000 |   |
| General and administrative                          |       | 441,000                                                           |       | 441,000                                                          |       | 1,235,000 |   | 1,213,000 |   |
| Total operating  expenses                           |       | 1,283,000                                                         |       | 1,550,000                                                        |       | 3,900,000 |   | 4,580,000 |   |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Loss from  operations                               |       | (370,000                                                          | )          | (830,000                                                         | )          | (550,000 | ) | (1,876,000 | ) |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Interest and  other income                          |       | —                                                            |       | —                                                           |       | 4,000 |   | 1,000 |   |
| Interest and  other expense                         |       | (72,000                                                           | )          | (38,000                                                          | )          | (177,000 | ) | (105,000 | ) |
| Net loss                                            |       | (442,000                                                          | )          | (868,000                                                         | )          | (723,000 | ) | (1,980,000 | ) |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Deemed preferred  dividend                          |       | —                                                            |       | —                                                           |       | (1,000,000 | ) | (2,200,000 | ) |
| Net loss  available after deemed preferred dividend |       | (442,000                                                          | )          | (868,000                                                         | )          | (1,723,000 | ) | (4,180,000 | ) |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Cumulative  preferred dividends                     |       | (97,000                                                           | )          | (66,000                                                          | )          | (283,000 | ) | (235,000 | ) |
| Net loss  available to common shareholders          |       | $                                                                 | (539,000   | )                                                                | $          | (934,000 | ) | $ | (2,006,000 | ) | $ | (4,415,000 | ) |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| Earnings (loss)  per share:                         |       |                                                              |       |                                                             |       |   |   |   |   |
| Basic and  diluted                                  |       | $                                                                 | (0.01      | )                                                                | $          | (0.03 | ) | $ | (0.05 | ) | $ | (0.13 | ) |
| Weighted average  shares outstanding:               |       |                                                              |       |                                                             |       |   |   |   |   |
| Basic and diluted                                   |       | 36,895,000                                                        |       | 35,022,000                                                       |       | 36,869,000 |   | 34,465,000 |   |
|                                                |       |                                                              |       |                                                             |       |   |   |   |   |
| **Statement  of Comprehensive Loss**                | ** ** | ** **                                                        | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                            |       | $                                                                 | (442,000   | )                                                                | $          | (868,000 | ) | $ | (723,000 | ) | $ | (1,980,000 | ) |
| Other  Comprehensive income (loss):                 |       |                                                              |       |                                                             |       |   |   |   |   |
| Foreign currency translation adjustment             |       | (55,000                                                           | )          | 46,000                                                           |       | (35,000 | ) | 2,000 |   |
| Comprehensive loss                                  |       | $                                                                 | (497,000   | )                                                                | $          | (822,000 | ) | $ | (758,000 | ) | $ | (1,978,000 | ) |

The accompanying notesare an integral part of these consolidated financial statements.

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**SPESCOMSOFTWARE INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                   | ** ** | **For the nine months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                         | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                       |       |                                                             |       |   |   |
| Net loss                                                                     |       | $                                                                | (723,000   | ) | $ | (1,980,000 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                             |       |   |   |
| Depreciation and amortization                                                |       | 118,000                                                          |       | 61,000 |   |
| Unpaid interest on notes payable                                             |       | 151,000                                                          |       | 109,000 |   |
| Share-based compensation                                                     |       | 177,000                                                          |       | — |   |
| Compensation for warrants issued to consultants                              |       | 40,000                                                           |       | 30,000 |   |
| Changes in  assets and liabilities:                                          |       |                                                             |       |   |   |
| Receivables, net                                                             |       | 186,000                                                          |       | 187,000 |   |
| Other current assets                                                         |       | (114,000                                                         | )          | 108,000 |   |
| Accounts payable                                                             |       | 248,000                                                          |       | (108,000 | ) |
| Payable to Spescom Ltd.                                                      |       | (16,000                                                          | )          | — |   |
| Accrued liabilities                                                          |       | (307,000                                                         | )          | (17,000 | ) |
| Deferred revenue                                                             |       | (385,000                                                         | )          | 495,000 |   |
| Net cash used in  operating activities                                       |       | (625,000                                                         | )          | (1,115,000 | ) |
|                                                                         |       |                                                             |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                             |       |   |   |
| Purchases of  property and equipment                                         |       | (42,000                                                          | )          | (15,000 | ) |
| Capitalization  of development costs                                         |       | (35,000                                                          | )          | (389,000 | ) |
| Purchases of  software                                                       |       | —                                                           |       | (38,000 | ) |
| Net cash used in  investing activities                                       |       | (77,000                                                          | )          | (442,000 | ) |
|                                                                         |       |                                                             |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                             |       |   |   |
| Proceeds from  exercise of stock options                                     |       | —                                                           |       | 6,000 |   |
| Proceeds from  exercise of warrants                                          |       | —                                                           |       | 17,000 |   |
| Net proceeds  from private placement                                         |       | 764,000                                                          |       | 1,750,000 |   |
| Payments on  capital lease obligations                                       |       | (32,000                                                          | )          | (21,000 | ) |
| Net cash  provided by financing activities                                   |       | 732,000                                                          |       | 1,752,000 |   |
|                                                                         |       |                                                             |       |   |   |
| Effect of  exchange rate changes on cash                                     |       | (9,000                                                           | )          | 6,000 |   |
|                                                                         |       |                                                             |       |   |   |
| Net increase in  cash and cash equivalents                                   |       | 21,000                                                           |       | 201,000 |   |
| Cash and cash  equivalents at beginning of period                            |       | 285,000                                                          |       | 109,000 |   |
|                                                                         |       |                                                             |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                                | 306,000    |   | $ | 310,000 |   |

See Note 2 for supplemental cash flow information.

The accompanyingnotes are an integral part of these consolidated financial statements.

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**SPESCOM SOFTWARE INC.**

**CONDENSED NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**Note 1 –Basis of Presentation**

The accompanyingconsolidated financial statements as of June 30, 2006 and for the three andnine months ended June 30, 2006 and 2005 are unaudited. The consolidatedfinancial statements and related notes have been prepared in accordance withgenerally accepted accounting principles applicable to interim periods. In the opinion of management, the consolidated financial statements reflect alladjustments, consisting only of normal recurring adjustments, necessary for afair presentation of the consolidated financial position, operating results andcash flows for the periods presented.

The information containedin the following Condensed Notes to the Consolidated Financial Statements iscondensed from that which would appear in the annual consolidated financialstatements; accordingly, the consolidated financial statements included hereinshould be reviewed in conjunction with the consolidated financial statementsand related notes thereto contained in the Company’s Annual Report on Form10-K/A for the year ended September 30, 2005.  It should beunderstood that the accounting measurements at an interim date inherentlyinvolve greater reliance on estimates than at year-end.  The results ofoperations for the interim periods presented are not necessarily indicative ofthe results expected for the entire year.

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

*Principlesof Consolidation*

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

*ForeignCurrency*

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

*Use ofEstimates*

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

*RevenueRecognition*

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

Software license andthird party product revenues are recognized upon shipment of the product if nosignificant vendor obligations remain and collection is probable. In caseswhere a significant vendor obligation exists, revenue recognition is delayeduntil such obligation has been satisfied. For new software products where ahistorical record has not yet been demonstrated that acceptance is perfunctory,the Company defers recognition of revenue until acceptance has occurred. If an undelivered element of the arrangement

5

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exists under the licensearrangement, a portion of revenue is deferred based on vendor-specificobjective evidence (VSOE) of the fair value of the undelivered element untildelivery occurs.  If VSOE does not exist for all undelivered elements, allrevenue is deferred until sufficient evidence exists or all elements have beendelivered.  Annual maintenance revenues, which consist of ongoing support andproduct updates, are recognized on a straight-line basis over the term of thecontract. Payments received in advance of performance of the related servicefor maintenance contracts are recorded as deferred revenue. Revenues fromtraining and consulting services are recognized when the services are performedand adequate evidence of providing such services is available. Contractrevenues for long-term contracts or programs requiring specialized systems arerecognized using the percentage-of-completion method of accounting, primarilybased on contract labor hours incurred to date compared with total estimatedlabor hours at completion. Provisions for anticipated contract losses arerecognized at the time they become known.

Contracts are billedbased on the terms of the contract. There are no retentions in billed contractreceivables. Unbilled contract receivables relate to revenues earned but notbilled at the end of the period. Prepaid contract costs are netted againstadvanced billings on contracts. As of June 30, 2006, prepaid contract cost of$61,000 for one customer contract were netted against billings of $140,000,included under deferred revenues in the balance sheet.  During the quarter ended June 30, 2006 thecompany recognized $31,000 of revenue for this contract.

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

·                                          The actualcontractual terms, such as payment terms, delivery dates, and pricing of thevarious product and service elements of a contract

·                                          Availabilityof products to be delivered

·                                          Time periodover which services are to be performed

·                                          Creditworthinessof the customer

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

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

*FairValue of Financial Instruments*

Statement of FinancialAccounting Standards (“SFAS”) No. 107, “Disclosures About Fair Value ofFinancial Instruments”, requires management to disclose the estimated fairvalue of certain assets and liabilities defined by SFAS No. 107 as cash ora contractual obligation that both conveys to one entity a right to receivecash or other financial instruments from another entity, and imposes on theother entity the obligation to deliver cash or other financial instruments tothe first entity. At June 30, 2006 and September 30, 2005, managementbelieves that the carrying amounts of cash and cash equivalents, short-terminvestments, accounts receivable and accounts payable, and accrued expensesapproximate fair value because of the short maturity of these financialinstruments. The Company believes that the carrying value of its loansapproximate their fair values based on current market rates of interest.

*Concentrationof Credit Risk*

The Company providesproducts and services to customers in a variety of industries worldwide,including local governments, petrochemicals, utilities, manufacturing andtransportation. Concentration of credit risk with respect to trade receivablesis limited due to the geographic and industry dispersion of the Company’scustomer base. The Company has not experienced significant credit losses on itscustomer accounts. Constellation Energy Group and City of Lancaster accountedfor 37% and 14%, respectively, of trade accounts receivable at June 30, 2006 ascompared to W.H. Smith Ltd. and Entergy Operations, which accounted for 33% and28%, respectively, of trade accounts receivable at September 30, 2005.

A small number ofcustomers have typically accounted for a large percentage of the Company’sannual revenues.  Constellation EnergyGroup accounted for 15% of revenue for the nine months ended June 30, 2006while Network Rail and CSC International Systems Ltd. accounted for 18% and10%, respectively, of revenue for the nine months ended June 30, 2005. The Company’s reliance on relatively few customers could have a materialadverse effect on the results of its operations on a quarterly basis.

6

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*Propertyand Equipment*

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

*SoftwareDevelopment Costs*

Software developmentcosts are capitalized when technological feasibility and marketability of therelated product have been established. Software development costs incurredsolely in connection with a specific contract are charged to cost of revenues.Capitalized software development costs are amortized on a product-by-productbasis, beginning when the product is available for

general release tocustomers. Annual amortization expense is calculated using the greater of theratio of each product’s current gross revenues to the total of current andexpected gross revenues or the straight-line method over the estimated usefullife of three to five years. While there was no capitalized software cost for thethree months ended June 30, 2006, there was $35,000 of capitalized softwaredevelopment costs for the nine months ended June 30, 2006.  Amortization expense for the three and ninemonths ended June 30, 2006 totaled $26,000 and $61,000, respectively.  As of June 30, 2006 and September 30, 2005,the net balance of software development capitalized totaled $451,000 and$477,000, respectively, with accumulated amortization of $62,000 and $1,000,respectively.

*Long-livedAssets*

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

*Share-BasedPayments*

In April 1996, theCompany adopted its 1996 Stock Incentive Plan (the “1996 Plan”).  The 1996Plan is administered by either the Board of Directors or a committee designatedby the Board to oversee the plan.  The total number of authorized sharesunder the 1996 Plan is 7,425,000.  As of June 30, 2006, options topurchase 5,571,000 shares are outstanding. The 1996 Plan expired as of March 31, 2006 and therefore no furthergrants are available from this Plan.

The option vesting periodunder the plan is determined by the Board of Directors or a Stock OptionCommittee and usually provides that 25% of the options granted can be exercised90 days from the date of grant, and thereafter, those options vest andbecome exercisable in additional cumulative annual installments of 25%commencing on the first anniversary of the date of grant. Options granted aregenerally due to expire upon the sooner of ten years from date of grant, thirtydays after termination of services other than by reason of convenience of theCompany, three months after disability, or one year after the date of theoption holder’s death. The option exercise price is equal to the fair marketvalue of the common stock on the date of grant.  Options granted toemployees under the 1996 Plan were either incentive stock options ornonqualified options. Only nonqualified options were granted to non-employeedirectors.

In December 2004,the Financial Accounting Standards Board (FASB) revised Statement of FinancialAccounting Standards No. 123 (FAS 123R), “Share-Based Payment,” whichestablishes accounting for share-based awards exchanged for employee servicesand requires companies to expense the estimated fair value of these awards overthe requisite employee service period. On April 14, 2005, the U.S.Securities and Exchange Commission adopted a new rule amending the effectivedates for FAS 123R. In accordance with the new rule, the accounting provisionsof FAS 123R were effective for the Company beginning in the quarter endedDecember 31, 2005.

Under FAS 123R,share-based compensation cost is measured at the grant date, based on theestimated fair value of the award, and is recognized as expense over theemployee’s requisite service period. The Company has no awards with market orperformance conditions. The Company adopted the provisions of FAS 123R onOctober 1, 2005, the first day of the Company’s fiscal year 2006, using amodified prospective application, which provides for certain changes to themethod for valuing share-based compensation. Under the modified prospectiveapplication, prior periods are not revised for comparative purposes. Thevaluation provisions of FAS 123R apply to new awards and to awards that areoutstanding on the effective date and subsequently modified or cancelled.Estimated compensation expense for awards outstanding at the effective datewill be recognized over the remaining service period using the compensationcost calculated for pro forma disclosure purposes under FASB StatementNo. 123, “Accounting for Stock-Based Compensation” (FAS 123).

On November 10,2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “TransitionElection Related to Accounting for Tax Effects of Share-Based Payment Awards.”The Company has elected to adopt the alternative transition method provided inthis FASB Staff Position for calculating the tax effects of share-basedcompensation pursuant to FAS 123R. The alternative transition method includes asimplified method to establish the beginning balance of the additional paid-incapital pool (APIC pool) related to the tax effects of employee share-basedcompensation, which is available to absorb tax deficiencies recognizedsubsequent to the adoption of FAS 123R.

7

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The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants:
|                          | ** ** | **For the three** | ** ** | **For the nine** | ** ** |
|--------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **months ended**       | ** ** | **months ended**      | ** ** |
| ** **               | ** ** | **June 30,**           | ** ** | **June 30,**          | ** ** |
| ** **               | ** ** | **2006**                    | ** ** | **2006**                   | ** ** |
| Dividend Yield           |       | 0                           | %          | 0                          | %          |
| Expected  Volatility     |       | 171                         | %          | 171                        | %          |
| Risk free  interest rate |       | 5.1                         | %          | 5.1                        | %          |
| Expected lives (years)   |       | 10                          |       | 10                         |       |

The weighted-average estimated fair value of employeestock options granted during the three and nine months ended June 30, 2006using the Black-Scholes model were as follows:
|                                                       | ** ** | **For the three** | ** ** | **For the nine** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **months ended**       | ** ** | **months ended**      | ** ** |
| ** **                                            | ** ** | **June 30,**           | ** ** | **June 30,**          | ** ** |
| ** **                                            | ** ** | **2006**                    | ** ** | **2006**                   | ** ** |
| Research and  development                             |       | $                           | 4,000      |                       | $          | 9,000 |   |
| Marketing and sales                                   |       | 27,000                      |       | 57,000                     |       |
| General and  administrative                           |       | 54,000                      |       | 111,000                    |       |
|                                                  |       |                        |       |                       |       |
| Share-based  compensation                             |       | $                           | 85,000     |                       | $          | 177,000 |   |
|                                                  |       |                        |       |                       |       |
| Basic and  diluted net loss per share attributable to |       |                        |       |                       |       |
| Basic                                                 |       | $                           | —     |                       | $          | — |   |
| Diluted                                               |       | $                           | —     |                       | $          | — |   |

A summary of option activity under the Plan as of June30, 2006, and changes during the nine months then ended is presented below:
|                                            | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|--------------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                 | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                 | ** ** | **Shares** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **Options**                                | ** ** | **(000)**  | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
|                                       |       |       |       |          |       |            |       |          |       |
| Outstanding  Options at September 30, 2005 |       | 4,856      |       | $             | 0.30       |            |       |          |       |   |
|                                       |       |       |       |          |       |            |       |          |       |
| Granted                                    |       | 2,194      |       | $             | 0.12       |            |       |          |       |   |
|                                       |       |       |       |          |       |            |       |          |       |
| Exercised                                  |       | —     |       | $             | —     |            |       |          |       |   |
|                                       |       |       |       |          |       |            |       |          |       |
| Forfeited or  expired                      |       | (1,479     | )          | $             | 0.23       |            |       |          |       |   |
|                                       |       |       |       |          |       |            |       |          |       |
| Outstanding at  June 30, 2006              |       | 5,571      |       | $             | 0.25       |            | 7.6        |          | $          | — |   |
|                                       |       |       |       |          |       |            |       |          |       |
| Exercisable at June 30,  2006              |       | 3,372      |       | $             | 0.32       |            | 6.6        |          | $          | — |   |

The weighted-average grant-date fair values of optionsgranted during the nine months ended June 30, 2006 were $0.12 per share. There were no options exercised for the nine months ended June 30, 2006.

8

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*ProForma Information under FAS 123 for Periods Prior to Fiscal 2006*

The Company measurescompensation expense for its stock-based employee compensation plans using theintrinsic value method and provides pro forma disclosures of net loss and basicand diluted net loss per share as if the fair value-based method had beenapplied in measuring compensation expense. The Company applies SFAS No.123,*Accounting for Stock-Based Compensation*and Accounting Principles Board Opinion No. 25 and related Interpretationsin accounting for its employee stock-based compensation plan.

No compensation cost wasrecognized for employee stock option grants during 2005 based upon theintrinsic value method, which were fixed in nature, as the options were grantedat exercise prices equal to fair market value on the date of grant. Hadcompensation cost for the Company’s employee stock-based compensation plan beendetermined based on the fair value at the grant dates the disclosurerequirements of SFAS No. 148, which amends the disclosure requirements of FAS123, would have been as follows:
|                                                                                                                              | ** ** | **For the three** | ** ** | **For the nine** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                   | ** ** | **months ended**       | ** ** | **months ended**      | ** ** |
| ** **                                                                                                                   | ** ** | **June 30,**           | ** ** | **June 30,**          | ** ** |
| ** **                                                                                                                   | ** ** | **2005**                    | ** ** | **2005**                   | ** ** |
| Net loss used in  computing net loss per share                                                                               |       |                        |       |                       |       |
| As reported                                                                                                                  |       | $                           | (934,000   | )                          | $          | (4,415,000 | ) |
| Subtract:                                                                                                                    |       |                        |       |                       |       |
| Total stock based employee compensation expense determined  under fair value based method for all awards, net of related tax |       | (39,000                     | )          | (154,000                   | )          |
| Pro forma net  loss                                                                                                          |       | $                           | (973,000   | )                          | $          | (4,569,000 | ) |
|                                                                                                                         |       |                        |       |                       |       |
| Basic and  diluted net loss per share attributable to common                                                                 |       |                        |       |                       |       |
| As reported                                                                                                                  |       | $                           | (0.03      | )                          | $          | (0.13 | ) |
| Pro forma                                                                                                                    |       | $                           | (0.03      | )                          | $          | (0.13 | ) |

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions used for grants:
|                          | ** ** | **For the three** | ** ** | **For the nine** | ** ** |
|--------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **months ended**       | ** ** | **months ended**      | ** ** |
| ** **               | ** ** | **June 30,**           | ** ** | **June 30,**          | ** ** |
| ** **               | ** ** | **2005**                    | ** ** | **2005**                   | ** ** |
| Dividend Yield           |       | 0                           | %          | 0                          | %          |
| Expected  Volatility     |       | 253                         | %          | 253                        | %          |
| Risk free  interest rate |       | 4.0                         | %          | 4.0                        | %          |
| Expected lives           |       | 10                          |       | 10                         |       |

*Income Taxes*

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

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

*NetIncome (Loss) per Common Share*

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

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*Statementsof Cash Flows*

The following tableprovides supplemental cash flow information:
|                                               | ** ** | **For the nine months ended  June 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                         | ** ** | **2005** | ** ** |
| Supplemental  cash flow information:          |       |                                                             |       |   |   |
| Interest paid                                 |       | $                                                                | 3,000      |   | $ | 8,000 |   |
|                                          |       |                                                             |       |   |   |
| Non-cash  financing and investing activities: |       |                                                             |       |   |   |
| Accrued preferred stock dividends             |       | $                                                                | 283,000    |   | $ | 198,000 |   |
| Warrants issued for services                  |       | —                                                           |       | — |   |
| Acquisition of equipment under capital lease  |       | —                                                           |       | 60,000 |   |
| Deemed dividend on private placement          |       | 1,000,000                                                        |       | 2,200,000 |   |
| Expiration of warrants                        |       | —                                                           |       | 133,000 |   |
|                                          |       | $                                                                | 1,283,000  |   | $ | 2,591,000 |   |

**Note 3 — Spescom Ltd. Transactionsand Related Parties**

As of June 30, 2006 andSeptember 30, 2005 there were 5,291 shares of Series F Convertible PreferredStock with a stated value of $1,000 per share held by Spescom Ltd., themajority shareholder of the Company. The Series F Convertible Preferred Stockis convertible into common stock, at a stated conversion price of $0.45 pershare subject to certain adjustments.  The conversion is at the option ofSpescom Ltd. through September 30, 2008. The outstanding Series FConvertible Preferred Stock is entitled to receive dividends of 5% of thestated value of $1,000 per share per annum, payable on a quarterly basis incash or common stock (valued on the basis of the average per share market valueon the 30 trading days immediately prior to the date on which such dividend isdeclared by the Board of Directors).  Unpaid dividends accrue interest atthe rate of 8% per annum.  As of June 30, 2006, unpaid dividends and accruedinterest amounted to $728,000 and $77,000, respectively. As ofSeptember 30, 2005, unpaid dividends and accrued interest amounted to$529,000 and $39,000, respectively.

Related party liabilitiesconsist of the following:
|                                                                 | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2006**          | ** ** | **2005**               | ** ** |
|                                                            |       |              |       |                   |       |
| Payable to  Spescom Ltd. UK                                     |       | $                 | 181,000    |                   | $          | 213,000 |   |
|                                                            |       |              |       |                   |       |
| Payable to  Spescom Ltd. S.A.                                   |       | $                 | 329,000    |                   | $          | 302,000 |   |
| Notes and  accrued interest payable on demand - Spescom Ltd. UK |       | 663,000           |       | 615,000                |       |
|                                                            |       | $                 | 992,000    |                   | $          | 917,000 |   |

The Company has two existing demand notes payable toSpescom Ltd. UK, a wholly owned subsidiary of Spescom Ltd., for $400,000and $100,000, each bearing interest rate of 10% per annum.  As of June 30,2006 and September 30, 2005, the balance owed on the notes including interestwas $663,000 and $615,000, respectively. Spescom Ltd. has agreed that it willnot cause Spescom Ltd. UK to demand repayment under the two notes prior toOctober 1, 2006.  Interest expense on the notes was $16,000 and$15,000 for the three months ended June 30, 2006 and 2005, respectively. These notes are collateralized by a security interest in favor of both SpescomLtd. and Spescom Ltd. UK in respect of all the Company’s assets. In November2005 the Company’s wholly owned subsidiary, Spescom Software Ltd. agreed toguarantee certain loan obligations of Spescom Ltd. which total $4.9 million asof June 30, 2006.  The proceeds of these loans had been used by SpescomLtd. in prior years to provide working capital to the Company. The guarantee issecured by the assets of Spescom Software Ltd. which totaled $246,000 as ofJune 30, 2006.

Under a royaltyarrangement beginning in fiscal 2004, Spescom Ltd. resold the Company’ssoftware and maintenance services in South Africa. In February 2006 the royaltyarrangement with Spescom Ltd. was terminated and the company entered into a newreseller arrangement with a third party company DocQnet International for theSouth African market. There was no royalty revenue recognized under the royaltyagreement with Spescom Ltd. for the three months ended June 30, 2006, while$117,000 was recognized during the nine months ended June 30, 2006.  In September 2005, Spescom Ltd. performedcertain marketing and business development projects for the company along withassisting in raising working capital. Spescom Ltd. had agreed to defer paymentfor

10

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these services untilafter October 1, 2006. However, interest will accrue on the balance owed at arate of 11%. The total expense relating to these services was $302,000 for theyear ended September 30, 2005 and additional expense of $2,000 was recorded forthe nine months ended June 30, 2006. As of June 30, 2006, the total unpaidservices and interest amounted to $304,000 and $25,000, respectively.

Prior to February 10,2006, Spescom Ltd. UK provided certain administrative and accounting functionsfor the Company’s United Kingdom subsidiary.  The Company was billed amonthly fee by Spescom Ltd. UK for reimbursement of certain costs in the UnitedKingdom including the office facilities, all accounting and human resourcesservices, and certain corporate marketing activities. As of February 10, 2006,Spescom Ltd. no longer provides administrative or accounting function and theCompany’s UK subsidiary has relocated to another facility.  For the three months ended June 30, 2006there were no administrative fees as compared to $148,000 for the same periodin 2005.  For the nine months ended June30, 2006 the administrative fees totaled $226,000 as compared to $457,000, forthe same period in 2005.  The administrative fee charged by Spescom Ltd.UK for the three months ended June 30, 2005 included office rent of $86,000.The office rent included in the administrative fee totaled $132,000 for thenine months ended June 30, 2006 as compared to $180,000 for the same periods in2005.  At June 30, 2006 and September 30,2005 the Company had a payable to Spescom Ltd. UK of $181,000 and $213,000,respectively. In 1999, as part of an agreement to sell a 60% interest in its UnitedKingdom subsidiary to Spescom Ltd., the lease for the United Kingdom officefacility was to be assigned to Spescom Ltd. UK; however, the landlord did notgrant its consent to the assignment and as such Spescom Ltd.UK has paid thelease for the entire office directly to the landlord.  The lease expiredon March 14, 2006.  The landlord has claimed that the Company owescertain dilapidation payments under the lease. The Company has disputed such claims and believes there will be nomaterial effect once resolved.

Spescom Ltd. and theCompany have entered into a license agreement pursuant to which Spescom Ltd.has licensed to the Company the right to use the name “Spescom” and to use atrademark owned by Spescom Ltd. related to certain computer software. TheCompany will not pay any royalties to Spescom Ltd. in connection with thislicense. The license is for an indefinite term, but is

terminable by eitherparty upon 60 days prior written notice. Under the license agreement, SpescomLtd. has agreed to indemnify and hold harmless the Company and its directors,officers, employees and agents against liabilities arising from any claimbrought against the Company that alleges that Spescom Ltd.’s or the Company’suse of the licensed trademark infringes the rights of any third party, providedthat the Company is in material compliance with the provisions of the licenseagreement.

**Note 4 —Receivables**

A summary of receivablesand allowance for doubtful accounts as of June 30, 2006 and September 30, 2005are as follows:
|                                        | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                             | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| **Receivables  consist of:**           | ** ** | ** **        | ** ** | ** **             | ** ** |
| Receivables                            |       | $                 | 286,000    |                   | $          | 621,000 |   |
| Unbilled  receivables                  |       | 155,000           |       | —                 |       |
|                                   |       | 441,000           |       | 621,000                |       |
| Less: allowance  for doubtful accounts |       | (5,000            | )          | (8,000                 | )          |
|                                   |       | $                 | 436,000    |                   | $          | 613,000 |   |

 

**Note 5 —Reconciliation of Net Loss and Shares Used in Per Share Computations:**
|                                             | ** ** | **For the three months ended  June 30,** | ** ** | **For the nine months ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                          | ** ** | **2005**                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss  available for common shareholders |       | $                                                                 | (539,000   | )                                                                | $          | (934,000 | ) | (2,006,000 | ) | (4,415,000 | ) |
|                                        |       |                                                              |       |                                                             |       |   |   |   |   |
| Common stock and common  stock equivalents  |       | 36,895,000                                                        |       | 35,022,000                                                       |       | 36,869,000 |   | 34,465,000 |   |
|                                             |            |                                                                   |            |                                                                  |            |  |  |  |  |  |  |

Basic net loss per share is computed using theweighted-average number of common shares outstanding during the period. Contingently issued shares are included in the computation of basic net income(loss) per share when the related conditions are satisfied.  Diluted net lossper share is computed using the weighted average number of common shares andpotentially dilutive securities outstanding during the period. Potentially dilutive securities consist of contingently issued shares, thecommon shares issuable upon conversion of preferred stock or convertible debtand shares issuable upon the exercise of stock options and common stock warrants. Potentially dilutive securities are excluded from the computation if theireffect is anti-dilutive.

11

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As of June 30, 2006, atotal of 5,571,000 stock options, 7,644,354 common stock warrants, and 5,291and 2,450 shares of Series F and Series I Convertible Preferred Stock,respectively, were excluded from the diluted net income (loss) per sharecalculation, as their effect would be anti-dilutive. There were no shares ofSeries H Convertible Preferred Stock at June 30, 2006 as the shares wereexchanged for Series I Convertible Preferred Stock on March 10, 2006.  As of June 30, 2005, a total of 4,030,000stock options, 3,758,335 common stock warrants, and 5,291 and 1,900 shares ofSeries F and Series G Convertible Preferred Stock, respectively, were excludedfrom the diluted net income (loss) per share calculation, as their effect wouldbe anti-dilutive.

**Note 6 —Segment and Geographic Information**

The Company has onebusiness segment, which consists of the development and sale of a suite ofintegrated document, configuration and records management software product.

Revenues by customerlocation and identifiable assets by location are as follows:
|                                   | ** ** | **For the three months ended  June 30,** | ** ** | **For the nine months ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                                          | ** ** | **2005**                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales:                        |       |                                                              |       |                                                             |       |   |   |   |   |
| United States                     |       | $                                                                 | 995,000    |                                                             | $          | 714,000 |   | $ | 3,416,000 |   | $ | 2,349,000 |   |
| Europe,  primarily United Kingdom |       | 410,000                                                           |       | 564,000                                                          |       | 1,396,000 |   | 2,200,000 |   |
| Other  International              |       | 128,000                                                           |       | 19,000                                                           |       | 613,000 |   | 74,000 |   |
|                              |       | $                                                                 | 1,533,000  |                                                             | $          | 1,297,000 |   | $ | 5,425,000 |   | $ | 4,623,000 |   |

 
|                                                  | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| Identifiable  assets from continuing operations: |       |              |       |                   |       |
| United States                                    |       | $                 | 1,377,000  |                   | $          | 1,300,000 |   |
| Europe, United  Kingdom                          |       | 246,000           |       | 345,000                |       |
|                                             |       | $                 | 1,623,000  |                   | $          | 1,645,000 |   |

**Note 7—Redeemable PreferredStock**

**October2005 Private Placement**

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

The shares of Series HPreferred Stock issued were convertible into common stock at the conversionrate in effect at the time of conversion.  The conversion price per shareof the Series H Preferred Stock was equal to 85% of the market price (thevolume weighted average price of the Company’s common stock during the 5immediately preceding trading days), provided that in no event shall theconversion price exceed a ceiling price of $0.40 per share, or be less than afloor price which varies with the aggregate gross revenues of the Companyduring the last four fiscal quarters for which revenues have been reported bythe Company prior to such time, but which will not be lower than $0.0725 pershare and not higher than $0.16 per share. The Series H Preferred Stock accrued dividends at 6.75% of the statedvalue of $1,000 per share per annum.  OnMarch 31, 2006 the Company issued 325,966 shares of common stock in payment ofdeclared Series H Preferred Stock dividends of $44,000 based on a fair marketvalue of $0.13 per share.

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

12

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## **March 2006Private Placement**

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

Each share of Series IPreferred Stock is convertible into a number of shares of common stockdetermined by dividing $1,000 by the conversion price per share in effect atthe time of conversion. The conversion price per share is equal to 85% of themarket price (the volume-weighted average price of the Company’s common stockduring the 5 immediately preceding trading days, subject to adjustment),provided that in no event shall the conversion price exceed a ceiling price of$0.21 per share, or be less than a floor price of $0.0725 per share.

Under the terms of theSeries I Preferred Stock, if the Company has not entered into a bindingagreement to consummate a consolidation, merger, reclassification of the stockof the Company (subject to certain exceptions), or disposition of all orsubstantially all of the assets of the Company on or before April 30,2006, the holders of Series I Preferred Stock may, by the vote not laterthan December 31, 2006 of at least two-thirds of the then-outstandingshares, elect to have all of the outstanding shares of Series I PreferredStock redeemed by the Company. Upon such election, the Company would beobligated to redeem the Series I Preferred Stock at an amount equal to$1,000 per share plus all declared but unpaid dividends. In the event that theholders of Series I Preferred Stock exercise their redemption right butthe Company does not have sufficient funds available to redeem theSeries I Preferred Stock in accordance with applicable law, the holders ofSeries I Preferred Stock as a class will be entitled to elect thesmallest number of directors of the Company constituting a majority of theauthorized number of directors.  As ofApril 30, 2006 the Company had not entered into a binding agreement toconsummate a consolidation, merger, reclassification of the stock of theCompany; or disposition of all or substantially all of the assets of theCompany; presently, however, the holders of the Series I Preferred Stock havenot taken any action in regard to their rights under these terms.  In the event the holders of the Series IPreferred Stock exercise their redemption right, the Company would not havesufficient funds available to redeem the Series I Preferred Stock and thoseholders would be entitled to elect a majority of the authorized directors ofthe Company.  In this event, those holders, through their majority controlof the Board of Directors, would be able to control or (with respect to mattersrequiring shareholder approval) exert significant influence over all mattersaffecting the Company.  Under FAS 150 “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity” and EITF D-98 “Classification and Measurement of Redeemable Securities”and since a binding agreement was not entered into by April 30, 2006, theCompany has reclassified the fair value of the Series I Preferred Stock toliabilities as of June 30, 2006 as the Company may be obligated to repay allthe proceeds received.

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

**Note 8—Equity**

**November2004 Private Placement**

On November 5, 2004, theCompany completed a financing arrangement whereby the Company issued 2,200shares of our Series G Preferred Stock along with 2,750,000 common stockwarrants for gross proceeds of $2,200,000. The Series G Preferred Stock wasconvertible into common stock at a price equal to 85% of the volume weightedaverage price of the Company’s common stock during the five trading days immediatelypreceding the conversion date; however, the conversion price could be no higherthan $0.40 per share and no lower than $0.30 per share. The 2,750,000 warrantshave an exercise price of $0.44 per share and which expire on November 5, 2007.The Company incurred $418,000 in expenses related to the transaction and issued825,000 common stock warrants to an investment consulting firm. The 825,000warrants were comprised of 550,000 warrants with an exercise price of $0.40 pershare which expire November 5, 2009 and 275,000 warrants with an exercise priceof $0.44 per share which expired on November 5, 2007. In connection with thefinancing, the Company recorded a beneficial conversion of $2,200,000 on theSeries G Preferred Stock as a deemed dividend for the three months endedDecember 31, 2004. During fiscal 2005, 750 shares of the Series G PreferredStock were

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converted into 2,428,000shares of common stock. As part of the private placement in October 2005 theCompany exchanged the 1,450 remaining shares of Series G Preferred Stock for1,450 shares of Series H Preferred Stock. Those 1,450 shares of Series HPreferred Stock were exchanged for Series I Preferred Stock in March 2006. Theshares of the Series G and H Preferred Stock have been cancelled by theCompany. (See Note 7)

**Issuanceof Warrants to Investor Relations Firm**

During November 2005, theCompany entered into a six-month engagement with an investment relations firmto develop and implement a marketing program to promote financial market andinvestor awareness for the Company. Under the engagement agreement, theinvestor relations firm was entitled to receive, every month the agreement iseffective, a warrant, expiring three years from the date of issuance, topurchase 50,000 shares of the Company’s common stock at an exercise price of$0.10 per share for a total of 300,000 shares over the six-month contract. Inaddition, the investment relations firm was entitled under the agreement to aone time performance warrant to purchase 500,000 shares of the Company’s commonstock at $0.25 per share, which would vest if, during the term of theagreement, the volume weighted-average price of the Company’s common stock wereto exceed $0.50 for five consecutive days. On March 31, 2006, the Companyissued to the investor relations firm a warrant, expiring on the thirdanniversary of its date of issuance, for the purchase of 300,000 shares of theCompany’s common stock at an exercise price of $0.10 per share. The investorrelations firm agreed to accept that warrant for the purchase of 300,000 sharesof common stock in lieu of all of the warrants issuable to the investorrelations firm as monthly compensation during the six-month term of theagreement and in lieu of the performance warrant.  Under EITF 96-19 the fair value of thewarrant to purchase 300,000 shares of common stock was determined to be $39,000and has been expensed ratably over the six month term of the engagementagreement.

**Note 9 -Recent Pronouncements**

There have not been anyrecent accounting pronouncements since the Company’s last filing that wouldhave a material effect on the financial statements of the Company.

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

**Forward –Looking Statements**

*Thisreport contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These forward-looking statements are subjectto certain risks and uncertainties that could cause actual results to differmaterially from historical results or anticipated results, including those setforth under “Certain Factors That May Affect Future Results” below andelsewhere in, or incorporated by reference into, this report.*

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

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

**OVERVIEW**

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

We develop, market andsupport*e*B, our integrated suiteof collaborative document, configuration and records management softwaresolutions. Our revenues in the three months ended June 30, 2006 increased by18% from the same period in the prior fiscal year primarily due to a largesoftware license sale and service project for Constellation Energy Group andTrinity Industries. During the three months ended June 30, 2005 there were nosimilar sales. Our revenues in the nine months ended June 30, 2006 increased by17% from the same period in the prior fiscal year as a result of higher licensesales through DocQnet International and to Florida Power & Light,Constellation Energy Group, and JEA.  

Our revenues are derivedfrom licenses of our software to our customers, services that we provide undermaintenance support contracts and our non-maintenance services, consistingprimarily of design studies, system implementation and training. Of our totalrevenues for the three months ended June 30, 2006, license revenues accounted for17%, maintenance services revenues accounted for 51% and non-maintenanceservices represented 32%.  For the ninemonths ended June 30, 2006, license revenue accounted for 27%, maintenanceservices revenues accounted for 41% and non-maintenance services revenuesrepresented 32%.

Many of our customers arelocated outside the United States. Foreign-originated revenues accounting for35% and 45% of revenues for the three months ended June 30, 2006 and 2005,respectively, and 37% and 49% of revenues for the nine months ended June 30,2006 and 2005, respectively.  Our revenuefor the three and nine months ended June 30, 2006 reflected a foreign currencyloss of $12,000 and $121,000, respectively, due to the declining value of theBritish pound to the dollar versus the same period during fiscal 2005.  

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While revenues increased,our cost of revenues increased by 7% due to third party scanning services whencompared to the same period in the prior fiscal year.  Operating expenses decreased by 17% primarilydue to a reduction in personnel during the second half of fiscal 2005 and lowerprofessional fees during the current period.

At June 30, 2006, ourprincipal sources of liquidity consisted of $306,000 of cash and cashequivalents, compared to $285,000 at September 30, 2005. On October 25, 2005and March 10, 2006 we completed private placements of preferred stock whichresulted in gross proceeds of $1,000,000.

**CRITICALACCOUNTING POLICIES**

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

*RevenueRecognition*

The Company enters intocontractual arrangements with end-users that may include licensing of theCompany’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,”  SOP 98-9, “Modification ofSOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”,Staff Accounting Bulletin (“SAB”) No. 101, updated by SAB’s 103 and 104 “Updateof Codification of Staff Accounting Bulletins,” and Emerging Issues Task ForceNo. 00-21 (“EITF 00-21”) “Accounting for Revenue Arrangements with MultipleDeliverables.” Revenue through the Company’s Value Added Resellers (“VARS”) arenet of any VAR discount in accordance with EITF 99-19 “Reporting Revenue Grossas a Principal versus Net as an Agent.”

Software license andthird party product revenues are recognized upon shipment of the product if nosignificant vendor obligations remain and collection is probable. In caseswhere a significant vendor obligation exists, revenue recognition is delayeduntil such obligation has been satisfied. For new software products where ahistorical record has not yet been demonstrated that acceptance is perfunctory,the Company defers recognition of revenue until acceptance has occurred. If anundelivered element of the arrangement exists under the license arrangement, aportion of revenue is deferred based on vendor-specific objective evidence(VSOE) of the fair value of the undelivered element until deliveryoccurs.  If VSOE does not exist for all undelivered elements, all revenueis deferred until sufficient evidence exists or all elements have been delivered. Annual maintenance revenues, which consist of ongoing support and productupdates, are recognized on a straight-line basis over the term of the contract.Payments received in advance of performance of the related service formaintenance contracts are recorded as deferred revenue. Revenues from trainingand consulting services are recognized when the services are performed andadequate evidence of providing such services is available. Contract revenuesfor long-term contracts or programs requiring specialized systems arerecognized using the percentage-of-completion method of accounting, primarilybased on contract labor hours incurred to date compared with total estimatedlabor hours at completion. Provisions for anticipated contract losses are recognizedat the time they become known.

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

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

·                                          The actualcontractual terms, such as payment terms, delivery dates, and pricing of thevarious 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

·                                          The saleschannel through which the sale is made (direct, VAR, distributor, etc.)

·                                          Discountsgiven for each element of a contract

·              Any commitments madeas to installation or implementation of “go live” dates

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

*SoftwareDevelopment Costs*

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

*Allowancefor Doubtful Accounts*

The Company sells itsproducts directly to end-users, generally requiring a significant up-frontpayment and remaining terms appropriate for the creditworthiness of thecustomer. The Company also sells its products to VARs and other softwaredistributors

generally under termsappropriate for the creditworthiness of the VAR or distributor. The Companyretains no continuing obligations on sales to VARs.  Receivables fromcustomers are generally unsecured. The Company continuously monitors itscustomer account balances and actively pursues collections on past duebalances. The Company maintains an allowance for doubtful accounts which iscomprised of a general reserve based on historical collections performance plusa specific reserve for certain known customer collections issues. If actual baddebts are greater than the reserves calculated based on historical trends andknown customer issues, the Company may be required to book additional bad debtexpense which could have a material adverse effect on our business, results ofoperations and financial condition for the periods in which such additionalexpense occurs.

**RESULTSOF OPERATIONS**

The following table setsforth the condensed consolidated statement of operations expressed as apercentage of total revenue for the periods indicated:
|                                 | ** ** | **For the three months ended  June 30,** | ** ** | **For the nine months ended  June 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                                          | ** ** | **2005**                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                        |       |                                                              |       |                                                             |       |   |   |   |   |
| Licenses                        |       | 17                                                                | %          | 11                                                               | %          | 27 | % | 11 | % |
| Services and  other             |       | 83                                                                | %          | 89                                                               | %          | 73 | % | 89 | % |
| Total revenues                  |       | 100                                                               | %          | 100                                                              | %          | 100 | % | 100 | % |
|                            |       |                                                              |       |                                                             |       |   |   |   |   |
| Cost of revenues                |       |                                                              |       |                                                             |       |   |   |   |   |
| Licenses                        |       | 5                                                                 | %          | 5                                                                | %          | 5 | % | 4 | % |
| Services and  other             |       | 35                                                                | %          | 40                                                               | %          | 33 | % | 38 | % |
| Total cost of  revenues         |       | 40                                                                | %          | 45                                                               | %          | 38 | % | 42 | % |
|                            |       |                                                              |       |                                                             |       |   |   |   |   |
| Gross profit                    |       | 60                                                                | %          | 55                                                               | %          | 62 | % | 58 | % |
|                            |       |                                                              |       |                                                             |       |   |   |   |   |
| Operating  expenses:            |       |                                                              |       |                                                             |       |   |   |   |   |
| Research and  development       |       | 19                                                                | %          | 13                                                               | %          | 14 | % | 15 | % |
| Marketing and  sales            |       | 36                                                                | %          | 73                                                               | %          | 35 | % | 58 | % |
| General and  administrative     |       | 29                                                                | %          | 34                                                               | %          | 23 | % | 26 | % |
| Total operating  expenses       |       | 84                                                                | %          | 120                                                              | %          | 72 | % | 99 | % |
|                            |       |                                                              |       |                                                             |       |   |   |   |   |
| Loss from  operations           |       | (24                                                               | )%         | (65                                                              | )%         | (10 | )% | (41 | )% |
|                            |       |                                                              |       |                                                             |       |   |   |   |   |
| Interest and  other             |       | (5                                                                | )%         | (3                                                               | )%         | (3 | )% | (2 | )% |
|                            |       |                                                              |       |                                                             |       |   |   |   |   |
| Net loss                        |       | (29                                                               | )%         | (68                                                              | )%         | (13 | )% | (43 | )% |
|                            |       |                                                              |       |                                                             |       |   |   |   |   |
| Deemed dividend                 |       | —                                                            |       | —                                                           |       | (18 | )% | (48 | )% |
| Cumulative  preferred dividends |       | (6                                                                | )%         | (5                                                               | )%         | (5 | )% | (5 | )% |
| Net loss available to  common   |       | (35                                                               | )%         | (73                                                              | )%         | (37 | )% | (96 | )% |

** **

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**Revenues**

*License Revenues*

(in thousands)
|                               | ** ** | **For the three months ended** | ** ** | ** **  | ** ** | **For the nine months ended** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                    | ** ** | **June 30,**                                  | ** ** | **Percent** | ** ** | **June 30,**                                 | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                                           | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| License revenues              |       | $                                                  | 255        |        | $          | 149                                               |       | 71          | %          | $ | 1,471 |   | 503 |   | 192 | % |
| Percentage of total  revenues |       | 17                                                 | %          | 11          | %          |                                              |       | 27          | %          | 11 | % |   |   |
|                               |            |                                                    |            |             |            |                                                   |            |             |            |  |  |  |  |  |  |  |

License revenues increased by $106,000, or 71%, to$255,000 from $149,000 for the three months ended June 30, 2006 compared to thesame period a year ago.  The Company’s license revenues fluctuate fromquarter to quarter which is reflected by the increase in license sales in thecurrent quarter. In the current quarter, large license sales to City of Dayton,Ohio, Constellation Energy Group, and Trinity Industries totaled $71,000,$63,000 and $52,000, respectively, while there were no similar size sales in theprior year.  License revenues increased$968,000, or 192%, to $1,471,000 from $503,000 for the nine months ended June30, 2006 as compared to the same period a year ago.  During the nine months ended June 30, 2006,large license sales to Florida Power & Light, Constellation Energy Group,and JEA amounted to $269,000, $269,000 and $200,000, respectively, while therewere no similar size sales in the prior year.

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

Although the Company hashistorically generated the majority of its revenues from its direct salesforce, the Company has also established a network of third-party VARs, systemintegrators and OEMs who build and sell systems (with components or completesystems provided by the Company) that address specific customer needs withinvarious industries, including those targeted directly by the Company.  Salesthrough indirect channels for the three months ended June 30, 2006 amounted to$147,000 or 10% compared to $89,000, or 7% for the same period in the prioryear. Sales through indirect channels for the nine months ended June 30, 2006amounted to $668,000 or 12% compared to $322,000, or 7% for the same period inthe prior year consistent with the Company’s efforts to increase its indirectchannel business as a percentage of overall revenue.

A small number ofcustomers have typically accounted for a large percentage of the Company’sannual revenues.  Constellation EnergyGroup accounted for 14% of revenue for the three months ended June 30, 2006,while Network Rail accounted for 15% of revenue for the three months ended June30, 2005.  Constellation Energy Group accounted for 15% of revenue for thenine months ended June 30, 2006, while Network Rail and CSC InternationalSystems Ltd. accounted for 18% and 10%, respectively, of revenue for the ninemonths ended June 30, 2005.  The Company’s reliance on relatively fewcustomers could have a material adverse effect on the results of its operationson a quarterly basis.

*Services and Other Revenues*

(in thousands)
|                               | ** ** | **For the three months ended** | ** ** | ** **  | ** ** | **For the nine months ended** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                    | ** ** | **June 30,**                                  | ** ** | **Percent** | ** ** | **June 30,**                                 | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                                           | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| Services and  other revenues  |       | $                                                  | 1,278      |        | $          | 1,148                                             |       | 11          | %          | $ | 3,954 |   | $ | 4,120 |   | -4 | % |
| Percentage of total  revenues |       | 83                                                 | %          | 89          | %          |                                              |       | 73          | %          | 89 | % |   |   |
|                               |            |                                                    |            |             |            |                                                   |            |             |            |  |  |  |  |  |  |  |  |

Services and other revenues are comprised ofmaintenance and non-maintenance services.  Non-maintenance servicestypically relate to business process studies, implementation of systems andtraining which vary with the level of license revenues while maintenancerevenue is primarily dependent on customers renewing their annual maintenancesupport contracts.

Services and otherrevenues increased $130,000, or 11%, from $1,148,000 to $1,278,000 for thethree months ended June 30, 2006 compared to the same period a year ago. The non-maintenance portion of services revenues increased during the currentquarter by $73,000 or 17% from $421,000 to $494,000 primarily due to onecustomer beginning services work previously delayed until its new fiscal year,April 1, 2006.  Also in this quarter,maintenance revenue increased $57,000, or 8% from $727,000 to $784,000. Theincrease in maintenance is primarily the result of an existing customerexpanding its maintenance contract with the completion of a large project. 

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Services and otherrevenues decreased $166,000, or 4%, from $4,120,000 to $3,954,000 for the ninemonths ended June 30, 2006 compared to the same period a year ago.  Thenon-maintenance portion of services revenues decreased $92,000, or 5% from$1,807,000 to $1,715,000 primarily due to the delaying of services by onecustomer until the beginning of its new fiscal year, April 1, 2006.  Also in the current fiscal year, maintenancerevenue decreased $74,000, or 3% from $2,313,000 to $2,239,000. The decrease inmaintenance is primarily the result of a customer that did not renew itsmaintenance contract as a result of its acquisition by another entity.

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

**Cost ofRevenues**

*Cost of License Revenues*

(in thousands)
|                               | ** ** | **For the three months ended** | ** ** | ** **  | ** ** | **For the nine months ended** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                    | ** ** | **June 30,**                                  | ** ** | **Percent** | ** ** | **June 30,**                                 | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                                           | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| Cost of license  revenues     |       | $                                                  | 78         |        | $          | 62                                                |       | 26          | %          | $ | 272 |   | $ | 170 |   | 60 | % |
| Percentage of total  revenues |       | 5                                                  | %          | 5           | %          |                                              |       | 5           | %          | 4 | % |   |   |
|                               |            |                                                    |            |             |            |                                                   |            |             |            |  |  |  |  |  |  |  |  |

Cost of licenses revenues consists of costs associatedwith reselling third-party products and amortization of capitalized softwaredevelopment costs.

Cost of license revenuesincreased by $16,000, or 26%, from $62,000 to $78,000 for the three monthsended June 30, 2006 compared to the same period a year ago.  The increaseis primarily due to amortization expense of capitalized software of $26,000with the completion and general release of our *e*BVersion 14 software product in November 2005, offset by a decrease of $10,000for third party products sold to our customers. The gross profit percentage of license revenues increased to 69% for thethree months ended June 30, 2006 as compared to 58% for the same period a yearago, primarily due to the increase in license revenues during the currentquarter.  

Cost of license revenuesincreased by $102,000, or 60%, from $170,000 to $272,000 for the nine monthsended June 30, 2006 compared to the same period a year ago.  The increaseis primarily due to third-party costs of $43,000 associated with the sale inthe current fiscal year of a third-party product to one particularcustomer.  In addition, amortization expense of capitalized software costsincreased $59,000 with completion and general release of our eB Version 14software product in November 2005.  The gross profit percentage of licenserevenues increased to 82% for the nine months ended June 30, 2006 as comparedto 66% for the same period a year ago, primarily due to the increase in licenserevenues during the current fiscal period.

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

*Cost of Services and Other Revenues*

(in thousands)
|                                      | ** ** | **For the three months ended** | ** ** | ** **  | ** ** | **For the nine months ended** | ** ** | ** **  | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                           | ** ** | **June 30,**                                  | ** ** | **Percent** | ** ** | **June 30,**                                 | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **2006**                                           | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| Cost of services  and other revenues |       | $                                                  | 542        |        | $          | 515                                               |       | 5           | %          | $ | 1,803 |   | $ | 1,749 |   | 3 | % |
| Percentage of services  and other    |       | 35                                                 | %          | 40          | %          |                                              |       | 33          | %          | 38 | % |   |   |
|                                      |            |                                                    |            |             |            |                                                   |            |             |            |  |  |  |  |  |  |  |  |

Cost of services and other revenues consists primarilyof personnel-related costs in providing consulting services, training tocustomers and support.  It also includes costs associated with resellingthird-party hardware and maintenance, which includes telephone support costs.

Cost of services andother revenues increased $27,000, or 5%, from $515,000 to $542,000 for thethree months ended June30, 2006 compared to the same period a year ago. The increase was primarily due to an increase in personnel related cost of$15,000 due to more development staff working on customer project andthird-party scanning services that amounted to $12,000 for one major projectduring the quarter.  The gross profit from services and other revenues asa percentage of services and other revenues increased to 58% for the threemonths ended June 30, 2006 as compared to 55% for the same period a year ago.We expect the cost of services and other revenues to fluctuate in absolutedollar amounts and as a percentage of total revenues as the related servicerevenue fluctuates.

19

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Cost of services andother revenues increased $54,000, or 3%, from $1,749,000 to $1,803,000 for thenine months ended June 30, 2006 compared to the same period a year ago. The increase was primarily due to third-party related services that amounted to$236,000 for two major projects during the current fiscal year, offset by areduction of personnel in the fourth quarter of fiscal 2005 and lower travelrelated costs totaling $182,000.  The gross profit from services and otherrevenues as a percentage of services and other revenues decreased to 54% forthe nine months ended June 30, 2006 as compared to 58% for the same period ayear ago due to the larger third-party service content in 2006.

We expect the cost ofservices and other revenues to fluctuate in absolute dollar amounts and as a percentageof total revenues as the related services revenues fluctuates.

 **Operating Expenses**

*Research and Development*

(in thousands)
|                                    | ** ** | **For the three months ended** | ** ** | ** **  | ** ** | **For the nine months ended** | ** ** | ** **  | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                         | ** ** | **June 30,**                                  | ** ** | **Percent** | ** ** | **June 30,**                                 | ** ** | **Percent** | ** ** |
| ** **                         | ** ** | **2006**                                           | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| Research and  development expenses |       | $                                                  | 289        |        | $          | 164                                               |       | 76          | %          | $ | 774 |   | $ | 684 |   | 13 | % |
| Percentage of total  revenue       |       | 19                                                 | %          | 13          | %          |                                              |       | 14          | %          | 15 | % |   |   |
|                                    |            |                                                    |            |             |            |                                                   |            |             |            |  |  |  |  |  |  |  |  |

Research and development expenses consist of salariesand benefits for software developers as well as an allocation of corporateexpenses, calculated on the basis of headcount, such as corporate insurance,facilities, telephone and other.

Research and developmentexpenses increased $125,000, or 76%, from $164,000 to $289,000 for the threemonths ended June 30, 2006 compared to the same period a year ago.  Theincrease was due primarily to the eB Version 14 upgrade development projectcompleted in November 2005 resulting in no capitalized labor cost in thecurrent quarter, while there was $180,000 of capitalized labor cost for thisproject in the same quarter of the prior year. This difference was offset by adecrease in personnel related cost of $55,000 due to reductions in engineeringpersonnel implemented in June 2005 and development staff working on customerprojects rather than research and development projects in the currentquarter.  

Research and developmentexpenses increased $90,000, or 13%, from $684,000 to $774,000 for the ninemonths ended June 30, 2006 compared to the same period a year ago.  The increase was due primarily to $342,000lower capitalized software development costs relating to the eB Version 14upgrade development project during the nine months ended June 30, 2006 ascompared to the nine months ended June 30, 2005.  The decrease was offset by lowerpersonnel-related cost of $252,000 as a result of reductions in engineeringpersonnel implemented in June 2005 and due to current development staff workingon customer projects rather than research and development projects.

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

However, our ability tomaintain research and development spending may be adversely impacted by ourlimited cash flow and liquidity.

*Marketing and Sales*

(in thousands)
|                                 | ** ** | **For the three months ended** | ** ** | ** **  | ** ** | **For the nine months ended** | ** ** | ** **  | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                      | ** ** | **June 30,**                                  | ** ** | **Percent** | ** ** | **June 30,**                                 | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **2006**                                           | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| Marketing &  sales expenses |       | $                                                  | 553        |        | $          | 945                                               |       | -41         | %          | $ | 1,891 |   | $ | 2,683 |   | -30 | % |
| Percentage of total  revenue    |       | 36                                                 | %          | 73          | %          |                                              |       | 35          | %          | 58 | % |   |   |
|                                 |            |                                                    |            |             |            |                                                   |            |             |            |  |  |  |  |  |  |  |  |

Marketing and sales expenses consist of salaries, costof benefits, sales commissions and other expenses related to the direct salesforce, as well as allocation of overall corporate expenses, calculated on thebasis of headcount, related to items such as corporate insurance, facilities,telephone and other.

Marketing and salesexpenses decreased $392,000, or 41%, from $945,000 to $553,000 for the threemonths ended June 30, 2006 compared to the same period a year ago.  Thedecrease in marketing and sales expenses is primarily due to lower personnelrelated costs of $244,000 in connection with the staff reductions the Companyimplemented in September 2005. The Company also reduced marketing costs by$102,000 related to professional services and $46,000 related to trade showsand travel.

20

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Marketing and salesexpenses decreased $792,000, or 30%, from $2,683,000 to $1,891,000 for the ninemonths ended June 30, 2006 compared to the same period a year ago.  Thedecrease in marketing and sales expenses is primarily due to lower personnelrelated costs of $459,000 in connection with the staff reductions the Companyimplemented in September 2005. The Company also reduced marketing costs by$243,000 primarily related to professional services and $90,000 related totrade shows and travel.

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

*General and Administrative*

(in thousands)
|                                      | ** ** | **For the three months ended** | ** ** | ** **  | ** ** | **For the nine months ended** | ** ** | ** **  | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                           | ** ** | **June 30,**                                  | ** ** | **Percent** | ** ** | **June 30,**                                 | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **2006**                                           | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| General and  administrative expenses |       | $                                                  | 441        |        | $          | 441                                               |       | 0           | %          | $ | 1,235 |   | $ | 1,213 |   | 2 | % |
| Percentage of total  revenue         |       | 29                                                 | %          | 34          | %          |                                              |       | 23          | %          | 26 | % |   |   |
|                                      |            |                                                    |            |             |            |                                                   |            |             |            |  |  |  |  |  |  |  |  |

General and administrative expenses consist primarilyof personnel costs for finance, information technology, human resources andgeneral management, as well as outside professional services and an allocationof overall corporate expenses, calculated on the basis of headcount, such ascorporate insurance, facilities, telephone and other.

General andadministrative expenses remained the same for the three months ended June 30,2006 compared to the same period a year ago. General and administrativeexpenses for the three months ended June 30, 2006 included stock relatedcompensation expense of $54,000 due to the adoption of FAS 123R in fiscal2006.  These additional costs were offsetby lower personnel related expenses of $33,000 and SEC filings andSarbanes-Oxley reporting requirements costs of $20,000.

General andadministrative expenses increased by $22,000, or 2%, from $1,213,000 to$1,235,000 for the nine months ended June 30, 2006 compared to the same perioda year ago.  The increase resulted from the adoption of FAS 123R and therelated stock compensation expense in the amount of $111,000, and an increaseof $73,000 due to a reduction in the allowance for uncollectible accounts ascompared to the nine months ended June 30, 2005.  These increases were offset by a decrease inlegal and professional fees related to SEC filings of $87,000 and a decrease of$76,000 in costs related to Sarbanes-Oxley reporting requirements when comparedto the nine months ended June 30, 2005.

We expect that generaland administrative expenses will increase in absolute dollars in comparison tothe prior year due to the share based compensation expense under the newlyimplemented SFAS 123R.

**InterestExpense**

Interest expense consistsprimarily of fixed interest obligations on our outstanding debt to Spescom Ltd.as well as interest paid on capital lease obligations.  Interest expensewas $72,000 and $177,000 for the three and nine months ended June 30, 2006 ascompared to $38,000 and $105,000 for the same period a year ago.  Theincrease is due primarily to increased debt balances owed to Spescom Ltd. onseveral outstanding notes payable as well as interest on accrued preferreddividends and certain accounts payable.

**DeemedDividends**

In March 2006 the Companycompleted a financing arrangement whereby the Company issued 2,450 shares ofSeries I Preferred Stock along with warrants to purchase 925,926 shares ofcommon stock for gross proceeds of $500,000 and the exchange and cancellationof 1,950 shares of Series H Convertible Preferred Stock. In accordancewith EITF 00-27 “Application of Issue No 98-5 to Certain ConvertibleInstruments,” the Company calculated using the Black–Scholes method theintrinsic value of the convertible instruments issued and determined that therewas a deemed preferred dividend equal to the gross proceeds received of$500,000.

In addition in October2005 the Company completed a similar financing arrangement whereby the Companyissued 1,950 shares of our Series H Preferred Stock along with 925,926common stock warrants for gross proceeds of $500,000 and the exchange andcancellation of 1,450 shares of Series G Convertible Preferred Stock. Inaccordance with EITF 00-27 “Application of Issue No 98-5 to Certain ConvertibleInstruments,” the Company calculated using the Black–Scholes method the intrinsicvalue of the convertible instruments issued and determined that there was adeemed preferred dividend equal to the gross proceeds received of $500,000.

In the prior year theCompany also had a deemed dividend in connection with a financing arrangement wherebythe Company issued 2,200 shares of Series G Preferred Stock along with2,750,000 common stock warrants for gross proceeds of $2,200,000. The Companycalculated using the Black–Scholes method the intrinsic value of theconvertible instruments issued and determined that there was a deemed preferreddividend equal to the gross proceeds received of $2,200,000.

21

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**CumulativePreferred Dividends**

The outstanding Series FConvertible Preferred Stock is entitled to receive dividends of 5% of thestated value of $1,000 per share per annum, payable on a quarterly basis incash or common stock (valued on the basis of the average per share market valueon the 30 trading days immediately prior to the date on which such dividend isdeclared by the Board of Directors).  Series F cumulative preferreddividends earned for the three and nine months ended June 30, 2006 and 2005 were$66,000 and $198,000, respectively, for each period. Unpaid dividends accrueinterest at the rate of 8% per annum.  As of June 30, 2006, unpaiddividends and accrued interest amounted to $805,000.

Prior to the exchange onMarch 10, 2006 of Series I Preferred Stock for all the outstanding Series HPreferred Stock, the Series H Preferred Stock was entitled to receive dividendsof 6.75% of the stated value of $1,000 per share per annum, payable monthly inarrears on the last day of each month based on the number of Series H PreferredStock outstanding as of the first day of each such month. For the three monthsended June 30, 2006 there were no dividends on the Series H PreferredStock.  For the nine months ended June 30,2006 dividends on the Series H Preferred Stock totaled $44,000 and there was noSeries H Preferred Stock outstanding for the same periods in the prioryear.  A total of 325,966 shares ofcommon stock were issued on March 31, 2006 based on a $0.13 per share fairmarket price in payment of Series H Preferred Stock dividends due as of March10, 2006, when the Series H preferred Stock was exchanged for Series IPreferred Stock.

The outstanding Series IPreferred Stock is entitled to receive dividends of 7.25% of the stated valueof $1,000 per share per annum, payable monthly in arrears on the last day ofeach month based on the number of Series I Preferred Stock outstanding as ofthe first day of each such month. For the three and nine months ended June 30,2006 accrued dividends on the Series I Preferred Stock totaled $31,000 and$41,000, respectively.  As of June 30,2006, unpaid dividends on the Series I Preferred stock totaled $41,000.

**LIQUIDITYAND CAPITAL RESOURCES**

At June 30, 2006, ourprincipal sources of liquidity consisted of $306,000 of cash and cashequivalents compared to $285,000 at September 30, 2005.  Ourliquidity could be negatively impacted by a decrease in demand for ourproducts, which are subject to rapid technological changes, reductions ordelays in capital expenditures by our customers and intense competition, amongother factors.

The Company has receivedloans from Spescom Ltd. in the past to meet its obligations.  Theoutstanding balance of our demand notes owed to Spescom Ltd. including interestwas $992,000 at June 30, 2006 as compared to $917,000 at September 30,2005.  Spescom Ltd. has agreed not to call the notes prior toOctober 1, 2006.  The Company has received no assurances from SpescomLtd. that the notes will be extended.

We used cash in operatingactivities of $625,000 during the nine months ended June 30, 2006 primarilyrelated to a net loss during the nine month period of $723,000 and reductionsin deferred revenue and accrued liabilities of $385,000 and $307,000,respectively. During the nine months ended June 30, 2005 we used cash inoperating activities of $1,115,000 primarily related to a net loss for theperiod of $1,980,000, offset by increases in deferred revenues, accountsreceivables, other assets, and unpaid interest on notes payable of $495,00,$187,000, $108,000 and $109,000, respectively.

Our investing activitiesused $77,000 and $442,000 for nine months ended June 30, 2006 and 2005,respectively, primarily relating to the capitalization of software developmentcosts for our eB Version 14 product.

Financing activitiesprovided cash of $732,000 for the nine months ended June 30, 2006, primarilyfrom the issuance of preferred stock through a private placement on October 25,2005 and March 10, 2006. The Company intends to use the funds from this privateplacement to expand its sales and marketing efforts and for liquidity.Financing activities provided cash of $1,752,000 for the nine months ended June30, 2005, primarily from the issuance of preferred stock through a privateplacement on November 5, 2004.

On October 25, 2005,the Company entered into a definitive agreement relating to a private placementwith Monarch Pointe Fund, Ltd. (“Monarch”) and M.A.G. Capital, LLC (“MAG”).Pursuant to the agreement, on October 25, 2005, the Company issued (1) 1,950 sharesof Series H Convertible Preferred Stock to Monarch and (2) warrants, whichexpire October 25, 2008, to purchase an aggregate of 925,926 shares of commonstock at $0.27 per share to Monarch and MAG. The aggregate considerationreceived by the Company for the Series H Convertible Preferred Stock andwarrants consisted of $500,000 and the remaining 1,450 shares of the Series GConvertible Preferred Stock, which were cancelled by the Company. The agreementcontemplated the issuance by the Company at a second closing of 500 shares ofSeries H Convertible Preferred Stock and warrants, expiring on the thirdanniversary of the second closing, to purchase 925,926 shares of common stockat $0.27 per share, in exchange for aggregate consideration of $500,000. The obligationsof the investors to consummate that second closing were subject to certainconditions, including that the closing price of the Company’s common stockwould be $0.16 or greater for 20 consecutive trading days. This stock pricecondition was not satisfied and the second closing was not completed.

22

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 On March 10, 2006, the Company completed aprivate placement with MAG, Monarch, and Mercator Momentum Fund III, L.P. (“MMF”).Under the terms of the financing, the Company issued (i) to Monarch and MMF anaggregate of 2,450 shares of Series I Convertible Preferred Stock and (ii) toMAG, Monarch and MMF warrants, expiring March 10, 2009, to purchase anaggregate of 925,926 shares of common stock at $0.27 per share.  TheCompany received aggregate consideration for the Series I Convertible PreferredStock and warrants issued in the private placement consisting of $500,000 andthe 1,950 shares of Series H Convertible Preferred Stock issued by the Companyin October 2005, which have been cancelled.

The Certificate ofDetermination for the Series I Convertible Preferred Stock provided that,if the Company had not entered into a binding agreement to consummate aconsolidation, merger, reclassification of the stock of the Company (subject tocertain exceptions), or disposition of all or substantially all of the assetsof the Company on or before April 30, 2006, the holders of Series IPreferred Stock may, by the vote not later than December 31, 2006 of at leasttwo-thirds of the then-outstanding shares of Series I Preferred Stock, elect tohave all of the outstanding Series I Preferred Stock redeemed by theCompany.  Upon such election, the Company would be obligated to redeem theSeries I Preferred Stock at an amount equal to $1,000 per share plus all declaredbut unpaid dividends.  If such election is made and the Company does nothave sufficient funds available to redeem the Series I Preferred Stock inaccordance with applicable law, the holders of Series I Preferred Stock asa class will be entitled to elect the smallest number of directors of theCompany constituting a majority of the authorized number of directors.

 A corporate transaction of the varietydiscussed in the preceding paragraph did not occur on or before April 30,2006.  Monarch and MMF, as the holders of the Series I Preferred Stock,are therefore entitled to elect to have all of the outstanding Series IPreferred Stock redeemed as discussed in the preceding paragraph.  If suchan election is made, the redemption price is anticipated to be $2,450,000, plusall declared but unpaid dividends.  In the event of such an election,unless the Company is able to raise additional debt or equity funds, theCompany anticipates that it would not have sufficient funds to carry out theredemption.  If the Company were able to raise additional funds, it islikely that existing shareholders would suffer additional substantialdilution.  If the election to redeem the Series I Preferred Stock ismade and the Company is unable to pay the redemption price, Monarch and MMFwould become entitled to elect a majority of the authorized directors of theCompany.  In this event, those entities, through their majority control ofthe Board of Directors, would be able to control or (with respect to mattersrequiring shareholder approval) exert significant influence over all mattersaffecting the Company. To date, the holders of the Series I Preferred Stockhave not elected to exercise this redemption option.

The Company believes itscapital requirements will continue to vary greatly from quarter to quarter,depending on, among other things, capital expenditures, fluctuations in itsoperating results, financing activities, and investments and third partyproducts and receivables management.  The Company’s future liquidity willdepend on its ability to generate new system sales of its*e*B product suite in the near term, whichcannot be assured.  Failure togenerate sufficient system sales to meet the Company’s cash flow needsincluding payment of the Company’s outstanding notes to Spescom Ltd., theoutstanding balance of which on June 30, 2006 including interest was $992,000and which may be called beginning on October 1, 2006, would likely have amaterial adverse effect on the Company’s business, results of operations andfinancial condition.  While management believes thatthe Company’s current cash and receivables and cash and receivables that may begenerated from operations will be sufficient to meet its short-term needs forworking capital for at least the next year, the Company would be subject toa significantly greater risk of insufficient cash resources in the event of adecision by Spescom Ltd. to call the Company’s indebtedness to it.  Moreover, the Company may not be able toobtain sufficient orders to enable the Company to achieve and maintainoperations on a cash flow break-even level, which is necessary for the Companyto continue operations in the absence of further financing.  In thatevent, the availability of any additional equity or debt financing for theCompany would be subject to substantial uncertainty.  Future equity financings, if available to theCompany, would likely be substantially dilutive to the existing holders of theCompany’s common stock.  Future debt financings, if available to theCompany, would likely involve restrictive covenants and other terms that areadverse to the Company.

**Off-BalanceSheet Arrangements**

At June 30, 2006 andSeptember 30, 2005, we did not have any relationships with unconsolidatedentities or financial partnerships, including entities often referred to asstructured finance or special purpose entities that would have been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes.  Therefore, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we were engaged in such relationships.

23

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**Inflation**

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

**ContractualObligations and Commercial Commitments**

The following summarizes ourcontractual obligations and other commitments at June 30, 2006, and the effectsuch obligations could have on our liquidity and cash flow in future periods:
|                                             | ** ** | **Amount of Commitment Expiring by Period** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                           | ** ** | **Less** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                                                           | ** ** | **Than** | ** ** | **Years** | ** ** | **Years** | ** ** | **Over 5** | ** ** |
| ** **                                  | ** ** | **Total**                                                            | ** ** | **1 Year** | ** ** | **1 - 3** | ** ** | **3-5** | ** ** | **Years** | ** ** |
| Notes and  Accounts Payable to Spescom Ltd. |       | $                                                                    | 1,173,000  |   | $ | 1,173,000 |   | — |   | — |   | — |   |
| Lease  commitments – Operating         |       | $                                                                    | 1,278,000  |   | $ | 331,000 |   | $ | 676,000 |   | $ | 271,000 |   | — |   |
| Lease  commitments – Capital           |       | $                                                                    | 68,000     |   | $ | 43,000 |   | $ | 25,000 |   | — |   | — |   |
| Total                                       |       | $                                                                    | 2,519,000  |   | $ | 1,547,000 |   | $ | 701,000 |   | $ | 271,000 |   | — |   |

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

**InterestRate Risk**

The Company’s exposure tomarket rate risk for changes in interest rates relates primarily to the Company’sinvestment portfolio.  The Company does not use derivative financialinstruments in its investment portfolio. The Company places its investment withhigh quality issuers and follows internally developed guidelines to limit the amountof credit exposure to any one issuer. Additionally, in an attempt to limitinterest rate risk, the Company follows guidelines to limit the average andlongest single maturity dates. The Company is adverse to principal loss andensures the safety and preservation of its invested funds by limiting default,market and reinvestment risk. As of June 30, 2006 and September 30, 2005,the Company did not have any investments in money market accounts.

**ForeignCurrency Exchange Risk**

The Company’s geographicmarkets are primarily in the United States and Europe, with some sales in otherparts of the world. For the three months ended June 30, 2006, revenues recordedin the United States were 65% of total revenues, and revenues from Europe andother locations were 35% of total revenues. This compares to 55% and 45% forthe same period a year ago.

For the nine months endedJune 30, 2006, revenues recorded in the United States were 63% of totalrevenues, and revenues from Europe and other locations were 37% of total revenues.This compares to 51% and 49% for the same period a year ago.

Revenues from our UnitedKingdom subsidiary can fluctuate from quarter to quarter based on the timing ofcustomer orders. Our revenue for the three and nine months ended June 30,2006 reflected a foreign currency loss of $12,000 and $121,000, respectively,as compared to the same period a year ago due to the declining value of the Britishpound to the dollar.  Changes in foreigncurrency rates, the condition of local economies, and the general volatility ofsoftware markets may result in a higher or lower proportion of foreign revenuesin the future. Although the Company’s operating and pricing strategies takeinto account changes in exchange rates over time, future fluctuations in thevalue of foreign currencies may have a material adverse effect on the Company’sbusiness, operating results and financial condition.

**ITEM4.    CONTROLS AND PROCEDURES**

The Company carried outan evaluation under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of June 30, 2006 pursuant to Exchange ActRule 13a-15. Based upon that evaluation, we have concluded that as of June30, 2006, the Company’s disclosure controls and procedures are effective inrecording, processing, summarizing and reporting within the time periodsspecified in the SEC’s rules and forms material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe Company’s periodic SEC filings.

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

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**PARTII.   OTHER INFORMATION**

**ITEM 1 –LEGAL PROCEEDINGS**

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

**ITEM 1A –RISK FACTORS**

***MonarchPointe Fund, Ltd. and its affiliate Mercator Momentum Fund III, as holders ofSeries I Convertible Preferred Stock, may become entitled to elect amajority of the Board of Directors.***

The Certificate ofDetermination for the Series I Convertible Preferred Stock provides that,if the Company has not entered into a binding agreement to consummate aconsolidation, merger, or certain other corporate transactions meeting certainrequirements on or before April 30, 2006, the holders of Series IPreferred Stock may, by a two-thirds vote not later than December 31,2006, elect to have all of the outstanding Series I Preferred Stockredeemed by the Company at an amount equal to $1,000 per share plus alldeclared but unpaid dividends.  If such election is made and the Companydoes not have sufficient funds to carry out the redemption, the holders ofSeries I Preferred Stock as a class will be entitled to elect a majorityof the authorized directors of the Company.

There are currently2,450 shares of Series I Preferred Stock outstanding, which are held byMonarch Pointe Fund, Ltd. (“Monarch”) and its affiliate Mercator Momentum FundIII, L.P. (“MMF”), each an affiliate of M.A.G. Capital, LLC (“MAG”).  Acorporate transaction of the variety discussed in the preceding paragraph didnot occur on or before April 30, 2006. Monarch and MMF are therefore entitled to elect to have all of theoutstanding Series I Preferred Stock redeemed as discussed in the precedingparagraph.  If such election is made, theredemption price is anticipated to be $2,450,000, plus all declared but unpaiddividends.  In the event of such election, unless the Company is able toraise additional debt or equity funds, the Company anticipates that it wouldnot have sufficient funds to carry out the redemption.  If the Companywere able to raise additional funds, it is likely that existing shareholderswould suffer additional substantial dilution.  If the election to redeemthe Series I Preferred Stock is made and the Company is unable to pay theredemption price, Monarch and MMF would become entitled to elect a majority ofthe authorized directors of the Company.  In this event, those entities,through their majority control of the Board of Directors, would be able tocontrol or (with respect to matters requiring shareholder approval) exertsignificant influence over all matters affecting the Company, including:

·                                          anydetermination with respect to the Company’s business direction and policies,including the appointment and removal of officers;

·                                          theallocation of business opportunities that may be suitable for the Company andSpescom Ltd.;

·                                          anydeterminations with respect to mergers or other business combinations orextraordinary transactions;

·                                          the Company’sacquisition or disposition of assets; and

·                                          the Company’sfinancing.

***Upon a liquidation of the Company, sale of all orsubstantially all of the Company’s assets, or merger of the Company, theCompany’s preferred shareholders would be entitled to receive substantialpayments prior to any distribution to the common shareholders.***

Upon a liquidation of theCompany, the holders of Series F Convertible Preferred Stock would be entitledto receive, prior to any distribution to the holders of common stock, anaggregate amount equal to $5,291,000 plus accrued but unpaid dividends pershare and interest on all such dividends, which as of  July 31, 2006 totaled $832,000.  Upon aliquidation of the Company, sale of all or substantially all of the Company’sassets, or merger of the Company, prior to any distribution or payment ofmerger consideration to the holders of common stock, the holders of Series IConvertible Preferred Stock would be entitled to receive an aggregate amountequal to the higher of (i) $2,450,000 plus declared but unpaid dividends pershare, which as of July 31, 2006 totaled $46,000 and (ii) the amount suchholders would be entitled to receive had such holders’ shares of Series IPreferred Stock been converted into shares of common stock immediately prior tothe liquidation, sale of assets or merger in accordance with the terms of theSeries I Preferred Stock

***The Company will likely not be able to rely on Spescom Ltd.to fund its future capital requirements, and financing from other sources maynot be available on favorable terms or at all.***

The Company may needfinancing in the future and such financing may not be available on favorableterms or at all from any source.  Although the Company in the past hasreceived funding from Spescom Ltd. for working capital purposes, the Companybelieves that, due to Spescom Ltd.’s current financial condition, it isunlikely that Spescom Ltd. would provide additional financing.  Inaddition, if Spescom Ltd. were able to provide additional loans on termsacceptable to the Company, the funding of such loans could be delayed orprevented by currency exchange regulations of the Republic of South Africa,under which Spescom Ltd. is required to apply for and obtain the approval ofthe South African Reserve Bank before providing any funds to the Company.

The Company believes itscapital requirements will vary greatly from quarter to quarter, depending on,among other things, capital expenditures, fluctuations in its operating results,financing activities, and investments and third party products and receivablesmanagement.  The Company’s future liquidity will depend on its ability togenerate new system sales of its*e*Bproduct suite in the near term, which cannot be assured.  Failure togenerate sufficient system sales to meet the Company’s cash flow needs can beexpected to have a material adverse effect on the Company’s business, resultsof operations, and financial condition.  Management believes that theCompany’s current cash and receivables, as well as additional cash that may begenerated from operations, will be sufficient to meet its short-term needs forworking capital.  However, the Company may not be able to obtainsufficient orders to enable the Company to achieve a sustained break-even levelof cash flow, which would be necessary to continue operations in the absence offurther financing.   Future equity financings would be dilutive tothe existing holders of the Company’s common stock.  Future debt financingscould involve restrictive covenants.  Moreover, the Company may not beable to attract equity or debt financing at all.

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**ITEM 6 –EXHIBITS**
| (a)(3)   | ** ** | **Exhibits**                                                                                                                        |
|----------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
|     |       |                                                                                                                                |
| 10.1 (1) |       | Retention Agreement between the Company and Keith  Stentiford, dated May 3, 2006                                                    |
|     |       |                                                                                                                                |
| 10.2 (2) |       | Retention Agreement between the Company and John W.  Low, dated April 27, 2006                                                      |
|     |       |                                                                                                                                |
| 10.3 (3) |       | Retention Agreement between the Company and Glenn  Cox, dated April 25, 2006                                                        |
|     |       |                                                                                                                                |
| 10.4 (4) |       | Retention Agreement between the Company and Pierre  DeWet, dated April 26, 2006                                                     |
|     |       |                                                                                                                                |
| 10.5 (5) |       | Retention Agreement between the Company and Alan  Kiraly, dated April 25, 2006                                                      |
|     |       |                                                                                                                                |
| 31.1     |       | Section 302 Certification by Keith Stentiford,  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. |

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(1)           Incorporated byreference to Exhibit 10.8 to the Form 10-Q filed on May 15, 2006.

(2)           Incorporated byreference to Exhibit 10.9 to the Form 10-Q filed on May 15, 2006.

(3)           Incorporated byreference to Exhibit 10.10 to the Form 10-Q filed on May 15, 2006.

(4)           Incorporated byreference to Exhibit 10.11 to the Form 10-Q filed on May 15, 2006.

(5)           Incorporatedby reference to Exhibit 10.12 to the Form 10-Q filed on May 15, 2006.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Signature             | ** ** | **Title**                         | ** **                                       | **Date**        |
|-----------------------|------------|-----------------------------------|--------------------------------------------------|-----------------|
| ** **            | ** ** | ** **                        | ** **                                       | ** **      |
| /s/ Keith  Stentiford |       |                              | Director and Chief Executive Officer (Principal  |            |   |
| Keith Stentiford      |       | Executive Officer)                |                                             | August 14, 2006 |
|                  |       |                              |                                             |            |
| /s/ John W. Low       |       |                              | Chief Financial Officer and Secretary (Principal |            |   |
| John W. Low           |       | Financial and Accounting Officer) |                                             | August 14, 2006 |

 

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