** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**
| **ý** |   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15 (d)**

**OF THE  SECURITIES EXCHANGE ACT OF 1934.** |
|------------|--------|-----------------------------------------------------------------------------------------------------|

 

 

**For the Quarterly Period EndedDecember 31, 2004.**

 

**OR**

 
| **o** |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|----------------------------------------------------------------------------------------------------------|

 

 

**For the transition period from                                    to                                     .**

 

**CommissionFile Number 0-15935**

 

**SPESCOMSOFTWARE INC.**

(Exact name of registrantas specified in its charter)

 
| **CALIFORNIA**                                                    |   | **95-3634089**                        |
|-------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of

incorporation or  organization) |   | (I.R.S. Employer

Identification No.) |
|                                                              |   |                                  |
| **10052  MESA RIDGE COURT, SUITE 100, SAN DIEGO, CA 92121**       |
| (Address of principal  executive offices and zip code)            |
|                                                              |   |                                  |
| **(858)  625-3000**                                               |
| (Registrants telephone  number, including area code)              |

 

 

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

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

 

 

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

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

 

 
| Number of shares of Common Stock outstanding at  February 14, 2005:   34,212,997 |
|-------------------------------------------------------------------------------------------------|
|                                                                                            |
| Number of Sequentially Numbered Pages: 25                                                       |

 

----

 

**ITEM1.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**SPESCOMSOFTWARE INC.**

** CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                 | ** ** | **December 31, 2004** | ** ** | **September 30, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                 | ** ** | **(Unaudited)**            | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                 |       |                       |       |                        |       |
| Current assets:                                                                                                                            |       |                       |       |                        |       |
| Cash and cash  equivalents                                                                                                                 |       | $                          | 812,000    |                        | $          | 109,000 |   |
| Receivables, net                                                                                                                           |       | 855,000                    |       | 954,000                     |       |
| Other current  assets                                                                                                                      |       | 179,000                    |       | 209,000                     |       |
| Total current  assets                                                                                                                      |       | 1,846,000                  |       | 1,272,000                   |       |
|                                                                                                                                       |       |                       |       |                        |       |
| Property and  equipment, net                                                                                                               |       | 98,000                     |       | 116,000                     |       |
| Computer  software, net                                                                                                                    |       | 40,000                     |       | 15,000                      |       |
| Other assets                                                                                                                               |       | 27,000                     |       | 27,000                      |       |
| Total assets                                                                                                                               |       | $                          | 2,011,000  |                        | $          | 1,430,000 |   |
|                                                                                                                                       |       |                       |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                             | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                      |       |                       |       |                        |       |
| Accounts payable                                                                                                                           |       | $                          | 415,000    |                        | $          | 440,000 |   |
| Payable to  Spescom Ltd.                                                                                                                   |       | 53,000                     |       | 90,000                      |       |
| Preferred stock  dividend payable to Spescom Ltd.                                                                                          |       | 348,000                    |       | 271,000                     |       |
| Accrued  liabilities                                                                                                                       |       | 997,000                    |       | 1,226,000                   |       |
| Lease  obligations— current portion                                                                                                   |       | 17,000                     |       | 19,000                      |       |
| Notes and  accrued interest payable to Spescom Ltd.                                                                                        |       | 574,000                    |       | —                      |       |
| Deferred revenue                                                                                                                           |       | 1,616,000                  |       | 1,919,000                   |       |
| Total current  liabilities                                                                                                                 |       | 4,020,000                  |       | 3,965,000                   |       |
|                                                                                                                                       |       |                       |       |                        |       |
| Notes and  accrued interest payable to Spescom Ltd.                                                                                        |       | —                     |       | 557,000                     |       |
| Lease  obligations                                                                                                                         |       | 40,000                     |       | 44,000                      |       |
| Total  liabilities                                                                                                                         |       | 4,060,000                  |       | 4,566,000                   |       |
|                                                                                                                                       |       |                       |       |                        |       |
| Shareholders’  deficit:                                                                                                               |       |                       |       |                        |       |
| Series F  Convertible Preferred Stock, $1,000 stated value, 5,291 shares authorized;  5,291 shares issued and outstanding in 2005 and 2004 |       | 6,790,000                  |       | 6,790,000                   |       |
| Series G  Convertible Preferred Stock, $1,000 stated value, 2,420 shares authorized;  2,200 shares issued and outstanding in 2005.         |       | 2,200,000                  |       | —                      |       |
| Common stock, no  par value, 40,000,000 shares authorized; 34,176,226 and 34,143,278 issued and  outstanding in 2005 and 2004              |       | 75,372,000                 |       | 74,726,000                  |       |
| Common stock  warrants                                                                                                                     |       | 1,372,000                  |       | 278,000                     |       |
| Accumulated  other comprehensive loss                                                                                                      |       | (436,000                   | )          | (387,000                    | )          |
| Accumulated  deficit                                                                                                                       |       | (87,347,000                | )          | (84,543,000                 | )          |
| Total  shareholders’ deficit                                                                                                          |       | (2,049,000                 | )          | (3,136,000                  | )          |
|                                                                                                                                       |       |                       |       |                        |       |
| Total  liabilities and shareholders’ deficit                                                                                          |       | $                          | 2,011,000  |                        | $          | 1,430,000 |   |
|                                                                                                                                            |            |                            |            |                             |            |  |  |  |  |  |

 

 

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

 

2

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**SPESCOMSOFTWARE INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                   | ** ** | **For the three months ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| Revenues:                                                    |       |                                             |       |   |   |
| Licenses                                                     |       | $                                                | 268,000    |   | $ | 1,119,000 |   |
| Services and  other                                          |       | 1,385,000                                        |       | 1,006,000 |   |
| Total revenues                                               |       | 1,653,000                                        |       | 2,125,000 |   |
|                                                         |       |                                             |       |   |   |
| Cost of  revenues:                                           |       |                                             |       |   |   |
| Licenses                                                     |       | 44,000                                           |       | 101,000 |   |
| Services and  other                                          |       | 614,000                                          |       | 553,000 |   |
| Total cost of  revenues                                      |       | 658,000                                          |       | 654,000 |   |
|                                                         |       |                                             |       |   |   |
| Gross profit                                                 |       | 995,000                                          |       | 1,471,000 |   |
|                                                         |       |                                             |       |   |   |
| Operating  expenses:                                         |       |                                             |       |   |   |
| Research and  development                                    |       | 346,000                                          |       | 334,000 |   |
| Marketing and  sales                                         |       | 824,000                                          |       | 605,000 |   |
| General and  administrative                                  |       | 399,000                                          |       | 503,000 |   |
|                                                         |       | 1,569,000                                        |       | 1,442,000 |   |
|                                                         |       |                                             |       |   |   |
| Income (loss)  from operations                               |       | (574,000                                         | )          | 29,000 |   |
|                                                         |       |                                             |       |   |   |
| Interest expense                                             |       | (30,000                                          | )          | (23,000 | ) |
| Gain on  derivative revaluation                              |       | —                                           |       | 5,000 |   |
|                                                         |       |                                             |       |   |   |
| Net income  (loss)                                           |       |                                             | (604,000   | ) |   | 11,000 |   |
|                                                         |       |                                             |       |   |   |
| Deemed preferred  dividend                                   |       | (2,200,000                                       | )          | — |   |
| Net income  (loss) available after deemed preferred dividend |       | (2,804,000                                       | )          | 11,000 |   |
| Cumulative  preferred dividends                              |       | (74,000                                          | )          | (66,000 | ) |
| Net loss  available to common shareholders                   |       | $                                                | (2,878,000 | ) | $ | (55,000 | ) |
|                                                         |       |                                             |       |   |   |
| Earnings (loss)  per share:                                  |       |                                             |       |   |   |
| Basic and  diluted                                           |       | $                                                | (0.08      | ) | $ | (0.00 | ) |
| Weighted average  shares outstanding:                        |       |                                             |       |   |   |
| Basic and  diluted                                           |       | 34,159,000                                       |       | 33,929,000 |   |
| ** **                                                   |       |                                             |       |   |   |
| **Statement  of Comprehensive Loss**                         |       |                                             |       |   |   |
| Net Income  (loss)                                           |       | $                                                | (604,000   | ) | $ | 11,000 |   |
| Other  Comprehensive income (loss):                          |       |                                             |       |   |   |
| Foreign currency  translation adjustment                     |       | (49,000                                          | )          | (149,000 | ) |
| Comprehensive  loss                                          |       | $                                                | (653,000   | ) | $ | (138,000 | ) |
|                                                              |            |                                                  |            |  |  |  |  |  |  |

 

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

 

3

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**SPESCOMSOFTWARE INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **For the three months ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| Cash flows from  operating activities:                                       |       |                                             |       |   |   |
| Net income  (loss)                                                           |       | $                                                | (604,000   | ) | $ | 11,000 |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                               |       | 26,000                                           |       | 57,000 |   |
| Unpaid interest  on notes payable                                            |       | 31,000                                           |       | 21,000 |   |
| Gain on  derivative revaluation                                              |       | —                                           |       | (5,000 | ) |
| Changes in  assets and liabilities:                                          |       |                                             |       |   |   |
| Receivables, net                                                             |       | 127,000                                          |       | (1,114,000 | ) |
| Other current  assets                                                        |       | 4,000                                            |       | (169,000 | ) |
| Accounts payable                                                             |       | (28,000                                          | )          | 258,000 |   |
| Payable to  Spescom Ltd.                                                     |       | 5,000                                            |       | 98,000 |   |
| Accrued  liabilities                                                         |       | (249,000                                         | )          | 231,000 |   |
| Deferred revenue                                                             |       | (344,000                                         | )          | (240,000 | ) |
| Net cash  provided by (used in) operating activities                         |       | (1,032,000                                       | )          | (852,000 | ) |
|                                                                         |       |                                             |       |   |   |
| Cash flows from  investing activities:                                       |       |                                             |       |   |   |
| Purchases of  property and equipment                                         |       | (2,000                                           | )          | — |   |
| Purchases of  software                                                       |       | (30,000                                          | )          | — |   |
| Net cash used in  investing activities                                       |       | (32,000                                          | )          | — |   |
|                                                                         |       |                                             |       |   |   |
| Cash flows from  financing activities:                                       |       |                                             |       |   |   |
| Proceeds from  exercise of stock options                                     |       | 2,000                                            |       | 14,000 |   |
| Net proceeds  from private placement                                         |       | 1,782,000                                        |       | 600,000 |   |
| Payments on  capital lease obligations                                       |       | (6,000                                           | )          | (6,000 | ) |
| Net cash provided  by financing activities                                   |       | 1,778,000                                        |       | 608,000 |   |
|                                                                         |       |                                             |       |   |   |
| Effect of  exchange rate changes on cash                                     |       | (11,000                                          | )          | (16,000 | ) |
|                                                                         |       |                                             |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 703,000                                          |       | (260,000 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 109,000                                          |       | 333,000 |   |
|                                                                         |       |                                             |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                | 812,000    |   | $ | 73,000 |   |

 

 

See Note 2 for supplemental cash flow information.

 

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

 

4

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**SPESCOM SOFTWARE INC.**

** CONDENSED NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**Note 1 - Basis of Presentation**

 

The accompanying consolidated financial statements as ofDecember 31, 2004 and for the three months ended December 31, 2004and 2003 are unaudited. The consolidated financial statements and related noteshave been prepared in accordance with generally accepted accounting principlesapplicable to interim periods.  In the opinion of management, theconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring adjustments, necessary for a fair presentation of theconsolidated financial position, operating results and cash flows for theperiods presented.

 

The information contained in the following Condensed Notes to theConsolidated Financial Statements is condensed from that which would appear inthe annual consolidated financial statements; accordingly, the consolidatedfinancial statements included herein should be reviewed in conjunction with theconsolidated financial statements and related notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended September 30, 2004. It should be understood that the accounting measurements at an interim dateinherently involve greater reliance on estimates than at year-end.  Theresults of operations for the interim periods presented are not necessarilyindicative of the results expected for the entire year.

 

**Note 2 — Summary of SignificantAccounting Policies**

 

*Principles of Consolidation*

 

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

 

*Foreign Currency*

 

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

 

*Use of Estimates*

 

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

 

*Revenue Recognition*

 

The Company’s revenues are derived from sales of its document andconfiguration management systems that are primarily composed of software andservices, including maintenance, training and consulting services, and thirdparty software and hardware. The Company recognizes revenue in accordance withStatement of Position (“SOP”) 97-2 “Software Revenue Recognition” and SOP 98-9,“Modification of SOP 97-2, Software Revenue Recognition with Respect to CertainTransactions” and Staff Accounting Bulletin (“SAB”) No. 101, updated by SAB’s103 and 104 “Update of Codification of Staff Accounting Bulletins.”

 

Software license and third party product revenues are recognized uponshipment of the product if no significant vendor obligations remain andcollection is probable. In cases where a significant vendor obligation exists,revenue recognition is delayed until such obligation has been satisfied. Fornew software products where a historical record has not yet been demonstratedthat acceptance is perfunctory, the Company defers recognition of revenue untilacceptance has occurred.   If an undelivered element of thearrangement exists under the license arrangement, a portion of revenue isdeferred based on vendor-specific objective evidence (VSOE) of the fair valueof the undelivered element until delivery occurs.  If VSOE does not existfor all undelivered elements, all revenue is deferred until sufficient evidenceexists or all elements have been delivered.  Annual maintenance revenues,which consist of ongoing support 

 

5

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and product updates, are recognized on a straight-line basis over theterm of the contract. Payments received in advance of performance of therelated service for maintenance contracts are recorded as deferred revenue.Revenues from training and consulting services are recognized when the servicesare performed and adequate evidence of providing such services is available.Contract revenues for long-term contracts or programs requiring specializedsystems are recognized using the percentage-of-completion method of accounting,primarily based on contract labor hours incurred to date compared with totalestimated labor hours at completion. Provisions for anticipated contract lossesare recognized at the time they become known.

 

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

 

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

 

•                                          The actual contractual terms, such as payment terms,delivery dates, and pricing of the various product and service elements of acontract

•                                          Availability of products to be delivered

•                                          Time period over which services are to be performed

•                                          Creditworthiness of the customer

•                                          The complexity of customizations to the Company’ssoftware required by service contracts

•                                          The sales channel through which the sale is made(direct, VAR, distributor, etc.)

•                                          Discounts given for each element of a contract

•                                          Any commitments made as to installation orimplementation of “go live” dates

 

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

 

*Fair Value of Financial Instruments*

 

Statement of Financial Accounting Standards (“SFAS”) No. 107, “DisclosuresAbout Fair Value of Financial Instruments”, requires management to disclose theestimated fair value of certain assets and liabilities defined by SFASNo. 107 as cash or a contractual obligation that both conveys to oneentity a right to receive cash or other financial instruments from anotherentity, and imposes on the other entity the obligation to deliver cash or otherfinancial instruments to the first entity. At December 31, 2004 and September 30,2004, management believes that the carrying amounts of cash and cashequivalents, short-term investments, accounts receivable and accounts payable,and accrued expenses approximate fair value because of the short maturity ofthese financial instruments. The Company believes that the carrying value ofits loans approximate their fair values based on current market rates ofinterest.  As of December 31, 2004 theCompany had two short term investments in Grade AA commercial paper of $350,000each, both with a maturity date of January 14, 2005.  Interest income from earned from theinvestments was $1,000 for the three months ended December 31, 2004.

 

*Concentration of Credit Risk*

 

The Company provides products and services to customers in a variety ofindustries worldwide, including local governments, petrochemicals, utilities,manufacturing and transportation. Concentration of credit risk with respect totrade receivables is limited due to the geographic and industry dispersion ofthe Company’s customer base. The Company has not experienced significant creditlosses on its customer accounts.  CACIInternational Inc., Caterpillar Inc. and Network Rail accounted for 17%, 12% and11%, respectively, of trade accounts receivable at December 31, 2004 as comparedto Entergy Operations Inc., Northeast Utilities Service Company and NetworkRail, which  accounted for 13%, 12% and11%, respectively, of trade accounts receivable at September 30, 2004.

 

A small number of customers have typically accounted for a largepercentage of the Company’s annual revenues. Network Rail and ConstellationEnergy Group accounted for 19% and 11% respectively of revenue for the threemonths ended December 31, 2004 while Constellation Energy Group accounted for36% of revenue for the three months ended December 31, 2003.  TheCompany’s reliance on relatively few customers could have a material adverseeffect on the results of its operations on a quarterly basis.

 

*Property and Equipment*

 

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

 

6

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*Software Development Costs andPurchased Software*

 

Software development costs and purchased software are capitalized whentechnological feasibility and marketability of the related product have beenestablished. Software development costs incurred solely in connection with aspecific contract are charged to cost of revenues. Capitalized software costsare amortized on a product-by-product basis, beginning when the product isavailable for

general release to customers. Annual amortization expense 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 four years. Accumulated amortization ofcapitalized software costs was $279,000 and $234,000 at December 31, 2004and 2003, respectively. The related amortization expense was $7,000 and $20,000for the three months ended December 31, 2004 and 2003, respectively.

 

*Long-lived Assets*

 

The Company assesses potential impairments to its long-lived assetswhen there is evidence that events or changes in circumstances have made recoveryof the assets’ carrying value unlikely. An impairment loss would be recognizedwhen the sum of the expected future net cash flows is less than the carryingamount of the asset.

 

*Stock-Based Compensation*

 

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

 

 

 No compensation cost was recognized for employee stock optiongrants during 2004 and 2003 based upon the intrinsic value method, which werefixed in nature, as the options were granted at exercise prices equal to fairmarket value on the date of grant. Had compensation cost for the Company’semployee stock-based compensation plan been determined based on the fair valueat the grant dates the disclosure requirements of SFAS No. 148, which amendsthe disclosure requirements of FAS 123, would have been as follows:

 
| ** **                                                                                                                                      | ** ** | **For the three months ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2004**                                          | ** ** | **2003** | ** ** |
| Net income  (loss) used in computing net loss per share                                                                                         |       |                                              |       |   |   |
| As reported                                                                                                                                     |       | $                                                 | (2,878,000 | ) | $ | (55,000 | ) |
| Subtract: Total  stock based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (58,000                                           | )          | (138,000 | ) |
| Pro forma net  loss                                                                                                                             |       | $                                                 | (2,936,000 | ) | $ | (193,000 | ) |
|                                                                                                                                            |       |                                              |       |   |   |
| Basic and  diluted net loss per share attributable to common shareholders                                                                       |       |                                              |       |   |   |
| As reported                                                                                                                                     |       | $                                                 | (0.09      | ) | $ | (0.00 | ) |
| Pro forma                                                                                                                                       |       | $                                                 | (0.09      | ) | $ | (0.00 | ) |
|                                                                                                                                                 |            |                                                   |            |  |  |  |  |  |  |

 

 

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

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Dividend yield           |       | 0        | %          | 0        | %          |
| Expected  volatility     |       | 235      | %          | 281      | %          |
| Risk free  interest rate |       | 4.23     | %          | 4.27     | %          |
| Expected lives  (years)  |       | 10       |       | 10       |       |

 

 *Income Taxes*

 

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

 

7

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*Net Income (Loss) per Common Share*

 

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

 

*Statements of Cash Flows*

The following table provides supplemental cash flow information: 
| ** **                                    | ** ** | **For the three months ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| Supplemental  cash flow information:          |       |                                             |       |   |   |
| Interest paid                                 |       | $                                                | 2,000      |   | $ | 2,000 |   |
|                                          |       |                                             |       |   |   |
| Non-cash  financing and investing activities: |       |                                             |       |   |   |
| Accrued  preferred stock dividends            |       | $                                                | 74,000     |   | $ | 67,000 |   |
| Warrants issued  for services                 |       | 30,000                                           |       | — |   |
| Deemed dividend  on private placement         |       | 2,200,000                                        |       | — |   |
| Expiration of  warrants                       |       | 133,000                                          |       | — |   |
|                                          |       | $                                                | 2,437,000  |   | $ | 67,000 |   |

**Note 3 — Related Parties Transactions**

 

As of December 31, 2004 and September 30, 2004 there were 5,291 sharesof Series F Convertible Preferred Stock with a stated value of $1,000 per shareheld by Spescom Ltd., the majority shareholder of the Company.  The Series F Convertible Preferred Stock is convertibleinto common stock, at a stated conversion price of $0.45 per share subject tocertain adjustments.  The conversion is at the option of Spescom Ltd. throughSeptember 30, 2008.  The outstandingSeries F Convertible Preferred Stock is entitled to receive dividends of 5% ofthe stated 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 December 31, 2004, unpaid dividends andaccrued interest amounted to $330,000 and $9,000, respectively.

 

On November 18, 2003 the Company issued a note payable to Spescom Ltd.UK, a wholly-owned subsidiary of Spescom Ltd., with a principal balance of$600,000 bearing an interest rate of 5% per annum.  The note was repaid during fiscal 2004.  Interest expense on the note for fiscal 2004was $9,000.

 

The Company has two existing demand notes payable to Spescom Ltd. UKfor $400,000 and $100,000, each bearing interest rate of 10% per annum.  Asof December 31, 2004 and September 30, 2004, the balance owed on the notes includinginterest was $574,000 and $557,000, respectively.   Spescom Ltd. has agreed that it will notcause Spescom Ltd. UK to demand repayment under the two notes prior toOctober 1, 2005.  Interest expense on the notes was $14,000 and $15,000for the three months ended December 31, 2004 and 2003, respectively. These notes are collateralized by a security interest in favor of Spescom Ltd. UKin respect of all the Company’s assets.

 

Under a royalty arrangement beginning in fiscal 2004, Spescom Ltd. resellsthe Company’s software and maintenance services in South Africa.  Royaltyrevenue recognized under this agreement for the three months ended December 31,2004 totaled $9,000.

 

Spescom Ltd. UK provides certain administrative and accountingfunctions for the Company’s United Kingdom subsidiary.  The Company isbilled a monthly fee by Spescom Ltd. UK for reimbursement of certain costs inthe United Kingdom including the office facilities, all accounting and humanresources services, and certain corporate marketing activities.  For the threemonths ended December 31, 2004 and 2003, the administrative fees totaled $153,000and $140,000, respectively.  The office rent for the Company’s UnitedKingdom operations included in the administrative fee totaled $90,000 and $82,000for the three months ended December 31, 2004 and 2003, respectively.  AtDecember 31, 2004 and September 30, 2004 the Company had a payable to Spescom Ltd.UK of $53,000 and $90,000, respectfully. 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 expiresin March 2006 and has an annual rent of $638,000.  A portion of theoffice has been subleased to third party tenants for an annual rent of $293,000. The subleases also expire March 2006.

 

Spescom Ltd. and the Company have entered into a license agreementpursuant to which Spescom Ltd. has licensed to the Company the right to use thename “Spescom” and to use a trademark owned by Spescom Ltd. related to certaincomputer software. The Company will not pay any royalties to Spescom Ltd. inconnection with this license. The license is for an indefinite term, but isterminable by either party upon 60 days prior written notice. Under the licenseagreement, Spescom Ltd. has agreed to indemnify and hold harmless the Companyand its directors, officers, employees and agents against liabilities arisingfrom any claim brought against the Company that alleges that Spescom Ltd.’s orthe Company’s use of the licensed trademark infringes the rights of any thirdparty, 

 

8

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provided that the Company is in material compliance with the provisionsof the license agreement.

 

**Note 4 — Receivables**
| ** **                                   | ** ** | **December 31,   2004** | ** ** | **September 30,   2004** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **(Unaudited)**              | ** ** | ** **                    | ** ** |
| **Receivables  consist of:**                 |       |                         |       |                          |       |
| Receivables                                  |       | $                            | 942,000    |                          | $          | 1,037,000 |   |
| Less:   allowance for doubtful accounts |       | (87,000                      | )          | (83,000                       | )          |
|                                         |       | $                            | 855,000    |                          | $          | 954,000 |   |

 

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

 
| ** **                                  | ** ** | **For the three months ended  December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                          | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                                   | ** ** | ** ** | ** ** |
| Net loss  available for common shareholders |       | $                                                 | (2,878,000 | ) | $ | (55,000 | ) |
|                                        |       |                                              |       |   |   |
| Common stock and  common stock equivalents  |       | 34,159,000                                        |       | 33,929,000 |   |
|                                             |            |                                                   |            |  |  |  |  |

 

Basic net income (loss) per share is computed usingthe weighted average number of common shares outstanding during theperiod.  Contingently issued shares are included in the computation ofbasic net income (loss) per share when the related conditions aresatisfied.  Diluted net income (loss) per share is computed using theweighted average number of common shares and potentially dilutive securitiesoutstanding during the period.  Potentially dilutive securities consist ofcontingently issued shares, the common shares issuable upon conversion ofpreferred stock or convertible debt and shares issuable upon the exercise ofstock options and common stock warrants.  Potentially dilutive securitiesare excluded from the computation if their effect is anti-dilutive.

 

As of December 31, 2004, a total of 5,393,846 stock options, 3,758,335 commonstock warrants, and 5,291 and 2,200 shares of Series F and G ConvertiblePreferred Stock, respectively, were excluded from the diluted net income (loss)per share calculation, as their effect would be anti-dilutive.  As of December 31, 2003, a total of 4,034,000stock options, 1,008,335 common stock warrants and, 5,291 shares of Series FConvertible Preferred Stock were excluded from the diluted net income (loss)per share calculation, as their effect would be anti-dilutive.

 

**Note 6 — Segment and GeographicInformation**

 

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

 

Revenues by customer location are as follows:

 
| ** **                        | ** ** | **For the three months ended  December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
| United States                     |       | $                                            | 917,000    |   | $ | 1,553,000 |   |
| Europe,  primarily United Kingdom |       | 722,000                                      |       | 546,000 |   |
| Other  International              |       | 14,000                                       |       | 26,000 |   |
|                              |       | $                                            | 1,653,000  |   | $ | 2,125,000 |   |

 
| ** **                                       | ** ** | **December 31, 2004** | ** ** | **September 30,   2004** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**       | ** ** | ** **               | ** ** |
| Identifiable  assets from continuing operations: |       |                  |       |                     |       |
| United States                                    |       | $                     | 1,600,000  |                     | $          | 973,000 |   |
| Europe, United  Kingdom                          |       | 411,000               |       | 457,000                  |       |
|                                             |       | $                     | 2,011,000  |                     | $          | 1,430,000 |   |
|                                                  |            |                       |            |                          |            |  |  |  |

 

9

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**Note 7 - Recent AccountingPronouncements**

 

In March 2004, the FASB issued consensus on EITF 03-06 *Participating Securities and the Two-Class Methodunder FASB Statement No. 128, Earnings Per Share* related tocalculating earnings per share with respect to using two-class method forparticipating securities.  Thispronouncement was effective for all periods after March 31, 2004 and requiredprior periods to be restated.  As we haveincurred net losses in the current periods, and as our preferred stock does nothave a contractual obligation to share in our losses, the adoption of EITF03-06 had no impact on our financial condition or the results of ouroperations.

InNovember 2004, the FASB issued SFAS No. 151,”Inventory Costs”.  SFAS No. 151 amends the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage) under the guidance in ARB No. 43, Chapter 4,”InventoryPricing”.  Paragraph 5 of ARB No. 43,Chapter 4, previously stated that “. . . under some circumstances, items suchas idle facility expense, excessive spoilage, double freight, and rehandlingcosts may be so abnormal as to require treatment as current period charges. . ...” This Statement requires that those items be recognized as current-periodcharges regardless of whether they meet the criterion of “so abnormal.” Inaddition, this Statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities. This statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a materialimpact on the Company’s financial statements.

InDecember 2004, the FASB issued SFAS No. 152,”Accounting for Real EstateTime-Sharing Transactions”.  The FASBissued this Statement as a result of the guidance provided in AICPA Statementof Position (SOP) 04-2,”Accounting for Real Estate Time-Sharing Transactions”. SOP04-2 applies to all real estate time-sharing transactions.  Among other items, the SOP provides guidanceon the recording of credit losses and the treatment of selling costs, but doesnot change the revenue recognition guidance in SFAS No. 66,”Accounting forSales of Real Estate”, for real estate time-sharing transactions.  SFAS No. 152 amends Statement No. 66 toreference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, “Accounting for Costs and InitialRental Operations of Real Estate Projects”, to state that SOP 04-2 provides therelevant guidance on accounting for incidental operations and costs related tothe sale of real estate time-sharing transactions.  SFAS No. 152 is effective for years beginningafter June 15, 2005, with restatements of previously issued financialstatements prohibited.  This statement isnot applicable to the Company.

InDecember 2004, the FASB issued SFAS No. 153,”Exchanges of Nonmonetary Assets,”an amendment to Opinion No. 29,”Accounting for Nonmonetary Transactions”.Statement No. 153 eliminates certain differences in the guidance in Opinion No.29 as compared to the guidance contained in standards issued by theInternational Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. Such an exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange. SFAS No. 153 is effective for nonmonetary asset exchangesoccurring in periods beginning after June 15, 2005.  Earlier application is permitted fornonmonetary asset exchanges occuring in periods beginning after December 16,2004.  Management does not expectadoption of SFAS No. 153 to have a material impact on the Company’s financialstatements.

In December 2004, theFASB issued SFAS No. 123 (Revised 2004) (SFAS 123 (R)) “Share-based payment”.SFAS 123 (R) will require compensation costs related to share-based paymenttransactions to be recognized in the financial statements. With limitedexceptions, the amount of compensation cost will be measured based on thegrant-date fair value of the equity or liability instruments issued. Inaddition, liability awards will be re-measured each reporting period.Compensation cost will be recognized over the period that an employee providesservice in exchange for the award. FASB 123 (R) replaces FASB 123, Accountingfor Stock-Based Compensation and supersedes APB option No. 25, Accounting forStock Issued to Employees. This guidance is effective as of the first interimor annual reporting period after December 15, 2005 for Small Business filers.

 

**Note 8—Equity**

 

**November 2004 Private Placement**

 

On November 5, 2004, the Company completeda financing arrangement whereby the Company issued 2,200 shares of our Series GConvertible Preferred Stock (“Series G Stock”) along with 2,750,000 in commonstock warrants for gross proceeds of $2,200,000.  The Series G Stock is convertible into commonstock at a price equal to 85% of the volume weighted average price of theCompany’s common stock during the five trading days immediately preceding theconversion date; however, the conversion price can be no higher than $0.40 pershare and no lower than $0.30 per share. The 2,750,000 warrants have an exercise price of $0.44 per share andexpire November 5, 2007.  The Companyincurred $418,000 in expenses related to the transaction and issued 825,000common stock warrants to an investment consulting firm.  The 825,000 warrants were comprised of550,000 warrants with an exercise price of $0.40 per share which expireNovember 5, 2009 and 275,000 warrants which have an exercise price of $0.44which expire on November 5, 2007.  In connection with the financing, theCompany recorded a beneficial conversion of $2,200,000 on the Series G Stock asa deemed dividend for the three months ended December 31, 2004.

 

10

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The Series G Stock is entitled to a liquidationpreference equal to $1,000 per share, plus declared but unpaid dividends pershare.  Commencing on the date ofissuance of the Series G Stock, and continuing until the effective date of theregistration statement on Form S-2 pursuant to which the Series G Stock isregistered, the Series G Stock is also entitled to receive dividends of 5% ofthe stated value of $1,000 per share per annum, payable monthly in arrears onthe last day of each month based on the number of Series G Stock outstanding asof the first day of such month.  OnDecember 5, 2004, the Company issued 24,448 shares of common stock with a fairvalue of $9,000 as a dividend on the Series G Stock.

 

 

**Warrants for Services**

 

On November 4, 2004, the Company issued to a public relations firmwarrants to purchase 1,000,000 shares of its common stock at $0.40 per share,expiring November 3, 2007. The warrants vest and become exercisable asfollows: (i) 500,000 warrants vest on the date that the average of thelast sale price of the Company’s stock on the OTC Bulletin Board for the tentrading days immediately preceding such date (the “Market Price”) exceeds $0.60per share, (ii) 250,000 warrants vest on the date that the Market Priceexceeds $0.70 per share, and (iii) the remaining 250,000 warrants vest andbecome exercisable on the date that the Market Price exceeds $0.80 per share.  The fair value of the warrants was determinedto be $30,000 and will be recognized ratably over the six months of the serviceagreement.

 

11

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 
| **Forward —Looking Statements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
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| *This report contains  forward-looking statements within the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the Securities Exchange Act of  1934. These forward-looking statements are subject to certain risks and  uncertainties that could cause actual results to differ materially from  historical results or anticipated results, including those set forth under “Certain  Factors That May Affect Future Results” below and elsewhere in, or  incorporated by reference into, this report.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| *In some cases, you can identify  forward looking statements by terms such as “may,” “intend,” “might,” “will,”  “should,” “could,” “would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,”  “potential,” or the negative of these terms, and similar expressions are  intended to identify forward-looking statements   When used in the following discussion, the  words “believes,” “anticipates” and similar expressions are intended to  identify forward-looking statements. Such statements are subject to certain  risks and uncertainties, which could cause actual results to differ  materially from those projected. Readers are cautioned not to place undue  reliance on these forward-looking statements, which speak only as of the date  hereof   The forward-looking statements in this  report are based upon management’s current expectations and belief, which  management believes are reasonable.    These statements represent our estimates and assumptions only as of  the date of this Quarterly Report on Form 10-Q, and we undertakes no  obligation to publicly release the result of any revisions to these  forward-looking statements, which may be made to reflect events or  circumstances after the date hereof or to reflect the occurrence of  unanticipated events.* |
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| *The following discussion should be  read in conjunction with the Selected Consolidated Financial Data and the  Consolidated Financial Statements, including the Notes thereto.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

**OVERVIEW**

 

The Company develops, markets and supports*e*B, its integrated suite of collaborative document,configuration and records management software solutions. The*e*B suite enables organizations in a broadrange of industries to create, capture, store, manage, share and distributecritical business information regarding their customers, products, assets andprocesses in an efficient manner The*e*Bsuite also enables them to maintain complete, up-to-date information about theconfiguration of their products, assets and infrastructures so that they canachieve operational excellence and compliance with regulatory requirements.*e*B provides the capabilities of anEnterprise Content Management (ECM)/Electronic Document Management (EDM)System, but extends these capabilities by also managing the “things’ that thecontent/documents relate to such as products, assets , functions, processes,requirements, projects, organizations, locations, work orders, etc. As aresult, eB can be used to manage the lifecycle of physical items (e.g.products, equipment or assets), and the requirements (e.g. functional, safety,performance, environmental, etc.) that govern them. It enables intelligentrelationships to be defined between these items thereby creating aninterdependency model. As a result, the effects of any change on requirements,documents and items can be determined and change can be managed to effectivelyensure information integrity. In particular,*e*B enables organizations with extensive and complex physicalinfrastructures to efficiently identify, classify, structure, link, and managedocuments, physical items, and requirements throughout their lifecycles andensure that conformance between these is maintained by means of an automatedchange process.

 

We develop, market and support*e*B,our integrated suite of collaborative document, configuration and recordsmanagement software solutions. Our revenues in the three months ended December31, 2004 decreased by 22% from the same period in the prior fiscal year due tolower license sales.  During the threemonths ended December 31, 2003 there was a large license sale to a new customeras compared to the current year which had no similar size sale.  The Company’s license revenue fluctuates fromquarter to quarter as reflected by the decrease in license sales during thequarter.

 

Our revenues are derived from licenses of our software to ourcustomers, services that we provide under maintenance support contracts and ournon-maintenance services, consisting primarily of design studies, systemimplementation and training.  Of ourtotal revenues for the three months ended December 31, 2004, license revenuesaccounted for 16%, maintenance services revenues accounted for 47% andnon-maintenance services represented 37%.

 

Many of our customers are located outside the United States, withforeign-originated revenues accounting for 45% and 27% of revenues for thethree months ended December 31, 2004 and 2003, respectively.  Our revenue for the three months endedDecember 31, 2004 reflected a foreign currency gain of $51,000 as compared tolast year due to the declining value of the dollar during the year.

 

While revenues decreased, our cost of revenues remained relativelyunchanged which resulted in a decrease in our gross profit from 69% to 60% ofrevenues.  Operating expenses increasedby 9% primarily as a result of our decision to expand the Company’s marketing andsales efforts.

 

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At December 31, 2004, our principal sources of liquidity consisted of $812,000of cash and cash equivalents, compared to $109,000 at September 30, 2004.  On November 5, 2004, we completed a privateplacement of preferred stock which resulted in gross proceeds of $2,200,000.

 

 **CRITICAL ACCOUNTING POLICIES**

 

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

 

*Revenue Recognition*

 

** **The Company enters into contractual arrangements withend-users that may include licensing of the Company’s software products,product support and maintenance services, consulting services or variouscombinations thereof, including the sale of such products or servicesseparately.  The Company recognizes revenue in accordance with Statementof Position (“SOP”) 97-2 “Software Revenue Recognition” and SOP 98-9, “Modificationof SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions”and Staff Accounting Bulletin (“SAB”)  No. 101, updated by SAB’s 103 and104 “Update of Codification of Staff Accounting Bulletins.”

 

 Software license and third party product revenues are recognizedupon shipment of the product if no significant vendor obligations remain andcollection is probable. In cases where a significant vendor obligation exists,revenue recognition is delayed until such obligation has been satisfied. Fornew software products where a historical record has not yet been demonstratedthat acceptance is perfunctory, the Company defers recognition of revenue untilacceptance has occurred. If an undelivered element of the arrangement existsunder the license arrangement, a portion of revenue is deferred based onvendor-specific objective evidence (VSOE) of the fair value of the undeliveredelement until delivery occurs.  If VSOE does not exist for all undeliveredelements, all revenue is deferred until sufficient evidence exists or allelements have been delivered.  Annual maintenance revenues, which consistof ongoing support and product updates, are recognized on a straight-line basisover the term of the contract. Payments received in advance of performance ofthe related service for maintenance contracts are recorded as deferred revenue.Revenues from training and consulting services are recognized when the servicesare performed and adequate evidence of providing such services is available.Contract revenues for long-term contracts or programs requiring specializedsystems are recognized using the percentage-of-completion method of accounting,primarily based on contract labor hours incurred to date compared with totalestimated labor hours at completion. Provisions for anticipated contract lossesare recognized at the time they become known.

 

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

 

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

 

•                                                  The actual contractual terms, such aspayment terms, delivery dates, and pricing of the various product and service elementsof a contract

•                                                  Availability of products to be delivered

•                                                  Time period over which services are to beperformed

•                                                  Creditworthiness of the customer

•                                                  The complexity of customizations to theCompany’s software required by service contracts

•                                                  The sales channel through which the sale ismade (direct, VAR, distributor, etc.)

•                                                  Discounts given for each element of acontract

•                                                  Any commitments made as to installationor implementation of “go live” dates

 

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

 

*Allowance for Doubtful Accounts*

 

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

 

13

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on sales to VARs.  Receivables from customers are generallyunsecured. The Company continuously monitors its customer account balances andactively pursues collections on past due balances. The Company maintains anallowance for doubtful accounts which is comprised of a general reserve basedon historical collections performance plus a specific reserve for certain knowncustomer collections issues. If actual bad debts are greater than the reservescalculated based on historical trends and known customer issues, the Companymay be required to book additional bad debt expense which could have a materialadverse effect on our business, results of operations and financial conditionfor the periods in which such additional expense occurs.

 

**RESULTS OF OPERATIONS**

 

The following table sets forth the condensed consolidated statement ofoperations expressed as a percentage of total revenue for the periodsindicated:
| ** **                                 | ** ** | **For the three months ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| **Revenues**                               |       |                                             |       |   |   |
| Licenses                                   |       | 16                                               | %          | 53 | % |
| Services and  other                        |       | 84                                               | %          | 47 | % |
| Total revenues                             |       | 100                                              | %          | 100 | % |
|                                       |       |                                             |       |   |   |
| Cost of revenues                           |       |                                             |       |   |   |
| Licenses                                   |       | 3                                                | %          | 5 | % |
| Services and  other                        |       | 37                                               | %          | 26 | % |
|                                       |       | 40                                               | %          | 31 | % |
|                                       |       |                                             |       |   |   |
| Gross profit                               |       | 60                                               | %          | 69 | % |
|                                       |       |                                             |       |   |   |
| Operating  expenses:                       |       |                                             |       |   |   |
| Research and  development                  |       | 21                                               | %          | 16 | % |
| Marketing and  sales                       |       | 50                                               | %          | 28 | % |
| General and  administrative                |       | 24                                               | %          | 24 | % |
|                                       |       | 95                                               | %          | 68 | % |
|                                       |       |                                             |       |   |   |
| Income (loss)  from operations             |       | (35                                              | )%         | 1 | % |
|                                       |       |                                             |       |   |   |
| Interest expense                           |       | (2                                               | )%         | (1 | )% |
| Gain on  derivative revaluation            |       | 0                                                | %          | (0 | )% |
|                                       |       |                                             |       |   |   |
| Net loss                                   |       | (37                                              | )%         | (0 | )% |
| Deemed dividend                            |       | (133                                             | )%         |   |   |
| Cumulative  preferred dividends            |       | (4                                               | )%         | (3 | )% |
| Net loss  available to common shareholders |       | (174                                             | )%         | (3 | )% |

 

14

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 **Revenues**

 

*License Revenues*

(in thousands)

 
| ** **                    | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|------------|------------|----------|------------|
| License revenues              |       | $        | 268        |       | (76        | )%       | $          | 1,119 |   |
| Percentage of  total revenues |       | 16       | %          |       |       | 53       | %          |
|                          |       |     |       |       |       |     |       |
|                               |            |          |            |            |            |          |            |  |  |

 

License revenues decreased by $851,000, or 76%, to $268,000 from $1,119,000for the three months ended December 31, 2004 compared to the same period ayear ago.  The Company’s license revenues fluctuate from quarter toquarter which is reflected by the decrease in license sales in the currentquarter.  In the prior year a large saleof licenses to Constellation Energy amounted to $750,000 as compared no similarsize sales in the current year.  Thelength of time it takes to establish new customer relationships typicallyranges from 6 to 12 months and as such the timing of sales can fluctuatesignificantly from quarter to quarter.

 

Despite the relatively weak license revenue in the three months endedDecember 31, 2004, we anticipate that the demand for our products will increaseif overall economic conditions continue to strengthen leading to an increase inoverall demand for enterprise document, configuration and records managementsoftware solutions.  The Company’s license revenues can fluctuate fromquarter to quarter, based on the timing of customer orders due to the longsales cycle and changes in customers’ internal plans of the rollout of softwarelicenses.

 

 Although the Company has historically generated the majority ofits revenues from its direct sales force, the Company has also established anetwork of third-party VARs, system integrators and OEMs who build and sellsystems (with components or complete systems provided by the Company) thataddress specific customer needs within various industries, including thosetargeted directly by the Company.  Sales through indirect channels for thethree months ended December 31, 2004 amounted to $167,000 or 10% comparedto $110,000, or 5% for the same period in the prior year.

 

A small number of customers have typically accounted for a largepercentage of the Company’s annual revenues. Network Rail and ConstellationEnergy Group accounted for 19% and 11% of revenue for the three months endedDecember 31, 2004 while Constellation Energy Group accounted for 36% of revenuefor the three months ended December 31, 2003.  The Company’s relianceon relatively few customers could have a material adverse effect on the resultsof its operations on a quarterly basis.

 

 *Service and Other Revenues*

(in thousands)

 
| ** **                    | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Service revenues              |       | $        | 1,385      |       | 38         | %        | $          | 1,006 |   |
| Percentage of  total revenues |       | 84       | %          |       |       | 47       | %          |
|                          |       |     |       |       |       |     |       |
|                               |            |          |            |            |            |          |            |  |  |

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

 

Services and other revenue increased $379,000, or 38%, from $1,006,000to $1,385,000 for the three months ended December 31, 2004 compared to thesame period a year ago.  The non-maintenance portion of service revenue increased$309,000, or 110% from $281,000 to $590,000.  This increase was dueto increased demand for consulting services relating to customers extendingtheir systems to additional departments.   Also in this quarter the maintenance revenue increased$75,000, or 10% from $720,000 to $795,000. The increase in maintenance reflects support services for the licensessold in fiscal year 2004.  Fluctuationsin license revenue can impact service revenues in future periods as customersimplement the software and require maintenance support.

 

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

 

15

----

 

**Cost of Revenues**

 

*Cost of License Revenues*

(in thousands)

 
| ** **                      | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Cost of license  revenues       |       | $        | 44         |       | (56        | )%       | $          | 101 |   |
| Percentage of  license revenues |       | 16       | %          |       |       | 9        | %          |
|                            |       |     |       |       |       |     |       |
|                                 |            |          |            |            |            |          |            |  |  |

 Cost of licenses revenues consists of costs associated withreselling third-party products and amortization of capitalized softwaredevelopment costs.

 

Cost of license revenue decreased by $57,000, or 56%, from $101,000 to$44,000 for the three months ended December 31, 2004 compared to the sameperiod a year ago.  The decrease is due to lower third-party softwarecosts of $44,000 due to fewer sales of third-party products.  In addition,amortization expense of capitalized software costs decreased $13,000 as aresult of a majority of such costs being fully amortized in fiscal2003. The large decrease in license revenue resulted in an reduced grossprofit percentage of license revenues to 84% for the three months endedDecember 31, 2004 as compared to 91% for the same period a year ago. We expect the cost of license revenues to fluctuate based on fluctuations inlicense revenues and in customer requirements for third-party software productssince the cost of meeting these customer requirements have the largest impacton cost of license revenues.

 

*Cost of Services and Other Revenues*

(in thousands)

 
| ** **                                 | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Cost of services  and other revenues       |       | $        | 614        |       | 11         | %        | $          | 553 |   |
| Percentage of  services and other revenues |       | 44       | %          |       |       | 55       | %          |
|                                       |       |     |       |       |       |     |       |
|                                            |            |          |            |            |            |          |            |  |  |

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

 

Cost of services and other revenue increased $61,000, or 11%, from $553,000to $614,000 for the three months ended December 31, 2004 compared to thesame period a year ago.  The increase was primarily due to increase of $40,000in personnel-related costs and $23,000 in costs primarily related to travel.  These increases were associated with the increasein services and other revenues.  The gross profit from services and otherrevenue as a percentage of services and other revenues increased to 56% for thethree months ended December 31, 2004 as compared to 45% for the sameperiod a year ago.  The improvement ingross profit percentages is due to the 38% increase in service and otherrevenues while cost of revenues increased only 11% due to the total number ofpersonnel dedicated to customer contracts remaining  relatively unchanged.  We expect the costof service and other revenues to fluctuate in absolute dollar amounts and as apercentage of total revenues as the related service revenue fluctuates.

 

**Operating Expenses**

 

*Research and Development*

(in thousands)

 
| ** **                         | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Research and  development expenses |       | $        | 346        |       | 4          | %        | $          | 334 |   |
| Percentage of  total revenue       |       | 21       | %          |       |       | 16       | %          |
|                               |       |     |       |       |       |     |       |
|                                    |            |          |            |            |            |          |            |  |  |

 Research and development expenses consist of salaries andbenefits 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 development expenses increased $12,000, or 4%, from $334,000to $346,000 for the three months ended December 31, 2004 compared to thesame period a year ago.  The increase was due primarily to an increase incompensation and related benefits associated with increased headcount duringthe last half of fiscal 2004 and relocation of several employees.   We believe that continued investment inresearch and development is a critical factor in maintaining our competitiveposition and we expect research and development costs to remain at the currentlevels in absolute dollar amounts in the next several quarters.

 

16

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*Marketing and Sales*

(in thousands)

 
| ** **                    | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Marketing and  sales expenses |       | $        | 824        |       | 36         | %        | $          | 605 |   |
| Percentage of  total revenue  |       | 50       | %          |       |       | 28       | %          |
|                          |       |     |       |       |       |     |       |
|                               |            |          |            |            |            |          |            |  |  |

 

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

 

Marketing and sales expenses increased $209,000, or 35%, from $605,000to $824,000 for the three months ended December 31, 2004 compared to thesame period a year ago.  The increase in marketing and sales expenses isprimarily due to increases of $150,000 in additional marketing and sales personneland their related costs, $95,000 in marketing costs primarily related to tradeshows and travel and $62,000 in fees related to a public relations campaign.  The increase was partially offset by adecrease in commissions of $90,000 relating to lower sales during the quarter ascompared to the same period a year ago.

 

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

 

*General and Administrative*

(in thousands)

 
| ** **                           | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| General and  administrative expenses |       | $        | 399        |       | (21        | )%       | $          | 503 |   |
| Percentage of  total revenue         |       | 24       | %          |       |       | 24       | %          |
|                                 |       |     |       |       |       |     |       |
|                                      |            |          |            |            |            |          |            |  |  |

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

 

General and administrative expenses decreased by $104,000, or 21%, from$503,000 to $399,000 for the three months ended December 31, 2004 comparedto the same period a year ago.  The overall decrease was due primarily todecreases of $55,000 in investor relations expenses related to the expirationof a contract with an investor relations firm, $22,000 in accounting and legalfees as during the prior year additional work was required for a routine SECreview of the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2002 and $27,000 in miscellaneous expenses.

 

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

 

**Interest Expense**

 

Interest expense consists primarily of fixed interest obligations onour outstanding debt to Spescom Ltd. as well as interest paid on capital leaseobligations.  Interest expense was $30,000 for the three months endedDecember 31, 2004 as compared to $23,000 for the same period a yearago.  The increase is due primarily to increased debt balances owed to SpescomLtd. on several outstanding notes payable as well as interest on accruedpreferred dividends.

 

**Preferred Dividends**

 

The outstanding Series F Convertible Preferred Stock is entitled toreceive dividends of 5% of the stated value of $1,000 per share per annum,payable on a quarterly basis in cash or common stock (valued on the basis ofthe average per share market value on the 30 trading days immediately prior tothe date on which such dividend is declared by the Board of Directors). Unpaid dividends accrue interest at the rate of 8% per annum.  As ofDecember 31, 2004, unpaid dividends and accrued interest amounted to $330,000and $9,000, respectively.

 

The outstanding Series G Stock is entitled to receive dividends of 5%of the stated value of $1,000 per share per annum, payable monthly in arrearson the last day of each month based on the number of Series G Stock outstandingas of the first day of each such month. For the three months ended December 31, 2004, the Company issued 24,448shares of common stock with a value of $9,000 as a dividend on the Series G Stock.  In addition the Company accrued $8,000 individends for the December monthly dividend payable in cash or stock on January5, 2005. In connection with the Series G Stock financing, the Company recordeda beneficial conversion of $2,200,000 a deemed dividend for the three monthsended December 31, 2004.

 

17

----

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At December 31, 2004, our principal sources of liquidity consisted of $812,000of cash and cash equivalents compared to $109,000 at September 30,2004.  Our liquidity could be negatively impacted by a decrease in demandfor our products, which are subject to rapid technological changes, reductionsin capital expenditures by our customers and intense competition, among otherfactors.

 

The Company has received loans from Spescom Ltd. in the past to meetits obligations.  The outstanding balance of our demand notes owed toSpescom Ltd. including interest was $574,000 at December 31, 2004 as comparedto $557,000 at September 30, 2004.  Spescom Ltd. has agreed not tocall the notes prior to October 1, 2005.

 

We used cash in operatingactivities of $1,032,000 during the three months ended December 31, 2004primarily related to a net loss during the quarter of $604,000 and reductionsin deferred revenue and accrued liabilities of $344,000 and $249,000,respectively.  During the three monthsended December 31, 2003 we used cash in operating activities of $852,000primarily related to a reduction in receivables of $1.1 million which waspartially offset by an increase in payables of $258,000.

 

Our investing activitiesused $32,000 for three months ended December 31, 2004 primarily for theacquisition of computer software and equipment. There were no capital asset purchases in the three months ended December31, 2004.

 

Financing activities provided cash of $1.8 million for the three monthsended December 31, 2004 primarily from the issuance of preferred stock througha private placement on November 5, 2004. The Company intends to use the funds from this private placement toexpand its sales and marketing efforts and improve its liquidity.  Inconnection with the private placement, the Company issued 2,200 shares ofSeries G Convertible Preferred Stock, and warrants, expiring November 5,2007, to purchase 2,750,000 shares of common stock at $0.44 per share. The preferred stock is convertible into up to 7,333,334 shares of commonstock.  The net proceeds from the private placement totaled $1,782,000.  Cash provided by financing activities for thethree months ended December 31, 2003 of $608,000 was primarily the proceedsfrom a loan received form Spescom Ltd. UK.

 

 **Off-Balance SheetArrangements**

 

At December 31, 2004 and September 30, 2004, we did not have anyrelationships with unconsolidated entities or financial partnerships, includingentities often referred to as structured finance or special purpose entitiesthat would have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we were engaged in suchrelationships.

 

 **Inflation**

 

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

 

**Contractual Obligations andCommercial Commitments**

 

The following summarizes our contractual obligations and othercommitments at December 31, 2004, and the effect such obligations could have onour liquidity and cash flow in future periods:

** **
| ** **                                  | ** ** | **Amount of Commitment Expiring by Period** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                   | ** ** | **Less Than 1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Over 5 Years** | ** ** |
| Notes and  Accounts Payable to Spescom Ltd. |       | $                                           | 627,000    |   | $ | 627,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Lease  commitments — Operating Leases  |       | 1,175,000                                   |       | 241,000 |   | 759,000 |   | 175,000 |   | — |   |
| Lease  commitments — Capital Leases    |       | 69,000                                      |       | 24,000 |   | 45,000 |   | — |   | — |   |
| Total                                       |       | $                                           | 1,871,000  |   | $ | 892,000 |   | $ | 804,000 |   | $ | 175,000 |   | $ | — |   |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

18

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

 

**Interest Rate Risk**

 

The Company’s exposure to market rate risk for changes in interestrates relates primarily to the Company’s investment portfolio.  TheCompany does not use derivative financial instruments in its investmentportfolio. The Company places its investment with high quality issuers andfollows internally developed guidelines to limit the amount of credit exposureto any one issuer. Additionally, in an attempt to limit interest rate risk, theCompany follows guidelines to limit the average and longest single maturitydates. The Company is adverse to principal loss and ensures the safety andpreservation of its invested funds by limiting default, market and reinvestmentrisk. The following table summarizes our securities and weighted averageyields, as of December 31, 2004:

 
| ** **                 | ** ** | **Expected Maturity Date** | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **2005**                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Total** | ** ** |
| Grade AA  Commercial Paper |       | $                          | 700,000    |   | $ | — |   | $ | — |   | — |   | $ | 700,000 |   |
| Weighted Average  Yield    |       | 1.63                       | %          |   |   |   |   |   |   |   |   |
| Money Market               |       | 84,000                     |       | — |   | — |   | — |   | 84,000 |   |
| Weighted Average  Yield    |       | 0.25                       | %          |   |   |   |   |   |   |   |   |
| Total                      |       | $                          | 784,000    |   | $ | — |   | $ | — |   | — |   | $ | 784,000 |   |

 

 

**Foreign Currency Exchange Risk**

 

The Company’s geographic markets are primarily in the United States andEurope, with some sales in other parts of the world. For the three months endedDecember 31, 2004, revenues recorded in the United States were 55% of totalrevenues, and revenues from Europe and other locations were 45% of totalrevenues.  This compares to 73% and 27%for the same period a year ago.

 

Revenues from our United Kingdom subsidiary can fluctuate from quarterto quarter based on the timing of customer orders.  The increased revenuein fiscal 2004 was improved by a foreign currency gain of $51,000 due to aweakened dollar value compared to the pound sterling.  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 out an evaluation under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures as ofDecember 31, 2004 pursuant to Exchange Act Rule 13a-14. Based upon thatevaluation, we have concluded that as of December 31, 2004, the Company’sdisclosure controls and procedures are effective in recording, processing,summarizing and reporting within the time periods specified in the SEC’s rulesand forms material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicSEC filings.

 

During the last fiscal quarter, there was no change in the Company’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

19

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**PARTII.   OTHER INFORMATION**

 

**ITEM 1 —LEGAL PROCEEDINGS**

 

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

 

**ITEM 6 — EXHIBITS**

 
| **(a)(3)** | ** ** | **Exhibits**                                                                                                                                                                           |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                   |
| 3.1 (1)    |       | Registrant’s Articles of Incorporation, as amended.                                                                                                                               |
|       |       |                                                                                                                                                                                   |
| 3.2*       |       | Registrant’s Bylaws, as amended.                                                                                                                                                  |
|       |       |                                                                                                                                                                                   |
| 4.1*       |       | Specimen certificate of Common Stock                                                                                                                                                   |
|       |       |                                                                                                                                                                                   |
| 4.2 (2)    |       | Certificate of Determination of Series F Convertible  Preferred Stock of Altris Software, Inc., dated September 29, 2003.                                                              |
|       |       |                                                                                                                                                                                   |
| 4.3 (3)    |       | Certificate of Determination of Series G Convertible  Preferred Stock of Spescom Software Inc., dated November 5, 2004.                                                                |
|       |       |                                                                                                                                                                                   |
| 4.3 (4)    |       | Registration Rights Agreement by and among Altris  Software, Inc., Spescom Limited, and Spescom Ltd., dated September 30, 2003.                                                        |
|       |       |                                                                                                                                                                                   |
| 4.4 (5)    |       | Registration Rights Agreement by and among Altris  Software, Inc. and certain shareholders, dated August 31. 2003.                                                                     |
|       |       |                                                                                                                                                                                   |
| 4.5(6)     |       | Registration Rights Agreement by and among the  Company, Monarch Pointe Fund, Ltd. and Mercator Advisory Group, LLC, dated  November 5, 2004.                                          |
|       |       |                                                                                                                                                                                   |
| 4.6 (7)    |       | Warrant to Purchase Common Stock issued to Mercator  Advisory Group, LLC, dated November 5, 2004.                                                                                      |
|       |       |                                                                                                                                                                                   |
| 4.7 (8)    |       | Warrant to Purchase Common Stock issued to Monarch  Pointe Fund, Ltd., dated November 5, 2004.                                                                                         |
|       |       |                                                                                                                                                                                   |
| 4.8 (9)    |       | Warrants to Purchase Common Stock issued to Trilogy  Capital Partners, dated November 4, 2004.                                                                                         |
|       |       |                                                                                                                                                                                   |
| 4.9 (10)   |       | Warrant to Purchase Common Stock issued to Cappello  Capital Corp., dated January 28, 2005.                                                                                            |
|       |       |                                                                                                                                                                                   |
| 4.10 (11)  |       | Warrant to Purchase Common Stock issued to Cappello  Capital Corp., dated January 28, 2005.                                                                                            |
|       |       |                                                                                                                                                                                   |
| 10.1 (12)  |       | Lease between CFD-Mesa Ridge Partners and Altris  Software, Inc., dated April 1, 2003.                                                                                                 |
|       |       |                                                                                                                                                                                   |
| 10.2 (13)  |       | 10.0% promissory note due October 15, 2003 in  principal amount of $1,810,383 issued by Altris Software, Inc. to Spescom  Limited, a United Kingdom corporation, on February 15, 2002. |
|       |       |                                                                                                                                                                                   |
| 10.3 (14)  |       | Security Agreement between Altris Software, Inc. and  Spescom Limited, a United Kingdom corporation, and Spescom Limited, a South  African corporation, dated February 15, 2002.       |
|       |       |                                                                                                                                                                                   |
| 10.4 (15)  |       | 10% promissory note due upon demand in principal  amount of $400,000 issued by Altris Software, Inc. to Spescom Limited, a  United Kingdom corporation, on March 15, 2002.             |
|       |       |                                                                                                                                                                                   |
| 10.5 (16)  |       | Security Agreement dated March 15, 2002 between  Altris Software, Inc., a California corporation, and Spescom Limited, a United  Kingdom corporation.                                  |

 

20

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|       |   |                                                                                                                                                                                                 |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6 (17)  |   | Pledge Agreement dated March 15, 2002 by and between  Altris Software, Inc., a California corporation, Spescom Limited, a United  Kingdom corporation, and Solomon Ward Seidenwurm & Smith, LLP. |
|       |   |                                                                                                                                                                                                 |
| 10.7 (18)  |   | 10.0% promissory note due upon demand in principal  amount of $500,000 issued by Altris Software, Inc. to Spescom Limited, a  United Kingdom corporation, on April 19, 2002.                         |
|       |   |                                                                                                                                                                                                 |
| 10.8 (19)  |   | 10.0% promissory note due upon demand in principal  amount of $700,000 issued by Altris Software, Inc. to Spescom Limited, a  United Kingdom corporation, on May 31, 2002.                           |
|       |   |                                                                                                                                                                                                 |
| 10.9 (20)  |   | Debt Conversion Agreement by and between Altris  Software, Inc., Spescom Limited, and Spescom Ltd., dated September 30, 2003.                                                                        |
|       |   |                                                                                                                                                                                                 |
| 10.10 (21) |   | Subscription Agreement by and among the Company,  Monarch Pointe Fund, Ltd. and Mercator Advisory Group, LLC, dated November 5,  2004.                                                               |
|       |   |                                                                                                                                                                                                 |
| 10.11 (22) |   | Amended and restated 1996 Stock Incentive Plan.                                                                                                                                                      |
|       |   |                                                                                                                                                                                                 |
| 10.12 (23) |   | Form of Incentive Stock-Option Agreement,  Non-Statutory Stock-Option Agreement and Restricted Stock Option Agreement  under Amended and Restated 1996 Stock Incentive Plan.                         |
|       |   |                                                                                                                                                                                                 |
| 10.15 *    |   | 1987 Stock Option Plan, as amended April 27, 1994.                                                                                                                                                   |
|       |   |                                                                                                                                                                                                 |
| 10.16*     |   | Forms of Incentive Stock Option Agreement and  Nonstatutory Stock Option Agreement under 1987 Stock Option Plan.                                                                                     |
|       |   |                                                                                                                                                                                                 |
| 21.1 (24)  |   | Subsidiaries of the Registrant                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                 |
| 31.1       |   | Section 302 Certification by Carl Mostert,  Chief Executive Officer                                                                                                                             |
|       |   |                                                                                                                                                                                                 |
| 31.2       |   | Section 302 Certification by John W. Low, Chief  Financial Officer                                                                                                                              |
|       |   |                                                                                                                                                                                                 |
| 32.1**     |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002.                                                                  |
|       |   |                                                                                                                                                                                                 |
| 32.2**     |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002.                                                                  |

 

(1)                                  Incorporated by reference to Exhibit 3.1to the Form 10-K filed on December 6, 2004.

(2)                                  Incorporated by reference to Exhibit 99.3to the Form 8-K filed on October 10, 2003.

(3)                                  Incorporated by reference to Exhibit 3.1to the Form 8-K filed on November 12, 2004.

(4)                                  Incorporated by reference to Exhibit 99.4to the Form 8-K filed on October 10, 2003.

(5)                                  Incorporated by reference to Exhibit 99.3to the Form 8-K filed on October 1, 2003.

(6)                                  Incorporated by reference to Exhibit 10.2to the Form 8-K filed on November 12, 2004.

(7)                                  Incorporated by reference to Exhibit 10.3to the Form 8-K filed on November 12, 2004.

(8)                                  Incorporated by reference to Exhibit 10.4to the Form 8-K filed on November 12, 2004.

(9)                                  Incorporated by reference to Exhibit 10.5to the Form 8-K filed on November 12, 2004.

(10)                            Incorporated by reference to Exhibit 10.1to the Form 8-K filed on January 28, 2005.

(11)                            Incorporated by reference to Exhibit 10.2to the Form 8-K filed on January 28, 2005.

(12)                            Incorporated by reference to Exhibit 10.1to the Form 10-Q filed on August 14, 2003

(13)                            Incorporated by reference to Exhibit10.29 to the Form 10-Q filed on May 15, 2002.

(14)                            Incorporated by reference to Exhibit10.29 to the Form 10-Q filed on May 15, 2002.

(15)                            Incorporated by reference to Exhibit10.29 to the Form 10-Q filed on May 15, 2002.

(16)                            Incorporated by reference to Exhibit10.29 to the Form 10-Q filed on May 15, 2002.

(17)                            Incorporated by reference to Exhibit 10.29to the Form 10-Q filed on May 15, 2002.

(18)                            Incorporated by reference to Exhibit10.34 to the Form 10-Q filed on August 14, 2002.

(19)                            Incorporated by reference to Exhibit10.35 to the Form 10-Q filed on August 14, 2002.

(20)                            Incorporated by reference to Exhibit 99.2to the Form 8-K filed on October 10, 2003.

(21)                            Incorporated by reference to Exhibit 10.1to the Form 8-K filed on November 12, 2004.

(22)                            Incorporated by reference to Exhibit 10.1to the Registration Statement on Form S-8 filed on April 5, 2004.

 

21

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(23)         Incorporated byreference to Exhibit 10.6 to the Form 10-k filed March 31, 1997.

(24)         Incorporated byreference to Exhibit 21 to the Form 10-K filed on December 20, 2002.

 

   *           Incorporated hereinby this reference from previous filings with the Securities and ExchangeCommission.

 

22

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**SIGNATURES**

 

 

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

 
| **Signature**    |   | **Title** |                                                                                | **Date** |
|------------------|--------|-----------|-------------------------------------------------------------------------------------|----------|
|             |   |      |                                                                                |     |
|             |   |      |                                                                                |     |
| /s/ Carl Mostert |   |      | Director and Chief Executive Officer (Principal

Executive Officer)                 |     | February  14, 2005 |
| Carl Mostert     |   |      |                                                                                |     |
|             |   |      |                                                                                |     |
|             |   |      |                                                                                |     |
| /s/ John W. Low  |   |      | Chief Financial Officer and Secretary (Principal

Financial and Accounting Officer) |     | February 14, 2005 |
| John W. Low      |   |      |                                                                                |     |

 

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