UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
               ---------------------------------------------------

                                   FORM 10-QSB

[X]      Quarterly Report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 For the quarterly period ended: June 30, 2005

[  ]     Transition report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934
         For the Transition period from                        to
                                        ------------------    ------------------

                         Commission file number: 1-12966

                            CLEARSTORY SYSTEMS, INC.
                             (FORMERLY INSCI CORP.)
        (Exact name of small business issuer as specified in its charter)

            DELAWARE                                   06-1302773
------------------------------------        -----------------------------------
          (State of incorporation)          (IRS employer identification number)

                         One Research Drive, Suite 200B
                              Westborough, MA 01581
                    (Address of principal executive offices)

         Issuer's telephone number, including area code: (508) 870-4000

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes   X     No  __
     ---


State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

TITLE OF EACH CLASS                            OUTSTANDING AUGUST 12, 2005
-------------------                            ---------------------------
Common Stock, par value $.10                            5,992,287

Transitional Small Business Disclosure Format (check one)
Yes  ___   No X
              -



<PAGE>





                            CLEARSTORY SYSTEMS, INC.

                                      INDEX


                                                                            PAGE
PART I   FINANCIAL INFORMATION

Item 1.   Financial Statements

Condensed Consolidated Balance Sheet as of June 30, 2005
     (Unaudited) and March 31, 2005                                            3

Condensed Consolidated Statements of Operations for the Three Months
     Ended June 30, 2005 and 2004 (Unaudited)                                  4

Condensed Consolidated Statements of Cash Flows for the Three Months
     Ended June 30, 2005 and 2004 (Unaudited)                                  5

Notes to Condensed Consolidated Financial Statements                           6

Item 2.   Management's Discussion and Analysis or Plan of Operation            9

Item 3.   Controls and Procedures                                             19


PART II  OTHER INFORMATION

Item 6.   Exhibits                                                            20

              Signature                                                       20






<PAGE>








<TABLE>
<CAPTION>



                            CLEARSTORY SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (In thousands)

                                                               JUNE 30,   MARCH 31,
                                                                2005        2005
                                                              --------    --------
                            ASSETS
Current assets:
<S>                                                           <C>         <C>
    Cash and cash equivalents                                 $    444    $    849
    Accounts receivable, net                                     1,245         917
    Prepaid expenses and other current assets                      514         439
                                                              --------    --------
       Total current assets                                      2,203       2,205


Property and equipment, net                                      1,315       1,439
Capitalized software, net                                        1,806       1,852
Goodwill                                                         1,223       1,223
Other assets                                                       164         186
                                                              --------    --------
                                                              $  6,711    $  6,905
                                                              ========    ========

             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable and accrued expenses                     $  2,395    $  2,665
    Advances against accounts receivable sold with recourse        760         606
    10% Convertible Promissory Note                                750        --
    Deferred revenue                                             2,442       2,527
   Capital leases, current portion                                 115         115
                                                              --------    --------
          Total current liabilities                              6,462       5,913

Long term liabilities:
    Deferred rent                                                  492         494
    Capital leases, net of current portion                          81         112
                                                              --------    --------
          Total long term liabilities                              573         606

Commitments and contingencies

Stockholders' equity:

   Series B Convertible Preferred Stock                              1           1
   Series C Convertible Preferred Stock                             38          37
   8% Convertible Preferred Stock                                    1           1
   Common Stock                                                    599         599
   Additional paid-in capital                                   56,428      56,139
   Accumulated deficit                                         (57,391)    (56,391)
                                                              --------    --------
          Total stockholders' equity (deficit)                    (324)        386
                                                              --------    --------
                                                              $  6,711    $  6,905
                                                              ========    ========






              The accompanying notes are an integral part of these
                       consolidated financial statements.





                                      -3-
</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                            CLEARSTORY SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                    (In thousands, except per share amounts)


                                                             THREE MONTHS ENDED JUNE 30,
                                                                 ------------------
                                                                  2005        2004
                                                                 -------    -------
Revenue:
<S>                                                              <C>        <C>
    Product                                                      $   568    $ 1,225
    Services                                                       1,567      1,758
                                                                 -------    -------
                                                                   2,135      2,983
Cost of revenues:
    Product                                                           49         63
   Services                                                          768        827
                                                                 -------    -------
                                                                     817        890
Gross profit                                                       1,318      2,093

Operating expenses:
    Sales and marketing                                              718        741
   Product development                                               801        612
    General and administrative                                       565        614
                                                                 -------    -------
                                                                   2,084      1,967
                                                                 -------    -------

Operating income (loss)                                             (766)       126
Interest expense, net                                                (45)       (26)
                                                                 -------    -------

                                                                 $  (811)   $   100
Net income (loss)                                                =======    =======

Net loss per share - basic and diluted                           $ (0.17)   $ (0.01)
                                                                 =======    =======

Weighted average common shares outstanding - basic and diluted     5,992      5,992
                                                                 =======    =======

















              The accompanying notes are an integral part of these
                       consolidated financial statements.

</TABLE>



                                      -4-
<PAGE>
<TABLE>
<CAPTION>



                            CLEARSTORY SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


                                                            THREE MONTHS ENDED JUNE 30,
                                                           ----------------------------
                                                                 2005       2004
                                                               -------    -------
Cash flows from operating activities:
<S>                                                            <C>        <C>
  Net income (loss)                                            $  (811)   $   100
  Reconciliation of net loss to net cash
    provided by (used in) operating activities:
  Depreciation and amortization                                    181        103
  Deferred rent                                                     (2)        93
  Changes in assets and liabilities:
      Accounts receivable                                         (328)        79
      Prepaid expenses and other current assets                    (75)      (148)
      Other assets                                                  22         70
      Accounts payable and accrued expenses                       (419)       588
      Deferred revenue                                             (85)       (17)
                                                               -------    -------
Net cash provided by (used in) operating activities             (1,517)       868

Cash flows from investing activities:
  Capitalized software                                            --         (374)
  Capital expenditures                                             (11)      (391)
                                                               -------    -------
Net cash used in investing activities                              (11)      (765)

Cash flows from financing activities:
  Net advances (repayments) from sale of receivables               154       (579)
  Proceeds from issuance of Note                                   750       --
  Payments on capital leases                                       (31)       (25)
  Proceeds from issuance of Series C Preferred                     250       --
Net cash provided by (used in) financing activities              1,123       (604)
                                                               -------    -------
Net decrease in cash                                              (405)      (501)
Cash, beginning of period                                          849        751
                                                               -------    -------
Cash, end of period                                            $   444    $   250
                                                               =======    =======

Supplemental Disclosure of Cash Flow Information:
  Series C Preferred Stock issued in settlement of dividends   $    41    $  --
  Cash interest paid                                                53         26












              The accompanying notes are an integral part of these
                       consolidated financial statements.

</TABLE>




                                      -5-
<PAGE>



                            CLEARSTORY SYSTEMS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NATURE OF BUSINESS AND BASIS OF PRESENTATION

         ClearStory Systems, Inc. (the "Company" or "ClearStory") is a leading
provider of integrated enterprise content management ("ECM") solutions.
ClearStory's proven technology provides a solid foundation for managing the full
spectrum of enterprise content, from documents to e-mail, and graphics to video.
By bringing digital assets and business content with a unified Web services
platform, ClearStory readily enables content use in e-commerce, customer
service, marketing content management and regulatory compliance applications.

         The consolidated financial statements included in this report have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission regarding interim financial reporting. In
addition, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations relating to interim condensed financial
statements. However, the Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. The financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 2005. The results for the three months ended June 30, 2005
may not be indicative of the results that may be expected for the year ending
March 31, 2006 or for any other future period.

         In the opinion of the management of the Company, the accompanying
unaudited financial statements reflect all adjustments that are necessary to
present fairly the financial position of the Company as of June 30, 2005 and the
results of operations for the three months ended June 30, 2005 and 2004 and cash
flows for the three months ended June 30, 2005 and 2004.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Standards ("SFAS") No. 123 (revised 2004),
SHARE-BASED PAYMENT ("SFAS No. 123(R)"), which is a revision of SFAS No. 123,
Accounting for Stock-based Compensation ("SFAS No. 123"). SFAS No. 123(R)
supersedes Accounting Principle Board Opinion ("APB") No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and amends FASB Statement No. 95, STATEMENT OF CASH
FLOWS. Generally, the approach to accounting for share-based payments in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure of the fair value of share-based
payments is no longer an alternative to financial statement recognition. SFAS
No. 123(R) is effective for small business issuers at the beginning of the first
fiscal year beginning after December 15, 2005, or effective April 1, 2006 for
the Company.

         The Company expects the adoption of SFAS No. 123(R) to have a material
effect on its financial statements, in the form of additional compensation
expense, on a quarterly and annual basis. It is not possible to precisely
determine the expense impact of adoption since a portion of the ultimate expense
that is recorded will likely relate to awards that have not yet been granted,
but are likely to be granted prior to our April 1, 2006 adoption date. The
expense associated with these future awards can only be determined based on
factors such as the price for the Company's common stock, volatility of the
Company's stock price and risk free interest rates as measured at the grant
date. However, the pro forma disclosures related to SFAS No. 123 included in the
Company's historic financial statements are relevant data points for gauging the
potential level of expense that might be recorded in future periods.



                                      -6-
<PAGE>


EARNINGS (LOSS) PER COMMON SHARE

         Basic and diluted net earnings (loss) per share are presented in
conformity with SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"), for all
periods presented. In accordance with SFAS No. 128, basic net earnings (loss)
per common share was determined by dividing net earnings (loss) applicable to
common stockholders by the weighted average common shares outstanding during the
period. Basic and diluted net earnings (loss) per share are the same because all
outstanding common stock equivalents have been excluded as they are
anti-dilutive.

     Reconciliation of the Company's net loss to net loss attributable to common
shareholders is as follows:

                                                     THREE MONTHS ENDED JUNE 30,
                                                  ------------------------------
                                                     2005                2004
                                                  ------------------------------
Net income (loss) - as reported                    $   (811)            $ 100
Preferred stock dividends                              (189)             (145)
                                                  ------------------------------
Net loss attributable to common shareholders       $ (1,000)           $  (45)
                                                  ==============================

         For the three months ended June 30, 2005 and 2004, approximately 18.0
million and 16.4 million shares, respectively, from stock options, warrants and
convertible securities were excluded due to their anti-dilutive effect.

STOCK-BASED COMPENSATION

         The Company has elected to follow APB No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations in accounting for its employee
stock options. Under APB No. 25, when the exercise price of employee stock
options is equal to or greater than the market price of the underlying stock on
the date of grant no compensation expense is recorded. The Company discloses
information relating to the fair value of stock-based compensation awards in
accordance with SFAS No. 123.

         The Company computed the pro forma disclosures required under SFAS No.
123 for all stock options granted to employees and directors of the Company as
of June 30, 2005 and 2004, using the Black-Scholes option pricing model
prescribed by SFAS No. 123.

         The effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>

                                                          THREE MONTHS ENDED JUNE 30,
                                                  --------------------------------------
                                                        2005                  2004
                                                  --------------------------------------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss attributable to common shareholders:
<S>                                                  <C>                    <C>
     As reported                                     $   (1,000)            $     (45)
                                                  =====================================
     Pro forma - SFAS 123                            $   (1,094)            $    (176)
                                                  =====================================

Basic and diluted net loss per share:
     As reported                                     $    (0.17)           $    (0.01)
                                                  =====================================
     Pro forma - SFAS 123                            $    (0.18)           $    (0.03)
                                                  =====================================
</TABLE>


ADVANCES AGAINST RECEIVABLES SOLD WITH RECOURSE

         On November 2, 2004, the Company entered into a factoring agreement
("Factoring Agreement") with Benefactor Funding Corporation ("Benefactor"),
which replaced its existing financing agreement with another financing company.
Pursuant to the Factoring Agreement, the Company will sell certain accounts
receivable to Benefactor at a purchase price, for each accepted account, equal
to (i) 98.75% of the face amount of the applicable account receivable less (ii)
Benefactor's fees and the amount of any trade or cash discounts, credits or
allowances, set-offs or any other applicable reductions or adjustments. The
Company has also granted Benefactor a security interest in all of the Company's
assets to secure the payment and performance of all obligations under the
Factoring Agreement.





                                      -7-
<PAGE>



10% CONVERTIBLE PROMISSORY NOTE

         On June 16, 2005, the Company, issued a 10% Convertible Promissory Note
(the "Note") to SCP Private Equity Partners II, L.P. ("SCP"). The Note was
issued in the amount of $750,000, and is payable on demand at any time. Pursuant
to the terms of the Note, the Note is convertible upon demand into up to 386,678
shares of the Company's Series C Convertible Preferred Stock, par value $.01 per
share ("Series C Preferred") or other equity securities of the Company. The Note
may be pre-paid by the Company at any time without penalty.

         Unless converted into securities, the Note must be prepaid by the
Company in cash upon the occurrence of any (i) merger or consolidation of the
Company with or into any other corporation or other entity or person (other than
a merger or consolidation in which the holders of capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least
ninety percent (90%) of the voting power of the surviving or acquiring
corporation), (ii) sale or pledge of all or substantially all the assets of the
Company, or (iii) transaction or series of transactions in which more than fifty
percent (50%) of the voting power of the capital stock of the Company is
disposed of to a single person or group of affiliated persons.

SERIES C CONVERTIBLE PREFERRED STOCK

         On January 28, 2005, the Company entered into a Series C Convertible
Preferred Stock Purchase Agreement with SCP and CSSMK, LLC ("CSSMK"), whereby
the Company sold 257,785 shares of Series C Preferred at $1.9396 per share to
SCP for the sum of $500,000 and sold an additional 51,557 shares of Series C
Preferred to CSSMK at $1.9396 per share for the sum of $100,000. Pursuant to the
agreement, SCP, or at the discretion of SCP, CIP Capital LP ("CIP"), agreed to
purchase a minimum of 77,336 additional shares of Series C Preferred at $1.9396
per share for the sum of $150,000, on or before April 15, 2005 (the "Second
Closing"). In addition, SCP could, at its sole discretion, expand the number of
shares to be purchased at the Second Closing to a maximum of 128,893 shares of
Series C Preferred for $250,000. SCP elected to purchase 128,893 shares of
Series C Preferred for $250,000 on April 15, 2005.

         For the period ended June 30, 2005, the Company also issued a total of
20,896 shares of Series C Preferred in settlement of dividends of $41,000 on its
Series B Convertible Preferred Stock ("Series B Preferred"). The Company has
recorded an additional $148,000 in accrued dividends associated with its Series
B Preferred and Series C Preferred at June 30, 2005.

LIQUIDITY

         As of June 30, 2005, the Company has a cash balance of $444,000 and the
ability to sell certain accounts receivable for additional funds of
approximately $250,000 pursuant to its Factoring Agreement. Based upon the
Company's current operating outlook for the remainder of the current fiscal
year, the Company needs additional financial resources to meet its short tem
liquidity requirements. The Company is currently in discussions with a third
party lender to obtain additional secured debt financing. Completion of the debt
financing is subject to a number of risks and uncertainties and to various
contingencies, including the agreement of the Company's principal stockholder to
guarantee the facility. The Company can make no assurances that the debt
financing will be completed..

         The Company may need additional financing, beyond that which is
contemplated above, to further supplement its liquidity needs, especially for
intra-quarter liquidity requirements that depend on the timing and amount of
monthly cash receipts that are anticipated by its current operating outlook.
Since its acquisition of WebWare in September 2003, the Company has incurred
operating losses and negative cash flows, that have historically been funded
through the issuance of additional capital from its major stockholders. While
the Company continues to expect that its revenue for the upcoming fiscal year
will be in excess of its revenue for the last fiscal year due to significant
investments in its direct sales and marketing efforts, the establishment of new
sales distribution channels and the development and release of new products,
there can be no assurances that the Company will be able to achieve revenue
levels or sufficiently reduce expenses to allow the Company to become profitable
without detrimentally affecting its revenues or market position. Additionally,
the Company already has a working capital deficit of $4,259,000 as of June 30,
2005, compared to a working capital deficit of $3,708,000 as of March 31, 2005,




                                      -8-
<PAGE>

which increases the need for the Company to successfully execute and deliver on
its current business plan. The Company expects its working capital deficit to
increase as the Company anticipates incurring operating losses over the next
several quarters of fiscal 2006. In the event that the Company's plans or
assumptions change or prove to be inaccurate (due to revenue shortfalls,
unanticipated expenses, difficulties, delays or otherwise), the Company may have
insufficient funds to support its operations. Over the past several years, the
Company has been successful in raising additional funds from its major
shareholders, which have allowed the Company to continue to make certain
strategic investments. However, the Company's ability to garner continued
financial support from these, or other investors, should the need arise cannot
be assured.

GEOGRAPHIC INFORMATION

         The Company operates as a single reportable segment as a developer and
distributor of software solutions for the ECM market.

     Revenue was derived from customers in the following geographic areas:

                                                THREE MONTHS ENDED JUNE 30,
                                             --------------------------------
                                                  2005             2004
                                             --------------- ----------------
North America                                    $    1,837       $    2,713
Europe                                                  183              185
Other                                                   115               85
                                             --------------- ----------------
                                                 $    2,135       $    2,983
                                             =============== ================



ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 ("FIRST QUARTER OF FISCAL
2006") AND THE THREE MONTHS ENDED JUNE 30, 2004 ("FIRST QUARTER OF FISCAL 2005")
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE RELATED
NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-QSB AND THE AUDITED FINANCIAL
STATEMENTS AND NOTES THERETO AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" INCLUDED IN OUR ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 2005, WHICH HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR BUSINESS, PLANS, ESTIMATES
AND BELIEFS. OUR RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS.

         We were founded to capture and preserve high volumes of mission
critical business information. Our product offering includes web-based
presentment capabilities for documents such as bank statements, 401(k)
statements, customer and vendor statements, explanation of benefits ("EOB")
statements, and transaction confirmation documents. We have expanded our product
offerings to include e-mail archiving and notification capabilities as well as
the ability to capture, store and deliver high value digital assets such as
video, voice on demand, graphics and presentations subsequent to our acquisition
of certain assets and liabilities of WebWare Corp. on September 5, 2003. These
offerings provide our customers with the ability to improve internal
communication, enhance productivity and increase customer satisfaction and
communication. With the March 2005 release of Radiant Enterprise Media Server
("Radiant EMS"), our next generation software platform, coupled with our
ActiveMedia product offerings, we have substantially expanded our digital
archive and rich media asset management capabilities and support business
efforts such as video and voice on demand, and marketing content management.



                                      -9-
<PAGE>


         We distribute our products through a combination of our direct sales
force and through our Alliance Partners. Revenue is net of discounts and
allowances given to our Alliance Partners. We also market and license our
products on an international basis through our Alliance Partners. We have
reseller relationships with Unisys, and Xerox Global Services, and original
equipment manufacturer ("OEM") agreements with Agfa Corporation, Ascent Media
Group, Inc., and Sunguard Shareholder Systems, Inc. In addition, on March 30,
2005, we signed a teaming agreement with IBM, representing a new distribution
opportunity for our recently released platform, Radiant EMS. We consider the
development of a successful Alliance Partner program as a key element for our
future growth. In Fiscal 2005, we derived approximately 46% of our total
revenues from our Alliance Partners. Sales to new end-users generally include a
software license, professional services, and maintenance contracts.
Additionally, our Radiant EMS and Active Media products are also offered under a
hosting contract pursuant to which we are an application service provider
("ASP"). ASP sales typically include monthly recurring revenues that are
recognized as earned.

SIGNIFICANT ACCOUNTING POLICIES

         Financial Reporting Release No. 60, which was recently issued by the
SEC, requires all registrants to discuss critical accounting policies or methods
used in the preparation of the financial statements. The notes to the
consolidated financial statements included in our Annual Report on Form 10-KSB
for the year ended March 31, 2005 includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements, the most significant of which are revenue recognition,
capitalization of software, and income taxes.

         Further, we have made a number of estimates and assumptions that affect
reported amounts of assets, liabilities, revenues and expenses, and actual
results may differ from those estimates. The areas that require the greatest
degree of management judgment are the assessment of the recoverability of
long-lived assets, primarily goodwill and capitalized software costs.
Capitalized software costs, which consist primarily of payroll and related
expenses, are capitalized once technological feasibility, which is defined as
completion of beta testing, is established. It is then amortized when the
product is released over an estimated useful life of three to five years.

         We believe that full consideration has been given to all relevant and
material circumstances to which we may be subject, and the financial statements
accurately reflect our best estimate of the results of operations, financial
position and cash flows for the periods presented.

COMPARISON OF RESULTS OF OPERATIONS

         The following tables compare total revenues for the periods indicated
(in thousands):

                                               THREE MONTHS ENDED JUNE 30,
                                               ---------------------------
                                                2005     2004     % CHANGE
                                               ------   ------     -------
Product revenues                               $  568   $1,225      -54%
Professional services                             242      428      -43%
Maintenance and hosting contract revenues       1,325    1,330      -- %
                                               ------   ------     -------
      Total revenues                           $2,135   $2,983      -28%
                                               ======   ======     ========


FIRST QUARTER OF FISCAL 2006 AS COMPARED TO FIRST QUARTER OF FISCAL 2005:

REVENUES

         Revenues for the First Quarter of Fiscal 2006 decreased by $848,000, or
28%, to $2,135,000 as compared to revenues of $2,983,000 for the First Quarter
of Fiscal 2005. Product revenues decreased by $657,000, or 54%, to $568,000 in
the First Quarter of Fiscal 2006 as compared to $1,225,000 in the First Quarter
of Fiscal 2005. The decrease in product revenues was attributable to longer
sales cycles associated with Radiant EMS and lower revenue volumes associated
with Radiant BDS. Professional service revenues decreased by $186,000, or 43%,
to $242,000 in the First Quarter of Fiscal 2006 as compared to $428,000 in the
First Quarter of Fiscal 2005. The decrease in professional services revenues was
due to the decline in product revenues. Maintenance and hosting revenues
remained essentially the same at $1.3 million in the First Quarter of Fiscal
2006 and the First Quarter of Fiscal 2005.



                                      -10-
<PAGE>


GROSS PROFIT

         Gross profit for the First Quarter of Fiscal 2006 decreased by
$775,000, or 37%, to $1,318,000 as compared to gross profit of $2,093,000 for
the First Quarter of Fiscal 2005. The decrease in gross profit is related to the
decrease in product and service revenue as previously discussed. Gross margin
percentage decreased to 62% for the First Quarter of Fiscal 2006 from 70% for
the First Quarter of Fiscal 2005. The decrease in the gross margin percentage
was primarily the result of lower product revenue, which have higher gross
profit margins, and lower service margins due to lower productivity from fewer
service engagements.

SALES AND MARKETING

         Sales and marketing expenses for the First Quarter of Fiscal 2006
decreased by $23,000, or 3%, to $718,000, as compared to $741,000 for the First
Quarter of Fiscal 2005. The decrease is primarily due to lower commissions,
partially offset by the strategic investment in our direct sales force.

         Sales and marketing expenses expressed as a percentage of sales
increased to 34% in the First Quarter of Fiscal 2006 compared to 25% in the
First Quarter of Fiscal 2005, primarily due to the decrease in revenues.

PRODUCT DEVELOPMENT

         Product development expenses, net of capitalized software, for the
First Quarter of Fiscal 2006 increased by $189,000, or 31%, to $801,000 as
compared to $612,000 for the First Quarter of Fiscal 2005. We capitalized
$374,000 of product development costs associated with the development of our
next generation platform, Radiant EMS, in the First Quarter of Fiscal 2005 with
no capitalization occurring in the First Quarter of Fiscal 2006. Radiant EMS
achieved technological feasibility in the fourth quarter of Fiscal 2004 and was
released in March 2005. Excluding the impact of the software capitalization,
total product development expenses for the First Quarter of Fiscal 2006 would
have decreased by $185,000, or 19%, to $801,000 as compared to $986,000 for the
First Quarter of Fiscal 2005. The decrease in product development costs is
attributable to reduced costs associated with Radiant BDS and a reduction in
external development costs associated with the development of Radiant EMS.

         Product development expenses, excluding the impact of the software
capitalization, expressed as a percentage of revenues was 38% in the First
Quarter of Fiscal 2006, compared to 33% in the First Quarter of Fiscal 2005.

GENERAL AND ADMINISTRATIVE

         General and administrative expenses for the First Quarter of Fiscal
2006 decreased by $49,000, or 8%, to $565,000 as compared to $614,000 for the
First Quarter of Fiscal 2005. General and administrative expenses decreased
primarily as a result of reduced facility costs as we moved into a new corporate
facility on March 1, 2004 but continued to be obligated on our prior facility
through September 2004.

         General and administrative expense, expressed as a percentage of
revenues, was 26% for the First Quarter of Fiscal 2006, compared to 21% in the
First Quarter of Fiscal 2005.

INTEREST EXPENSE, NET

         Interest expense, net for the First Quarter of Fiscal 2006 increased by
$19,000, or 73%, to $45,000 as compared to $26,000 for the First Quarter of
Fiscal 2005. The increase was due to an increase in the level of borrowings,
fees, and interest payable under our Factoring Agreement.

PROVISION FOR TAXES

         No provision for or benefit from federal, state or foreign income taxes
was recorded for the First Quarter of Fiscal 2006 or for the First Quarter of
Fiscal 2005 because we incurred net operating losses and fully reserved our
deferred tax assets as their future realization could not be determined.



                                      -11-
<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 2005, we have a cash balance of $444,000 and the ability
to sell certain accounts receivable for additional funds of approximately
$250,000 pursuant to our Factoring Agreement. Based upon our current operating
outlook for the remainder of the current fiscal year, we need additional
financial resources to meet our short tem liquidity requirements. We are
currently in discussions with a third party lender to obtain additional secured
debt financing. Completion of the debt financing is subject to a number of risks
and uncertainties and to various contingencies, including the agreement of our
principal stockholder to guarantee the facility. We can make no assurances that
the debt financing will be completed.

         We may need additional financing, beyond that which is contemplated
above, to further supplement our liquidity needs, especially for intra-quarter
liquidity requirements that depend on the timing and amount of monthly cash
receipts that are anticipated by our current operating outlook. Since our
acquisition of WebWare in September 2003, we have incurred operating losses and
negative cash flows that have historically been funded through the issuance of
additional capital from our major stockholders. While we continue to expect that
our revenue for the upcoming fiscal year will be in excess of our revenue for
the last fiscal year due to significant investments in our direct sales and
marketing efforts, the establishment of new sales distribution channels and the
development and release of new products, there can be no assurances that we will
be able to achieve these higher revenue levels or sufficiently reduce expenses
to allow us to become profitable without detrimentally affecting our revenues or
market position. Additionally, we already have a working capital deficit of
$4,259,000 as of June 30, 2005, compared to a working capital deficit of
$3,708,000 as of March 31, 2005, which increases the need for us to successfully
execute and deliver on our current business plan. We expect our working capital
deficit to increase as we anticipate incurring operating losses over the next
several of quarters of fiscal 2006. In the event our plans or our assumptions
change or prove to be inaccurate (due to revenue shortfalls, unanticipated
expenses, difficulties, delays or otherwise), we may have insufficient funds to
support our operations. Over the past several years, we have been successful in
raising additional funds from our major shareholders, which has allowed us to
continue to make certain strategic investments. However, our ability to garner
continued financial support from these, or other investors, should the need
arise, cannot be assured.

         Our cash flows are summarized below for the periods indicated: (in
thousands)

                                                    THREE MONTHS ENDED JUNE 30,
                                                    ---------------------------
                                                        2005             2004
                                                     -------          -------
Cash provided by (used in):
  Operating activities                               $(1,517)         $   868
   Investing activities                                  (11)            (765)
   Financing activities                                1,123             (604)
                                                     -------          -------
Net decrease in cash                                    (405)            (501)
Cash, beginning of period                                849              751
                                                     -------          -------
Cash, end of period                                  $   444          $   250
                                                     =======          =======


         Net cash used in operating activities was $1,517,000 in the First
Quarter of Fiscal 2006 compared to net cash provided by operating activities of
$868,000 in the prior comparable period. The decrease in cash from operations is
primarily due to our higher net loss for the First Quarter of Fiscal 2006, an
increase in accounts receivable and a decrease in accounts payable and accrued
expenses due to the timing of payments. For the First Quarter of Fiscal 2006,
the days sales outstanding ("DSO") was 52 compared to a DSO of 61 for the First
Quarter of Fiscal 2005.

         Net cash used in investing activities was $11,000 in the First Quarter
of Fiscal 2006 compared to $765,000 in the prior comparable period. For the
First Quarter of 2005, we utilized funds of $374,000 for capitalized software
development costs and $391,000 of funds for capital expenditures for the
completion of our hosted data center, other equipment relating to the relocation
of corporate facilities and computer equipment and software associated with our
product development activities.



                                      -12-
<PAGE>


         Net cash provided by financing activities was $1,123,000 in the First
Quarter of Fiscal 2006 compared to net cash used in financing activities of
$604,000 in the prior comparable period. Cash provided by financing activities
in the First Quarter of Fiscal 2006 was a result of the proceeds from the
issuance of $250,000 of Series C Preferred, the issuance of the $750,000 Note
and $154,000 of advances against account receivables under our Factoring
Agreement. Cash used in financing activities in the First Quarter of Fiscal 2005
was primarily the result of the repayment of $579,000 of advances against
accounts receivable.

QUARTERLY RESULTS

         Quarterly revenues and results of operations may fluctuate as the
result of a variety of factors, including the lengthy sales cycle for our
products, the proportion of revenues attributable to software license fees
versus services, the amount of revenue generated by alliances with other
companies distributing our products, demand for our products and services, the
size and timing of individual license transactions, the introduction of new
products and product enhancements by us or our competitors, changes in customer
budgets and capital expenditures, competitive conditions in the industry and
general economic conditions. Additionally, the sale of our products generally
involves a significant commitment of capital by our customers and may be delayed
due to time-consuming authorization procedures within an organization. Other
factors affecting our operating results include our ability to design and
introduce on a timely basis new products which compete effectively on the basis
of price and performance, product obsolescence, technological changes,
competition and competitive pressures on price, the ability to hire and retain
qualified personnel and general economic conditions affecting the investment by
potential customers in technology based investments. There is no assurance that
we can maintain or increase our sales volume going forward or that we will be
able to achieve a profit in the marketing of our products.

OFF-BALANCE SHEET ARRANGEMENTS

         The Company does not have any off-balance sheet arrangements that have
not been disclosed.

"FORWARD-LOOKING" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

         This Quarterly Report on Form 10-QSB contains statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements appear in a number of places in this
Quarterly Report and include all statements that are not statements of
historical fact regarding the intent, belief or expectations of the Company and
its management. These statements are based upon a number of assumptions and
estimates, which are subject to significant uncertainties, many of which are
beyond our control. Words such as "may," "would," "could," "will," "expect,"
"anticipate," "believe," "intend," "plan" and "estimate" are meant to identify
such forward-looking statements. Such forward-looking statements are not
guarantees and actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, our ability to
achieve or maintain growth or profitability, our ability to execute our business
strategy successfully, our ability to obtain financing and to pay off our
existing liabilities and to fund our working capital needs, our relationship
with our existing lenders, our relationship with our customers and suppliers,
increased competition, possible system failures and rapid changes in technology
and other factors discussed in this Quarterly Report on Form 10-QSB and in our
other filings with the SEC.

BUSINESS RISKS

         An investment in our common stock involves a high degree of risk.
Current and potential investors should carefully consider the following risks,
and consult with their legal, tax and financial advisors when considering an
investment in the Company.



                                      -13-
<PAGE>


WE HAVE A HISTORY OF LOSSES AND OUR ABILITY TO BE PROFITABLE DEPENDS ON A NUMBER
OF FACTORS THAT WE MAY BE UNABLE TO CONTROL.

         We have incurred substantial operating losses since our inception,
which has resulted in an accumulated deficit of $57,391,000, as of June 30,
2005. For the years ended March 31, 2005 and March 31, 2004, we incurred net
losses of $1,242,000 and $2,324,000, respectively, and we incurred additional
net losses of $811,000 for the three months ended June 30, 2005. We expect this
working capital deficit to further increase as we anticipate incurring
additional losses for the next several quarters of fiscal 2006. Since our
acquisition of certain assets and liabilities of WebWare on September 3, 2003,
we have experienced operating losses as we focused our efforts on integration
and market enhancement initiatives and the development of our next generation
platform, Radiant EMS. There can be no assurance that revenues will continue to
increase from current levels to allow us to become profitable or that any
expense reduction actions we may take will allow us to become profitable, or not
affect our future revenues or market position.

         Our quarterly sales and operating results have varied significantly,
and may vary in the future, as a result of several factors such as:

     o   Size and timing of software license orders
     o   Adoption of recently introduced products
     o   Sales mix of installed versus hosted license revenues
     o   License revenues as a percentage of our revenues
     o   Completion of backlog orders
     o   Successful implementation of a direct sales model
     o   Acceptance and sign off of service contracts
     o   Maintenance contract renewal rates
     o   Seasonality
     o   Customer budgetary constraints and timelines
     o   Availability of embedded third party products or tool sets
     o   Availability of Alliance Partner products
     o   Financial condition of Alliance Partners
     o   Variations of Alliance Partner strategies
     o   Competitive pricing
     o   Changes in product distribution channels
     o   Execution of a direct sales strategy
     o   Variations in expense levels
     o   General technology trends
     o   Change of business strategy
     o   General economic conditions
     o   Changes in accounting pronouncements

         A significant amount of our license and service revenues are derived
from a limited number of customers. Such orders are typically placed within the
specific financial quarter when revenue is recognized, and we expect this trend
to continue. The placement of such orders is typically at the end of a fiscal
quarter requiring shipment. The sales cycle is typically lengthy for a new
licensed customer and shorter for an existing customer. Revenue recognition for
service contracts requires the acceptance and sign off from a customer. The
amount of licensed product and service backlogs at the end of a quarter is
typically immaterial. We experience variations in product demand due to customer
budgetary constraints that may be imposed within a fiscal year. Additionally, we
may experience changes in product demand due to changes in budgetary timelines.
As a consequence, we experience difficulty in forecasting license and service
revenues, particularly at the beginning of the fiscal quarter.

License revenue gross margins are substantially higher than other revenue
sources. The percentage of license revenues to the overall revenues in a fiscal
period may materially affect the overall gross margins and profitability for any
period. Variations in expense levels compared to other periods may result in
changes in operating income within a fiscal period.

EXECUTION OF OUR BUSINESS PLAN WILL REQUIRE THE SUCCESSFUL IMPLEMENTATION OF OUR
DIRECT SALES STRATEGY.

         Historically, we have significantly relied on the indirect sales
channel for sales leads and product revenues. We have invested, and expect to
continue to invest, in the development and growth of a direct sales channel. To
the extent that we are not successful in such efforts, future revenue growth and
operating margins may be adversely affected.



                                      -14-
<PAGE>


BECAUSE WE HAVE EXPERIENCED LOSSES WE MAY NEED ADDITIONAL WORKING CAPITAL TO
IMPLEMENT OUR BUSINESS PLAN.

         We experienced losses from operations of $1,242,000 and $2,324,000 for
the fiscal years ended March 31, 2005 and 2004, respectively, and we incurred
additional net losses of $811,000 for the three months ended June 30, 2005.
These losses were funded partially through additional equity offerings and most
recently debt offerings. Based upon our current operating outlook for the
remainder of the current fiscal year, we need additional financial resources to
meet our short tem liquidity requirements. We are currently in discussions with
a third party lender to obtain additional secured debt financing. Completion of
the debt financing is subject to a number of risks and uncertainties and to
various contingencies, including the agreement of our principal stockholder to
guarantee the facility. We can make no assurances that the debt financing will
be completed.

         We may need additional financing, beyond that which is contemplated
above, to further supplement our liquidity needs, especially for intra-quarter
liquidity requirements that depend on the timing and amount of monthly cash
receipts that are anticipated by our current operating outlook. As of June 30,
2005, the Company had a working capital deficit of $4,259,000 compared to a
working capital deficit of $3,708,000 as of March 31, 2005.

         If additional funds are raised by issuance of equity securities,
dilution to our stockholders will result. There can be no assurances, however,
that we will be successful in obtaining funds from any equity sources. If
additional funds are not available, we may be forced to eliminate or curtail
certain of our projects, sell assets, take additional steps to conserve cash and
modify the execution of our business plan. These actions may adversely affect
our results of operations.

OUR INABILITY TO RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS IN THE FUTURE MAY
LIMIT OUR GROWTH.

         If our capital resources become insufficient to meet future
requirements, we will have to raise additional funds to continue the operations,
development and commercialization of our technologies. Our inability to raise
capital would seriously harm our business and development efforts. In addition,
we may choose to raise additional capital due to market conditions or strategic
considerations even if we believe we have sufficient funds for our current or
future operations. These funds may not be available on favorable terms, or at
all. If adequate funds are not available on attractive terms, we may have to
restrict our operations significantly or obtain funds by entering into
agreements on unattractive terms. Further, to the extent that additional capital
is raised through the sale of equity or convertible debt securities, the
issuance of these securities could result in dilution to our stockholders.

OUR EXISTING COMMON STOCK SHAREHOLDERS FACE SUBSTANTIAL DILUTION UPON THE
CONVERSION OF OUR OUTSTANDING SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C
CONVERTIBLE PREFERRED STOCK.

         Our stock is traded on the Over the Counter Bulletin Board (OTCBB)
under the symbol "CSYS". As of June 30, 2005, we have 5,992,287 common shares
outstanding. As of June 30, 2005, the Company's Series B Convertible Preferred
Stock is convertible into 8,634,080 shares of common stock while the Company's
Series C Convertible Preferred Stock is convertible into approximately 7,617,650
shares of common stock.

THE MEMBERS OF OUR BOARD OF DIRECTORS OWN A SIGNIFICANT PERCENTAGE OF OUR COMMON
STOCK AND CAN INFLUENCE MATTERS REQUIRING THE VOTE OF SHAREHOLDERS.

         As of June 30, 2005, our directors and officers, assuming the
conversion of all outstanding preferred stock into common stock, owned
approximately 17.4 million shares of common stock, representing approximately
78% of the outstanding common stock. Based on their ownership, our directors and
officers have the ability to influence matters requiring a stockholder vote,
including the election of directors, the amendment of charter documents, the
merger or dissolution of the Company and the sale of all or substantially all of
its assets. Their voting power also may discourage or prevent any proposed
takeover.



                                      -15-
<PAGE>



OUR PREFERRED STOCKHOLDERS HAVE SENIOR RIGHTS IN THE EVENT OF OUR LIQUIDATION,
DISSOLUTION OR WINDING-UP.

         Our preferred stockholders have senior rights in the event of our
liquidation, dissolution or winding-up, including our sale to a third party. In
the event that any liquidation, dissolution or winding-up occurs, our common
stockholders would not be entitled to any proceeds of such liquidation,
dissolution or winding-up until the liquidation preference of our preferred
stockholders is fully satisfied. As a result, we can provide no assurances that
our common stockholders will receive any proceeds in the event of our
liquidation, dissolution or winding-up to the extent that the liquidation
preference of our preferred stockholders is not fully satisfied. As of June 30,
2005, the aggregate liquidation preference for all series of preferred stock was
approximately $19.1 million, and if the Note is converted into Series C
Preferred, the aggregate liquidation preference would be $20.6 million.

THE POTENTIAL ISSUANCE OF ADDITIONAL SHARES OF PREFERRED STOCK MAY NEGATIVELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND SHAREHOLDER RIGHTS.

          Our certificate of incorporation empowers the board of directors with
the right to determine the designations, rights, preferences and privileges of
the holders of one or more series of preferred stock. The board of directors can
issue, without stockholder approval, preferred stock with voting, dividend,
conversion, liquidation or other rights, which could adversely affect the voting
power and equity interest of common stockholders.

BECAUSE OUR COMMON STOCK HAS HISTORICALLY HAD LIMITED TRADING VOLUMES, OUR
SHAREHOLDERS MAY EXPERIENCE LIQUIDITY ISSUES.

         The average daily trading volume for the three-month trading period
ended June 30, 2005 on the OTC bulletin board was approximately 4,000 shares of
common stock. This may impair the ability of our shareholders to achieve
liquidity within certain periods of trading.

OUR FORMER INDEPENDENT PUBLIC ACCOUNTANTS, GOLDSTEIN & MORRIS PC, RESIGNED
EFFECTIVE OCTOBER 20, 2004.

         On October 20, 2004, Goldstein & Morris PC ("Goldstein & Morris")
informed us that they were resigning as our independent registered public
accounting firm. Prior to October 20, 2004, Goldstein & Morris had not
previously advised management or our audit committee of its intention to resign
its engagement as our independent registered public accounting firm. The
resignation was not sought or recommended by our audit committee.

          Following this resignation, the Company's audit committee engaged a
new independent public accounting firm.

         On May 25, 2005, the Public Company Accounting Oversight Board took
action against Goldstein & Morris by revoking its registration and barring its
managing partner, Edward B. Morris, from associating with a registered
accounting firm for violating the auditor independence rules of the
Sarbanes-Oxley Act with respect to two public companies unrelated to the
Company.


         SEC rules require the Company to present historical audited financial
statements in various SEC filings, such as registration statements, along with
Goldstein & Morris's consent to the inclusion of their audit report in those
filings. Despite our best efforts, we have not been able to obtain the consent
of Goldstein & Morris to the inclusion of their audit report in the Company's
current filing and, most likely, future filings. The SEC has previously provided
relief to allow companies to file reports without the requirement to file a
consent of its former independent registered public accounting firm in certain
circumstances, but purchasers of securities sold under the registration
statements, which were not filed with the consent of former independent
registered public accounting firm's audit report, would not be able to sue the
former independent registered public accounting firm pursuant to Section
11(a)(4) of the Securities Act, and therefore, the purchasers' right of recovery
under that section may be limited as a result of the Company's inability to
obtain Goldstein & Morris's consent.

          Our business and our results of operations may be adversely impacted
by Goldstein & Morris's resignation in that:

     o   We have and expect to continue to incur substantial additional legal
         and accounting fees relating to disclosure and other regulatory
         compliance matters associated with the resignation of Goldstein &
         Morris; and

     o   Our management has already spent, and is expected to continue to spend,
         considerable time and effort on matters related to the resignation of
         Goldstein & Morris.



                                      -16-
<PAGE>


OUR BUSINESS GREATLY DEPENDS ON INDIRECT SALES.

         We depend upon introductions to potential customers by companies with
which we maintain strategic alliances for a significant percentage of our sales.
Although we have written agreements with our Alliance Partners and other value
added resellers, the agreements do not require customer introductions nor do
they provide for minimum required purchases of our products. If any of the
companies with which we maintain strategic alliances decide not to refer
potential customers to us, our sales may be reduced and operating losses
increased. In addition, there is no assurance that we will be able to maintain
our strategic alliances on current terms. If our Alliance Partners' strategy,
product offerings or financial condition change, or if there are material
changes in their sales force or customer support, or if their hardware or
software products are unavailable, our revenues may be affected.

WE ARE DEPENDENT ON LICENSED TECHNOLOGY.

         We depend on certain software products that are licensed from third
parties, which are embedded and used in our products. We believe that there are
replacement alternatives for such third party products; however, the
interruption of the availability of such products may have an adverse impact on
the delivery of our products. Additionally, we expect our third party vendors to
maintain and continually improve their products. To the extent that such
products became obsolete or inoperable with other industry standard
applications, we may experience an adverse effect on revenues, operating results
and a decrease in customer satisfaction.

WE CHANGED THE NAME OF THE COMPANY AND INITIATED A NEW PRODUCT BRANDING.

                  At the Annual Stockholder Meeting held on October 28, 2004,
our stockholders approved a proposal to change the name of the Company to
ClearStory Systems, Inc. from INSCI Corp. We believe that the name change better
reflects our current positioning within the ECM market. The name change has
required and may continue to require increased expense for legal matters, as
well as promotional, marketing and communication materials. We have also
initiated an effort to establish a common brand for our products within the ECM
market with a new naming convention for certain of our products. To the extent
that the name change and product branding cause confusion within our target
market or client base, we may experience a decrease in revenues and/or an
increase in overall expenses.

WE ARE OFFERING OUR CUSTOMERS A HOSTED SOLUTION.

         We host our certain of our applications in our hosted data center. The
success of the hosted application business model has not been clearly
demonstrated, and market acceptance of the hosted center is not ensured. To the
extent that we experience technological problems or challenges, certain of our
customers may seek a market alternative, which may limit market adoption of the
hosted model.

OUR PRODUCTS AND SERVICES ARE DEPENDENT ON INTERNET ACCEPTANCE, ACCESSIBILITY,
INFRASTRUCTURE AND SECURITY.

         We have developed and realized revenues from our Internet-based
products and related services. The Internet is a recent product delivery
platform, and as such, is characterized by rapid technology changes, evolving
standards and adoption rates. Future revenues and services are dependent upon
the acceptance of the Internet as a recognized method of conducting business.

         The accessibility of the Internet has expanded over the last several
years. Technology enhancements and improvements have accelerated the
availability of Internet access. To the extent that continued developments in
communications, communication standards, availability and accessibility do not
continue to expand, the rate of adoption may decline. Additionally, the
expansion of the Internet as a commercial communications platform typically
requires continued capital investment and infrastructure support. To the extent
that capital investment declines or funding for Internet-based programs is
reduced, the accessibility and necessary supporting infrastructure may reduce
the adoption and performance of the Internet.



                                      -17-
<PAGE>


         If there is an increase in the use of the Internet, or no increase in
bandwidth, the infrastructure may not be able to effectively support demand and
result in a degradation of commercial acceptance. Reduced response times may
also affect the acceptance of the Internet.

RAPID TECHNOLOGY CHANGES IN OUR INDUSTRY MAY ADVERSELY AFFECT OUR BUSINESS.

         Our business is subject to technological advances and possible product
obsolescence. The market for our products is characterized by rapidly changing
technology, intense competition, technological complexity and evolving industry
standards. We must ensure that our products are compatible with those products
offered by third-party vendors, including server platforms for our software and
various storage devices and platforms. We have no contracts with third-party
vendors; therefore, there is no assurance that we will be able to make our
software products compatible with new products that are introduced by others.

WE HAVE RECENTLY RELEASED THE NEXT GENERATION OF OUR PRODUCT.

         We recently announced the release of our next generation software
platform, Radiant EMS, based upon a pure J2EE architecture. We have also
embraced a Web services technology model for the user interfaces and application
program interface. There can be no assurance that such technologies will not be
replaced by more contemporary offerings in the marketplace.

         The market acceptance of the architecture and related applications
cannot be ensured. To the extent that we experience certain product issues or
that acceptance is limited, we may incur increased expense to maintain
additional product lines and may not realize anticipated savings with the
technology model. The performance and market adoption of this platform may alter
future product development strategies, which may result in delays to subsequent
product introductions. In addition, customers may delay upgrading and migrating
to new products. As a result of the above, we may experience reduced revenues
and increased expenses in future periods.

QUALITY ASSURANCE AND PRODUCT STABILITY.

         We have invested to establish a quality assurance function to limit
certain errors, omissions and support incidents. While we believe that we have
implemented industry standards and procedures to minimize issues, there can be
no assurance that released versions of the product will not contain certain
issues, the consequence of which cannot be fully determined.

WE DEPEND ON PROPRIETARY TECHNOLOGY, WHICH IS NOT PROTECTED BY PATENTS.

         Our business depends on proprietary software technology for which we
have no patent protection. Although we require our employees and others to whom
we disclose proprietary information to sign non-disclosure agreements, this
protection may not be sufficient. Our business will be adversely affected if
anyone improperly uses or discloses our proprietary software or other
proprietary information.

         We do not hold any patents and rely on copyright and trade secret laws,
non-disclosure agreements and contractual provisions to protect our proprietary
technology. These methods afford only limited protection. Despite the
precautions we take, unauthorized parties may attempt to copy or otherwise
obtain and use our proprietary technologies, ideas, know-how and other
proprietary information without authorization or may independently develop
technologies similar or superior to our technologies. Policing unauthorized use
of our products may be difficult and costly. Also, the laws of some foreign
countries may not protect our proprietary rights to the same extent as the laws
of the United States. Therefore, we are unable to predict whether our means of
protecting our proprietary rights will be adequate.

         We believe that our technologies have been developed independent of
others. Nevertheless, third parties may assert infringement claims against us
and our technologies may be determined to infringe on the intellectual property
rights of others. We could become liable for damages, or be required to modify
our technologies or obtain a license if our technologies are determined to
infringe upon the intellectual property rights of others. We may not be able to
modify our technologies or obtain a license in a timely manner, if required, or
have the financial or other resources necessary to defend an infringement
action. We would be materially adversely affected if we fail to do any of the
foregoing.



                                      -18-
<PAGE>


BECAUSE OF THE HIGH COST, WE LACK PRODUCT LIABILITY INSURANCE.

         We develop, market, install and service enterprise content management
and digital asset management systems. Failure of our products may result in a
claim against us. Because of the high cost of product liability insurance, we do
not maintain insurance to protect against claims associated with the use of our
products. Any claim against us may result in costs to us in defending
litigation. Further, any claim may require management's time and the use of
certain of our resources.

WE DEPEND UPON CERTAIN KEY EMPLOYEES TO DEVELOP OUR PRODUCTS.

         We do not have the financial resources to compete with larger more
established companies to attract and retain certain key technological employees.
The loss of current technological employees or our inability to recruit and
retain employees with certain key technology skills could have an adverse effect
on product development and our business.

BECAUSE OF CERTAIN PROVISIONS IN OUR BY-LAWS, CHANGE IN CONTROL MAY BE
DIFFICULT.

         Our by-laws and the Delaware General Corporation Law contain provisions
that may make a change in control of the Company more difficult or delay
attempts by others to obtain control of us, even when this may be in the
interests of stockholders. The Delaware General Corporation Law also imposes
conditions on certain business combinations with "interested stockholders", as
defined by Delaware law. Under certain agreements with key personnel, we also
have provided the acceleration of vesting of stock options in the event of a
change of control and severance payments in the event that the employment of
such personnel is terminated without cause following a change in control.
Additionally, we have provided that if a change of control occurs, certain
directors will receive immediate vesting of stock options granted under our 1992
and 2004 Directors Option Plans.


ITEM 3.       CONTROLS AND PROCEDURES

         As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Exchange Act Rule 15(d)-15(e). Based upon
that evaluation, we believe that our disclosure controls and procedures are
effective in enabling us to record, process, summarize and report information
required to be disclosed in our periodic SEC filings within the required time
periods. Our disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the periodic reports filed with the SEC is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.

         During the period covered by this report, there have been no
significant changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.






                                      -19-
<PAGE>




PART II       OTHER INFORMATION

ITEM 6.       EXHIBITS

     (A) EXHIBITS
         10.1  10% Convertible Promissory Note, dated June 16, 2005 issued by
               the Company (incorporated by reference to the Company's Current
               Report on Form 8-K dated as of June 17, 2005).
         31.1  Certificate pursuant to 18 U.S.C. Section 1350 as adopted
               pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
         31.2  Certificate pursuant to 18 U.S.C. Section 1350 as adopted
               pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
         32.1  Certificate pursuant to 18 U.S.C. Section 1350 as adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
         32.2  Certificate pursuant to 18 U.S.C. Section 1350 as adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

----------------------------------

*   Filed herewith.
**  Furnished herewith.








                                    SIGNATURE

        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 the
undersigned thereunto duly authorized.


                            CLEARSTORY SYSTEMS, INC.

Dated: AUGUST 12, 2005                By: /s/ HENRY F. NELSON
       ---------------
                                      Henry F. Nelson, President and
                                      Chief Executive Officer


Dated: AUGUST 12, 2005                By: /s/ STEPHEN A. READ
      ----------------
                                      Stephen A. Read, Vice President and
                                      Chief Financial Officer















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