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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

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FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|For   the Quarterly Period Ended June 30, 2005 | Commission File Number    1-13524
|---------------------------------------------- | ---------------------------------

TIMELINE, INC.
(Exact name of small business issuer as specified in its charter)

|Washington                                                       |  | 91-1590734                         
|---------------------------------------------------------------- |  | -----------------------------------
|(State or   other jurisdiction of incorporation or organization) |  | (IRS   Employer Identification No.)

3055 112th Avenue N.E., Suite 106 Bellevue, WA  98004
(Address of principal executive offices)

(425) 822-3140
(Issuers telephone number)

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
xNo
o

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

|Class                          |  | Outstanding   at   July 30, 2005
|------------------------------ |  | --------------------------------
|                               |  |                                 
|Common Stock, $.01 Par   Value |  | 4,190,998                       

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PART I - FINANCIAL INFORMATION

|Item 1. | Financial Statements
|------- | --------------------

TIMELINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                      |  | As of   June 30,   2005 |             | As of,   March 31,   2005 |  
|--------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | ------------------------- | -
|                                                                                                                      |  |                         |             |                           |  
|                                                                                                                      |  | (Unaudited)             |             |                           |  
|ASSETS                                                                                                                |  |                         |             |                           |  
|CURRENT ASSETS:                                                                                                       |  |                         |             |                           |  
|Cash and cash   equivalents                                                                                           |  | $                       | 114,123     |                           | $
|Accounts receivable,   net of allowance for doubtful accounts of $10,579 and $17,613                                  |  |                         | 237,080     |                           |  
|Prepaid expenses and   other                                                                                          |  |                         | 79,960      |                           |  
|                                                                                                                      |  |                         |             |                           |  
|Total current assets                                                                                                  |  |                         | 431,163     |                           |  
|PROPERTY AND EQUIPMENT,   net of accumulated depreciation of $399,503 and $447,495                                    |  |                         | 2,053       |                           |  
|CAPITALIZED PATENTS,   net of accumulated amortization of $88,970 and $82,786                                         |  |                         | 263,255     |                           |  
|Assets of business   segment to be sold                                                                               |  |                         | 440,646     |                           |  
|                                                                                                                      |  |                         |             |                           |  
|Total assets                                                                                                          |  | $                       | 1,137,117   |                           | $
|                                                                                                                      |  |                         |             |                           |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                        |  |                         |             |                           |  
|CURRENT LIABILITIES:                                                                                                  |  |                         |             |                           |  
|Accounts payable                                                                                                      |  | $                       | 62,367      |                           | $
|Accrued expenses                                                                                                      |  |                         | 148,423     |                           |  
|Notes payable                                                                                                         |  |                         | 251,250     |                           |  
|Liabilities of business   segment to be sold                                                                          |  |                         | 809,083     |                           |  
|                                                                                                                      |  |                         |             |                           |  
|Total current   liabilities                                                                                           |  |                         | 1,271,123   |                           |  
|                                                                                                                      |  |                         |             |                           |  
|SHAREHOLDERS EQUITY:                                                                                                 |  |                         |             |                           |  
|Common stock, $.01 par   value, 20,000,000 shares authorized, 4,198,998 and 4,198,998 shares issued   and outstanding |  |                         | 41,910      |                           |  
|Additional paid-in   capital                                                                                          |  |                         | 10,578,447  |                           |  
|Accumulated other   comprehensive loss                                                                                |  |                         | (77,122     | )                         |  
|Accumulated deficit                                                                                                   |  |                         | (10,677,241 | )                         |  
|                                                                                                                      |  |                         |             |                           |  
|Total shareholders   (deficit) equity                                                                                |  |                         | (134,006    | )                         |  
|                                                                                                                      |  |                         |             |                           |  
|Total liabilities and   shareholders equity                                                                          |  | $                       | 1,137,117   |                           | $
|                                                                                                                      |  |                         |             |                           |  

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

2



TIMELINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30, 2005 and 2004 (unaudited)

|                                                                     |  | 2005 |           | 2004 |  
|-------------------------------------------------------------------- |  | ---- | --------- | ---- | -
|                                                                     |  |      |           |      |  
|REVENUES:                                                            |  |      |           |      |  
|Software license                                                     |  | $    |          |      | $
|Patent license                                                       |  |      | 90        |      |  
|Maintenance                                                          |  |      |          |      |  
|Consulting and other                                                 |  |      |          |      |  
|                                                                     |  |      |           |      |  
|Total revenues                                                       |  |      | 90        |      |  
|COST OF REVENUES:                                                    |  |      |           |      |  
|Patent license                                                       |  |      | 6,184     |      |  
|Maintenance, consulting   and other                                  |  |      |          |      |  
|                                                                     |  |      |           |      |  
|Total cost of revenues                                               |  |      | 6,184     |      |  
|                                                                     |  |      |           |      |  
|Gross loss                                                           |  |      | (6,094    | )    |  
|OPERATING EXPENSE:                                                   |  |      |           |      |  
|Sales and marketing                                                  |  |      |          |      |  
|Research and   development                                           |  |      | 17,493    |      |  
|General and   administrative                                         |  |      | 141,756   |      |  
|Patents                                                              |  |      | 14,975    |      |  
|Depreciation                                                         |  |      |          |      |  
|                                                                     |  |      |           |      |  
|Total operating   expenses                                           |  |      | 174,224   |      |  
|                                                                     |  |      |           |      |  
|Loss from operations                                                 |  |      | (180,318  | )    |  
|                                                                     |  |      |           |      |  
|OTHER EXPENSE:                                                       |  |      |           |      |  
|Interest income   (expense) and other                                |  |      | (2,597    | )    |  
|                                                                     |  |      |           |      |  
|Total other expense                                                  |  |      | (2,597    | )    |  
|                                                                     |  |      |           |      |  
|Loss from continuing operations before income   taxes                |  |      | (182,915  | )    |  
|Provision for income tax                                             |  |      |          |      |  
|Loss from discontinued operations, net of income
tax                 |  |      | (51,739   | )    |  
|                                                                     |  |      |           |      |  
|Net loss                                                             |  | $    | (234,654  | )    | $
|                                                                     |  |      |           |      |  
|Basic and diluted net loss per share                                 |  | $    | (0.06     | )    | $
|                                                                     |  |      |           |      |  
|Shares used in calculation of basic and diluted net   loss per share |  |      | 4,198,998 |      |  
|                                                                     |  |      |           |      |  

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

3



TIMELINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended June 30, 2005 and 2004 (unaudited)

|                                                      |  | 2005 |         | 2004 |  
|----------------------------------------------------- |  | ---- | ------- | ---- | -
|                                                      |  |      |         |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES                  |  |      |         |      |  
|Net cash provided by   (used in) operating activities |  | $    | 142,019 |      | $
|CASH FLOWS FROM DISCONTINUED OPERATIONS               |  |      |         |      |  
|Net cash used in   discontinued operations            |  |      | (48,453 | )    |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                 |  |      |         |      |  
|Capitalized patent   acquisition costs                |  |      | (3,528  | )    |  
|                                                      |  |      |         |      |  
|Net cash used in   investing activities               |  |      | (3,528  | )    |  
|                                                      |  |      |         |      |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS               |  |      | 90,038  |      |  
|CASH AND CASH EQUIVALENTS, beginning of period        |  |      | 162,355 |      |  
|                                                      |  |      |         |      |  
|CASH AND CASH EQUIVALENTS, end of period              |  | $    | 252,393 |      | $
|                                                      |  |      |         |      |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:     |  |      |         |      |  
|Cash paid for interest                                |  | $    | 1,348   |      | $

The accompanying notes are an integral part of these financial statements

4



TIMELINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2005

1.  THE COMPANY

Organization

The accompanying consolidated financial statements are for Timeline, Inc. and subsidiaries (the Company).  The Company, which is headquartered in Bellevue, Washington and (through July 20, 2005) had operations in the United Kingdom, develops, markets and supports enterprise-wide financial management, budgeting and reporting software and event-based notification, application integration and process automation systems.  Timelines software products are designed to automatically access and distribute business information with full accounting control.

Operations

The Company has historically suffered recurring operating losses and negative cash flows from operations.  As of June 30, 2005, the Company had negative net working capital of approximately $517,000 and had an accumulated deficit of approximately $10,677,000 with total negative shareholders equity of approximately $134,000.  These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, assuming that the Company will continue as a going concern.  Our auditors for fiscal year ended March 31, 2005, added an explanatory paragraph to their opinion on our fiscal 2005 financial statements stating that there was substantial doubt about our ability to continue as a going concern.

On July 20, 2005, the Company entered into an Asset Purchase Agreement with Global Software, Inc. for the sale to Global of all of its software licensing operations.  (A copy of the Asset Purchase Agreement has been filed as an exhibit to a Current Report on Form 8-K, as filed with the SEC on July 25, 2005.)  Under the terms of the Asset Purchase Agreement, the sale of the Companys software business is to occur in two stages, consisting of (1) the sale of 100% of stock in its U.K. subsidiary, Analyst Financials Limited, and certain other assets and customer contracts (the Stock Sale), and (2) the sale of its other software assets (the Asset Sale), in each case in exchange for cash, promissory notes, and assumption of certain liabilities.  The Stock Sale was consummated on July 20, 2005.  The Asset Sale is subject to approval by the Companys shareholders, and the Company has called an annual meeting
for August 30, 2005 for that purpose.  There are other conditions to closing the Asset Sale, which is currently scheduled to occur on August 31, 2005, but which may be extended until September 30, 2005.  Many of the closing conditions for the Asset Sale are outside of the Companys control.  There are no assurances that the Companys shareholders will approve the Asset Sale or that the Asset Sale will close.  If the Asset Sale closes, the Company will retain such assets as required to continue its patent licensing operations.  The Stock Sale and the Asset Sale will be reported in the Companys financial statements in the period in which each transaction is consummated.  The Stock Sale closed on July 20, 2005, and the Company currently anticipates that the Asset Sale will also be completed during the second quarter of fiscal 2006, ending September 30, 2005, and will be reflected as a discontinued operation at that time.

5



With the net proceeds the Company received from the Stock Sale on July 20, 2005, management believes that current cash and cash equivalent balances, and any net cash provided by operations, will provide adequate resources to fund operations through March 31, 2006.  However, there can be no assurance that the shareholders will approve the Asset Sale or that the Asset Sale will close.  If the Asset Sale does not close, the Company will be required to continue its U.S. software operations on a diminished scale which will require a major downsizing of staff in order to minimize projected ongoing losses.  At some point in time if the Company is unable to achieve at least breakeven from these operations, it may be forced to seek protection from creditors under the bankruptcy laws and/or cease operation

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  The presentation in this Quarterly Report is as of June 30, 2005, prior to entering into the Asset Purchase Agreement and prior to the closing of the Stock Sale.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

The accompanying condensed consolidated financial statements of the Company are unaudited.  In the opinion of the Companys management, the financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information set forth in this Report in conformity with accounting principles generally accepted in the United States of America.  Results of operations for the three-month period ended June 30, 2005 are not necessarily indicative of future financial results.

Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-QSB.  Accordingly, these financial statements should be read in conjunction with the Companys annual financial statements for the year ended March 31, 2005, as previously reported in the Companys Form 10-KSB.

Basis of Presentation

All subsidiaries of the Company are wholly-owned.  The accompanying consolidated financial statements include the accounts and operations of these subsidiaries.  All intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

The Company recognizes revenue pursuant to the requirements of Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2), as amended by Statement of Position No. 98-9, Software Revenue Recognition with Respect to Certain Arrangements (SOP 98-9).  Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software.

For all sales, the Company uses either a binding purchase order or signed agreement, depending on the nature of the transaction, as evidence of an arrangement.  Sales through its resellers are evidenced by a master agreement governing the relationship.

6



For software license fees in single element arrangements and multiple element arrangements that do not include customization or consulting services, delivery typically occurs when the product is shipped to customers and a license key is issued.

At the time of each transaction, the Company assesses whether the fee associated with its revenue transactions is fixed and determinable and whether or not collection is reasonably assured.  The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction.  If a significant portion of a fee is due after the Companys normal payment terms, is based upon a variable matrix such as a minimum level of distribution or is subject to refund, the Company accounts for the fee as not being fixed and determinable.  In these cases, it defers revenue and recognizes it when it becomes due and payable.

The Company assesses the probability of collection based on a number of factors, including past transaction history with the customer and the current financial condition of the customer.  It does not request collateral from its customers.  If the Company determines that collection of a fee is not reasonably assured, it defers revenue until the time collection becomes reasonably assured.

For multiple element arrangements, when Company-specific objective evidence of fair value exists for all of the undelivered elements of the arrangement, but does not exist for one or more of the delivered elements in the arrangement, the Company recognizes revenue under the residual method.

Under the residual method, at the outset of the arrangement with a customer, the Company defers revenue for the fair value of its undelivered elements such as consulting services and product support and upgrades, and recognizes the revenue for the remainder of the arrangement fee attributable to the elements initially delivered, such as software licenses, when the criteria in SOP 97-2 have been met.  Company-specific objective evidence is established for support and upgrades of standard products for which no installation or customization is required based upon the amounts charged when support and upgrades are sold separately.  Company-specific objective evidence is established for consulting and installation services based on the hourly rates charged for its employees when they are performing these services provided the Company has the ability to accurately estimate the hours required to complete a project based upon its experience with similar
projects.  For multiple element arrangements involving installation or customization, Company-specific objective evidence is established for support and maintenance arrangements if its customers have an optional annual renewal rate specified in the arrangement and the rate is substantive.

The Company recognizes revenue from nonrefundable minimum royalty agreements from distributors or resellers upon delivery of product to the distributor or reseller, provided no significant obligations remain outstanding and the conditions of SOP 97-2 have been met.  Additional royalties are recognized as revenue to the extent the minimums are exceeded when earned, based on the distributors or resellers contractual reporting obligations.

In all other cases, the Company recognizes revenue when delivery to the end user has occurred and the amount due from the reseller is fixed and determinable.  Most resellers are required to contact Timeline directly to request Timeline provide a key to the resellers customer that allows the software to operate.  In those situations, Timeline invoices the reseller at the time the key is released to the customer indicating the software has been loaded on a unique customer machine.  Some resellers have the right to distribute keys to their own customers, in which case the reseller distributes a copy of the software and then provides a key to the end user.  The reseller is contractually

7



required to have a binding license or purchase order in place with the end user before the end user is allowed to physically load the Timeline software on a unique machine.  These distributors report to Timeline on a monthly or quarterly basis the number and dollar amount of licenses they have distributed in the prior period; i.e. the keys utilized.  Based upon that report, Timeline then invoices the reseller.  Timeline records revenue at the time of invoice for the period covered.  There are no return rights offered to either the reseller or the end user.

Revenue from support agreements is recognized on a straight-line basis over the life of the contract.

The Company also enters into separately priced consulting agreements with its customers to provide installation, training and other consulting services.  These agreements are generally priced on a time and materials basis and revenues are recognized as the services are performed.  The nature of the services does not significantly alter the licensed software.

With regard to revenue generated from the licensing of patents, the Company recognizes revenue when a patent license agreement is signed, collectibility is probable and the amount of payment is fixed and determinable, consistent with SOP 97-2 and Staff Accounting Bulletin (SAB) No.101, Revenue Recognition (SAB 101).

Net Loss per Common Share

Basic and diluted net loss per share is the net loss divided by the weighted average number of shares outstanding during the period. The effect of including outstanding options and warrants is anti-dilutive for all periods presented.

Shares issuable pursuant to stock options and warrants that have not been included in the calculation of net loss per share because they are antidilutive totaled 533,500 and 594,000 for the three-month periods ended June 30, 2005 and 2004, respectively.

Stock-Based Compensation

The Company applies the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, and interpretation of APB Opinion No. 25 (FIN No. 44), to account for its fixed plan stock options.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.  Compensation costs for fixed awards with pro rata vesting are recognized using the straight-line method.  SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123), established accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans.  As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123.  There were no outstanding or unvested awards under the Companys fixed plan stock in either three-month periods ended June 30, 2005 or 2004.

Options and warrants issued to non employees are accounted for using the fair value method of accounting as prescribed by SFAS No. 123, using the Black-Scholes options-pricing model.

8



In April 2003, Fidelity National Information Solutions (Nasdaq:FNIS) obtained a license to use and sublicense Timeline products to provide financial reporting and analytics for real estate, lenders and settlement companies.  Additionally, FNIS may sublicense Timeline products and build its own private label derivative products for its customers.  As part of this agreement, FNIS was issued a warrant to buy up to 100,000 shares of Timeline stock at $1.62 per share and, upon appropriate notice, to appoint either an observer or member to the Timeline Board of Directors.  The warrants were fully vested upon issuance.  The fair value of each warrant was established on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: zero dividend yield; expected volatility of 91%; risk-free interest rate of 2.78%, and a contractual life of 4 years.  These warrants expire if not exercised by April
2007.  The aggregate fair value of these warrants was approximately $84,000 and was recognized as a reduction to license revenue recognized in the first quarter of fiscal 2004.

In September 2004, the Company entered into a financing agreement with Silicon Valley Bank.  As part of the financing agreement, a warrant to purchase up to 7,500 shares of the Companys common stock at $0.80 per share was issued.  The warrant was fully vested upon issuance.  The fair value of the warrant was established on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: zero dividend yield; expected volatility of 91%; risk-free interest rate of 2.78%, and a contractual life of 7 years.  The warrant expires if not exercised by September 23, 2011.  The fair value of the warrant was approximately $4,725 and was recognized as interest expense in the second quarter of fiscal 2005.

Intangible Assets and Goodwill

Intangible assets historically consisted primarily of acquired technology, customer lists, skilled workforce and goodwill related to acquisitions accounted for under the purchase method of accounting.  Amortization of these purchased intangibles was historically provided on the straight-line basis over the respective useful lives of the assets, primarily three years.  Goodwill represents the excess of acquisition cost over the fair value of net identifiable assets acquired.

Carrying amounts of goodwill included in discontinued operations as of June 30, and March 31 were as follows:

|                         |  | June 30,   2005 |         | March 31,   2005 |  
|------------------------ |  | --------------- | ------- | ---------------- | -
|                         |  |                 |         |                  |  
|Gross carrying amount    |  | $               | 194,121 |                  | $
|Accumulated amortization |  |                 | 123,938 |                  |  
|                         |  |                 |         |                  |  
|Net book value           |  | $               | 70,183  |                  | $
|                         |  |                 |         |                  |  

Impairment of Long-lived Assets

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the Company evaluates long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on estimated undiscounted cash flows attributable to that asset.  The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.  The Company does not currently believe that any of its long-lived assets are impaired.

9



3.  CUSTOMER CONCENTRATION

Total Revenue

During the three months ended June 30, 2005, one customer comprised 11% of the Companys total revenue.  During the three months ended June 30, 2004, one customer comprised approximately 14% of the Companys total revenue.

Accounts Receivable

At June 30, 2005, one customer comprised 10% of the Companys accounts receivable balance, while in the same quarter of fiscal 2004, one customer comprised 11% of the Companys account receivable balance.  At March 31, 2005, approximately 35% of the Companys accounts receivable balance was due from two customers.

4.  LINE OF CREDIT

On September 23, 2004, the Company entered into an Accounts Receivable Financing Agreement with Silicon Valley Bank.  Under the terms of the financing, the Company was able to borrow up to a maximum of $350,000, limited to 80% of its then qualified receivables.  Qualified receivables were generally trade receivables from U.S. customers not outstanding more than 90 days.  The interest rate varied dependent upon the Companys then quick ratio.  The rate was the greater of a fixed rate of six to eight percent or a variable rate of prime plus one and one-half to three and one-half percentage points.  In connection with the Financing Agreement, the Company granted the lender a security interest in all of the Companys assets and also granted the lender a warrant to purchase 7,500 shares of the Companys common stock.  On June 2, 2005, the line of credit and security interest was terminated.

5.SECURED PROMISSORY NOTE

On June 1, 2005, the Company entered into a security agreement and secured promissory note with Global Software, Inc., providing for a $250,000 loan to the Company.  Principal amounts owing under the note bore interest at a fixed rate of 6% per annum, and was secured by a security interest in our software assets and intellectual property.  The Note was paid in full on July 20, 2005 from the gross proceeds from the Stock Sale, pursuant to the Asset Purchase Agreement with Global (see Note 1 above), and the security agreement was terminated.

6.  SEGMENT INFORMATION

The Company follows the requirements of Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131).  As defined in SFAS 131, the Company operated in two reportable segments that were based on geographic business units in the United States (Timeline) and Europe (Analyst Financials Ltd.).  Both segments generated revenues from the license and support of the Companys software products.  Revenues from other licenses and patent licenses are included in the Timeline segment.  The accounting policies of the segments were the same as those described in the summary of critical accounting policies included herein and in the Companys annual financial statements for the year ended March 31, 2005.  During the three months ended June 30, 2005 and 2004, the Timeline segment included intersegment revenues and the Analyst Financials segment included
intersegment expenses that totaled $119,594

10



and $119,626, respectively.  These intersegment transactions were recorded at market rates as if the transactions occurred with third parties.  The following tables summarize operations by segment during the three months ended June 30, 2005 and June 30, 2004:

|                                |  | Three   Months Ended 6/30/05 |         
|------------------------------- |  | ---------------------------- | --------
|                                |  |                              |         
|                                |  | Timeline                     |         
|                                |  |                              |         
|Revenues                        |  | $                            | 502,734 
|Operating loss                  |  | $                            | (192,259
|Depreciation and   amortization |  | $                            | 3,580   
|Long lived assets               |  | $                            | 297,308 
|Total assets                    |  | $                            | 703,204 

|                                |  | Three Months   Ended 6/30/04 |         
|------------------------------- |  | ---------------------------- | --------
|                                |  |                              |         
|                                |  | Timeline                     |         
|                                |  |                              |         
|Revenues                        |  | $                            | 464,743 
|Operating loss                  |  | $                            | (324,142
|Depreciation and   amortization |  | $                            | 7,530   
|Long lived assets               |  | $                            | 310,146 
|Total assets                    |  | $                            | 770,597 

7.  GUARANTEES

In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34 (FIN No. 45).  FIN 45 provides expanded accounting guidance surrounding liability recognition and disclosure requirements related to guarantees, as defined by this Interpretation.  In the ordinary course of business, the Company is not subject to potential obligations under guarantees that fall within the scope of FIN 45 except for standard indemnification and warranty provisions that are contained within many of its customer license and service agreements, and give rise only to the disclosure requirements prescribed by FIN 45.

Indemnification and warranty provisions contained within the Companys customer license and service agreements are generally consistent with those prevalent in its industry.  The duration of its product warranties generally does not exceed 90 days following delivery of its products.  The Company has not incurred significant obligations under customer indemnifications or warranty provisions historically and does not expect to incur significant obligations in the future.  Accordingly, the Company does not maintain accruals for potential customer indemnifications or warranty-related obligations.

8.  LITIGATION

In June 2005, the Company filed an action in the Federal District Court for the Western District of Washington against ProClarity Corporation alleging infringement of certain of our patents.  The Company intends to seek monetary damages and an injunction against ProClarity licensing certain of its products.  No trial date has been set at this time.

11



From time to time, the Company may pursue litigation against other third parties to enforce or protect its rights under this patent or its intellectual property rights generally.

9.  SUBSEQUENT EVENTS

On July 20, 2005, the Company entered into an Asset Purchase Agreement with Global Software, Inc. for the sale to Global of all of its software licensing operations.  (A copy of the Asset Purchase Agreement has been filed as an exhibit to a Current Report on Form 8-K, as filed with the SEC on July 25, 2005.)  Under the terms of the Asset Purchase Agreement, the sale of the Companys software business is to occur in two stages, consisting of (1) the sale of 100% of stock in its U.K. subsidiary, Analyst Financials Limited, and certain other assets and customer contracts (the Stock Sale), and (2) the sale of its other software assets (the Asset Sale), in each case in exchange for cash, promissory notes, and assumption of certain liabilities.  The Stock Sale was consummated on July 20, 2005.

The Asset Sale is subject to approval by the Companys shareholders, and the Company has called an annual meeting for August 30, 2005 for that purpose.  There are other conditions to closing the Asset Sale, which is currently scheduled to occur on August 31, 2005, but which may be extended until September 30, 2005.  Many of the closing conditions for the Asset Sale are outside of the Companys control.  There are no assurances that the Companys shareholders will approve the Asset Sale or that the Asset Sale will close.  If the Asset Sale closes, the Company will retain such assets as required to continue its patent licensing operations.

The Stock Sale and the Asset Sale will be reported in the Companys financial statements in the period in which each transaction is consummated.  The Stock Sale closed on July 20, 2005, and the Company currently anticipates that the Asset Sale will also be completed during the second quarter of fiscal 2006, ending September 30, 2005, and will be reflected as a discontinued operation at that time.

10.RESTATEMENT TO REFLECT LINE OF BUSINESS TO BE SOLD

On July 20, 2005 the Company sold all the outstanding stock of its wholly owned subsidiary, Analyst Financials Limited.  Additionally, it entered in an Agreement under which it will sell the majority of its remaining software line of business contingent upon receiving appropriate authorization, including shareholder approval.  In conformity with generally accepted accounting principals, the Company has accounted for the probable disposition of all software operations as constituting disposition of a significant portion of the business.  The costs of such dispositions such as attorney and accounting fees, severance benefits, etc. are unknown as the transactions have not been completed but are estimated to approximately $100,000.  These costs will be accounted for in the quarter in which the gain or loss from the dispositions occur.

12



The assets and liabilities of the segments of the business discontinued as of July 20, 2005 and proposed to be discontinued are as follows:

|                                                                      |  | June 30,   2005 |          | March 31,   2005 |  
|--------------------------------------------------------------------- |  | --------------- | -------- | ---------------- | -
|                                                                      |  |                 |          |                  |  
|Assets                                                                |  |                 |          |                  |  
|Cash and cash equivalents                                             |  | $               | 138,271  |                  | $
|Accounts receivable  net                                             |  |                 | 184,578  |                  |  
|Goodwill  net                                                        |  |                 | 70,183   |                  |  
|Other assets                                                          |  |                 | 47,614   |                  |  
|                                                                      |  |                 |          |                  |  
|Total assets of proposed   discontinued operations                    |  |                 | 440,646  |                  |  
|                                                                      |  |                 |          |                  |  
|Liabilities                                                           |  |                 |          |                  |  
|Accounts payable                                                      |  |                 | 141,694  |                  |  
|Deferred revenue                                                      |  |                 | 667,389  |                  |  
|                                                                      |  |                 |          |                  |  
|Total liabilities of   proposed discontinued operations               |  |                 | 809,083  |                  |  
|                                                                      |  |                 |          |                  |  
|Liabilities in excess of   assets of Probable discontinued operations |  | $               | (368,437 | )                | $
|                                                                      |  |                 |          |                  |  

Condensed results of segments of the businesses discontinued as of July 20, 2005 and proposed to be discontinued are as follows:

|                                                      |  | June 30,   2005 |          | June 30,   2004 |  
|----------------------------------------------------- |  | --------------- | -------- | --------------- | -
|                                                      |  |                 |          |                 |  
|Revenues                                              |  | $               | 742,681  |                 | $
|Cost of revenues                                      |  |                 | (152,472 | )               |  
|                                                      |  |                 |          |                 |  
|Gross profit                                          |  |                 | 594,209  |                 |  
|Operating expenses                                    |  |                 | 606,723  |                 |  
|Other  foreign exchange                              |  |                 | (35,224  | )               |  
|Income taxes                                          |  |                 |         |                 |  
|                                                      |  |                 |          |                 |  
|Income (loss) from proposed   discontinued operations |  | $               | (51,738  | )               | $
|                                                      |  |                 |          |                 |  

13



The cash flows of segments of the businesses discontinued as of July 20, 2005 and proposed to be discontinued are as follows:

|                                         |  | June 30,   2005 |         | June 30,   2004 |  
|---------------------------------------- |  | --------------- | ------- | --------------- | -
|                                         |  |                 |         |                 |  
|Cash used in operations                  |  | $               | (51,738 | )               | $
|Property and equipment                   |  |                 | 874     |                 |  
|Effect of foreign exchange   rage        |  |                 | 2,411   |                 |  
|                                         |  |                 |         |                 |  
|Cash flow from discontinued   operations |  | $               | (48,453 | )               | $
|                                         |  |                 |         |                 |  

|Item 2. | Managements Discussion and   Analysis or Plan of Operations
|------- | ------------------------------------------------------------

This Quarterly Report on Form 10-QSB includes a number of forward-looking statements that reflect our current views with respect to business strategies, products, future events and financial performance.  These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results or those anticipated, including the risks and uncertainties described below, as well as in our annual report on Form 10-KSB for the year ended March 31, 2004, under the respective caption Other Factors that May Affect Operating Results.  When used in this Report, the words anticipate, believe, predict, intend, may, could, should, would, will, expect, future, continue,   judgment and
variations of such words and similar expressions as they relate to the Company are intended to identify such forward-looking statements, but are not the exclusive means of identifying such statements.  Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements.  We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.  In addition, the disclosures under the caption Other Factors that May Affect Operating Results consist principally of a brief discussion of risks which may affect future results and are thus, in their entirety, forward-looking in nature.  To facilitate readers in identifying forward-looking statements in this Report, we have attempted to mark sentences containing such statements with a single asterisk and paragraphs containing only forward-looking statements with double asterisks.  However,
no assurance can be made all such statements have been identified and marked.Therefore, readers are urged to carefully review and consider the various disclosures made in this report and in our other reports previously filed with the Securities and Exchange Commission (the SEC), including our periodic reports on Forms 10-KSB and 10-QSB, and those described from time to time in our press releases and other communications, which attempt to advise interested parties of the risks and factors that may affect the Companys business.

OVERVIEW

Timeline, Inc, which is headquartered in Bellevue, Washington and (through July 20, 2005) had operations in the United Kingdom, develops, markets and supports enterprise-wide financial management, budgeting and reporting software and event-based notification, application integration and process automation systems.  Timelines software products are designed to automatically access and distribute business information with full accounting control.

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On July 20, 2005, we entered into an Asset Purchase Agreement with Global Software, Inc. for the sale to Global of all of our software licensing operations.  (A copy of the Asset Purchase Agreement has been filed as an exhibit to a Current Report on Form 8-K, as filed with the SEC on July 25, 2005.)  Under the terms of the Asset Purchase Agreement, the sale of our software business is to occur in two stages, consisting of (1) the sale of 100% of stock in our U.K. subsidiary, Analyst Financials Limited, and certain other assets and customer contracts (the Stock Sale), and (2) the sale of our other software assets (the Asset Sale), in each case in exchange for cash, promissory notes, and assumption of certain liabilities.  The Stock Sale was consummated on July 20, 2005.

The Asset Sale is subject to approval by our shareholders, and we have called an annual meeting for August 30, 2005 for that purpose.  There are other conditions to closing the Asset Sale, which is currently scheduled to occur on August 31, 2005, but which may be extended until September 30, 2005.  Many of the closing conditions for the Asset Sale are outside of our control.  There are no assurances that our shareholders will approve the Asset Sale or that the Asset Sale will close.  If the Asset Sale closes, we will retain such assets as required to continue our patent licensing operations.

The presentation in this Quarterly Report is as of June 30, 2005, prior to entering into the Asset Purchase Agreement and prior to the closing of the Stock Sale.  The Stock Sale and the Asset Sale will be reported in our financial statements in the period in which each transaction is consummated.*  The Stock Sale closed on July 20, 2005, and we currently anticipate that the Asset Sale will also be completed during the second quarter of fiscal 2006, ending September 30, 2005, and will be reflected as a discontinued operation at that time.*

Our consolidated financial statements for the first quarter of fiscal 2006 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.  We incurred a net loss of approximately $235,000 for the first quarter of fiscal 2006 and have incurred recurring net losses from operations over the past several fiscal years.  As of June 30, 2005, we had negative net working capital of approximately $517,000.  These factors raise substantial doubt about our ability to continue as a going concern.

With the net proceeds we received from the Stock Sale on July 20, 2005, as discussed in footnotes 1 and 9 to the financial statements included herein, we believe that our current cash and cash equivalents, together with any net cash provided by operations, will be sufficient to meet anticipated cash needs for working capital and capital expenditures through fiscal 2006.  If our shareholders do not approve the Asset Sale or if the Asset Sale otherwise does not close, we will be required to continue our U.S. software operations on a diminished scale which will require a major downsizing of staff in order to minimize projected ongoing losses.  At some point in time if we are unable to achieve at least breakeven from these operations, we may be required to seek protection from creditors under the bankruptcy laws and/or cease operations.  See Liquidity and Capital Resources below.**

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates including, among others, those affecting revenues, the allowance for doubtful accounts, and the useful lives of tangible and intangible assets.  The discussion below is intended as a brief discussion of some of the judgments and uncertainties that can impact the application of these policies and the specific dollar amounts reported on our financial statements.  We base our estimates

15



on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates.  Our estimates or judgments are based in part on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere in this Report.  We do not undertake any obligation to update or revise this discussion to reflect any future events or circumstances.

We have identified the policies below as critical to our business operations and the understanding of our results of operations.  The impact and any associated risks related to these policies on our business operations is discussed throughout Managements Discussion and Analysis or Plan of Operations where such policies affect our reported and expected financial results.  For a detailed discussion on the application of these and our other accounting policies, see the Notes to Condensed Consolidated Financial Statements of this Form 10-QSB and Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-KSB for the year ended March 31, 2005.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software.  We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction.  If a fee is based upon a variable such as a minimum level of distribution or is subject to acceptance by the customer, we account for the fee as not being fixed and determinable.  In these cases, we defer revenue and recognize it when it becomes due and payable.  We assess the probability of collection based on a number of factors, including past transaction history with the customer and the current financial condition of the customer.  We do not request collateral from our customers.  If we determine that collection of a fee is not reasonably assured, we defer revenue until the
time collection becomes reasonably assured.

For all software licenses, we use either a binding purchase order or signed agreement, depending on the nature of the transaction, as evidence of an arrangement.  Licenses through our resellers are evidenced by a master agreement governing the relationship.  For software license fees which do not include customization or consulting services, delivery typically occurs when the product is shipped to a customer.  We offer a 90 day money-back warranty if the software does not perform in accord with our published specifications.  However, within the 90 days, we have the right to correct any valid issues.  Historically we have had few or no warranty claims resulting in a refund.  However, if our software fails to work in accordance with our published standards, we could be subject to refund claims which, on average, would equal 25% of our annual license fee revenue.*

Consulting revenue is recognized in the month the work is performed and invoiced on payment terms of net 30 days.  Nonpayment of an invoice could occur in the event of disagreement on the amount billed, dissatisfaction with the work performed, or an unforeseen inability to pay on the part of the customer.  However, because consulting projects are typically preapproved by the customer, historically we have experienced very few invoice disputes.  Revenue from support agreements is recognized on a straight-line basis over the life of the contract, although the fee is due and payable at the time the agreement is signed or upon annual renewal.

16



We recognize revenue from nonrefundable minimum royalty agreements from distributors or resellers upon delivery of product to the distributor or reseller, provided no significant obligations remain outstanding, the fee is fixed and determinable, and collectibility is probable.  Once minimum royalties have been received, additional royalties are recognized as revenue when earned, based on the distributors or resellers contractual reporting obligations.

Allowance for Doubtful Accounts

We estimate the uncollectibility of our accounts receivable by analyzing historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms in order to evaluate the adequacy of the allowance for doubtful accounts.  Historically, we have experienced a minimal rate of doubtful accounts and therefore provide for an allowance of a set percentage based on aging of the receivable, i.e., 1% for receivables within 60 days of due date and 5% for those 61 days or more past the due date.  However, material differences may result in the amount and timing of our bad debt expenses for any period if we had an increase in unpaid accounts, which could reduce our total current assets.  At March 31, 2002, we accrued an additional allowance of $58,000 due to a disputed account with one of our resellers.  This account was paid in part during fiscal 2003, and the remaining balance was written
off.  In fiscal 2004, no bad debt expense was recorded against our bad debt reserves.  Additionally, if we underestimated the collectibility of our accounts receivable, it would have a negative impact on our reported net receivables, net loss and our cash flow.*

Capitalized Patents

We capitalize the direct out-of-pocket costs to obtain patents on our technology.  Such costs are amortized over the life of the patent, which have typical contractual lives of 20 years.  Should we determine that we will not be able to generate future revenues as a result of these patents, we would need to write off the patent in the period we determine that the patent is impaired.*  At June 30, 2004, such a write-off would reduce our total assets by $252,413.  It would have no effect on cash.  Costs of defending our patents are expensed as incurred, which, depending on the nature and complexity of the legal defense strategy, could materially impact our results of operations in any given period.*

Impairment of Long-Lived Assets

Long-lived assets, including property and equipment and capitalized patents are amortized over their useful lives.  We assess the impairment of these assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable based on estimated undiscounted cash flows attributable to that asset.  The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.  Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses.  Future events could cause us to conclude that impairment indicators exist and that certain assets are impaired.*  Such an adjustment would have no effect on our cash.*

17



RESULTS OF OPERATIONS

The Results of Operations below are
based upon actual operations during the relevant quarters.  This
presentation is inconsistent with the fact our accompanying Financial Statements
are prepared on the basis software operations is nominated as discontinued
operations.  Presentation of financial statements in accord with FASB 144
require that a business segment which has been designated for discontinuance and
it is probable it will be discontinued in subsequent periods must be shown in
this manner. Yet, management believes that to present the actual Management
Discussion and Analysis of the results of operations without discussion of the
software operations would be of little value.  Software operations was the
dominant business activity during the relevant quarters being discussed; in part
due to managements decision to not pursue any patent litigation which might
inhibit the Companys ability to actively market software operations. See
also Note 10.

Revenues

|                       |  | Three   Months Ended June 30, |     |      |   |       
|---------------------- |  | ----------------------------- | --- | ---- | - | ------
|                       |  |                               |     |      |   |       
|(Dollars in Thousands) |  | 2005                          |     | 2004 |   | Change
|                       |  |                               |     |      |   |       
|Software license       |  | $                             | 227 |      | $ | 265   
|Patent licenses        |  |                               |    |      |   |      
|Maintenance            |  |                               | 376 |      |   | 331   
|Consulting and other   |  |                               | 139 |      |   | 123   
|                       |  |                               |     |      |   |       
|Total Revenues         |  | $                             | 742 |      | $ | 719   

For the quarter ended June 30, 2005, our total operating revenues were $742,000 compared to $719,000 for the quarter ended June 30, 2004, representing a 3% increase.  This increase is primarily attributable to increased maintenance and consulting revenue which more than offset the decrease in software license revenue.

A decrease in software license revenue occurred in Europe while North America showed a slight increase.   In Europe considerable disruption occurred in the effectiveness of our sales efforts due to the pending sale of the subsidiary which included the loss of one of our two sales personnel.  The increase in North America was attributable to increased sales of existing resellers rather than bringing on additional reseller partners.

Due to the sale of Analyst Financials Limited in July 2005, we expect a significant decrease in software license revenues during the remainder of fiscal 2006 as compared to fiscal 2005.  If the Asset Sale is approved by our shareholders and closes, we will have no further software license revenues subsequent to the date of closing.**

We received nominal patent license revenues of $90 during the first quarter of fiscal 2006 and did not receive any revenues from patent licenses during the first quarter of fiscal 2005.  Patent license revenue is very sporadic.  The timing of fees usually corresponds to the settlement of litigation and, therefore, is unpredictable.  While we intend to continue to pursue additional patent license agreements during fiscal 2006, we cannot predict the outcome of ongoing and future negotiations and there are no assurances that we will be successful in entering into additional patent licenses, or the timing or amount of any such licenses.*

Maintenance revenue increased 14% to $376,000 for the first quarter of fiscal 2006 as compared to $331,000 for the first quarter of fiscal 2005.   The increase in maintenance revenue is primarily due to fees from new customers who have installed and are using our software.  Our software maintenance service is provided either directly to end users of our products (first tier maintenance) or to third party resellers (second tier maintenance). In first tier maintenance, we provide telephonic response and diagnosis to end users where in second tier maintenance this function is provided to end users by the

18



reseller.  We provide software patches, updates and technical diagnostics under either approach.  Both first and second-tier maintenance is typically provided under annually renewable agreements.  We receive a smaller portion of the annual support fees for second tier support than we do for first tier support.  Most of our customers sign maintenance agreements and renew them on an annual basis until such time as they no longer use our software products.  As a result of the Stock Sale in July 2005, which included the sale of certain of our maintenance contacts, future fiscal 2006 quarters will provide substantially reduced maintenance fees.*  In addition, if the Asset Sale is approved by our shareholders and closes, we will have no further maintenance revenues subsequent to the date of closing.*

An increase in consulting revenue in comparable quarters ended June 30, 2005 and June 30, 2004 occurred in both Europe and North America.  Consulting revenue tends to be directly affected by the level of new software license revenue.  While new licenses in our European market were lower than a year earlier results, significant new licenses were signed in Europe in the fourth quarter of fiscal 2005 and a substantial portion of the installation on those sites occurred in the quarter ended June 30, 2005.   As a result of the Stock Sale in July 2005, future fiscal 2006 quarters will provide substantially reduced consulting fees.*  In addition, if the Asset Sale is approved by our shareholders and closes, we will have no further consulting revenues subsequent to the date of closing.*

Cost of Revenues

|                                  |  | Three   Months Ended June 30, |     |      |   |       
|--------------------------------- |  | ----------------------------- | --- | ---- | - | ------
|                                  |  |                               |     |      |   |       
|(Dollars in Thousands)            |  | 2005                          |     | 2004 |   | Change
|                                  |  |                               |     |      |   |       
|Software license                  |  | $                             |    |      | $ |      
|Patent licenses                   |  |                               | 6   |      |   | 5     
|Maintenance, consulting and other |  |                               | 152 |      |   | 84    
|                                  |  |                               |     |      |   |       
|Total Cost of Revenues            |  | $                             | 158 |      | $ | 89    
|Percentage of revenues            |  |                               | 21  | %    |   | 12    

Cost of revenues for the first quarter of fiscal 2006 increased by 76% from the comparable period in fiscal 2005.  Cost as a percentage of revenue for the first quarter of fiscal 2006 also increased by 9% from the comparable period in fiscal 2005.  As all capitalized costs of software development were fully amortized prior to fiscal 2005, there were no cost of software license revenue.  In the case of the cost of patent revenue, the increase was not material on an actual basis and is solely due to the increase in amortization of the cost of obtaining the patents.  The capitalized cost which is subject to amortization over the remaining life of the patents is due to costs associated with our success in receiving patents in a number of additional countries over the last year.  Maintenance, consulting and other costs increased by 81% between the comparable quarters.  This increase reflects additional costs in both Europe and North
America.  Higher salaries drove most of this increase as there was a change in the allocation of personnel in Europe as between departments and the increase in activity triggered additional incentive compensation in both Europe and North America.  Additional travel expenses were also incurred based upon the increased activity.

As a result of the Stock Sale in July 2005, which included the sale of certain of our maintenance contacts and our European software operations, future fiscal 2006 quarters will provide substantially reduced maintenance costs.*  If the Asset Sale is approved by our shareholders and closes, we will have no further software license, maintenance or consulting costs subsequent to the date of closing.*

19



Gross Profit

|                       |  | Three   Months Ended June 30, |     |      |   |       
|---------------------- |  | ----------------------------- | --- | ---- | - | ------
|                       |  |                               |     |      |   |       
|(Dollars in Thousands) |  | 2005                          |     | 2004 |   | Change
|                       |  |                               |     |      |   |       
|Gross profit           |  | $                             | 584 |      | $ | 630   
|Percentage of revenues |  |                               | 79  | %    |   | 88    

Gross profit for the first quarter of fiscal 2006 decreased by 7% from the comparable period in fiscal 2005.  The decrease in gross profit is primarily attributable to the increase in the cost of revenues. This, in turn, reflects the fact consulting and maintenance revenue were a higher percentage of overall gross revenue.  These revenue sources inherently operate on lower margins than does software licensing and patent licensing as they are labor intensive.

Sales and Marketing Expense

|                       |  | Three   Months Ended June 30, |     |      |   |       
|---------------------- |  | ----------------------------- | --- | ---- | - | ------
|                       |  |                               |     |      |   |       
|(Dollars in Thousands) |  | 2005                          |     | 2004 |   | Change
|                       |  |                               |     |      |   |       
|Sales and marketing    |  | $                             | 134 |      | $ | 323   
|Percentage of revenues |  |                               | 18  | %    |   | 45    

Sales and marketing expenses decreased by 59% between the quarters ended June 30, 2005 and June 30, 2004.  Decreases occurred in virtually every sales and marketing expense category.  Nevertheless, salary expense and marketing expenses generated the largest decreases.  The decrease in salary expenses occurred primarily in Europe due to a decrease in staff allocated to sales efforts.  The decrease in marketing expense reflects that in the prior year quarter ended June 30, 2004 we expended approximately $37,000 for a targeted advertising campaign in Europe, whereas there was no comparable advertising campaign in the quarter ended June 30, 2005.

Sales and marketing expenses quarter-to-quarter for the remainder of fiscal 2006 will be substantially lower due to the sale of our European operations in July 2005.  Sales and marketing expenses as a percentage of revenue may vary widely in future quarters based upon the level and type of gross revenue in each quarter.  If the Asset Sale is approved by our shareholders and closes, we will have nominal sales and marketing expenses, if any, subsequent to the date of closing as we do not expect to incur any such expenses in connection with our ongoing patent licensing.**

Research and Development Expense

|                         |  | Three   Months Ended June 30, |     |      |  |       
|------------------------ |  | ----------------------------- | --- | ---- |  | ------
|                         |  |                               |     |      |  |       
|(Dollars in Thousands)   |  | 2005                          |     | 2004 |  | Change
|                         |  |                               |     |      |  |       
|Research and development |  | $                             | 202 |      |  | 214   
|Percentage of revenues   |  |                               | 27  | %    |  | 30    

Research and development expenses decreased during the first quarter of fiscal 2006 by 6% compared to the first quarter of fiscal 2005.  We do not consider this $12,000 decrease to be material and is mainly attributable to reduced salary expense for two employees who left the company in the last month of the quarter.

20



Research and development efforts and the associated expenses during both periods were primarily attributable to the enhancement of the functionality of the current product lines and to integration of our products with various accounting packages.  We anticipate research and development head count quarter-to-quarter for the remainder of fiscal 2006 to remain relatively stable. * However, if the Asset Sale is approved by our shareholders and closes, research and development expenses will be minimal, if any, subsequent to closing as we do not expect to incur any such expenses in connection with our on-going patent licensing.*

General and Administrative Expense

|                           |  | Three   Months Ended June 30, |     |      |  |       
|-------------------------- |  | ----------------------------- | --- | ---- |  | ------
|                           |  |                               |     |      |  |       
|(Dollars in Thousands)     |  | 2005                          |     | 2004 |  | Change
|                           |  |                               |     |      |  |       
|General and administrative |  | $                             | 423 |      |  | 444   
|Percentage of revenues     |  |                               | 57  | %    |  | 62    

General and administrative expenses decreased by 5% between the comparable quarters ended June 30, 2005 and 2004.  A substantial increase in salaries was more than offset by a decrease in rents and auditing fees.  The increase in salary-related expenses occurred mainly in Europe and reflects a one-time severance benefit paid to a departing executive.

As a result of the Stock Sale that closed in July 2005, which included the sale of our European operations, we expect general and administrative expenses to decrease significantly during the remainder of fiscal 2006, other than transaction expenses, including legal fees and other expenses, related to the Stock Sale which will be included in expenses in the quarter ending September 30, 2005.  Additionally, if the Asset Sale is approved by our shareholders and closes, we anticipate a complete restructuring of the company that will result in substantial reduction in the expense level by the fourth quarter of fiscal 2006.**

Patents Expense

|                       |  | Three   Months Ended June 30, |    |      |   |       
|---------------------- |  | ----------------------------- | -- | ---- | - | ------
|                       |  |                               |    |      |   |       
|(Dollars in Thousands) |  | 2005                          |    | 2004 |   | Change
|                       |  |                               |    |      |   |       
|Patent                 |  | $                             | 15 |      | $ | 23    
|Percentage of revenues |  |                               | 2  | %    |   | 3     

Patent expenses include the costs of litigation and negotiations with respect to patent licenses.  Patent expenses for the quarter ended June 30, 2005 were not significantly different than those incurred in the quarter ended June 30, 2004 as patent expenses consisted primarily of amortization of the capitalized cost of patent prosecution and renewal in various countries.  These expenses can vary dramatically quarter-to-quarter depending upon the level of activity required from legal counsel and experts.  Since we brought an action against ProClarity Corporation during the quarter ended June 30, 2005, we expect costs to increase dramatically over the remainder of fiscal 2006 as this case matures.*   We also anticipate undertaking additional new litigation during fiscal 2006 to protect our patent rights.*  Consequently, we expect significant swings in patent costs will result.*

21



Depreciation and Amortization

Depreciation expense decreased in the quarter ended June 30, 2005 to $7,000 from $8,000 in the quarter ended June 30, 2004.  Amortization of intangible assets were $0 during the same periods due to the fact all intangible assets other than patents and goodwill have been fully amortized.

Other Income and Expense

Other income and expense generated a loss of $38,000 in the first fiscal quarter of fiscal 2006 compared to a loss of $8,000 in fiscal 2005.  In both quarters the major component of income and expense was from foreign currency exchange fluctuations, with some impact from increased interest expense in the first quarter of fiscal 2006.

Income Tax

No income tax expense was recorded in the first quarter of either fiscal 2006 or fiscal 2005.  All income or loss is offset by appropriate adjustments to the valuation allowance of our net operating loss carry-forwards.

LIQUIDITY AND CAPITAL RESOURCES

We have historically suffered recurring operating losses and negative cash flows from operations.  As of June 30, 2005, we had negative net working capital of approximately $517,000 (positive working capital position of approximately $150,000 when excluding deferred revenue).  Additionally, as of June 30, 2005, our cash and cash equivalents were $252,000 compared to cash and cash equivalents of $162,000 as of March 31, 2005.  This increase was due to our having secured a $250,000 bridge loan from Global Software, Inc.  as of June 1, 2005.

Accounts receivable were approximately $422,000 and $643,000 at June 30, 2005 and March 31, 2005, respectively.  We believe the decrease in accounts receivable is simply due to the normal swings in the timing of collections.

Total liabilities, excluding deferred revenue, were approximately $604,000 at June 30, 2005 compared to approximately $510,000 at March 31, 2005.  The increase in total liabilities is primarily attributable to the note payable resulting from the bridge loan entered into as of June 1, 2005 with Global Software.  As of July 20, 2005 this loan was paid in full out of the gross proceeds from the Stock Sale with Global.

With the net proceeds we received from the Stock Sale on July 20, 2005, as discussed in footnotes 1 and 9 to the financial statements included herein, we believe that our current cash and cash equivalents, together with any net cash provided by operations, will be sufficient to meet anticipated cash needs for working capital and capital expenditures through fiscal 2006.  If our shareholders do not approve the Asset Sale or if the Asset Sale otherwise does not close, we will be required to continue our U.S. software operations on a diminished scale which will require a major downsizing of staff in order to minimize projected ongoing losses.  At some point in time if we are unable to achieve at least breakeven from these operations, we may be required to seek protection from creditors under the bankruptcy laws and/or cease operations.**

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Other Factors That May Affect Operating Results

Our operating results may fluctuate due to a number of factors, including, but not limited to, the following factors:

| | the pending sale of the assets of our software   licensing line of business;                                                                                                                
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                             
| | changes resulting from the completed sale of Analyst   Financials Limited and certain other assets;                                                                                         
|  |                                                                                                                                                                                             
| | our patent licensing strategies and ability to   pursue further patent licenses and generate patent revenues,                                                                               
|  |                                                                                                                                                                                             
| | competition from existing or new product offerings,                                                                                                                                         
|  |                                                                                                                                                                                             
| | the ability of our third-party distributors and   licensees in selling and marketing our products,                                                                                          
|  |                                                                                                                                                                                             
| | market acceptance of our products,                                                                                                                                                          
|  |                                                                                                                                                                                             
| | changes in the size or volume of consulting or   maintenance contracts with existing clients and potential clients,                                                                         
|  |                                                                                                                                                                                             
| | our ability to develop and expand distribution   channels and to develop relationships with third-party distributors and licensees   of our products, both internationally and domestically,
|  |                                                                                                                                                                                             
| | our decreased emphasis on direct sales, and   increased reliance on OEMs and VARs                                                                                                           
|  |                                                                                                                                                                                             
| | our ability to motivate and retain our existing   employees, including sales and marketing personnel, as well as to attract and   hire new employees in the future,                         
|  |                                                                                                                                                                                             
| | our ability to integrate our products with those of   our third-party distributors and licensees,                                                                                           
|  |                                                                                                                                                                                             
| | the availability of additional financing or capital   resources,                                                                                                                            
|  |                                                                                                                                                                                             
| | the volume and timing of systems sales and licenses,                                                                                                                                        
|  |                                                                                                                                                                                             
| | changes in the level of operating expenses, and                                                                                                                                             
|  |                                                                                                                                                                                             
| | general economic conditions in the software   industry.                                                                                                                                     

All of the above factors are difficult for us to forecast, and can materially adversely affect our business and operating results for one quarter or a series of quarters.**

|Item 3. | Controls and Procedure
|------- | ----------------------

(a) Evaluation of Disclosure Controls and Procedures

We performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer/Chief Financial Officers, as of the end of the period covered by this report, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)).  Based on this evaluation, we concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in Internal Controls

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II.  OTHER INFORMATION

|Item 6. | Exhibits
|------- | --------

Exhibits:

31.1          Certification of Charles R. Osenbaugh, President, Chief Executive Officer and Chief Financial Officer of Timeline, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1          Certification of Charles R. Osenbaugh, President, Chief Executive Officer and Chief Financial Officer of Timeline, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                         | TIMELINE, INC.
|------------------------ | --------------
|                         | (Registrant)  
|                         |               
|Date:  August   15, 2005 | By:           
|                         |               
|                         |               
|                         |               
|                         |               
|                         |               

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