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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   December 31, 2004 | 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
x | No
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   January 31, 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   December 31,   2004   (Unaudited) |             | As of,   March 31,   2004 |  
|------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ----------- | ------------------------- | -
|                                                                                                                          |  |                                           |             |                           |  
|ASSETS                                                                                                                    |  |                                           |             |                           |  
|CURRENT ASSETS:                                                                                                           |  |                                           |             |                           |  
|Cash and cash   equivalents                                                                                               |  | $                                         | 99,555      |                           | $
|Accounts receivable,   net of allowance for doubtful accounts of $13,221 and $12,326                                      |  |                                           | 593,821     |                           |  
|Prepaid expenses and   other                                                                                              |  |                                           | 41,502      |                           |  
|                                                                                                                          |  |                                           |             |                           |  
|Total current assets                                                                                                      |  |                                           | 734,878     |                           |  
|PROPERTY AND EQUIPMENT, net of accumulated  depreciation of $457,980 and $875,625                                         |  |                                           | 66,646      |                           |  
|CAPITALIZED PATENTS, net of accumulated  amortization of $76,753 and $60,069                                              |  |                                           | 265,473     |                           |  
|GOODWILL, net of accumulated  amortization of $123,938                                                                    |  |                                           | 70,183      |                           |  
|                                                                                                                          |  |                                           |             |                           |  
|Total assets                                                                                                              |  | $                                         | 1,137,180   |                           | $
|                                                                                                                          |  |                                           |             |                           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                      |  |                                           |             |                           |  
|CURRENT LIABILITIES:                                                                                                      |  |                                           |             |                           |  
|Accounts payable                                                                                                          |  | $                                         | 60,307      |                           | $
|Accrued expenses                                                                                                          |  |                                           | 282,665     |                           |  
|Line of credit                                                                                                            |  |                                           | 26,168      |                           |  
|Deferred revenues                                                                                                         |  |                                           | 730,723     |                           |  
|                                                                                                                          |  |                                           |             |                           |  
|Total current   liabilities                                                                                               |  |                                           | 1,099,863   |                           |  
|                                                                                                                          |  |                                           |             |                           |  
|SHAREHOLDERS EQUITY:                                                                                                     |  |                                           |             |                           |  
|Common stock, $.01 par   value, 20,000,000 shares  authorized,   4,190,998 and 4,178,498 shares issued    and outstanding |  |                                           | 41,910      |                           |  
|Additional paid-in   capital                                                                                              |  |                                           | 10,578,447  |                           |  
|Accumulated other   comprehensive loss                                                                                    |  |                                           | (139,542    | )                         |  
|Accumulated deficit                                                                                                       |  |                                           | (10,443,498 | )                         |  
|                                                                                                                          |  |                                           |             |                           |  
|Total shareholders   equity                                                                                              |  |                                           | 37,317      |                           |  
|                                                                                                                          |  |                                           |             |                           |  
|Total liabilities and   shareholders equity                                                                              |  | $                                         | 1,137,180   |                           | $
|                                                                                                                          |  |                                           |             |                           |  

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

2



TIMELINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended December 31, 2004 and 2003 (unaudited)

|                                                                             |  | Three   Months Ended   December 31, |           | Nine   Months Ended   December 31, |  
|---------------------------------------------------------------------------- |  | ----------------------------------- | --------- | ---------------------------------- | -
|                                                                             |  |                                     |           |                                    |  
|                                                                             |  | 2004                                |           | 2003                               |  
|                                                                             |  |                                     |           |                                    |  
|REVENUES:                                                                    |  |                                     |           |                                    |  
|Software   license                                                           |  | $                                   | 354,890   |                                    | $
|Patent   license                                                             |  |                                     | 1,000     |                                    |  
|Maintenance                                                                  |  |                                     | 403,377   |                                    |  
|Consulting   and other                                                       |  |                                     | 187,871   |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Total   revenues                                                             |  |                                     | 947,138   |                                    |  
|                                                                             |  |                                     |           |                                    |  
|COST OF REVENUES:                                                            |  |                                     |           |                                    |  
|Software   license                                                           |  |                                     |          |                                    |  
|Patent   license                                                             |  |                                     | 5,794     |                                    |  
|Maintenance,   consulting and other                                          |  |                                     | 140,231   |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Total   cost of revenues                                                     |  |                                     | 146,025   |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Gross   profit                                                               |  |                                     | 801,113   |                                    |  
|                                                                             |  |                                     |           |                                    |  
|OPERATING EXPENSE:                                                           |  |                                     |           |                                    |  
|Sales   and marketing                                                        |  |                                     | 190,553   |                                    |  
|Research   and development                                                   |  |                                     | 209,613   |                                    |  
|General   and administrative                                                 |  |                                     | 352,935   |                                    |  
|Patents                                                                      |  |                                     | 20,049    |                                    |  
|Depreciation                                                                 |  |                                     | 9,461     |                                    |  
|Amortization   of intangibles                                                |  |                                     |          |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Total   operating expenses                                                   |  |                                     | 782,611   |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Income   (loss) from operations                                              |  |                                     | 18,502    |                                    |  
|                                                                             |  |                                     |           |                                    |  
|OTHER (EXPENSE) INCOME:                                                      |  |                                     |           |                                    |  
|Interest   expense and other                                                 |  |                                     | (1,399    | )                                  |  
|Foreign   exchange gain (loss)                                               |  |                                     | 34,223    |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Total   other expense                                                        |  |                                     | 32,824    |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Income (loss) before   income taxes                                          |  |                                     | 51,326    |                                    |  
|Provision   for income tax                                                   |  |                                     |          |                                    |  
|                                                                             |  |                                     |           |                                    |  
|Net   income (loss)                                                          |  | $                                   | 51,326    |                                    | $
|                                                                             |  |                                     |           |                                    |  
|OTHER COMPREHENSIVE   (EXPENSE):                                             |  |                                     |           |                                    |  
|Change   in fair value of available for sale securities                      |  | $                                   |          |                                    | $
|Foreign   currency translation adjustment                                    |  |                                     | (50,917   | )                                  |  
|                                                                             |  |                                     |           |                                    |  
|Total   other comprehensive loss                                             |  |                                     | (50,917   | )                                  |  
|Comprehensive   income (loss)                                                |  | $                                   | 409       |                                    | $
|                                                                             |  |                                     |           |                                    |  
|Basic and diluted net   income (loss) per common and common equivalent share |  | $                                   | 0.01      |                                    | $
|                                                                             |  |                                     |           |                                    |  
|Shares used in calculation   of basic and diluted loss per share             |  |                                     | 4,190,998 |                                    |  
|                                                                             |  |                                     |           |                                    |  

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

3



TIMELINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended December 31, 2004 and 2003 (unaudited)

|                                                   |  | 2004 |          | 2003 |  
|-------------------------------------------------- |  | ---- | -------- | ---- | -
|                                                   |  |      |          |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:              |  |      |          |      |  
|Net cash used in   operating activities            |  | $    | (398,396 | )    | $
|                                                   |  |      |          |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES:              |  |      |          |      |  
|Purchase of property   and equipment               |  |      | (16,517  | )    |  
|Capitalized patent   & software development costs  |  |      | (28,225  | )    |  
|Line of credit   borrowings                        |  |      | 115,284  |      |  
|Line of credit   repayments                        |  |      | (89,116  | )    |  
|                                                   |  |      |          |      |  
|Net cash used in   investing activities            |  |      | (18,574  | )    |  
|                                                   |  |      |          |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES:              |  |      |          |      |  
|Issuance of common   stock warrants                |  |      | 4,725    |      |  
|                                                   |  |      |          |      |  
|Net cash provided by   financing activities        |  |      | 4,725    |      |  
|                                                   |  |      |          |      |  
|EFFECT OF FOREIGN EXCHANGE RATE                    |  |      | 317      |      |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS            |  |      | (411,928 | )    |  
|CASH AND CASH EQUIVALENTS, beginning of period     |  |      | 511,483  |      |  
|                                                   |  |      |          |      |  
|CASH AND CASH EQUIVALENTS, end of period           |  | $    | 99,555   |      | $
|                                                   |  |      |          |      |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:  |  |      |          |      |  
|Cash paid for interest   during year               |  | $    | 1,848    |      | $
|Non-cash transactions:                             |  |      |          |      |  
|Unrealized loss on   available for sale securities |  | $    |         |      | $

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

4



TIMELINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

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 has operations in North America and 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 December 31, 2004, the Company had negative net working capital of approximately $365,000 and had an accumulated deficit of approximately $10,443,000 with total stockholders equity of approximately $37,000.  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, 2004, added an explanatory paragraph to their opinion on our fiscal 2004 financial statements stating that there was substantial doubt about our ability to continue as a going concern.  Management believes that current cash, cash equivalents, any net cash provided by operations, and proceeds from bank credit facilities, will provide adequate resources to fund
operations through March 31, 2005.  Management is contemplating a number of alternatives to enable the Company to continue operating including, but not limited to:

| |  | engaging a financial advisor to explore strategic   alternatives, which may include a merger, asset sale, joint venture or   another comparable transaction;             
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | raising additional capital to fund continuing   operations by private placements of equity or debt securities or through the   establishment of other funding facilities;
| |  | forming a joint venture with a strategic partner or   partners to provide additional capital resources to fund operations; and                                           
| |  | loans from management or employees, salary deferrals   or other cost cutting mechanisms.                                                                                 

None of these potential alternatives may be available to the Company, or may only be available on unfavorable terms.  There can be no assurance that any of these alternatives will be successful.  If the Company is unable to obtain sufficient cash when needed to fund its operations, it may be forced to seek protection from creditors under the bankruptcy laws and/or cease operations.

The Companys inability to obtain additional cash as needed could have a material adverse effect on its financial position, results of operations and its ability to continue in existence.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

5



2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

The accompanying 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 nine-month period ended December 31, 2004 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, 2004, 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.

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.

6



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 that 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 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.

7



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 Earnings per Common Share

Basic and diluted net earnings per share is the net earnings 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 earnings per share because they are antidilutive totaled 596,500 and 615,625 for the three-month periods ended December 31, 2004 and 2003, 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.  The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each three and nine month period ended December 31, 2004 and 2003, respectively.

8



|                                                                                                                   |  | Three   Months Ended |           | Nine   Months Ended |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------------- | --------- | ------------------- | -
|                                                                                                                   |  |                      |           |                     |  
|                                                                                                                   |  | Dec. 31,   2004      |           | Dec. 31,   2003     |  
|                                                                                                                   |  |                      |           |                     |  
|Net income (loss), as   reported                                                                                   |  | $                    | 51,326    |                     | $
|Add stock-based employee   compensation expense included in reported net income (loss)                             |  |                      |          |                     |  
|Deduct total stock-based   employee compensation expense determined under fair-value based method for   all awards |  |                      |          |                     |  
|                                                                                                                   |  |                      |           |                     |  
|As   adjusted net income (loss)                                                                                    |  | $                    | 51,326    |                     | $
|                                                                                                                   |  |                      |           |                     |  
|Shares used in basic and   diluted net income (loss) per share                                                     |  |                      | 4,190,998 |                     |  
|                                                                                                                   |  |                      |           |                     |  
|Basic and diluted net   income (loss) per share as reported                                                        |  | $                    | 0.01      |                     | $
|                                                                                                                   |  |                      |           |                     |  
|Basic and diluted net loss   per share  as adjusted                                                               |  | $                    | 0.01      |                     | $
|                                                                                                                   |  |                      |           |                     |  

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.

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 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.

9



Intangible Assets and Goodwill

Intangible assets historically included 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 provided on the straight-line basis over the respective useful lives of the assets, primarily three years.  Goodwill, as recorded, represented the excess of acquisition cost over the fair value of net identifiable assets acquired.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).  SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142.  SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values.  Additionally in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the Company is required to review its intangible assets at least annually for impairment.

The Company performed its annual goodwill impairment test as required by SFAS No. 142 during its fiscal 2004 fourth quarter.  The results of this test did not give any indication that goodwill was potentially impaired, and accordingly no amounts were recorded for goodwill impairment in fiscal 2004.

Carrying amounts as of December 31, 2004 and March 31, 2004 are as follows:

|                                 |  | December   31, 2004 |           | March 31,   2004 |  
|-------------------------------- |  | ------------------- | --------- | ---------------- | -
|                                 |  |                     |           |                  |  
|Gross carrying amount:           |  |                     |           |                  |  
|Goodwill                         |  | $                   | 194,121   |                  | $
|Acquired   technology            |  |                     | 649,981   |                  |  
|Customer/distributor   contracts |  |                     | 320,000   |                  |  
|                                 |  |                     |           |                  |  
|Total                            |  | $                   | 1,164,102 |                  | $
|                                 |  |                     |           |                  |  
|Accumulated amortization:        |  |                     |           |                  |  
|Goodwill                         |  | $                   | 123,938   |                  | $
|Acquired   technology            |  |                     | 620,216   |                  |  
|Customer/distributor   contracts |  |                     | 266,226   |                  |  
|                                 |  |                     |           |                  |  
|Total                            |  | $                   | 1,010,380 |                  | $
|                                 |  |                     |           |                  |  
|Net book value                   |  | $                   | 153,722   |                  | $
|                                 |  |                     |           |                  |  

Amortization of intangible assets was $-0- in both periods ended December 31, 2004 and December 31, 2003.  As of June 30, 2003, the Company had fully amortized certain intangible assets including general intangibles, acquired and capitalized software.

10



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.  During the quarter ended December 31, 2004, the Company wrote off certain fully depreciated assets it identified as obsolete, with minimal market value and no longer used by the Company.

3.  CUSTOMER CONCENTRATION

Total Revenue

During the quarter and nine months ended December 31, 2004, no single customer comprised more than 10% of the Companys total revenue.  During the quarter and nine months ended December 31, 2003, one customer comprised approximately 11% and another customer comprised 11% of the Companys total revenue, respectively.

Accounts Receivable

At December 31, 2004, one customer comprised 16% of the Companys accounts receivable balance, while in the same quarter of fiscal 2004, no single customer comprised more than 10% of the Companys account receivable balance.  At March 31, 2004, approximately 15% of the Companys accounts receivable balance was due from two of the Companys 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 may be able to borrow up to a maximum of $350,000, limited to 80% of its then qualified receivables.  Qualified receivables are generally trade receivables from U.S. customers not outstanding more than 90 days.  The interest rate can vary dependent upon the Companys then quick ratio.  The rate is 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.  At December 31, 2004, the amount outstanding on the facility was $26,168.  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.

5.  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 operates in two reportable segments that are based on geographic business units in the United States (Timeline) and Europe (Analyst Financials Ltd.).  Both segments generate 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 are the same as those described in the summary of critical accounting policies included

11



herein and in the Companys annual financial statements for the year ended March 31, 2004.  During the three months ended December 31, 2004 and 2003, the Timeline segment included intersegment revenues and the Analyst Financials segment included intersegment expenses that totaled $120,639 and $118,651, respectively.  During the nine months ended December 31, 2004 and 2003, the Timeline segment included intersegment revenues and the Analyst Financials segment included intersegment expenses that totaled $380,396 and $375,011, respectively.  These intersegment transactions are recorded at market rates as if the transactions occurred with third parties.  The following tables summarize operations by segment during the three and nine months ended December 31, 2004 and December 31, 2003:

|                                |  | Three   Months Ended 12/31/04 |        
|------------------------------- |  | ----------------------------- | -------
|                                |  |                               |        
|                                |  | Timeline                      |        
|                                |  |                               |        
|Revenues                        |  | $                             | 632,391
|Operating income (loss)         |  | $                             | (37,391
|Depreciation and   amortization |  | $                             | 7,177  
|Long lived assets               |  | $                             | 308,887
|Total assets                    |  | $                             | 670,364

|                                |  | Three   Months Ended 12/31/03 |         
|------------------------------- |  | ----------------------------- | --------
|                                |  |                               |         
|                                |  | Timeline                      |         
|                                |  |                               |         
|Revenues                        |  | $                             | 566,932 
|Operating loss                  |  | $                             | (214,948
|Depreciation and   amortization |  | $                             | 13,708  
|Long lived assets               |  | $                             | 297,439 
|Total assets                    |  | $                             | 621,932 

|                                |  | Nine   Months Ended 12/31/04 |          
|------------------------------- |  | ---------------------------- | ---------
|                                |  |                              |          
|                                |  | Timeline                     |          
|                                |  |                              |          
|Revenues                        |  | $                            | 1,638,790
|Operating income (loss)         |  | $                            | (496,262 
|Depreciation and   amortization |  | $                            | 21,532   
|Long lived assets               |  | $                            | 308,887  
|Total assets                    |  | $                            | 670,364  

12



|                                |  | Nine   Months Ended 12/31/03 |          
|------------------------------- |  | ---------------------------- | ---------
|                                |  |                              |          
|                                |  | Timeline                     |          
|                                |  |                              |          
|Revenues                        |  | $                            | 1,967,561
|Operating income (loss)         |  | $                            | (649,632 
|Depreciation and   amortization |  | $                            | 43,986   
|Long lived assets               |  | $                            | 297,439  
|Total assets                    |  | $                            | 621,932  

6.  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.

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, if, forecast 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

13



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.

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 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, 2004.

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.

14



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.

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.*  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 December 31, 2004, such a write-off would reduce our total assets by $265,473.  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.*

15



RESULTS OF OPERATIONS

Our consolidated financial statements for the first three quarters of fiscal 2005 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 $471,000 for the first nine months of fiscal 2005.  As of December 31, 2004, we had negative net working capital of approximately $365,000.  These factors raise substantial doubt about our ability to continue as a going concern.

We believe that our current cash and cash equivalents, together with any net cash provided by operations and proceeds from bank credit facilities, will be sufficient to meet anticipated cash needs for working capital and capital expenditures through fiscal 2005.  However, our revenue is unpredictable, and a revenue shortfall could deplete our limited financial resources and require us to reduce operations substantially or to raise additional funds through equity or debt financings.  See Liquidity and Capital Resources below.**

Revenues

|                       |  | Three   Months Ended   December 31, |     | Nine   Months Ended   December 31, |  
|---------------------- |  | ----------------------------------- | --- | ---------------------------------- | -
|                       |  |                                     |     |                                    |  
|(Dollars in Thousands) |  | 2004                                |     | 2003                               |  
|                       |  |                                     |     |                                    |  
|Software license       |  | $                                   | 355 |                                    | $
|Patent license         |  |                                     | 1   |                                    |  
|Maintenance            |  |                                     | 403 |                                    |  
|Consulting and other   |  |                                     | 188 |                                    |  
|                       |  |                                     |     |                                    |  
|Total revenues         |  | $                                   | 947 |                                    | $

For the quarter ended December 31, 2004, our total operating revenues were $947,000 compared to $863,000 for the quarter ended December 31, 2003, representing an increase of 10%.  The increase in operating revenues is attributable to increased licensing and maintenance activity which more than offset a decrease in consulting revenue.  On a comparative nine month basis, revenue decreased by 15% in fiscal 2005 from fiscal 2004, which is attributable primarily to significant decreases in software license and consulting revenues.

In Europe, our largest reseller channel for new license revenue for the quarter ended December 31, 2004 was Cedar Software Limited (CedAr), displacing Sage Enterprise, a reseller who had maintained that distinction for both the nine-month periods ended December 31, 2004 and 2003, and for the prior quarter ended December 31, 2003.  As we have previously disclosed, during late fiscal 2004, Sage introduced its own product to compete with our Analyst Financials products and several of our mutual resellers elected to sell the Sage product.  This weakened our sales in this channel for fiscal 2005, which was reflected in lower total gross revenue until the most recent quarter.  The increased license revenue generated in the third quarter of fiscal 2005 reflects in part the fact CedAr has now been reselling our products for several quarters and is experiencing increasing revenue from the licensing of our Companys products.

North American software license revenue for the quarter ended December 31, 2004 exceeded the comparable period for the prior year.   However, license revenue for the first nine months of fiscal 2005 decreased from the comparable nine-month period of fiscal 2004. The most notable difference was that in the first quarter of fiscal 2004 we received one unusually large license fee in the amount of $92,000.

16



Although we continue to work with current resellers and engage new resellers to license our products, it is difficult to predict if our distribution channels will be able to generate any increase in software licenses or revenues during the remainder of fiscal 2005 over fiscal 2004.*

We received only $1,000 of revenue from patent licenses during the first three quarters of fiscal 2005 while we received a fee of $150,000 during the second quarter of fiscal 2004.  Patent license revenue is very sporadic.  We are not currently negotiating or pursuing any litigation intended to require the licensing of our patents and, consequently, it is unlikely patent revenue will contribute to total revenue during the remainder of fiscal 2005.*  Since we had a significant license during the fourth quarter of fiscal 2004, we expect to show a substantial decrease in patent revenue between the fourth quarter and the entire year of fiscal 2005 as compared to the fourth quarter and fiscal year 2004.*  We intend to pursue additional patent license agreements during fiscal 2006.*  We have been relatively inactive during fiscal 2005 in order to facilitate our efforts to sell, merge, or refinance our software operations.  Nevertheless,
we expect to re-energize our patent enforcement activity as we are very aware the patents are an asset with a limited lifespan.*  Consequently, we intend to increase our future activity in this area but there are no assurances we will be successful in entering into additional patent licenses, or the timing or amount of any such licenses.*

Maintenance revenue increased 23% to $403,000 for the third quarter of fiscal 2005 as compared to $327,000 for the third quarter of fiscal 2004.  For comparable nine-month periods ending December 31, 2004 and 2003, the increase was 20% for the current year.  The increase in maintenance revenue is primarily due to fees from new customers who have installed and are using our software.  We expect maintenance in future periods to continue to grow based on new licenses from the current quarter and, hopefully, new licenses in future quarters*.  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.  In second tier maintenance, these functions are provided to end-users by the reseller.  We provide software patches, updates and technical
diagnostics under either approach.  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.

A decrease in consulting revenue in comparable quarters and nine-month periods ending December 31, 2004 and December 31, 2003 occurred in both Europe and North America.  We believe, on a going-forward basis, that we will continue to see low levels of consulting revenues because a higher percentage of the consulting services associated with the use of our software will be provided by our resellers rather than directly through us.*  We do not receive revenue from consulting services provided by our resellers.  Any increase in the volume of consulting services performed by our resellers will negatively affect our consulting service revenue in future quarters.*

17



Cost of Revenues

|                                   |  | Three   Months Ended   December 31, |     | Nine   Months Ended   December 31, |  
|---------------------------------- |  | ----------------------------------- | --- | ---------------------------------- | -
|                                   |  |                                     |     |                                    |  
|(Dollars in Thousands)             |  | 2004                                |     | 2003                               |  
|                                   |  |                                     |     |                                    |  
|Software license                   |  | $                                   |    |                                    | $
|Patent license                     |  |                                     | 6   |                                    |  
|Maintenance, consulting  and other |  |                                     | 140 |                                    |  
|                                   |  |                                     |     |                                    |  
|Total cost of revenues             |  | $                                   | 146 |                                    | $
|Percentage of revenues             |  |                                     | 15  | %                                  |  

Cost of revenues for the third quarter and the first nine months of fiscal 2005 decreased by 5% and 32%, respectively, from the comparable periods in fiscal 2004.  Cost as a percentage of revenue for the third quarter of fiscal 2005 also decreased by 3% and for the first nine months of fiscal 2005 by 4%, from the comparable periods in fiscal 2004.  Both statistics are largely the result of the elimination of amortization for capitalized and acquired software development that occurred during the comparable periods.  As of December 31, 2003, we had fully amortized all such costs for capitalized and acquired software, thereby reducing the amortization charge from $46,000 and $186,000 in the third quarter and the first nine months of fiscal 2004, respectively, to $0 in the comparable periods of fiscal 2005.  Patent costs for the third quarter and the first nine months of fiscal 2005 increased slightly over comparable periods in fiscal 2004. 
Maintenance, consulting and other costs increased between the comparable periods, primarily due to salary and travel expenses incurred during the third quarter of fiscal 2005 for the transfer of existing personnel between departments.

Gross Profit

|                       |  | Three   Months Ended   December 31, |     | Nine   Months Ended   December 31, |  
|---------------------- |  | ----------------------------------- | --- | ---------------------------------- | -
|                       |  |                                     |     |                                    |  
|(Dollars in Thousands) |  | 2004                                |     | 2003                               |  
|                       |  |                                     |     |                                    |  
|Gross profit           |  | $                                   | 801 |                                    | $
|Percentage of revenues |  |                                     | 85  | %                                  |  

Gross profit for the third quarter of fiscal 2005 increased by 13% and for the nine-month period decreased by 12%, respectively, from comparable periods in fiscal 2004.  The increase in gross profit for the quarter is primarily attributable to higher software license and maintenance revenue.  Likewise, the decrease in the nine-month period reflects the higher gross revenue during fiscal 2004 as compared to fiscal 2005 on a nine month basis.  Gross margins increased slightly during the comparable periods due to higher revenue in the quarter ended December 31, 2004 against relatively stable costs and in the nine-month period ended December 31, 2004 due to a significant decrease in the cost of revenues and the elimination of amortization expense for capitalized and acquired software.

18



Sales and Marketing Expense

|                       |  | Three   Months Ended   December 31, |     | Nine   Months Ended   December 31, |  
|---------------------- |  | ----------------------------------- | --- | ---------------------------------- | -
|                       |  |                                     |     |                                    |  
|(Dollars in Thousands) |  | 2004                                |     | 2003                               |  
|                       |  |                                     |     |                                    |  
|Sales and marketing    |  | $                                   | 191 |                                    | $
|Percentage of revenues |  |                                     | 20  | %                                  |  

Sales and marketing expenses decreased during both the third quarter and the first nine months of fiscal 2005 as compared to the same periods of fiscal 2004.  In part, these decreases reflect the transfer of personnel between departments during the first nine months of fiscal 2005 and some attrition of headcount during the third quarter of fiscal 2005.  Additionally, marketing and travel expenses decreased significantly during the third quarter of fiscal 2005 over the third quarter of the prior year and also as compared to the first and second quarters in fiscal 2005 as we curtailed our sales and marketing activities to preserve cash.   Sales and marketing expense as a percentage of revenues decreased for the third quarter of fiscal 2005 when compared to the third quarter of fiscal 2004 due to both lower expenses and higher revenue in the current quarter.  In the comparable nine-month periods, slightly lower costs did not offset lower
revenues in fiscal 2005, resulting in an increase in expenses as a percentage of revenues over the first nine months of fiscal 2004.

Sales and marketing expenses quarter-to-quarter for the remainder of fiscal 2005 will be directly impacted by commissions payable with respect to new licenses.  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.**

Research and Development Expense

|                       |  | Three   Months Ended   December 31, |     | Nine   Months Ended   December 31, |  
|---------------------- |  | ----------------------------------- | --- | ---------------------------------- | -
|                       |  |                                     |     |                                    |  
|(Dollars in Thousands) |  | 2004                                |     | 2003                               |  
|                       |  |                                     |     |                                    |  
|Research & development |  | $                                   | 210 |                                    | $
|Percentage of revenues |  |                                     | 22  | %                                  |  

Research and development expenses for the third quarter and the first nine months of fiscal 2005 decreased by 1% and 3%, respectively, over comparable periods in fiscal 2004.  This decrease is not material.

Research and development efforts and the associated expenses during all 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.  Additionally, during the first quarter of fiscal 2005, we began work on our next version of software, having completed full commercial release in March 2004 of Version 2.9 of our Timeline Analyst suite of applications.  These efforts continued during the second and third quarters of fiscal 2005 and we anticipate they will continue throughout the remainder of the 2005 and 2006 fiscal years.*  We also anticipate research and development head count quarter-to-quarter for the remainder of fiscal 2005 will remain relatively stable.*

19



We have instituted a compensation plan that could cause employee compensation costs to increase, as described in the Liquidity and Capital Resources section below.*  No bonus was paid for the results of the first three fiscal quarter of 2005.

General and Administrative Expense

|                         |  | Three   Months Ended   December 31, |     | Nine   Months Ended   December 31, |  
|------------------------ |  | ----------------------------------- | --- | ---------------------------------- | -
|                         |  |                                     |     |                                    |  
|(Dollars in Thousands)   |  | 2004                                |     | 2003                               |  
|                         |  |                                     |     |                                    |  
|General & administrative |  | $                                   | 353 |                                    | $
|Percentage of revenues   |  |                                     | 37  | %                                  |  

General and administrative expenses for the third quarter and first nine months of fiscal 2005 decreased by 7% and 9%, respectively, over comparable periods in fiscal 2004.  We have instituted changes which have generated substantial decreases in salaries, payroll taxes and rents.  We experienced a significant increase in auditing fees during the first quarter of fiscal 2005 for the audit for the 2004 fiscal year.  However, we engaged a new auditing firm in the first quarter of fiscal 2005 and our accounting fees have been lower in each subsequent quarter.

We expect general and administrative expenses to decline further during the remainder of fiscal 2005 due to a scheduled reduction in leased space in London.*  We have taken a number of steps during fiscal 2005 to reduce our costs of operations, including renegotiating the terms of some vendor contracts.  However, we have instituted a compensation plan for employees, as described in Liquidity and Capital Resources below, that may increase compensation costs if certain revenue goals are achieved.*

Patents Expense

|                       |  | Three   Months Ended   December 31, |    | Nine   Months Ended   December 31, |  
|---------------------- |  | ----------------------------------- | -- | ---------------------------------- | -
|                       |  |                                     |    |                                    |  
|(Dollars in Thousands) |  | 2004                                |    | 2003                               |  
|                       |  |                                     |    |                                    |  
|Patent                 |  | $                                   | 20 |                                    | $
|Percentage of revenues |  |                                     | 2  | %                                  |  

Patent expenses include the costs of litigation and negotiations with respect to patent licenses.  Patent expenses for the third quarter and the first nine months of fiscal 2005 decreased by 38% and 25%, respectively, over the comparable periods in fiscal 2004.  Patent expenses decreased in part because no patent litigation was pending during the first nine months of fiscal 2005.  These expenses can vary dramatically quarter-to-quarter depending upon the level of activity required from legal counsel and experts.  We continue to incur capital expenses related to the registration of our patents which in turn increases the amount of amortization charged against quarterly operations.  The capitalized procurement costs were in part related to attorney fees incurred to finalize the issuance of our WorkWise patents on process automation and our Canadian, Chinese and second Australian patent on automation of data mart design.  We anticipate
undertaking new litigation during the remainder of fiscal 2005 and/or fiscal 2006 to protect our patent rights.*  Consequently, we expect significant swings in patent costs will result.*

20



Depreciation and Amortization

Depreciation expense decreased in the quarter ended December 31, 2004 to approximately $9,000 from approximately $16,000 in the quarter ended December 31, 2003.  Depreciation expense decreased in the nine-month period ended December 31, 2004 to approximately $26,000 from approximately $49,000 in the nine-month period ended December 31, 2003.  Amortization of intangible assets for each of the quarters ended December 31, 2004 and 2003 was $0.

Other Income and Expense

Other income and expense generated income of approximately $33,000 in the third quarter of fiscal 2005 compared to income of approximately $16,000 in the third quarter of fiscal 2004.  The major components of other income and expense in all periods are interest and foreign currency exchange gain and loss.  During the quarter ended December 31, 2004, interest expense was approximately $1,000 and foreign exchange gain was approximately $34,000.  During the quarter ended December 31, 2003, interest expense was less that one thousand dollars and foreign exchange gain was approximately $16,000.

Income Tax

No income tax expense was recorded in the third quarter of either fiscal 2005 or fiscal 2004.  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 December 31, 2004, we had negative net working capital of approximately $365,000 (positive working capital position of approximately $366,000 when excluding deferred revenue).  Additionally, as of December 31, 2004, our cash and cash equivalents were approximately $100,000 compared to cash and cash equivalents of approximately $511,000 as of March 31, 2004.

The decrease in our cash and cash equivalents is attributable to losses from operations during the first two quarters of fiscal 2005, although we had operating income in the third quarter of fiscal 2005.  These losses were primarily attributable to significant decreases in software and patent license and consulting revenue during those quarters.

Accounts receivable were approximately $594,000 and $423,000 at December 31, 2004 and March 31, 2004, respectively.  We believe the increase in accounts receivable is simply due to the normal swings in the timing of collections and the greater revenue during the third quarter of fiscal 2005.

On September 23, 2004, we entered into an Accounts Receivable Financing Agreement with Silicon Valley Bank, providing for a line of credit of up to $350,000.  Under the Financing Agreement, for any of our accounts receivable that Silicon Valley Bank agrees to finance, we will receive an advance equal to 80% of the face amount of such accounts receivable.  All advances are subject to a variable interest rate.  As of December 31, 2004, the interest rate for any advances by the Bank was 7.75% per annum.  In connection with the Financing Agreement, we granted Silicon Valley Bank a security interest in all of our assets.  As of December 31, 2004, we had approximately $26,000 outstanding under the line of credit, out of total of approximately $245,000 available for borrowing based on

21



eligible accounts receivable at that time.  Silicon Valley Bank is not obligated to finance any of our accounts receivable.  There can be no assurance that Silicon Valley Bank will make advances to us when requested.*

Total liabilities, excluding deferred revenue, were approximately $369,000 at December 31, 2004 compared to approximately $344,000 at March 31, 2004.  The increase in total liabilities is attributable to an increase in our borrowings under our accounts receivable line of credit established in the second quarter of fiscal 2005, as described above.

For the fourth quarter of fiscal 2005, we expect to generate cash from increased maintenance revenues and software license revenues and, possibly, additional licenses of our patented technology.*  We expect that our primary uses of cash will be salaries and other expenses associated with general and administrative, research and development, and sales and marketing activities.*  We have instituted an compensation plan based on certain gross revenue and net income targets that could cause employee compensation costs to increase.* All U.S.-based employees are eligible to participate in a bonus pool in an amount, subject to specified adjustments and limitations, that represents 50% of the amount by which U.S. revenue exceeds U.S. internal budgets for each quarter of fiscal 2005.  No bonus was paid for the results of the first three fiscal quarters of 2005.  Additionally, if the economy and new license revenue numbers improve to a level where
salary reductions instituted in the fourth quarter of fiscal 2002 are no longer deemed necessary, this would also put upward pressure on costs.*

We intend to continue to monitor new license activity closely and may have to reduce staff, and/or seek outside financing or a sale or merger if consulting and maintenance revenues and patent and software licenses do not increase quarter-to-quarter during the remainder of fiscal 2005 and beyond.*  By taking this cautious approach combined with our current cash and cash equivalent balances and proceeds from bank credit facilities, we believe we will have adequate resources to fund operations, as well as costs and expenses of any litigation we may pursue, through the balance of fiscal 2005.*  Our auditors added an explanatory paragraph to their opinion on our fiscal 2004 consolidated financial statements stating that there was substantial doubt about our ability to continue as a going concern.

There can be no assurance that our efforts to monitor expenses and generate revenue will be successful.*  Accordingly, we need to contemplate other alternatives to enable us to fund continuing operations, including, but not limited to, engaging a financial advisor to explore strategic alternatives, which may include a merger, asset sale, joint venture or another comparable transaction, loans from management or employees, requesting further advances under the Financing Agreement, salary deferrals or other cost cutting mechanisms, or raising additional capital by private placements of equity or debt securities or through the establishment of other funding facilities.*  None of these potential alternatives may be available to us, or may only be available on unfavorable terms.*  If we are unable to obtain sufficient cash to continue to fund our operations, we may be forced to seek protection from creditors under the bankruptcy laws or cease
operations.*  Our inability to obtain additional cash as needed could have a material adverse effect on our financial position, results of operations and our ability to continue in existence.*  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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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:

| |  | 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,                                                                                           
| |  | our patent licensing strategies and ability to   pursue further patent licenses,                                                                                                            
| |  | 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 Officer, 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

(a)     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:    February 10, 2005 | By:           
|                           |               
|                           |               
|                           |               
|                           |               
|                           |               

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