---

UNITED STATES  SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549

---

FORM 10-QSB

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

|For the Quarterly Period Ended June   30, 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 July 30, 2004
|------------------------------ |  | ----------------------------
|Common Stock, $.01 Par   Value |  | 4,190,998                   

---



PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

TIMELINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                      |  | As of   June 30,   2004   (Unaudited) |             | As of,   March 31,   2004 |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ----------- | ------------------------- | -
|                                                                                                                      |  |                                       |             |                           |  
|ASSETS                                                                                                                |  |                                       |             |                           |  
|CURRENT ASSETS:                                                                                                       |  |                                       |             |                           |  
|Cash and cash   equivalents                                                                                           |  | $                                     | 180,405     |                           | $
|Accounts receivable,   net of allowance for doubtful accounts of $12,901 and $12,326                                  |  |                                       | 492,390     |                           |  
|Prepaid expenses and   other                                                                                          |  |                                       | 145,625     |                           |  
|                                                                                                                      |  |                                       |             |                           |  
|Total current assets                                                                                                  |  |                                       | 818,420     |                           |  
|PROPERTY AND EQUIPMENT, net of accumulated   depreciation of $883,495 and $875,625                                    |  |                                       | 71,688      |                           |  
|CAPITALIZED PATENTS, net of accumulated amortization   of $65,472 and $60,069                                         |  |                                       | 252,413     |                           |  
|GOODWILL, net of accumulated amortization of   $123,938                                                               |  |                                       | 70,183      |                           |  
|                                                                                                                      |  |                                       |             |                           |  
|Total assets                                                                                                          |  | $                                     | 1,212,704   |                           | $
|                                                                                                                      |  |                                       |             |                           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                  |  |                                       |             |                           |  
|CURRENT LIABILITIES:                                                                                                  |  |                                       |             |                           |  
|Accounts payable                                                                                                      |  | $                                     | 109,836     |                           | $
|Accrued expenses                                                                                                      |  |                                       | 303,036     |                           |  
|Deferred revenues                                                                                                     |  |                                       | 635,077     |                           |  
|                                                                                                                      |  |                                       |             |                           |  
|Total current   liabilities                                                                                           |  |                                       | 1,047,949   |                           |  
|                                                                                                                      |  |                                       |             |                           |  
|SHAREHOLDERS EQUITY:                                                                                                 |  |                                       |             |                           |  
|Common stock, $.01 par   value, 20,000,000 shares authorized, 4,198,998 and 4,178,498 shares issued   and outstanding |  |                                       | 41,910      |                           |  
|Additional paid-in   capital                                                                                          |  |                                       | 10,573,722  |                           |  
|Accumulated other   comprehensive loss                                                                                |  |                                       | (93,197     | )                         |  
|Accumulated deficit                                                                                                   |  |                                       | (10,357,680 | )                         |  
|                                                                                                                      |  |                                       |             |                           |  
|Total shareholders   equity                                                                                          |  |                                       | 164,755     |                           |  
|                                                                                                                      |  |                                       |             |                           |  
|Total liabilities and   shareholders equity                                                                          |  | $                                     | 1,212,704   |                           | $
|                                                                                                                      |  |                                       |             |                           |  

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

2



TIMELINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30, 2004 and 2003 (unaudited)

|                                                                     |  | 2004 |           | 2003 |  
|-------------------------------------------------------------------- |  | ---- | --------- | ---- | -
|                                                                     |  |      |           |      |  
|REVENUES:                                                            |  |      |           |      |  
|Software license                                                     |  | $    | 264,934   |      | $
|Maintenance                                                          |  |      | 330,906   |      |  
|Consulting and other                                                 |  |      | 123,153   |      |  
|                                                                     |  |      |           |      |  
|Total revenues                                                       |  |      | 718,993   |      |  
|COST OF REVENUES:                                                    |  |      |           |      |  
|Software license                                                     |  |      |          |      |  
|Patent license                                                       |  |      | 5,403     |      |  
|Maintenance, consulting   and other                                  |  |      | 83,858    |      |  
|                                                                     |  |      |           |      |  
|Total cost of revenues                                               |  |      | 89,261    |      |  
|                                                                     |  |      |           |      |  
|Gross profit                                                         |  |      | 629,732   |      |  
|OPERATING EXPENSE:                                                   |  |      |           |      |  
|Sales and marketing                                                  |  |      | 323,089   |      |  
|Research and   development                                           |  |      | 213,950   |      |  
|General and   administrative                                         |  |      | 444,411   |      |  
|Patents                                                              |  |      | 22,956    |      |  
|Depreciation                                                         |  |      | 8,023     |      |  
|Amortization                                                         |  |      |          |      |  
|                                                                     |  |      |           |      |  
|Total operating   expenses                                           |  |      | 1,012,429 |      |  
|                                                                     |  |      |           |      |  
|Loss from operations                                                 |  |      | (382,697  | )    |  
|                                                                     |  |      |           |      |  
|OTHER INCOME (EXPENSE):                                              |  |      |           |      |  
|Foreign currency   exchange, interest and other (expense) income     |  |      | (7,989    | )    |  
|                                                                     |  |      |           |      |  
|Total other income   (expense)                                       |  |      | (7,989    | )    |  
|                                                                     |  |      |           |      |  
|Loss before income   taxes                                           |  |      | (390,686  | )    |  
|Provision for income tax                                             |  |      |          |      |  
|                                                                     |  |      |           |      |  
|Net loss                                                             |  | $    | (390,686  | )    | $
|                                                                     |  |      |           |      |  
|Basic and diluted net loss per share                                 |  | $    | (0.09     | )    | $
|                                                                     |  |      |           |      |  
|Shares used in calculation of basic and diluted net   loss per share |  |      | 4,183,580 |      |  
|                                                                     |  |      |           |      |  

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

3



TIMELINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended June 30, 2004 and 2003 (unaudited)

|                                                           |  | 2004 |          | 2003 |  
|---------------------------------------------------------- |  | ---- | -------- | ---- | -
|                                                           |  |      |          |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |      |          |      |  
|Net cash used in   operating activities                    |  | $    | (321,778 | )    | $
|                                                           |  |      |          |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                      |  |      |          |      |  
|Purchase of property   and equipment                       |  |      | (5,087   | )    |  
|Capitalized patent   acquisition costs                     |  |      | (3,884   | )    |  
|                                                           |  |      |          |      |  
|Net cash used in   investing activities                    |  |      | (8,971   | )    |  
|                                                           |  |      |          |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                      |  |      |          |      |  
|Warrants issued to   Fidelity National Information Systems |  |      |         |      |  
|                                                           |  |      |          |      |  
|Net cash provided by   financing activities                |  |      |         |      |  
|                                                           |  |      |          |      |  
|EFFECT OF FOREIGN EXCHANGE RATE FLUCTUATIONS               |  |      | (329     | )    |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                    |  |      | (331,078 | )    |  
|CASH AND CASH EQUIVALENTS, beginning of period             |  |      | 511,483  |      |  
|                                                           |  |      |          |      |  
|CASH AND CASH EQUIVALENTS, end of period                   |  | $    | 180,405  |      | $
|                                                           |  |      |          |      |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          |  |      |          |      |  
|Cash paid for interest                                     |  | $    | 352      |      | $

The accompanying notes are an integral part of these financial statements

4



TIMELINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 the United Kingdom, develops, markets and supports enterprise-wide financial management, budgeting and reporting software and event-based notification, application integration and process automation systems.  Timelines software products are designed to automatically access and distribute business information with full accounting control.

Operations

The Company has historically suffered recurring operating losses and negative cash flows from operations.  As of June 30, 2004, the Company had negative net working capital of approximately $230,000 and had an accumulated deficit of approximately $10,358,000 with total stockholders equity of approximately $165,000.  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 and cash equivalent balances, and any net cash provided by operations, may 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 condensed consolidated financial statements of the Company are unaudited.  In the opinion of the Companys management, the financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information set forth in this Report in conformity with accounting principles generally accepted in the United States of America.  Results of operations for the three-month period ended June 30, 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.

Marketable Securities

In December 2000, the Company settled a patent infringement lawsuit filed against Sagent Technology, Inc. (Sagent).  As part of the settlement, the Company licensed certain patented technology to Sagent in exchange for $600,000 and 600,000 shares of Sagent common stock with a fair market value of $1,425,000 at the date of the settlement.

The Company has accounted for these shares as available for sale securities as required under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments:  Debt and Equity Securities (SFAS No. 115).  Accordingly, these securities are stated at fair market value, based on quoted market prices, with unrealized gains and losses excluded from results of operations and reported as a component of accumulated other comprehensive loss on the Companys balance sheet.  Realized gains and losses on sales of these securities are determined on the specific identification method and included in results of operations.  During fiscal 2003, the Company sold 52,300 of the Sagent shares resulting in realized losses of $6,040.  As of March 31, 2003, unrealized losses excluded from results of operations and reported as a component of accumulated other comprehensive loss were $7,540.  The Company accumulated
$2,334 of additional unrealized holding losses during fiscal 2004.  During the fourth quarter of fiscal 2004, the Company determined, subsequent to the distribution discussed below, that the securities no longer had any value to the Company and all unrealized losses on securities were eliminated and recorded as a component of realized loss on an impairment of marketable securities  held for sale in the consolidated statement of operations.

In fiscal 2003, the Company determined that declines in the fair value of the securities from a new accounting basis as established in fiscal 2002 were other than temporary.  Accordingly, the Company recorded a loss on the impairment of the available for sale securities of $123,204 in the second fiscal quarter of 2003, and established another new accounting basis.

6



The Company subsequently determined in fiscal 2004, upon announcement of Sagents liquidation, that further declines in the fair value of the securities from such new accounting basis as established in the second fiscal quarter of 2003 were other than temporary.  Accordingly, the Company recorded a loss on the impairment of available for sale securities of $11,834 in the fourth quarter of fiscal 2004.

The Company received notification of a distribution of $15,080 for its remaining shares held as of the record date of March 31, 2004, which distribution was received subsequent to year-end.  The Company recorded this distribution receivable in prepaid expenses and other current assets in the consolidated balance sheet.

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.

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.

7



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

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

In all other cases, the Company recognizes revenue when delivery to the end user has occurred and the amount due from the reseller is fixed and determinable.  Most resellers are required to contact Timeline directly to request Timeline provide a key to the resellers customer that allows the software to operate.  In those situations, Timeline invoices the reseller at the time the key is released to the customer indicating the software has been loaded on a unique customer machine.  Some resellers have the right to distribute keys to their own customers, in which case the reseller distributes a copy of the software and then provides a key to the end user.  The reseller is contractually required to have a binding license or purchase order in place with the end user before the end user is allowed to physically load the Timeline software on a unique machine.  These distributors report to Timeline on a monthly or
quarterly basis the number and dollar amount of licenses they have distributed in the prior period; i.e. the keys utilized.  Based upon that report, Timeline then invoices the reseller.  Timeline records revenue at the time of invoice for the period covered.  There are no return rights offered to either the reseller or the end user.

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

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

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

8



Net Loss per Common Share

Basic and diluted net loss per share is the net loss divided by the weighted average number of shares outstanding during the period. The effect of including outstanding options and warrants is anti-dilutive for all periods presented. 
Shares issuable pursuant to stock options and warrants that have not been included in the calculation of net loss per share because they are antidilutive totaled 594,000 and 679,175 for the three-month periods ended June 30, 2004 and 2003, respectively.

Concentration of Credit Risk

The Company maintains the majority of its cash in one commercial account at a major financial institution.  Although the financial institution is considered creditworthy and has not experienced any losses on its deposits, at June 30, 2004, the Companys cash balance in this account exceeded Federal Deposit Insurance Corporation (FDIC) limits by approximately $45,000.

Comprehensive Loss

Comprehensive loss for the three months ended June 30, 2004 and 2003 was as follows:

|                                                                    |  | June 30,   2004 |          | June 30,   2003 |  
|------------------------------------------------------------------- |  | --------------- | -------- | --------------- | -
|                                                                    |  |                 |          |                 |  
|Foreign currency translation gain (loss)                            |  | $               | 4,238    |                 | $
|Change in unrealized gain (loss) on available for   sale securities |  |                 |         |                 |  
|Net loss                                                            |  |                 | (390,686 | )               |  
|                                                                    |  |                 |          |                 |  
|Total comprehensive loss                                            |  | $               | (386,448 | )               | $
|                                                                    |  |                 |          |                 |  

Accumulated other comprehensive loss consisted of a foreign currency translation adjustments of $(93,197) and $(97,433) at June 30, 2004 and March 31, 2004, respectively.

Stock-Based Compensation

The Company applies the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, and interpretation of APB Opinion No. 25 (FIN No. 44), to account for its fixed plan stock options.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.  Compensation costs for fixed awards with pro rata vesting are recognized using the straight-line method.  SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123), established accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans.  As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123.  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-month period ended June 30, 2004 and 2003, respectively:

9



|                                                                                                                 |  | Three   months ended |          
|---------------------------------------------------------------------------------------------------------------- |  | -------------------- | ---------
|                                                                                                                 |  |                      |          
|                                                                                                                 |  | June 30,   2004      |          
|                                                                                                                 |  |                      |          
|Net loss, as reported                                                                                            |  | $                    | (390,686 
|Add stock-based employee compensation expense   included in reported net loss                                    |  |                      |         
|Deduct total stock-based employee compensation   expense determined under fair-value-based method for all awards |  |                      |         
|                                                                                                                 |  |                      |          
|Pro forma net loss                                                                                               |  | $                    | (390,686 
|                                                                                                                 |  |                      |          
|Shares used in the calculation of basic and diluted   net Loss per share:                                        |  |                      | 4,184,580
|                                                                                                                 |  |                      |          
|Basic and diluted net loss per share  as reported:                                                              |  | $                    | (0.09    
|                                                                                                                 |  |                      |          
|Basic and diluted net loss per share  pro forma:                                                                |  | $                    | (0.09    
|                                                                                                                 |  |                      |          

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 recognized in the first quarter of fiscal 2004.

Intangible Assets and Goodwill

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

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, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets  (SFAS No. 144).

10



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 June 30, 2004 and March 31, 2004 are as follows:

|                                 |  | June 30,   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   |                  | $
|                                 |  |                 |           |                  |  

Each class of intangible assets subject to amortization has a weighted average amortization period of three years.

Amortization of intangible assets was $-0- and $83,539, in the quarters ended June 30, 2004 and June 30, 2003, respectively.  As of June 30, 2004, the Company had fully amortized certain intangible assets including general intangibles, acquired and capitalized software.

Impairment of Long-lived Assets

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

11



3.     MAJOR CUSTOMERS

During the quarter ended June 30, 2004, one customer comprised approximately 14% of the Companys total revenue.  During the quarter ended June 30, 2003, one customer comprised
approximately 12% of the Companys total revenue and another customer comprised 10% of the Companys total revenue. At June 30, 2004, no customer comprised more than 10% of the Companys accounts 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.     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 herein and in the Companys annual financial statements for the year ended March 31, 2004.  During the three months ended June 30, 2004 and 2003, the Timeline segment included intersegment revenues and the Analyst Financials segment included intersegment
expenses that totaled $119,626 and $120,643, 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 months ended June 30, 2004 and June 30, 2003:

|                                |  | Three   Months Ended 6/30/04 |         
|------------------------------- |  | ---------------------------- | --------
|                                |  |                              |         
|                                |  | Timeline                     |         
|                                |  |                              |         
|Revenues                        |  | $                            | 487,743 
|Operating loss                  |  | $                            | (324,142
|Depreciation and   amortization |  | $                            | 7,530   
|Long lived assets               |  | $                            | 310,146 
|Total assets                    |  | $                            | 770,597 

|                                |  | Three   Months Ended 6/30/03 |         
|------------------------------- |  | ---------------------------- | --------
|                                |  |                              |         
|                                |  | Timeline                     |         
|                                |  |                              |         
|Revenues                        |  | $                            | 632,850 
|Operating loss                  |  | $                            | (305,371
|Depreciation and   amortization |  | $                            | 15,677  
|Long lived assets               |  | $                            | 429,376 
|Total assets                    |  | $                            | 863,603 

5.     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.

12



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.

6.     LITIGATION

On September 17, 2003, the Company filed an action in the Federal District Court for the Western District of Washington against Cognos Inc. and its U.S. subsidiary, Cognos Corporation, alleging patent infringement in the United States.  On February 12, 2004, the Company entered into a settlement agreement with Cognos in which it granted to Cognos a license to its patented technology and Cognos agreed to pay a license fee of $1,750,000.  The total amount was recognized as patent license revenue in the quarter ended March 31, 2004 and is reflected in patent license revenue for the year-ended March 31, 2004.

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

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, estimate, 
judgment and variations of such words and similar expressions as they relate to the Company are intended to identify such forward-looking statements, but are not the exclusive means of identifying such statements.  Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements.  We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.  In addition, the disclosures under the caption Other Factors that May Affect Operating Results consist principally of a brief discussion of risks which may affect future results and are thus, in their entirety, forward-looking in nature.  To facilitate readers in identifying forward-looking statements in this Report, we have attempted to mark sentences containing such statements with a single asterisk and paragraphs containing only forward-looking statements with double
asterisks.  However, no assurance can be made all such statements have been identified and marked.Therefore, readers are urged to carefully review and consider the various disclosures made in this report and in our other reports previously filed with the Securities and Exchange Commission (the SEC), including our periodic reports on Forms 10-KSB and 10-QSB,
and those described from time to time in our press releases and other communications, which attempt to advise interested parties of the risks and factors that may affect the Companys business.

13



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.

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.*

14



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.  At March 31, 2002, we accrued an additional allowance of $58,000 due to a disputed account with one of our resellers.  This account was paid in part during fiscal 2003, and the remaining balance was written
off.  In fiscal 2004, no bad debt expense was recorded against our bad debt reserves.  Additionally, if we underestimated the collectibility of our accounts receivable, it would have a negative impact on our reported net receivables, net loss and our cash flow.*

Capitalized Patents

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

15



Impairment of Long-Lived Assets

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

RESULTS OF OPERATIONS

Our consolidated financial statements for the first quarter 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 $391,000 for the first quarter of fiscal 2005 and have incurred recurring net losses from operations over the past several fiscal years.  As of June 30, 2004, we had negative net working capital of approximately $230,000.  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, may 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 June 30, |     |      |  
|---------------------- |  | ----------------------------- | --- | ---- | -
|                       |  |                               |     |      |  
|(Dollars in Thousands) |  | 2004                          |     | 2003 |  
|                       |  |                               |     |      |  
|Software license       |  | $                             | 264 |      | $
|Patent licenses        |  |                               |    |      |  
|Maintenance            |  |                               | 331 |      |  
|Consulting and other   |  |                               | 123 |      |  
|                       |  |                               |     |      |  
|Total Revenues         |  | $                             | 718 |      | $
|                       |  |                               |     |      |  

For the quarter ended June 30, 2004, our total operating revenues were $718,000 compared to $942,000 for the quarter ended June 30, 2003, representing a decrease of 24%.  The decrease in total operating revenues is primarily attributable to declines in revenue from software licenses and consulting services, partially offset by an increase in revenue from maintenance services.

The decrease in software license revenue occurred in both Europe and North America.   In Europe, our largest reseller channel for new licenses revenue for the quarters ended June 30, 2004 and June 30, 2003 was Sage Enterprise resellers.  During fiscal 2004, Sage introduced its own product to compete with our Analyst Financials products and several of our mutual resellers elected initially to sell the Sage product.  New Licenses and consulting from this channel remain at a level approximately 30% below year ago levels.  A number of these resellers, having now worked with clients using each product, appear to be reverting to Analyst Financials products as their preferred solution.

16



Nevertheless, the experience is illustrative of the dramatic swings in license revenue we can experience depending on the changing focus of our major channels.  Our software license revenue in Europe was also adversely affected by a decline in software license revenue from Analyst Financials new licenses with GEAC and Navision Systems.  Both GEAC and Navision Systems were acquired or combined with software vendors whose products are competitive with the products of Analyst Financials.  As a result of these acquisitions and combinations, we anticipate that software license revenue from GEAC and Navision Systems will continue to be minimal in future quarters.*

North American software license revenue decreased in roughly the same proportion as in Europe.  However, the overall activity through existing North American channels was not markedly different between the comparable quarters.  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.

While we were successful in signing new reseller relationships during fiscal 2004, in the current economic uncertainty, particularly in the United States, it is impossible to predict if our distribution channels will be able to generate any increase in software licenses or revenues during fiscal 2005 over fiscal 2004.*

We did not receive any revenues from patent licenses during the first quarters of fiscal 2005 or fiscal 2004.  Patent license revenue is very sporadic.  The timing of fees usually corresponds to the settlement of litigation and, therefore is unpredictable.  While we intend to continue to pursue additional patent license agreements during fiscal 2005, we cannot predict the outcome of ongoing and future negotiations and there are no assurances that we will be successful in entering into additional patent licenses, or the timing or amount of any such licenses.*

Maintenance revenue increased 13% to $331,000 for the first quarter of fiscal 2005 as compared to $292,000 for the first quarter of fiscal 2004.   The increase in maintenance revenue is primarily due to fees from new customers who have installed and are using our software.  Our software maintenance service is provided either directly to end users of our products (first tier maintenance) or to third party resellers (second tier maintenance). In first tier maintenance, we provide telephonic response and diagnosis to end users where in second tier maintenance this function is provided to end-users by the reseller.  We provide software patches, updates and technical diagnostics under either approach.  Both first and second-tier maintenance is typically provided under annually renewable agreements.  We receive a smaller portion of the annual support fees for second tier support than we do for first tier support.  Most of our customers
sign maintenance agreements and renew them on an annual basis until such time as they no longer use our software products.  Future fiscal 2005 quarters may show mixed results depending upon the commencement of new maintenance agreements and the expiration of existing maintenance agreements.*

The decrease in consulting revenue in comparable quarters ending June 30, 2004 and June 30, 2003 also affected both Europe and North America.  Consulting revenue tends to be directly affected by the level of new license revenue, and it is not unusual to see consulting revenue decrease during periods when new license revenue is similarly affected.  Furthermore, as the number of resellers and their experience level with our products increase over time, we believe that a higher percentage of the consulting services associated with use of our software will be provided by the reseller community 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 June 30, |    |      |   |       
|--------------------------------- |  | ----------------------------- | -- | ---- | - | ------
|(Dollars in Thousands)            |  | 2004                          |    | 2003 |   | Change
|                                  |  |                               |    |      |   |       
|                                  |  |                               |    |      |   |       
|Software license                  |  | $                             |   |      | $ | 70    
|Patent licenses                   |  |                               | 5  |      |   | 4     
|Maintenance, consulting and other |  |                               | 84 |      |   | 107   
|                                  |  |                               |    |      |   |       
|Total Cost of Revenues            |  | $                             | 89 |      | $ | 181   
|Percentage of revenues            |  |                               | 12 | %    |   | 19    

Cost of revenues for the first quarter of fiscal 2005 decreased by 51% from the comparable period in fiscal 2004.  Cost as a percentage of revenue for the first quarter of fiscal 2005 also decreased by 7% from the comparable period in fiscal 2004.  Both statistics were most dramatically impacted by the reduction of amortization for capitalized and acquired software development.  As of December 31, 2003, we had fully amortized all such costs for capitalized and acquired software, thereby reducing the amortization charge from $70,000 in the first quarter of fiscal 2004 to $0 in the first quarter of fiscal 2005.  Maintenance, consulting and other costs decreased by 21% between the comparable quarters as a result of a reduction in travel expense and commissions earned by our consulting staff during the quarter ended June 30, 2004.

Gross Profit

|                       |  | Three   Months Ended June 30, |     |      |   |       
|---------------------- |  | ----------------------------- | --- | ---- | - | ------
|(Dollars in Thousands) |  | 2004                          |     | 2003 |   | Change
|                       |  |                               |     |      |   |       
|Gross profit           |  | $                             | 630 |      | $ | 761   
|Percentage of revenues |  |                               | 88  | %    |   | 81    

Gross profit for the first quarter of fiscal 2005 decreased by 17% from the comparable period in fiscal 2004.  The decrease in gross profit is primarily attributable to lower software license and consulting revenue during the first quarter of fiscal 2005.  Gross margins increased 7% during the comparable periods.  The improvement in gross margin is primarily attributable to the elimination of amortization expense for capitalized and acquired software for the first quarter of fiscal 2005, compared to $70,000 of amortization expense in the first quarter of fiscal 2004.  As of December 31, 2003, the cost of all capitalized and acquired software had been fully amortized.  Margins are also affected by the volume of business as recorded in total revenue, and the mix among various revenue bearing activities, and our ability to control costs associated with the generation of those activities.

Sales and Marketing Expense

|                       |  | Three   Months Ended June 30, |     |      |   |       
|---------------------- |  | ----------------------------- | --- | ---- | - | ------
|(Dollars in Thousands) |  | 2004                          |     | 2003 |   | Change
|                       |  |                               |     |      |   |       
|Sales and marketing    |  | $                             | 323 |      | $ | 275   
|Percentage of revenues |  |                               | 45  | %    |   | 29    

18



Sales and marketing expenses increased by 17% between the quarters ended June 30, 2004 and June 30, 2003.  Substantial increases occurred in two categories, salary expense and marketing.  Increased
salary for fiscal 2005 is due in large part to the addition of two new departmental employees in Analyst Financials between the comparable quarters.  Our increased marketing expense represent approximately $37,000 for a targeted advertising campaign in Europe during the first quarter of fiscal 2005.  Sales and marketing expense in the period ended June 30, 2003 included a large payment to a reseller of approximately $65,000.

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.  We have instituted a compensation plan for employees, as described in Liquidity and Capital Resources below, that may increase compensation costs.  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 June 30, |     |      |  |       
|------------------------ |  | ----------------------------- | --- | ---- |  | ------
|(Dollars in Thousands)   |  | 2004                          |     | 2003 |  | Change
|                         |  |                               |     |      |  |       
|Research and development |  |                               | 214 |      |  | 200   
|Percentage of revenues   |  |                               | 30  | %    |  | 21    

Research and development expenses increased during the first quarter of fiscal 2005 by 7% compared to the first quarter of fiscal 2004.  We do not consider this $14,000 increase to be material and is mainly attributable to normal salary and insurance cost increases.

Research and development efforts and the associated expenses during both periods were primarily attributable to the enhancement of the functionality of the current product lines and to integration of our products with various accounting packages.  Additionally, during the June 30, 2004 quarter we began planning in earnest for our next version of software; having completed full commercial release in March 2004 of Version 2.9 of our Timeline Analyst suite of applications which incorporated Oracle and IBM RDBMS support.  We anticipate such efforts will continue throughout the remainder of the 2005 and 2006 fiscal years.*  However, we anticipate research and development head count quarter-to-quarter for the remainder of fiscal 2005 to remain relatively stable.*

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 fiscal quarter of 2005.

General and Administrative Expense

|                         |  | Three   Months Ended June 30, |     |      |  |       
|------------------------ |  | ----------------------------- | --- | ---- |  | ------
|(Dollars in Thousands)   |  | 2004                          |     | 2003 |  | Change
|                         |  |                               |     |      |  |       
|Research and development |  |                               | 214 |      |  | 200   
|Percentage of revenues   |  |                               | 30  | %    |  | 21    

General and administrative expenses decreased by 3% between the comparable quarters ended June 30, 2004 and 2003.  Substantial decreases in salaries, payroll taxes and rents, more than offset a substantial increase in auditing fees.  The decrease in salary related expenses occurred mainly in
Europe as a result of one employee transferring from Administration to Consulting.  Audit fees increased due to additional audit responsibilities to meet regulatory requirements.

19



We expect general and administrative expenses to remain relatively steady throughout the remainder of fiscal 2005.  We continue to take steps to reduce our costs of operations, including renegotiating the terms of some vendor contracts.  Additionally, on June 30, 2004, we hired Williams & Webster, P.S. to serve as our independent auditors for fiscal 2005 and as a result we anticipate that our auditing fees will be lower for fiscal 2005.  However, we have instituted a compensation plan for employees, as described in Liquidity and Capital Resources below, that may increase compensation costs.

Patents Expense

|                       |  | Three   Months Ended June 30, |    |      |   |       
|---------------------- |  | ----------------------------- | -- | ---- | - | ------
|(Dollars in Thousands) |  | 2004                          |    | 2003 |   | Change
|                       |  |                               |    |      |   |       
|Patent                 |  | $                             | 23 |      | $ | 20    
|Percentage of revenues |  |                               | 3  | %    |   | 2     

Patent expenses include the costs of litigation and negotiations with respect to patent licenses.  Patent expenses for the quarter ended June 30, 2004 were not significantly different than those incurred in the quarter ended June 30, 2003.  These expenses can vary dramatically quarter-to-quarter depending upon the level of activity required from legal counsel and experts.  No patent litigation was pending during either the first quarter of fiscal 2005 or fiscal 2004; however, 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 patent on automation of data mart design.  We anticipate undertaking new litigation during fiscal 2005 to protect our patent
rights.*  Consequently, we expect significant swings in patent costs will result.*

Depreciation and Amortization

Depreciation expense decreased in the quarter ended June 30, 2004 to $8,000 from $17,000 in the quarter ended June 30, 2003.  Amortization of intangible assets due primarily to the acquisitions of Analyst Financials and WorkWise decreased from $84,000 to $0 during the same period due to the fact all intangible assets other than patents and goodwill have been fully amortized.

Other Income and Expense

Other income and expense generated a loss of $8,000 in the first fiscal quarter of 2005 compared to income of $24,000 in fiscal 2004.  In both quarters the major component of income and expense was from foreign currency exchange fluctuations, with some impact from interest expense and interest income.

20



Income Tax

No income tax expense was recorded in the first quarter of either fiscal 2005 or fiscal 2004.  All income or loss is offset by appropriate adjustments to the valuation allowance of the Companys net operating loss carry-forwards.

LIQUIDITY AND CAPITAL RESOURCES

We have historically suffered recurring operating losses and negative cash flows from operations.  As of June 30, 2004, we had negative net working capital of approximately $230,000 (positive working capital position of approximately $406,000 when excluding deferred revenue).  Additionally, as of June 30, 2004, our cash and cash equivalents were $180,000 compared to cash and cash equivalents of $511,000 as of March 31, 2004.

The decrease in our cash and cash equivalents is attributable to losses from operations during the first quarter of fiscal 2005.  These losses are primarily attributable to decreases in software and consulting revenue and increases in expenses related to sales and marketing, research and development and patents.

Accounts receivable were approximately $492,000 and $423,000 at June 30, 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.

Total liabilities, excluding deferred revenue, were approximately $413,000 at June 30, 2004 compared to approximately $344,000 at March 31, 2004.  The increase in total liabilities is primarily attributable to an increase in our accounts payable, which more than doubled in the first quarter of fiscal 2005.  Accounts payable increased because of normal variations in the timing of payments.

During the balance 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 may 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 fiscal quarter 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 of the Company if consulting and maintenance revenues and patent and software licenses do not increase quarter-to-quarter during fiscal 2005 and beyond.*  By taking this cautious approach combined with our current cash and cash equivalent balances, we believe we may 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.

21



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, 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.

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

22



(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.

PART II.  OTHER INFORMATION

Item 2.               Changes in Securities and Use of Proceeds

In March 2004, two of our officers, Frederick W. Dean and Michael Evans each received a performance-based award of 6,250 shares of Timeline common stock, which were issued in May 2004.  These shares were issued without registration under the Securities Act of 1933, as amended, in reliance on the exemption provided by Section 4(2) of the Securities Act.

Item 6.               Exhibits and Reports on Form 8-K

(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.

(b)     Reports on Form 8-K:

A report on Form 8-K was filed on May 27, 2004, reporting that a news release was issued on May 26, 2004 announcing our financial results for the 2004 fiscal year and fourth quarter ended March 31, 2004.

A report on Form 8-K was filed on July 8, 2004, as amended on July 16 and August 3, 2004, reporting our decision to engage Williams & Webster, P.S. as our new independent auditors, replacing KPMG, LLP, for the fiscal year ending March 31, 2005.

23



SIGNATURE

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

|                         |     | TIMELINE, INC.                                                      
|------------------------ | --- | --------------------------------------------------------------------
|                         |     | (Registrant)                                                        
|                         |     |                                                                     
|Date:  August   12, 2004 | By: | /s/ CHARLES R. OSENBAUGH                                            
|                         |     |                                                                     
|                         |     | Charles R.   Osenbaugh   President/Chief Financial Officer          
|                         |     |                                                                     
|                         |     | Signed on behalf of registrant and as principal   financial officer.

24