----

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, 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 September 30, 2005** | **Commission File Number    1-13524** |
|---------------------------------------------------------|--------------------------------------------|

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

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

**1700 Seventh Avenue, Ste. 2100 Seattle, WA  98101****(Address of principal executive offices)**

**(206) 357-8422****(Issuer’s telephone number)**

**3055 112th Avenue N.E., Suite 106 Bellevue, WA  98004****(Former Address, if Changed Since Last Report)**

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 |
|------------------|-----------------|

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

| Yes  o | No  x |
|------------------|-----------------|

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   October 30, 2005** |
|--------------------------------|--------|-----------------------------------------|
| Common Stock, $.01 Par   Value |   | 4,190,998                               |

----

**PART I - FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**TIMELINE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

|   |   | **As of   September 30,   2005**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **As of,   March 31,   2005** |   |
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        |                          |        |  |   |
|   |   | **(Unaudited)**
 

 

 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash   equivalents

 

$

790,628

 

$

121,390

 

Accounts receivable,   net of allowance for doubtful accounts of $3,665 and $3,136

 

 

78,975

 

 

281,690

 

Prepaid expenses and   other

 

 

53,795

 

 

18,285

 

 

 

 

 

Total current assets

 

 

923,398

 

 

421,365

 

Property and equipment, net of accumulated   depreciation of $76,909 and $447,495

 

 

3,143

 

 

3,882

 

Capitalized patents, net of accumulated amortization   of $95,238 and $82,786

 

 

272,694

 

 

265,911

 

Long term notes receivable

 

 

1,008,252

 

 

—  

 

Other assets

 

 

2,450

 

 

—  

 

Assets of discontinued operations

 

 

—  

 

 

558,234

 

 

 

 

 

Total assets

 

$

2,209,937

 

$

1,249,392

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

18,340

 

$

56,865

 

Accrued expenses

 

 

48,341

 

 

129,340

 

Notes payable

 

 

72,785

 

 

61,327

 

Deferred revenue

 

 

470,000

 

 

—  

 

 

 

 

 

Total current   liabilities

 

 

609,466

 

 

247,532

 

 

 

 

 

Liabilities of   discontinued operations

 

 

—  

 

 

943,341

 

 

 

 

 

Total Liabilities

 

 

609,466

 

 

1,190,873

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock, $.01 par   value, 20,000,000 shares authorized, 4,198,998 and 4,198,998 shares issued   and outstanding

 

 

41,910

 

 

41,910

 

Additional paid-in   capital

 

 

10,578,447

 

 

10,578,447

 

Accumulated other comprehensive loss

 

 

—  

 

 

(119,252

)

Accumulated deficit

 

 

(9,019,886

)

 

(10,442,586

)

 

 

 

 

Total shareholders’   equity

 

 

1,600,471

 

 

58,519

 

 

 

 

 

Total liabilities and   shareholders’ equity

 

$

2,209,937

 

$

1,249,392

 

 

 

 

 

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

2

**TIMELINE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the Three Months and Six Months Ended September 30, 2005 and 2004****(unaudited)**

 

 

**Three   Months Ended   September 30,**

 

**Six Months   Ended   September 30,**

 

 

 

 

 

 

 

**2005**

 

**2004**

 

**2005**

 

**2004**

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Patent license

 

$

272

 

$

—  

 

$

362

 

$

3,092

 

Warranty and other

 

 

10,621

 

 

—  

 

 

10,621

 

 

—  

 

 

 

 

 

 

 

Total revenues

 

 

10,893

 

 

—  

 

 

10,983

 

 

3,092

 

 

 

 

 

 

 

COST OF REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Patent license

 

 

6,268

 

 

5,487

 

 

12,452

 

 

10,890

 

 

 

 

 

 

 

Total cost of revenues

 

 

6,268

 

 

5,487

 

 

12,452

 

 

10,890

 

 

 

 

 

 

 

Gross profit (loss)

 

 

4,625

 

 

(5,487

)

 

(1,469

)

 

(7,798

)

 

 

 

 

 

 

OPERATING EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

General and   administrative

 

 

145,692

 

 

109,392

 

 

287,448

 

 

280,030

 

Patents

 

 

39,745

 

 

33,503

 

 

72,213

 

 

75,020

 

Depreciation

 

 

369

 

 

547

 

 

738

 

 

1,093

 

 

 

 

 

 

 

Total operating   expenses

 

 

185,806

 

 

143,442

 

 

360,399

 

 

356,143

 

 

 

 

 

 

 

Loss from operations

 

 

(181,181

)

 

(148,929

)

 

(361,868

)

 

(363,941

)

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income   (expense) and other

 

 

13,658

 

 

(4,609

)

 

11,061

 

 

(4,708

)

Gain on stock sale

 

 

1,287,132

 

 

—  

 

 

1,287,132

 

 

—  

 

Gain on asset sale

 

 

594,925

 

 

—  

 

 

594,925

 

 

—  

 

 

 

 

 

 

 

Total other income   (expense)

 

 

1,895,715

 

 

(4,609

)

 

1,893,118

 

 

(4,708

)

 

 

 

 

 

 

Income (loss) from   continuing operations before income taxes

 

 

1,714,534

 

 

(153,538

)

 

1,531,250

 

 

(368,649

)

Provision for income   tax

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

(Loss) income from   discontinued operations, net of income tax

 

 

(57,181

)

 

16,394

 

 

(108,551

)

 

(159,181

)

 

 

 

 

 

 

Net income (loss)

 

$

1,657,353

 

$

(137,144

)

$

1,422,699

 

$

(527,830

)

 

 

 

 

 

 

Basic net income (loss) per common and common   equivalent share

 

$

0.40

 

$

(0.03

)

$

0.34

 

$

(0.13

)

 

 

 

 

 

 

Shares used in calculation of basic net income   (loss) per share

 

 

4,190,998

 

 

4,190,998

 

 

4,190,998

 

 

4,190,998

 

 

 

 

 

 

 

Diluted net income (loss) per common and common   equivalent share

 

$

0.40

 

$

(0.03

)

$

0.34

 

$

(0.13

)

 

 

 

 

 

 

Shares used in calculation of diluted net income   (loss) per share

 

 

4,190,998

 

 

4,190,998

 

 

4,190,998

 

 

4,190,998

 

 

 

 

 

 

 

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

3

**TIMELINE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended September 30, 2005 and 2004****(unaudited)**

 

 

**2005**

 

**2004**

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net cash provided by   (used in) operating activities

 

$

1,739,098

 

$

(295,090

)

CASH FLOWS FROM DISCONTINUED OPERATIONS

 

 

 

 

 

 

 

Net cash used in   discontinued operations

 

 

(108,550

)

 

(159,181

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capitalized patent   acquisition costs

 

 

(19,235

)

 

(17,672

)

Line of credit   borrowings

 

 

—  

 

 

40,250

 

Line of credit   repayments

 

 

(61,327

)

 

(3,840

)

Notes receivable

 

 

(1,000,000

)

 

—  

 

 

 

 

 

Net cash (used in) from   investing activities

 

 

(1,080,562

)

 

18,738

 

 

 

 

 

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

 

 

119,252

 

 

8,807

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

669,238

 

 

(422,001

)

CASH AND CASH EQUIVALENTS, beginning of period

 

 

121,390

 

 

465,561

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 

$

790,628

 

$

43,560

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,129

 

$

724

 

The accompanying notes are an integral part of these financial statements

4

**TIMELINE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2005**

**1.   THE COMPANY**

Organization

The accompanying consolidated financial statements are for Timeline, Inc. and subsidiaries (the Company).  The Company, headquartered in Seattle, Washington, licenses intellectual property protected by patents granted by the U.S. Patent and Trademark Office and six other countries.  Prior to August 31, 2005, the Company also developed, marketed and supported enterprise-wide financial management, budgeting and reporting software and event-based notification, application integration and process automation systems, and prior to July 20, 2005, had operations in the United Kingdom.

Operations

The Company has historically suffered recurring operating losses and negative cash flows from operations.  As of September 30, 2005, the Company had net working capital of approximately $314,000 and had an accumulated deficit of approximately $9,020,000 with total negative shareholders’ equity of approximately $1,600,000.  These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, assuming that the Company will continue as a going concern.  Our auditors for fiscal year ended March 31, 2005, added an explanatory paragraph to their opinion on our fiscal 2005 financial statements stating that there was substantial doubt about our ability to continue as a going concern.

On July 20, 2005, the Company entered into an Asset Purchase Agreement with Global Software, Inc. (“Global”) for the sale to Global of all of its software licensing operations.  (A copy of the Asset Purchase Agreement was filed as an exhibit to a Current Report on Form 8-K, as filed with the SEC on July 25, 2005.)  Under the terms of the Asset Purchase Agreement, the sale of the Company’s software business occurred in two stages, consisting of (1) the sale of 100% of stock in its U.K. subsidiary, Analyst Financials Limited, and certain other assets and customer contracts (the “Stock Sale”), and (2) the sale of its other software assets (the “Asset Sale”), in each case in exchange for cash, promissory notes, and assumption of certain liabilities.  The Stock Sale was consummated on July 20, 2005.  The Asset Sale was approved by the Company’s shareholders at its annual meeting on August 30,2005, and was consummated on August 31, 2005.  The Company retains such assets as required to continue its patent licensing operations.  The Stock Sale and the Asset Sale are reported in the Company’s financial statements in the current period.  Operations of the software business conducted by the Company and its subsidiaries during the periods covered in these financial statements are shown as discontinued operations.

The Company continues in the business of licensing its intellectual property which consists of a portfolio of patents granted in seven different countries.  This line of business has previously generated approximately $14 million in total patent license fees since March 1998.  However, patent licensing tends to be very litigious in nature and, as such, revenue generation has been sporadic.   

5

With the net proceeds the Company received from the Stock Sale on July 20, 2005 and the Asset Sale on August 31, 2005, management believes that current cash and cash equivalent balances, and any net cash provided by continuing operations, will provide adequate resources to fund operations through March 31, 2006.  

**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, including those described in Note 6 to reflect the discontinued line of business, 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 six-month period ended September 30, 2005 are not indicative of future financial results due to the change in business operations as explained above.

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

**Use of Estimates**

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses.  Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements.  Accordingly, upon settlement, actual results may differ from estimated amounts.

**Basis of Presentation**

All subsidiaries of the Company are wholly-owned.  The Company’s subsidiaries did not generate any revenue or expense for the period reflected in the accompanying consolidated financial statements.

**Revenue Recognition**

The Company recognizes revenue generated from the licensing of patents 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).  

For all licenses, the Company uses a signed agreement as evidence of an arrangement.  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, 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 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.

**Net Income (Loss) per Common Share**

Basic and diluted net income (loss) per share is the net income or 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 518,500 and 596,500 for the three-month periods ended September 30, 2005 and 2004, respectively.  

**Stock-Based Compensation**

The Company applies the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, and interpretation of APB Opinion No. 25” (FIN No. 44), to account for its fixed plan stock options.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.  Compensation costs for fixed awards with pro rata vesting are recognized using the straight-line method.  SFAS No. 123, “Accounting for Stock Based Compensation” (SFAS No. 123), established accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans.  As allowed by SFAS No. 123, the Company has elected tocontinue 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 income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each of the three- and six-month periods ended September 30, 2004 and 2005, respectively:

 

 

**Three   Months Ended**

 

**Six Months   Ended**

 

 

 

 

 

 

 

**Sept. 30,   2005**

 

**Sept. 30,   2004**

 

**Sept. 30,   2005**

 

**Sept. 30,   2004**

 

 

 

 

 

 

 

Net income (loss), as   reported

 

$

1,657,353

 

$

(137,144

)

$

1,422,699

 

$

(527,830

)

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)

 

$

1,657,353

 

$

(137,144

)

$

1,422,699

 

$

(527,830

)

 

 

 

 

 

 

Shares used in basic and   diluted net income (loss) per share

 

 

4,190,998

 

 

4,190,998

 

 

4,190,998

 

 

4,190,998

 

 

 

 

 

 

 

Basic and diluted net   income (loss) per share as reported

 

$

0.40

 

$

(0.03

)

$

0.34

 

$

(0.13

)

 

 

 

 

 

 

7

In April 2003, in connection with a software license with Fidelity National Information Solutions (Nasdaq:FNIS), Timeline issued a warrant to FNIS to buy up to 100,000 shares of Timeline stock at $1.62 per share and, upon appropriate notice, to appoint either an observer or member to the Timeline Board of Directors.  The warrants were fully vested upon issuance.  The fair value of each warrant was established on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: zero dividend yield; expected volatility of 91%; risk-free interest rate of 2.78%, and a contractual life of 4 years.  These warrants expire if not exercised by April 2007.  The aggregate fair value of these warrants was approximately $84,000 and was recognized as a reduction to license revenue recognized in the first quarter of fiscal 2004.

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

**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. 

**3.   LINE OF CREDIT**

On September 23, 2004, the Company entered into an Accounts Receivable Financing Agreement with Silicon Valley Bank.  Under the terms of the financing, the Company was able to borrow up to a maximum of $350,000, limited to 80% of its then qualified receivables.  Qualified receivables were generally trade receivables from U.S. customers not outstanding more than 90 days.  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.  At September 30, 2004, the amount outstanding on the facility was $36,410.  On June 2, 2005, the line of credit and security interest was terminated and paid in full, and no amounts were outstanding as of September 30, 2005.  

**4.   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

8

within the scope of FIN 45 except for standard indemnification and warranty provisions that are contained within many of its former customer software license and service agreements, and give rise only to the disclosure requirements prescribed by FIN 45.  In connection with Timeline’s sale of its software licensing business to Global Software, Timeline agreed in the Asset Purchase Agreement to indemnify Global for certain warranty claims that may be made under these customer software license and service agreements being sold to Global.  As of September 30, 2005, no such warranty or indemnification claims had been made against Timeline.

Indemnification and warranty provisions contained within the Company’s customer software 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.

**5.   LITIGATION**

In June 2005, the Company filed an action in the Federal District Court for the Western District of Washington against ProClarity Corporation alleging infringement of certain of its patents.  The Company intends to seek monetary damages and an injunction against ProClarity licensing certain of its products.  A trial date of September 1, 2006 has been set but is subject to change at the court’s discretion.

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.

**6.   RESTATEMENT TO REFLECT DISCONTINUED LINE OF BUSINESS**

During the quarter ended September 30, 2005, Timeline sold all of its software licensing operations to Global Software, Inc.  The Stock Sale closed on July 20, 2005, and the Asset Sale closed on August 31, 2005.  In conformity with generally accepted accounting principals, the Company has accounted for the disposition of its software operations as the disposition of a significant portion of its business.  

9

The assets and liabilities of the discontinued line of business were as follows:

 

 

**As of   September 30, 2005**

 

**As of   March 31, 2005**

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

—  

 

$

40,965

 

Accounts receivable – net

 

 

—  

 

 

361,634

 

Goodwill – net

 

 

—  

 

 

70,183

 

Other assets

 

 

—  

 

 

85,452

 

 

 

 

 

Total assets discontinued operations

 

 

—  

 

 

558,234

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Accounts payable

 

 

—  

 

 

262,016

 

Deferred revenue

 

 

—  

 

 

681,325

 

 

 

 

 

Total liabilities of discontinued operations

 

 

—  

 

 

943,341

 

 

 

 

 

Liabilities in excess of assets of discontinued   operations

 

$

—  

 

$

(385,107

)

 

 

 

 

Condensed results of the discontinued line of business were as follows: 

 

 

**Six months Ended** |