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

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File number 000-24547

Scientific Learning Corporation

(Exact name of registrant as specified in its charter)

Delaware	94-3234458
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

300 Frank H. Ogawa Plaza, Suite 600

Oakland, California 94612

(510) 444-3500

(Address of Registrant’s principal executive offices, including zip code, and

telephone number, including area code)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer   o   Accelerated filer    o  Non-accelerated filer   x

          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

          As of April 15, 2008, there were 17,395,274 shares of Common Stock outstanding.

SCIENTIFIC LEARNING CORPORATION

INDEX TO FORM 10-Q
FOR THE QUARTER ENDED March 31, 2008

		PAGE
PART 1. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Balance Sheets	3
	Condensed Statements of Operations	4
	Condensed Statements of Cash Flows	5
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4T.	Controls and Procedures	21
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	23
Item 6.	Exhibits	29
	Signature	30

Page 2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Scientific Learning Corporation
Condensed Balance Sheets
(In thousands)
Unaudited

	March 31, 2008			December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	4,672		$	21,179
Accounts receivable, net		4,742			6,155
Deferred income taxes		1,191			1,191
Prepaid expenses and other current assets		1,756			1,291
Total current assets		12,361			29,816
Property and equipment, net		1,741			1,742
Loan to JTT Holdings		—			1,000
Deferred acquisition costs		—			319
Goodwill		4,557			—
Other intangible assets, net		7,011			—
Other assets		939			926
Total assets	$	26,609		$	33,803
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	439		$	716
Accrued liabilities		4,239			3,859
Deferred revenue		15,322			17,379
Total current liabilities		20,000			21,954
Deferred revenue, long-term		4,443			5,576
Other liabilities		464			453
Total liabilities		24,907			27,983
Stockholders’ equity :
Common stock and addditional paid in capital		83,104			82,558
Accumulated deficit		(81,402	)		(76,738	)
Total stockholders’ equity:		1,702			5,820
Total liabilities and stockholders’ equity	$	26,609		$	33,803

See accompanying notes.

Page 3

Scientific Learning Corporation
Condensed Statements of Operations
(In thousands, except per share amounts)
Unaudited

	Three months ended March 31,
	2008			2007
Revenues:
Products	$	4,629		$	5,453
Service and support		4,456			3,359
Total revenues		9,085			8,812
Cost of revenues:
Cost of products		428			306
Cost of service and support		2,487			2,253
Total cost of revenues		2,915			2,559
Gross profit		6,170			6,253
Operating expenses:
Sales and marketing		6,936			6,406
Research and development		2,119			1,146
General and administrative		1,996			1,771
Total operating expenses		11,051			9,323
Operating loss		(4,881	)		(3,070	)
Other income from related party		67			78
Interest and other income, net		153			255
Net loss before income tax		(4,661	)		(2,737	)
Income tax expense (benefit)		3			(109	)
Net loss	$	(4,664	)	$	(2,628	)
Basic and diluted net loss per share:	$	(0.27	)	$	(0.15	)
Shares used in computing basic and diluted net loss per share		17,338			17,003

See accompanying notes.

Page 4

Scientific Learning Corporation
Condensed Statements of Cash Flows
(In thousands)
Unaudited

	Three months ended March 31,
	2008			2007
Operating Activities:
Net loss	$	(4,664	)	$	(2,628	)
Items to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		272			82
Stock based compensation		533			465
Changes in operating assets and liabilities:
Accounts receivable		1,681			2,392
Prepaid expenses and other current assets		(446	)		(315	)
Other assets		(13	)		8
Accounts payable		(531	)		39
Accrued liabilities		142			(1,399	)
Deferred revenue		(3,300	)		(2,974	)
Other liabilities		11			11
Net cash used in operating activities		(6,315	)		(4,319	)
Investing Activities:
Purchases of property and equipment, net		(86	)		(281	)
Purchase of Soliloquy		(10,119	)		—
Net cash used in investing activities		(10,205	)		(281	)
Financing Activities:
Proceeds from issuance of common stock, net		13			344
Net cash provided by financing activities		13			344
Decrease in cash and cash equivalents		(16,507	)		(4,256	)
Cash and cash equivalents at beginning of period		21,179			16,364
Cash and cash equivalents at end of period	$	4,672		$	12,108
Supplemental schedule of non cash investing activities:
Forgiveness of loan to JTT Holdings	$	1,000		$	—

See accompanying notes.

Page 5

Notes to Condensed Financial Statements

1. Summary of Significant Accounting Policies

Description of Business

Scientific Learning Corporation develops and distributes the Fast ForWord^® family of software. These patented products build learning capacity by rigorously and systematically applying neuroscience-based learning principles to improve the fundamental cognitive skills required to read and learn. On January 7, 2008, we completed the acquisition of substantially all of the assets of Soliloquy Learning, including the Reading Assistant™ product, for $10.7 million in cash. The Scientific Learning Reading Assistant combines advanced speech recognition technology with scientifically based intervention to help students strengthen reading fluency, vocabulary and comprehension to become proficient life-long readers. To facilitate the use of our products, we offer a variety of on-site and remote professional and technical services, as well as phone, email and web-based support. We sell primarily to K-12 schools in the United States through a direct sales force.

All of our activities are in one operating segment.

We were incorporated in 1995 in the State of California and were reincorporated in 1997 in the State of Delaware.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are material differences between these estimates and actual results, our financial statements could be affected.

Interim Financial Information

The interim financial information as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 is unaudited, and includes all normal recurring adjustments and an adjustment to account for the acquisition of Soliloquy Learning that we consider necessary for a fair presentation of our financial position at such date and our results of operations and cash flows for those periods.

These condensed financial statements and notes should be read in conjunction with our audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission.

Other Assets

Other assets consist of the following (in thousands):

	March 31, 2008		December 31, 2007
Long-term lease deposits	$	878	$	855
Other non current assets		61		71
	$	939	$	926

Page 6

Notes to Condensed Financial Statements

1. Summary of Significant Accounting Policies (continued)

Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution of securities by adding common stock equivalents (computed using the treasury stock method) to the weighted-average number of common shares outstanding during the period, if dilutive. Potentially dilutive securities of 937,179 and 1,124,190 have been excluded from the computation of diluted net loss per share in the three month periods ending March 31, 2008 and 2007, respectively, as their inclusion is antidilutive.

The following table sets forth the computation of net loss per share (in thousands, except per share data):

	Three Months Ended March 31,
	2008			2007
Net loss	$	(4,664	)	$	(2,628	)
Weighted average shares used in calculation of basic net loss per share		17,338			17,003
Effect of dilutive securities:
Employee stock options and awards		—			—
Weighted-average basic and diluted common shares		17,338			17,003
Net loss per common share - basic and diluted	$	(0.27	)	$	(0.15	)

Recent Accounting Pronouncements

Fair Value Measurements

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS 157 with respect to our financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

• Level 1 - Quoted prices in active markets for identical assets or liabilities.

• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Page 7

Notes to Condensed Financial Statements

1. Summary of Significant Accounting Policies (continued)

The adoption of this statement did not have a material impact on our results of operations and financial condition. Level 1 financial assets measured at fair value on a recurring basis consist of money market funds (cash equivalents) of approximately $4.3 million as of March 31, 2008. We have no Level 2 or Level 3 financial assets measured at fair value on a recurring basis as of March 31, 2008.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations” and Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51”. SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for us beginning in the first quarter of fiscal 2010. Early adoption is not permitted. We are currently evaluating the impact that SFAS 141R and SFAS 160 will have on our financial statements.

2. Soliloquy Acquisition

On December 18, 2007 we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with JTT Holdings Inc. d/b/a Soliloquy Learning (“JTT”), pursuant to which we agreed to acquire from JTT the Soliloquy Reading Assistant product line and substantially all of the other assets of the Soliloquy Learning business, based in Waltham, Massachusetts, for cash consideration. In addition, we assumed certain specified liabilities associated with the Soliloquy business pursuant to the Purchase Agreement. The acquisition was completed on January 7, 2008.

The results of operations of Soliloquy Learning were included in our financial statements beginning on the effective date of the acquisition, January 7, 2008.

Under the terms of the Purchase Agreement, we paid at closing $9.7 million and retained $1.0 million in satisfaction of outstanding indebtedness owed to us by JTT. Of the aggregate cash amount, approximately $1.1 million was withheld at the closing and placed into a third party escrow to secure JTT’s indemnification obligations to us under the Purchase Agreement. The acquisition has been accounted for under the purchase method of accounting.

The following table summarizes the components of the total preliminary purchase price (in thousands):

Cash paid	$	9,685
Loan provided		1,000
Direct transaction costs		676
Preliminary adjustments to working capital per purchase agreement		77
Total preliminary purchase price	$	11,438

In accordance with SFAS No. 141 “Business Combinations”, we allocated the preliminary purchase price of the acquisition to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of purchase price over those fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired is primarily determined using the income approach, which discounts expected future cash flows to present value using estimates and assumptions provided by management.

Included in the preliminary purchase price allocation is an accrual of $235,000 for costs relating to the involuntary termination of former Soliloquy employees. Of this amount, approximately $211,000 is unpaid at March 31, 2008 and expected to be paid out during the second quarter.

Page 8

Notes to Condensed Financial Statements

2. Soliloquy Acquisition (continued)

The total preliminary purchase price has been allocated as follows (in thousands):

Net current assets (liabilities):
Accounts receivable	$	268
Inventory and other current assets		19
Fixed assets		6
Accounts payable		(254	)
Accrued liabilities		(238	)
Deferred service and support revenue		(110	)
Total net current liabilities	($	309	)
Identifiable intangible assets:
Core technology	$	5,800
OEM contracts		560
Customer list		220
Non compete agreement		610
Total identifiable intangible assets		7,190
Total net assets		6,881
Goodwill		4,557
Total purchase price	$	11,438

Purchased identifiable intangible assets

Estimated useful lives for the intangible assets were based on historical experience with technology life cycles and our intended future use of the intangible assets. We are amortizing the intangible assets over an estimated useful life of three years for the customer list, five years for the OEM contracts and non compete agreement, and nine years for the core technologies, based on the present value of future estimated cash flows that will be generated by these assets.

The aggregate estimated annual intangible amortization expense is as follows (in thousands):

Fiscal year	Amortization
2008	$	766
2009		948
2010		1,057
2011		1,009
2012 and thereafter		3,411
	$	7,190

Pro forma results

The unaudited pro forma financial information below presents the combined results of operations of Scientific Learning and Soliloquy Learning for the first quarter of fiscal 2007 as if the acquisition had occurred on January 1, 2007. The information was derived from our unaudited condensed statement of operations for the three months ended March 31, 2007, and from the detailed data used to prepare the audited financial statements of Soliloquy Learning for the year ended December 31, 2007. The unaudited pro forma financial information is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company.

Page 9

Notes to Condensed Financial Statements

2. Soliloquy Acquisition (continued)

	Three Months Ended March 31, 2008			Unaudited Pro Forma Financial Information: Three Months Ended March 31, 2007
Total revenue	$	9,263		$	9,247
Net loss	$	(4,453	)	$	(3,384	)
Net loss per basic and diluted share	$	(0.26	)	$	(0.20	)

3. Stock-Based Compensation

Accounting for Stock-Based Compensation

We account for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123R”), which we adopted as of January 1, 2006, using the modified prospective method. We recognized stock-based compensation expense of $533,000 and $465,000 in the three months ended March 31, 2008 and 2007, respectively.

Valuation of Stock Option Awards

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. This model requires the input of subjective assumptions, including expected stock price volatility, the estimated life of each award and estimated pre-vesting forfeitures. The fair value of these stock options was estimated assuming no expected dividends and estimates of expected life, volatility and risk-free interest rate at the time of grant. Estimated volatility is based on the historical prices of our common stock over the expected life of each option. Expected life of the options is based on our history of option exercise and cancellation activity. The risk free interest rates used are based on the U.S. Treasury yield curve in effect at the time of grants for periods corresponding with the expected life of the options. We use historical data to estimate pre-vesting option forfeitures. We recognize compensation expense for the fair values of these awards, which typically have graded vesting, on a straight-line basis over the requisite service period of each of these awards.

Summary of Stock Options

There were no stock options granted in the three month periods ended March 31, 2008 or 2007.

The aggregate intrinsic value of options outstanding at March 31, 2008 was approximately $5.0 million and is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 1,847,506 shares that had exercise prices that were lower than the $4.70 market price of our common stock at March 31, 2008 (“in the money options”). The total intrinsic value of options exercised during the three months ended March 31, 2008 and 2007 was $7,000 and $141,000, respectively. The intrinsic value of options vested during the three months ended March 31, 2008 and 2007 was $209,000 and $392,000, respectively.

As of March 31, 2008, total unrecognized compensation cost related to stock options granted under our various plans was $877,000. We expect that cost to be recognized over a weighted-average period of 0.7 years.

Summary of Restricted Stock Units

We granted 258,400 and 195,000 restricted stock units during the three month periods ended March 31, 2008 and 2007, respectively.

Page 10

Notes to Condensed Financial Statements

3. Stock-Based Compensation (continued)

The fair value of restricted stock units was calculated based upon the fair market value of our stock at the date of grant, less an estimate of pre-vesting forfeitures. The weighted-average grant-date fair value of restricted stock units awarded during the three months ending March 31, 2008 and 2007 was $4.74 and $6.86, respectively.

Disclosures Pertaining to All Share-Based Compensation Plans

Cash received under all share-based payment arrangements for the three months ended March 31, 2008 and 2007 was $13,000 and $344,000, respectively, related to the exercise of stock options. Because of our net operating losses and related valuation allowance, we did not realize any tax benefits for the tax deductions from share-based payment arrangements during the three months ended March 31, 2008 or 2007.

4. Comprehensive Loss

We have no items of other comprehensive loss, and accordingly, the comprehensive loss is equal to the net loss for all periods presented.

5. Warranties; Indemnification

We generally provide a warranty that our software products substantially operate as described in the manuals and guides that accompany the software for a period of 90 days. The warranty does not apply in the event of misuse, accident, and certain other circumstances. To date, we have not incurred any material costs associated with these warranties and have no accrual for such items at March 31, 2008.

From time to time, we enter into contracts that require us, upon the occurrence of certain contingencies, to indemnify parties against third party claims. These contingent obligations primarily relate to (i) claims against our customers for violation of third party intellectual property rights caused by our products; (ii) claims resulting from personal injury or property damage resulting from our activities or products; (iii) claims by our office lessor arising out of our use of the premises; and (iv) agreements with our officers and directors under which we may be required to indemnify such persons for liabilities arising out of their activities on behalf of ourselves. Because the obligated amounts for these types of agreements usually are not explicitly stated, the overall maximum amount of these obligations cannot be reasonably estimated. No liabilities have been recorded for these obligations on our balance sheet as of March 31, 2008 or March 31, 2007.

6. Related Party Transaction

In September 2003 we entered into an agreement with Posit Science Corporation (“PSC”), formerly Neuroscience Solutions Corporation (“NSC”), to provide PSC with exclusive rights in the healthcare field to certain intellectual property owned or licensed by us, along with transfer of certain healthcare research projects. A co-founder, substantial shareholder, and member of our Board of Directors, is a co-founder, officer, director and substantial shareholder of PSC.

During the quarter ended March 31, 2008, we recorded $67,000 in royalties receivable from PSC. For the comparable period in 2007, we recorded $78,000 in royalties receivable. Amounts received to date and any future receipts are being reported as other income as we do not consider these royalties to be part of our recurring operations.

7. Bank Line of Credit

On June 5, 2007 we amended our existing revolving line of credit agreement with Comerica Bank. The maximum that can be borrowed under the agreement is $5.0 million. The line expires on December 2, 2008. Borrowing under the line of credit bears interest at a floating prime rate, or a fixed rate of LIBOR plus 2.5%. To secure the line we granted Comerica a security interest in all of our assets other than our intellectual property. We also agreed with Comerica that we will not grant a security interest in our intellectual property to any third party. Borrowings under the line are subject to reporting covenants requiring the provision of financial statements to Comerica, and a financial covenant

Page 11

Notes to Condensed Financial Statements

7. Bank Line of Credit (continued)

requiring us to maintain a minimum adjusted quick ratio of 1.5. If the adjusted quick ratio falls below 1.75, we are also required to maintain a minimum net worth of $1. The agreement includes a letter of credit sublimit not to exceed $1.0 million. At March 31, 2008, we have an outstanding letter of credit for $206,000. There were no borrowings outstanding on the line of credit at March 31, 2008 and we were in compliance with all related covenants.

8. Provision for Income Taxes

In the three months ending March 31, 2008, we recorded income tax expense of $3,000. For the three months ended March 31, 2007 we recorded an income tax benefit of $109,000. The tax expense for the three months ended March 31, 2008 consists of penalties and interest paid. The tax benefit for the three months ended March 31, 2007 principally consists of federal and state taxes currently payable offset by the utilization of net operating losses resulting in an effective tax rate of approximately 4%.

Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”) provides for the recognition of deferred tax assets if realization of such assets is more likely than not. During the fourth quarter of 2007, we recorded a $1.2 million reduction in the valuation allowance related to a portion of our deferred tax assets that will more likely than not be realized. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support further reversals of the valuation allowance. Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance.

Accounting for Uncertainty in Income Taxes

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There was not a material impact on our financial position and results of operations as a result of the adoption of the provisions of FIN 48. At March 31, 2008, we had a liability for unrecognized tax benefits of approximately $1.9 million (of which $24,000, if recognized, would affect our effective tax rate). We do not believe there will be any material changes in our unrecognized tax positions over the next twelve months.

Interest and penalty costs related to unrecognized tax benefits are classified as a component of “Income Tax Benefit” in the accompanying statement of operations and the corresponding liability in “Income Taxes Payable” or “Prepaid Income Taxes” in the accompanying balance sheet. We recognized $3,000 of interest and penalty expense related to unrecognized tax benefits for the three months ended March 31, 2008.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal income tax examination for calendar tax years ending 2005 through 2007. In December 2007we completed an audit from the I.R.S for our 2004 and earlier tax years. Additionally, we are subject to various state income tax examinations for the 1997 through 2007 calendar tax years.

9. Commitments and Contingencies

Litigation with Former Sales Representative

On January 23, 2008, Robert G. (Jerry) Smith, a former account manager in Florida, filed a complaint against us in US District Court for the Middle District of Florida. The lawsuit claims breach of contract for unpaid wages of approximately $423,000. Smith alleges that he is owed additional commission relating to a large sale transaction in the second quarter of 2007. We are in the early stages of this proceeding; discovery has not yet started.

Page 12

Notes to Condensed Financial Statements

9. Commitments and Contingencies (continued)

Litigation with School District Customer

On October 22, 2007, we were sued by the Christina School District (the “District”) in the US District Court for the District of Delaware. The District had previously been sued by investors who are the assignees of the lessor under a Master Lease Purchase Agreement (the “Lease Agreement”) entered into by the District in 2003. The District ceased making payments under the Lease Agreement and the investors have claimed that the District breached the Lease Agreement. The District filed a third party complaint against us, claiming that we must refund amounts paid to us by the District for training and consulting under our contracts with the District. Because the District decided not to use our products, it did not therefore use all of the services specified in the contract. The third party complaint alleges unjust enrichment against us. The District states that the amount it is seeking is approximately $220,000. We have filed a motion to dismiss the complaint, which has not yet been decided.

We believe that these claims are not meritorious and that we do not have any significant liability to these claimants. We therefore do not believe that the resolution of these matters will have a material adverse effect on our financial position or results of operations.

Page 13

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

This report contains forward-looking statements. Forward-looking statements are not historical facts but rather are based on current expectations about our business and industry, as well as our beliefs and assumptions. Words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” and variations and negatives of these words and similar expressions are used to identify forward-looking statements. Statements regarding our expectations for our future business results and financial position, our business strategies and objectives, and trends in our market are forward-looking statements. Forward-looking statements are not guarantees of future performance or events, and are subject to risks, uncertainties and other factors, many of which are beyond our control and some of which we may not even be presently aware. As a result, our future results and other future events or trends may differ materially from those anticipated in our forward-looking statements. Specific factors that might cause such a difference include, but are not limited to, the risks and uncertainties discussed in this Management’s Discussion and in the Risk Factors section of this report. We also refer you to the risk factors that are or may be discussed from time to time in our public announcements and filings with the SEC, including our future Forms 8-K, 10-Q and 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our view only as of the date of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report.

Overview

Scientific Learning Corporation develops and distributes the Fast ForWord^® family of software. These patented products build learning capacity by rigorously and systematically applying neuroscience-based learning principles to improve the fundamental cognitive skills required to read and learn. On January 7, 2008, we completed the acquisition of substantially all of the assets of Soliloquy Learning, including the Reading Assistant™ product, for $10.7 million in cash. The Scientific Learning Reading Assistant combines advanced speech recognition technology with scientifically based intervention to help students strengthen reading fluency, vocabulary and comprehension to become proficient life-long readers. To facilitate the use of our products, we offer a variety of on-site and remote professional and technical services, as well as phone, email and web-based support. We sell primarily to K-12 schools in the United States through a direct sales force. Since our inception, learners have used our Fast ForWord products over 1.2 million times and approximately 5,300 schools have purchased at least $10,000 of our Fast ForWord product licenses and services. As of March 31, 2008 we had 232 full-time equivalent employees, compared to 215 at December 31, 2007.

Business Highlights

We market our Fast ForWord products primarily as a reading intervention solution for struggling, at-risk, English Language Learners, and special education students. Approximately 70% of the estimated 55 million public and private school K-12 students in the United States test as not proficient in reading. While our installed base is growing, the approximately 5,300 schools that have purchased at least $10,000 of our product licenses and services represent a small fraction of the approximately 125,000 K-12 schools in the US.

Federal education funds are a critical resource in helping school districts address the needs of the most challenged learners. We believe that a significant proportion of our sales are funded by federal sources, particularly Title One and IDEA (special education) grants. In fiscal 2008, these programs are projected to total $25.4 billion. States are forecasting shortfalls in their taxation revenues for fiscal 2009 because of the existing housing slump and a potential recession in the nationwide economy. Such shortfalls could have an impact on education spending, although we believe that education would remain among the top priorities.

Sales of our products are included in the growing supplemental education materials segment of the overall education materials market. Simba Information’s Publishing for the PreK-12 Market 2008 – 2009 (April 2008) estimates that:

Ø	The total market for K-12 instructional materials is $9.36 billion, growing at 3.2%
Ø	The electronic materials segment of that market is $2.04 billion
Ø	The fastest growing electronic materials segment, which is where we compete, is electronic courseware at $928 million and expected to grow 9.3%.

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Company Highlights

For the three months ended March 31, 2008, our total revenue increased by 3% compared to the same period in 2007. Product revenue declined by 15% compared to the same period in 2007. The decrease in product revenues was mainly because current quarter license bookings were approximately $900,000 lower in the three months ended March 31, 2008 as compared to the same period in the previous year. Service and support revenue increased by 33% due to a higher number of schools on support and more services delivered.

For the three months ended March 31, 2008, our total booked sales increased by 1% over the same period in 2007. (Booked sales is a non-GAAP financial measure. For more explanation on booked sales, see Revenue below). The first quarter historically is our smallest booked sales quarter. As we have discussed before, the characteristics of our public school market cause us to have a somewhat long and unpredictable sales cycle. For the three months ended March 31, 2008, we closed eight transactions in excess of $100,000, the same number as in the first quarter of 2007. One of our major goals is to increase the number of large booked sales, which we believe to be an important indicator of education industry acceptance and critical to achieving our targets. These large transactions frequently require school board approvals and their timing is often difficult to predict.

For the three months ended March 31, 2008, gross profit declined compared to the three months ended March 31, 2007, mainly due to a shift in revenue mix and additional costs arising from the Soliloquy acquisition. Operating expenses increased 19%, mostly due to organic headcount growth, the addition of the Reading Assistant development team, and amortization expenses resulting from the Soliloquy acquisition.

We recorded a net loss of $4.7 million for the three months ended March 31, 2008 compared to a net loss of $2.6 million in the same period in 2007.

At March 31, 2008 and 2007 we had no outstanding debt.

Results of Operations

Revenues

	Three Months Ended March 31,
(dollars in thousands)	2008		Change		2007
Products	$	4,629	-15	%	$	5,453
Service and support		4,456	33	%		3,359
Total revenues	$	9,085	3	%	$	8,812

Product revenues decreased by 15% during the three months ended March 31, 2008, compared to the same period in 2007. The decrease in product revenues was mainly because K-12 current quarter license bookings were approximately $900,000 lower in the three months ended March 31, 2008 as compared to the same period in the previous year.

Our service and support revenue increased significantly during the three months ended March 31, 2008 compared to the same period in 2007 due to a higher number of schools on support and more services delivered.

Revenue from the acquired Reading Assistant product line was not significant.

Booked sales and selling activity: Booked sales is a non-GAAP financial measure that management uses to evaluate current selling activity. We believe that booked sales is a useful metric for investors as well as management because it is the most direct measure of current demand for our products and services. Booked sales equals the total value (net of allowances) of software, services and support invoiced in the period. We record booked sales and deferred revenue when all of the requirements for revenue recognition have been met, other than the requirement that the revenue for software licenses and services has been earned. We use booked sales information for resource allocation, planning, compensation and other management purposes. We believe that revenue is the most comparable GAAP measure to

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booked sales. However, booked sales should not be considered in isolation from revenues, and is not intended to represent a substitute measure of revenues or any other performance measure calculated under GAAP.

The following reconciliation table sets forth our booked sales, revenues and change in deferred revenue for the three months ended March 31, 2008 and 2007:

	Three Months Ended March 31,
(dollars in thousands)	2008			Change		2007
Booked sales	$	5,895		1	%	$	5,838
Less revenue		9,085		3	%		8,812
Net decrease in deferred revenue		(3,190	)				(2,974	)
Total deferred revenue end of period	$	19,765		22	%	$	16,185

Booked sales in the K-12 sector decreased 11% to $4.7 million during the three months ended March 31, 2008, compared to $5.3 million in the same period in 2007. The first quarter historically is our lowest booked sales quarter. The characteristics of our public school market cause us to have a somewhat long and unpredictable sales cycle.

Booked sales to the K-12 sector for the three months ended March 31, 2008 were 80% of total booked sales, compared to 91% in the same period in 2007. Booked sales to non-school customers, including both private practice clinicians and international customers, increased by 122% for the three months ended March 31, 2008 compared to the same period in 2007.

We believe large booked sales are an important indicator of mainstream education industry acceptance and an important factor in reaching our goal of increasing sales force productivity. During the first quarter of 2008, we closed eight sales that had a contract value in excess of $100,000 the same number as in the same period in 2007. For both the three months ended March 31, 2008 and 2007, approximately 37% of our K-12 booked sales were realized from booked sales over $100,000. Large booked sales include volume and negotiated discounts but the percentage discount applicable to any given transaction will vary and the relative percentage of large booked sales and smaller booked sales in a given quarter may fluctuate. Because we discount product license fees but do not discount service and support fees, product booked sales and revenue are disproportionately affected by discounting. We cannot predict the size and number of large transactions in the future.

Although federal, state and local budget pressures make for an uncertain funding environment for our customers, we remain optimistic about our growth prospects in the K-12 market. However, achieving our booked sales growth objectives will depend on increasing customer acceptance of our products, which requires us to continue to focus on improving our products’ ease of use, their fit with school requirements, and our connection with classroom teachers and administrators. Our K-12 growth prospects are also influenced by factors outside our control, including the overall level, certainty and allocation of state, local and federal funding. States are forecasting shortfalls in their taxation revenues for fiscal 2009 because of the existing housing slump and a potential recession in the nationwide economy. Such shortfalls may impact on education spending. In addition, the revenue recognized from our booked sales can be unpredictable. Our various license and service packages have substantially differing revenue recognition periods, and it is often difficult to predict which license package a customer will purchase, even when the amount and timing of a sale can be reasonably projected. See “Management’s Discussion and Analysis – Application of Critical Accounting Policies” for a discussion of our revenue recognition policy. In addition, the timing of a single large order or its implementation can significantly impact the level of booked sales and revenue at any given time. See “Risk Factors” for a further discussion of some of the factors that affect our sales and revenue.

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Gross Profit and Cost of Revenues

	Three Months Ended March 31,
(dollars in thousands)	2008			2007
Gross profit on products	$	4,201		$	5,147
Gross profit margin on products		91	%		94	%
Gross profit on service and support		1,969			1,106
Gross profit margin on services and support		45	%		33	%
Total gross profit	$	6,170		$	6,253
Total gross profit margin		68	%		71	%

The overall gross profit margin decreased due to a revenue mix shift. Higher margin product revenues made up 51% of total revenues in the three months ended March 31, 2008, compared to 62% in the same period in 2007. Product margins also declined from 94% to 91%, mainly due to the impact of the amortization expense arising from the intangible assets acquired from Soliloquy and product costs associated with the initial shipments of Reading Assistant. Service and support gross margins improved because the 33% revenue growth more than offset a 10% increase in costs, which was due to additional staff and their associated expenses.

Operating Expenses

	Three Months Ended March 31,
(dollars in thousands)	2008		Change			2007
Sales and marketing	$	6,936		8	%	$	6,406
Research and development		2,119		85	%		1,146
General and administrative		1,996		13	%		1,771
Total operating expenses	$	11,051		19	%	$	9,323

Sales and Marketing Expenses: For the three months ended March 31, 2008, our sales and marketing expenses increased 8% or $530,000 compared to the same period in 2007. This increase is due to multiple factors, including higher salary and benefits costs due to increased staffing ($257,000), travel expenses ($247,000) and trade shows and meeting costs ($337,000). These increases were partially offset by a $150,000 decrease in printing costs for marketing materials. At March 31, 2008, we had 51 quota-bearing sales personnel compared to 46 at March 31, 2007.

Research and Development Expenses: Research and development expenses increased by 85% or $973,000 in the three months ended March 31, 2008, compared to the same period in 2007. The main cause of this large increase is that research and development expenses now include the costs of the Reading Assistant development team. Research and development expenses principally consist of compensation paid to employees and consultants engaged in research and product development activities and product testing, together with software and equipment costs.

General and Administrative Expenses: The primary reasons for the $225,000 increase in general and administrative expenses in the three months ended March 31, 2008, compared to the same period in 2007, were higher salary and benefit costs of $183,000 and higher consulting and temporary services costs of $156,000. These increases were partially offset by a $72,000 decrease in bad debt expense.

Other Income from Related Party

In September 2003, we signed an agreement with Posit Science Corporation (“PSC”), transferring technology to PSC for use in the health field. During the quarter ended March 31, 2008, we recorded $67,000 in royalties receivable from PSC. For the comparable period in 2007, we recorded $78,000 in royalties receivable. Amounts received to date and any future receipts are being reported as other income as we do not consider these royalties to be part of our recurring operations.

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Interest and Other Income, net

	Three Months Ended March 31,
(dollars in thousands)	2008			Change		2007
Interest on invested cash			74	-56	%			168
Reclassification of service revenue			72	-17	%			87
Miscellaneous			7	NA				—
Interest and other income, net		$	153	-40	%		$	255

For the three months ended March 31, 2008, interest and other income, net, consisted primarily of interest earned on our invested cash of $74,000 and a reclassification of $72,000 of service and support revenue relating to two customers for whom we are no longer performing services. In the three months ended March 31, 2007, interest and other income, net, comprised mainly interest earned on our invested cash of $168,000 and the same reclassification from service and support revenue of $87,000.

Provision for Income Taxes

In the three months ending March 31, 2008, we recorded income tax expense of $3,000. For the three months ended March 31, 2007 we recorded an income tax benefit of $109,000. The tax expense for the three months ended March 31, 2008 consists of penalties and interest paid. The tax benefit for the three months ended March 31, 2007 principally consisted of federal and state taxes then currently payable offset by the utilization of net operating losses resulting in an effective tax rate of approximately 4%.

Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”) provides for the recognition of deferred tax assets if realization of such assets is more likely than not. During the fourth quarter of 2007, we recorded a $1.2 million reduction in the valuation allowance related to a portion of our deferred tax assets that will more likely than not be realized. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support further reversals of the valuation allowance. Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance.

Accounting for Uncertainty in Income Taxes

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There was not a material impact on our financial position and results of operations as a result of the adoption of the provisions of FIN 48. At March 31, 2008, we had a liability for unrecognized tax benefits of approximately $1.9 million (of which $24,000, if recognized, would affect our effective tax rate). We do not believe there will be any material changes in our unrecognized tax positions over the next twelve months.

Interest and penalty costs related to unrecognized tax benefits are classified as a component of “Income Tax Benefit” in the accompanying statement of operations and the corresponding liability in “Income Taxes Payable” or “Prepaid Income Taxes” in the accompanying balance sheet. We recognized $3,000 of interest and penalty expense related to unrecognized tax benefits for the three months ended March 31, 2008.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal income tax examination for calendar tax years ending 2005 through 2007. In December 2007, we completed an audit from the I.R.S for our 2004 and earlier tax years. Additionally, we are subject to various state income tax examinations for the 1997 through 2007 calendar tax years.

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Liquidity and Capital Resources

Our cash, cash equivalents and short term investments were $4.7 million at March 31, 2008, compared to $21.2 million at December 31, 2007. Our cash balances decreased primarily because of the $10.1 million payment for the acquisition of Soliloquy Learning, including direct transaction costs. In addition, our first quarter is historically our lowest booked sales quarter, reflecting school purchasing cycles and a trend in our industry. Therefore, we generally use cash in operations during the first quarter and this trend continued in 2008. We expect that our cash flow from operations and our current cash balances will be the primary source of liquidity and will be sufficient to provide the necessary funds for our operations and capital expenditures during at least the next twelve months. Accomplishing this, however, will require us to meet specific booked sales targets in the K-12 market. We cannot assure you that we will meet our targets with respect to booked sales, revenues, expenses or operating results.

If we are unable to achieve sufficient cash flow from operations, we may seek other sources of debt or equity financing, or may be required to reduce expenses. We have a revolving line of credit agreement with Comerica Bank that expires on December 2, 2008. The maximum that can be borrowed under the agreement is $5.0 million. Borrowings under the line are subject to reporting covenants requiring the provision of financial statements to Comerica, and a financial covenant requiring us to maintain a minimum adjusted quick ratio of 1.5. If the adjusted quick ratio falls below 1.75, we are also required to maintain a minimum net worth of $1. Reducing our expenses could adversely affect operations by reducing the resources available for sales, marketing, research or product development. We cannot assure you that we will be able to secure additional debt or equity financing on acceptable terms, if at all.

Net cash used in operating activities for the three months ended March 31, 2008 was $6.3 million versus cash used of $4.3 million during the same period in 2007. This difference was mainly the result of higher employee related expenses, primarily due to increased headcount arising from the Soliloquy acquisition.

Net cash used in investing activities for the three months ended March 31, 2008 was $10.2 million, due to the acquisition of Soliloquy Learning. Net cash used in investing activities for the three months ended March 31, 2007 was $281,000, due to capital spending.

Financing activities generated $13,000 for the three months ended March 31, 2008, compared to $344,000 for the three months ended March 31, 2007 from the sale of stock upon option exercises.

For the three months ended March 31, 2008 and March 31, 2007 we had no borrowings.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations and Commitments

We have a non-cancelable lease agreement for our corporate office facilities in Oakland, California. The minimum lease payment is approximately $78,000 per month through 2008. After 2008 the base lease payment increases at a compound annual rate of approximately 5%. The lease expires in December 2013. We also have a lease agreement for our Tucson, Arizona office through May 2013 at an average rent of approximately $11,300 per month. In early 2008, we entered into a new lease for our Reading Assistant operations in Waltham, Massachusetts for approximately 6,000 square feet that expires in September 2011 at an average rent of approximately $11,500 per month.

We also make royalty payments to the institutions who participated in the original research that produced our initial products. Our minimum royalty payments are $150,000 per year.

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The following table summarizes our obligations at March 31, 2008 and the effects such obligations are expected to have on our liquidity and cash flow in future periods (dollars in thousands):

(dollars in thousands)	Less than 1 year		2-3 years		4-5 years		Thereafter		Total
Contractual Obligations:
Operating lease obligations	$	1,196	$	2,578	$	2,577	$	932	$	7,283
Purchase obligations		150		300		300		150	$	900
Total	$	1,346	$	2,878	$	2,877	$	1,082	$	8,183

Our purchase order commitments at March 31, 2008 are not material.

Application of Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, assumptions and judgments. We believe that the estimates, assumptions and judgments upon which we rely are reasonable based upon information available to us at the time. The estimates, assumptions and judgments that we make can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, our financial statements would be affected.

We believe that, as discussed in our most recent Report on Form 10-K, the estimates, assumptions and judgments pertaining to revenue recognition, the allowance for doubtful accounts, income taxes and stock based compensation are the most critical assumptions to understand in order to evaluate our reported financial results. There has been no change to these policies. Following the acquisition of Soliloquy, we now consider that our policy for accounting for goodwill and other intangible assets is also critical.

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), we do not amortize goodwill and other intangible assets with indefinite lives. Our goodwill will be subject to annual impairment tests, which require us to estimate the fair value of our business compared to the carrying value. The impairment reviews require an analysis of future projections and assumptions about our operating performance. Should such review indicate the assets are impaired, we would record an expense for the impaired assets.

In accordance with Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS No. 144”), long-lived assets, such as property and equipment and intangible assets with definite lives, are reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability would be measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The determination of estimated future cash flows, however, requires management to make estimates. Future events and changes in circumstances may require us to record a significant impairment charge in the period in which such events or changes occur. Impairment testing requires considerable analysis and judgment in determining results. If other assumptions and estimates were used in our evaluations, the results could differ significantly.

Annual tests or other future events could cause us to conclude that impairment indicators exist and that our goodwill is impaired. For example, if we had reason to believe that our recorded goodwill and intangible assets had become impaired due to decreases in the fair market value of the underlying business, we would have to take a charge to income for that portion of goodwill or intangible assets that we believed was impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to the rate of interest that we earn on our cash and cash equivalents. A hypothetical increase or decrease in market interest rates by 10% from the market interest rates at March 31, 2008 would not have a material affect on our results of operations.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the required time periods. These procedures are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As required under Rule 13a-15(b) of the Exchange Act, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, and concluded that our disclosure controls and procedures were effective as of March 31, 2008.

It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As a result, there can be no assurance that a control system will succeed in preventing all possible instances of error and fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the conclusions of our Chief Executive Officer and the Chief Financial Officer are made at the “reasonable assurance” level.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Litigation with Former Sales Representative

On January 23, 2008, Robert G. Smith, a former account manager in Florida, filed a complaint against us in US District Court for the Middle District of Florida. The lawsuit claims breach of contract for unpaid wages of approximately $423,000. Smith alleges that he is owed additional commission relating to a large sale transaction in the second quarter of 2007. We are in the early stages of this proceeding; discovery has not yet started.

Litigation with School District Customer

On October 22, 2007, we were sued by the Christina School District (the “District”) in the US District Court for the District of Delaware. The District had previously been sued by investors who are the assignees of the lessor under a Master Lease Purchase Agreement (the “Lease Agreement”) entered into by the District in 2003. The District ceased making payments under the Lease Agreement and the investors have claimed that the District breached the Lease Agreement. The District filed a third party complaint against us, claiming that we must refund amounts paid to us by the District for training and consulting under our contracts with the District. Because the District decided not to use our products, it did not therefore use all of the services specified in the contract. The third party complaint alleges unjust enrichment against us. The District states that the amount it is seeking is approximately $220,000. We have filed a motion to dismiss the complaint, which has not yet been decided.

We believe that these claims are not meritorious and that we do not have any significant liability to these claimants. We therefore do not believe that the resolution of these matters will have a material adverse effect on our financial position or results of operations.

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Item 1A. Risk Factors

RISK FACTORS

The following factors as well as other information contained in this report should be considered in making any investment decision related to our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected and the trading price of our common stock could decline.

Our sales cycle tends to be long and somewhat unpredictable, which may result in delayed or lost revenue, which could materially and adversely impact our revenue and profitability.

Like other companies in the instructional market, our sales to K-12 schools are affected by school purchasing cycles and procedures, which can be quite bureaucratic. The cost of some of our K-12 license packages requires multiple levels of approval in a political environment, which results in a time-consuming sales cycle that can be difficult to predict. When a district decides to finance its license purchase, the time required to obtain necessary approvals can be extended even further. In addition, sales to schools are subject to budgeting constraints, which may require schools to find available discretionary funds, obtain grants or wait until subsequent budget cycles. As a result, our sales cycle generally takes months, and in some cases, can take a year or longer. Therefore, we may devote significant time and energy to a particular customer sale over the course of many months, and then not make the sale when expected or at all. This can result in lost opportunities that can materially and adversely impact our revenue and profit.

It is difficult to accurately forecast our future financial results. This may cause us to fail to achieve the financial performance anticipated by investors and financial analysts, which could cause the price of our stock to decline.

Our revenue and net income or loss are difficult to predict and may fluctuate substantially from quarter to quarter and from year to year. We started operations in February 1996 and through 2002 incurred significant operating losses. In both 2006 and 2007, we had an operating loss and modest net income. At March 31, 2008, we had an accumulated deficit of $81.4 million from inception.

A significant proportion of our customers’ purchases are made within the last two weeks of each quarter. We therefore have limited visibility on revenue for the quarter until the end of the quarter. If a customer unexpectedly postpones or cancels an expected purchase due to changes in the customer’s objectives, priorities, budget or personnel, we may experience an unexpected shortfall that cannot be made up in the quarter. The effect of the concentration of sales at the end of the quarter is compounded by the fact that our various license and service packages have substantially differing revenue recognition periods. Even when the amount and timing of a transaction can be accurately projected, it may be difficult to predict which license package a customer will purchase.

In addition, our sales strategy emphasizes district-level, multi-site transactions. The receipt or implementation of a single large order, or conversely its loss or delay, can significantly impact the level of sales booked and revenue recognized in a given quarter.

Our expense levels are based on our expectations of future revenue and are primarily fixed in the short term. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, which could cause our net income to fluctuate unexpectedly.

Failure to achieve the financial results expected by investors and financial analysts in a given quarter could cause an immediate and significant decline in the trading price of our common stock.

To grow our business, we need to increase acceptance of our products among K-12 education purchasers. Failure to do so would materially and adversely impact our revenue, profitability and growth prospects.

We believe that to date most educators who have used Fast ForWord products are “early adopters.” Early adopters make up a relatively small proportion of our K-12 market, so in order to grow our revenue and profit we need to increase our reach beyond early adopters to more conservative customers. We believe that our ability to grow

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acceptance of our products in the conservative K-12 education market will depend largely on the critical factors discussed below.

Our Fast ForWord products use an approach that differs from the approaches that schools have traditionally used to address reading problems. In particular, our products develop the brain to process more efficiently, are based on neuroscience research and focus on building cognitive skills. All of these concepts may be unfamiliar to educators. K-12 educational practices are slow to change, and it can be difficult to convince educators of the value of a substantially different approach.

In order to obtain the best student results from using our product, schools must follow a recommended protocol for Fast ForWord use, which requires at least 30 minutes per day out of a limited and already crowded school day. Our recommendation that schools follow a prescribed protocol in using our products may limit the number of schools willing to purchase from us. In addition, if our products are not used in accordance with the protocol, they may not produce the expected student results, which may lead to customer dissatisfaction and decreased revenue.

Our products are generally implemented in a computer lab with a lab coach or teacher rather than in the classroom with the students’ regular classroom teachers. To reach a broader group of customers, encourage additional sales from existing customers and improve student achievement results, we need to better engage classroom teachers in the products’ implementation, in an effective and efficient manner.

If we are unable to convince our market of the value of our significantly different approach and otherwise overcome the challenges identified above, our revenue and growth prospects could be materially and adversely impacted and our profit could decline.

We may not achieve the benefits we expect from our acquisition of the Reading Assistant product, which could have a material adverse effect on our business, financial and operating results.

Our goals in acquiring the Reading Assistant product are to provide additional products to serve a broader range of students, to broaden our offering for English language learners for the US K-12 market as well as the international market, and to further leverage our growing direct sales organization with additional complementary and effective products for sale. To fully realize the anticipated benefits from the acquisition, we face a number of challenges:

• We must significantly increase the volume of sales over the level historically achieved by Soliloquy. In addition, if our understanding about the Reading Assistant product, its ease of use, efficacy, and acceptability to educators is not correct, it will be more challenging to reach our expected sales volume.

• We must successfully retain critical management and technical personnel who have joined us from the Soliloquy business.

• We may experience unanticipated difficulties in further developing the Reading Assistant product. If so, development of product improvements and new products built on the Reading Assistant platform may be more costly and may take more time than we expect.

We rely on studies of student performance results to demonstrate the effectiveness of our products. If the validity of these studies or the conclusions that we draw from them are challenged, our reputation could be harmed and our business prospects and financial results could be materially and adversely affected.

We rely heavily on statistical studies of student results on assessments to demonstrate that our products lead to improved student achievement. Reliance on these studies to support our claims about the effectiveness of our products involves risks, including the following:

• The results of studies depend on schools’ appropriately implementing the products and adhering to the product protocol. If a school does not do so, the study may not show that our products produce substantial student improvements.

• Some studies on which we rely may be challenged because the studies use a limited sample size, lack a randomly selected control group, include assistance or participation from us or our scientists, or have

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	other design characteristics that are not optimal. These challenges may assert that these studies are not sufficiently rigorous or free from bias, and may lead to criticism of the validity of the studies and the conclusions that we draw from them.
•	Schools studying the effectiveness of our products use the product with different types of students and use different assessments, sometimes making it difficult to aggregate or compare results.

Our sales and marketing efforts, as well as our reputation, could be adversely impacted if the studies upon which we rely to demonstrate the effectiveness of our products, or the conclusions we draw from those studies, are seen to be insufficient.

If our products contain errors or if customer access to our web-delivered products is disrupted, we could lose new sales and be subject to significant liability claims.

Because our software products are complex, they may contain undetected errors or defects, known as bugs. Bugs can be detected at any point in a product’s life cycle, but are more common when a new product is introduced or when new versions are released. In the past, we have encountered unexpected bugs in our products shortly after release. We expect that, despite our testing, errors will be found in new products and product enhancements in the future. Significant errors in our products could lead to:

• delays in or loss of market acceptance of our products;

• diversion of our resources;

• a lower rate of expansion purchases from current customers;

• injury to our reputation; and

• increased service expenses or payment of damages.

Our Progress Tracker data tool and the Web-enabled version of the Reading Assistant product both rely on the World Wide Web in order to function. Unanticipated problems affecting our network systems could cause interruptions or delays in the delivery of that product. The servers that support our Web-delivered products are located in third party facilities. While we believe that the services provided by these facilities are robust, interruptions in customer access could be caused by the occurrence of a natural disaster, power loss, vandalism or other telecommunications problems. We have experienced problems due to power loss in the past, and we will continue to be exposed to the risk of access failure in the future.

If our products do not work properly, or if there are problems with customer access to Progress Tracker or the Web-enabled version of Reading Assistant, we may be required to issue credits, customers may elect not to renew their support or access contracts or not to purchase additional licenses, we may lose sales to potential customers and we may be subject to liability claims. We cannot be certain that the limitations of liability set forth in our agreements would be enforceable or would otherwise protect us from liability for damages. A material liability claim against us, regardless of its merit or its outcome, could result in substantial costs, significantly harm our business reputation and divert management’s attention from our operations.

We will be required to comply with the auditors’ attestation requirement of Sarbanes-Oxley Section 404 starting in fiscal 2008 or fiscal 2009. If we or our auditors determine that our internal controls over financial reporting are not effective or if we are unable to comply with the auditors’ attestation requirement when we are required to do so, such ineffective controls or non-compliance could have a materially adverse effect on us.

Under Sarbanes-Oxley Section 404, as implemented by the SEC and PCAOB, we were required to provide an initial management assessment on our internal control over financial reporting for fiscal 2007 and we complied with that requirement in our Form 10-K.

Under current rules, we will be required to provide an auditors’ attestation on our internal controls for fiscal 2008. However, the SEC has recently proposed extending the deadline for that requirement so that, as long as we are a non-

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accelerated filer measured at June 30, 2008, we would not be required to comply with the auditor’s attestation requirement until fiscal 2009. We cannot assure you that, in the course of completing the work to satisfy the auditors’ attestation requirement, we or our auditors will not detect a material weakness in our internal control over financial reporting or that we can satisfactorily comply with the attestation requirement.

Claims relating to data collection from our user base may subject us to liabilities and additional expense.

Schools and clinicians that use our products frequently use students’ names to register them in our products and enter into our database academic, diagnostic and/or demographic information about the students. In addition, the results of student use of our products are uploaded to our database. We have designed our system to safeguard this personally-identifiable information, but the protection of such information is an area of increasing public concern and significant government regulation, including but not limited to the Children’s Online Privacy Protection Act. If our privacy protection measures prove to be ineffective, we could be subject to liability claims for unauthorized access to or misuses of personally-identifiable information stored in our database. We may also face additional expenses to analyze and comply with increasing regulation in this area.

Sales of our products depend on the availability of government funding for public school reading intervention purchases, which is variable and outside the control of both us and our direct customers. If such funding becomes less available, our public school customers may be unable to purchase our products and services on a scale or at prices that we anticipate, which would materially and adversely impact our revenue and net income.

United States public schools are funded primarily through state and local tax revenues, which are devoted primarily to school building costs, teacher salaries and general operating expenses. Public schools also receive funding from the federal government through a variety of federal programs, many of which target children who are poor and/or are struggling academically. Federal funds typically are restricted to specified uses.

We believe that the funding for a substantial portion of our K-12 sales comes from federal funding, in particular IDEA (special education) and Title One funding. The current federal budget deficit and competing federal priorities may impact the availability of federal education funding. A cutback in federal education funding could have a materially adverse impact on our revenue.

State and local school funding can be significantly impacted by fluctuations in tax revenues due to changing economic conditions. States are forecasting shortfalls in their tax revenues for fiscal 2009, because of the existing housing slump and a potential recession in the nationwide economy. While education spending remains an important priority for states, it faces competition from demands for relief for homeowners, transportation spending and rising health care costs. An economic downturn leading to a significant reduction in state tax revenues could have a materially adverse impact on our revenue.

The availability of funding for instructional products like ours can also be affected by unpredictable events, such as increases in energy costs or damage due to severe weather. We believe that severe storms and spiking energy costs adversely impacted our sales in 2005. Unpredictable events of similar magnitude could adversely impact our revenue in the future.

We compete for sales with companies that have longer histories and greater resources than we do. We may not be able to compete effectively in the education market.

The market in which we operate is very competitive. While our products are highly differentiated by their neuroscience basis and their focus on improving brain processing efficiency and developing cognitive skills, we nevertheless compete vigorously for the funding available to schools. We compete not only against other software-based reading intervention products but also against print and service-based offerings from other companies and against traditional methods of teaching language and reading. Many of the companies providing these competitive offerings are much larger than we are, are more established in the school market than we are, offer a broader range of products to schools, and have greater financial, technical, marketing and distribution resources than we do. Encouraged by the No Child Left Behind Act, new competitors may enter our market segment and offer actual or claimed results similar to those achieved by our products. In addition, although traditional approaches to language and reading are fundamentally different from our approach, the traditional methods are more widely known and accepted and, therefore, represent significant competition for available funds.

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If we lose key personnel or are unable to hire additional qualified personnel as necessary, we may not be able to achieve our business goals, which could materially and adversely affect our financial results and share price.

We depend on the performance of our senior management, sales, marketing, development, research, educational, finance and other administrative personnel with extensive experience in our industry and with our Company. The loss of key personnel could harm our ability to execute our business strategy, which could adversely affect our financial results and share price. In addition, we believe that our future success will depend in large part on our continued ability to identify, hire, retain and motivate highly skilled employees who are in great demand. We cannot assure you that we will be able to do so.

Our current liquidity resources may not be sufficient to meet our needs.

We believe that cash flow from operations will be our primary source of funding for our operations during 2008 and the next several years. In 2007 and 2006, we generated $6.1 million and $4.3 million, respectively, in cash from operating activities. We ended 2007 with $21.2 million in cash and cash equivalents. We expended $10.7 million in cash in connection with the acquisition of the Reading Assistant product line. We typically consume cash in our operating activities in the first quarter of each year because of the timing of sales and expenses. At March 31, 2008, we had $4.7 million in cash and cash equivalents.

In addition, we have a line of credit with Comerica Bank totaling $5.0 million, which expires on December 30, 2008. At March 31, 2008 no borrowings were outstanding and we were in compliance with the covenants of that line. Borrowings under the line are subject to reporting covenants requiring the provision of financial statements to Comerica, and a financial covenant requiring us to maintain a minimum adjusted quick ratio of 1.5. If the adjusted quick ratio falls below 1.75, we are also required to maintain a minimum net worth of $1. If we did not comply with the covenants, we would risk being unable to borrow under the credit line.

Funding our liquidity needs out of cash flow from operations will require us to achieve certain levels of booked sales and expenses. If we are unable to achieve sufficient levels of cash flow from operations, or are unable to obtain waivers or amendments from Comerica in the event we do not comply with our covenants, we would be required either to obtain debt or equity financing from other sources, or to reduce expenses. Reducing our expenses could adversely affect our operations by reducing the resources available for sales, marketing, research or development efforts. We cannot assure you that we will be able to secure additional debt or equity financing on acceptable terms, if at all.

If we are unable to maintain our access to the intellectual property rights that we license from third parties, our sales and net income will be materially and adversely affected.

Our most important products are based on licensed inventions owned by the University of California and Rutgers, the State University of New Jersey. In 2007, we generated approximately 78% of our booked sales from products that use this licensed technology. If we were to lose our rights under these licenses (whether through expiration of our exclusive license period, expiration of the underlying patent’s exclusivity, invalidity or unenforceability of the underlying patents, a breach by us of the terms of the license agreements or otherwise), such a loss of these licensed rights or a requirement that we must re-negotiate these licenses could materially harm our booked sales, our revenue and our net income.

If we are unable to adequately protect our intellectual property rights or if we infringe on the rights of others, we could become subject to significant liabilities, need to seek licenses or lose our rights to sell our products.

Our ability to compete effectively depends in part on whether we are able to maintain the proprietary aspects of our technology and to operate without infringing on the proprietary rights of others. It is possible that our issued patents will not offer sufficient protection against competitors with similar technology, that our trademarks will be challenged or infringed by competitors, or that our pending patent applications will not result in the issuance of patents. Issued patents can prove to be invalid or unenforceable as a result of a variety of reasons, including deficiencies in prosecution. As a result of potential deficiencies during the prosecution of certain patents to which we have rights, it is possible that these patents may be subject to a claim of unenforceability or invalidity. If others are able to develop similar products due to the expiration, unenforceability or invalidity of the underlying patents, the resulting competition could materially harm our booked sales, revenue and net income. The Company historically has not registered its copyrights in the United States, which may make it difficult to collect damages from a third party that

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may be infringing a Company copyright. The degree of future protection for our proprietary rights is also uncertain for products or product improvements in early-stage development, because it is difficult to predict from early-stage development efforts which product(s) will ultimately be marketed or what form the ultimately marketed product(s) will take.

In addition, we could become party to patent or trademark infringement claims, litigation or interference proceedings. These proceedings could result from claims that we are violating the rights of others or may be necessary to enforce our own rights. Any such proceedings would result in substantial expense and significant diversion of management effort, and the outcome of any such proceedings cannot be accurately predicted. An adverse determination in such proceedings could subject us to significant liabilities or require us to seek licenses from third parties, which may not be available on commercially reasonable terms or at all. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture or increase their market share with respect to related technologies.

We generally require the execution of a written licensing agreement, which restricts the use and copying of our software products. However, if unauthorized copying or misuse were to occur to a substantial degree, our sales could be adversely affected.

Our common stock is thinly traded and its price is volatile.

Our common stock presently trades on the Nasdaq Global Market, and our trading volume is low. For example, for the first three months of 2008, our average daily trading volume was approximately 35,000 shares. The market price of our common stock has been highly volatile since we became publicly traded and could continue to be subject to wide fluctuations.

The ownership of our common stock is concentrated.

At March 31, 2008, Trigran Investments owned approximately 27% of our outstanding stock, and our executive officers and directors held approximately 16% of the outstanding stock. As a result, these stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and may have interests that diverge from those of other stockholders. This concentration of ownership may also delay, prevent or deter a change in control of our company.

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Item 6. Exhibits

Exhibit No.	Description of Document
3.1 (1)	Amended and Restated Certificate of Incorporation.
3.2 (2)	Amended and Restated Bylaws
10.1 (3)*	2008 Management Incentive Plan.
10.2 (4)*	Separation Agreement between the Company and Glenn Chapin, dated April 15, 2008.
10.3	First Amendment to Lease dated February 2008, between TriPointe Tucson, LLC and the Company.
10.4	Commercial Lease, dated February 26, 2008, between Clematis, LLC and the Company.
31.1	Certification of Chief Executive Officer (Section 302).
31.2	Certification of Chief Financial Officer (Section 302).
32.1	Certification of Chief Executive Officer (Section 906).
32.2	Certification of Chief Financial Officer (Section 906).

(1)	Incorporated by reference to exhibit previously filed with the Company’s Form 10-Q for the quarter ended March 31, 2007, file no. 000.2457.
(2)	Incorporated by reference to exhibits previously filed with the Company’s Amendment No. 1 to the Registration Statement on Form S-1 filed on July 13, 2007, registration no. 333-143093.
(3)	Incorporated by reference to exhibit previously filed with the Company’s Form 8-K filed on March 12, 2008.
(4)	Incorporated by reference to exhibit previously filed with the Company’s Form 8-K filed on April 16, 2008.

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SIGNATURE

          Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 9, 2008

SCIENTIFIC LEARNING CORPORATION
(Registrant)

/s/ Jane A. Freeman

Jane A. Freeman
Chief Financial Officer
(Authorized Officer and Principal Financial and
Accounting Officer)

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Index to Exhibits

Exhibit No.	Description of Document
3.1 (1)	Amended and Restated Certificate of Incorporation.
3.2 (2)	Amended and Restated Bylaws
10.1 (3)*	2008 Management Incentive Plan.
10.2 (4)*	Separation Agreement between the Company and Glenn Chapin, dated April 15, 2008.
10.3	First Amendment to Lease dated February 2008, between TriPointe Tucson, LLC and the Company.
10.4	Commercial Lease, dated February 26, 2008, between Clematis, LLC and the Company.
31.1	Certification of Chief Executive Officer (Section 302).
31.2	Certification of Chief Financial Officer (Section 302).
32.1	Certification of Chief Executive Officer (Section 906).
32.2	Certification of Chief Financial Officer (Section 906).

(1)	Incorporated by reference to exhibit previously filed with the Company’s Form 10-Q for the quarter ended March 31, 2007, file no. 000.2457.
(2)	Incorporated by reference to exhibits previously filed with the Company’s Amendment No. 1 to the Registration Statement on Form S-1 filed on July 13, 2007, registration no. 333-143093.
(3)	Incorporated by reference to exhibit previously filed with the Company’s Form 8-K filed on March 12, 2008.
(4)	Incorporated by reference to exhibit previously filed with the Company’s Form 8-K filed on April 16, 2008.