The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the financial statements pertain to revenue recognition, the allowance for doubtful accounts receivable, and the valuation of long term assets including goodwill, intangibles and deferred tax assets. Actual results could differ from those estimates.

Revenue from software license sales is recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, and a fixed fee and collectability has been determined. The Company does not provide for a right of return. For multiple element arrangements, total fees are allocated to each of the undelivered elements based upon vendor specific objective evidence of their fair values, with the residual recognized as revenue for the delivered elements. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements, typically one year. Revenue from engineering, consulting and training services is recognized as those services are rendered using a proportional performance model.

The Company accounts for its software development costs in accordance with ASC 985, Costs of Computer Software to Be Sold, Leased or Marketed. Costs that are incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software development costs are capitalized until the product is available for general release to customers. Such costs are amortized using the straight-line method over the estimated economic life of the product, generally three years. The Company evaluates the realizability of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when technological feasibility of a product is established as well as its economic life.

During the three months ended February 29, 2012, the Company capitalized approximately $139,000 of software development costs related to a new product in development. This product was completed and available in March 2012. The Company did not capitalize any software development costs during the first six months of fiscal year 2012 or the nine months ended February 28, 2011.

The Company capitalizes the direct costs associated with entering into debt agreements and amortizes those costs over the life of the debt agreement. During fiscal 2011, the Company incurred total costs of approximately $330,000 in connection with entering into the debt agreement with Danversbank and its subsidiary, One Conant Capital, LLC. These costs have been capitalized and are being amortized over the three year life of the loan. Amortization expense related to debt issuance costs for the three and nine month periods ended February 29, 2012 was approximately $29,000 and $85,000, respectively.

The Company accounts for goodwill pursuant to the provisions of the ASC 350, Intangibles – Goodwill and Other. This requires that goodwill be reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement’s criteria.

As of May 31, 2011, the Company conducted its annual impairment test of goodwill by comparing the fair value of the reporting unit to the carrying amount of the underlying assets and liabilities of its single reporting unit. The Company determined that the fair value of the reporting unit exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date. The Company concluded that no facts or circumstances arose during the nine months ended February 29, 2012 to warrant an interim impairment test.

Costs related to patent applications are capitalized as incurred and are amortized once the patent is awarded or are expensed if the patent is finally rejected. Patent costs are amortized over their estimated economic lives under the straight-line method, and are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through the estimated undiscounted future cash flows to be derived from the use of the associated patent.

The Company periodically reviews the carrying value of all intangible and other long-lived assets. If indicators of impairment exist, the Company compares the undiscounted cash flows estimated to be generated by those assets over their estimated economic life to the related carrying value of those assets to determine if the assets are impaired. If the carrying value of the asset is greater than the estimated undiscounted cash flows, the carrying value of the assets would be decreased to their fair value through a charge to operations. As of February 29, 2012, the Company does not have any long-lived assets it considers to be impaired.

Stock-based compensation expense for all stock-based payment awards made to employees and directors is measured based on the grant-date fair value of the award. The Company estimated the fair value of each share-based award using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award.

The Company’s 1994 Stock Option Plan provided for the granting of stock options at an exercise price not less than fair market value of the stock on the date of the grant and with vesting schedules as determined by the Board of Directors. No new options could be granted under the Plan after fiscal year 2004 and all stock options had vested prior to May 31, 2009. As of February 29, 2012 all options previously issued under the 1994 Plan had expired. In May 2011, the 2011 Equity Incentive Plan (the “2011 Plan”) was approved by the Company’s shareholders, pursuant to which 150,000 shares of the Company’s common stock are reserved for issuance. The Company may grant stock options, restricted stock, restricted stock units, stock equivalents and awards of shares of common stock that are not subject to restrictions or forfeiture under the 2011 Plan.

The following table summarizes option activity under the 1994 Stock Option Plan and 2011 Plan:


			Weighted	Weighted-
			Average	Average
	Number of		Exercise Price	Remaining		Aggregate
	Options		Per Share	Life (in years)		Intrinsic Value

Outstanding options at May 31, 2010	5,550	$	4.00	1.78	$	770
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	(4,200)		4.64	-		-

Outstanding options at May 31, 2011	1,350		1.80	0.50		810
Granted	10,000		2.40	10.00		-
Exercised	-		-	-		-
Forfeited or expired	(1,350)		0.86	-		-

Outstanding options at February 29, 2012	10,000	$	2.40	9.28	$	-

Exercisable at February 29, 2012	2,224	$	2.40	9.28	$	-

The Company determined the volatility for options granted during the nine months ended February 29, 2012 using the historical volatility of the Company’s common stock. The expected life of options has been determined utilizing the “simplified” method as prescribed in ASC 718 Compensation, Stock Compensation. The expected life represents an estimate of the time options are expected to remain outstanding. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.

For the nine month period ended February 29, 2012, the Company expensed approximately $6,000 of stock-based compensation. The weighted-average fair value of each option granted in the nine month period ended February 29, 2012 is estimated as $2.35 on the date of grant using the Black-Scholes model with the following weighted average assumptions:

The functional currency of the Company’s foreign operations (Germany and Italy) is the Euro. As a result, assets and liabilities are translated at period-end exchange rates and revenues and expenses are translated at the average exchange rates. Adjustments resulting from translation of such financial statements are classified in accumulated other comprehensive income (loss). Foreign currency gains and losses arising from transactions were included in operations in the three and nine month periods February 29, 2012 and February 28, 2011. For the three and nine month periods ended February 29, 2012, the Company recorded a net loss from foreign currency related transactions of approximately $1,000 and $13,000, respectively, as compared to a net (gain) from foreign currency related transactions of approximately $(20,000) and $(45,000) for the comparable periods in the prior fiscal year, respectively, to Other expense (income), net in the Consolidated Condensed Statements of Operations.

The provision for income taxes is based on the earnings or losses reported in the consolidated financial statements. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company provides a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.


		February 29, 2012		May 31, 2011
		(Amounts in thousands)

Property and equipment	$	2,161	$	2,175
Accumulated depreciation and amortization		(2,111)		(2,117)
Property and equipment, net	$	50	$	58

Basic and diluted net income per share from continuing operations and from discontinued operations are computed by dividing the net income by the weighted-average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted-average number of common and equivalent dilutive common shares outstanding. For periods in which losses are reported potentially dilutive common stock equivalents are excluded from the calculation of diluted loss per share because the effect is antidilutive.

The following table details the derivation of weighted average shares outstanding used in the calculation of basic and diluted net income from continuing operations and from discontinued operations for each period:


		For the Three Months Ended
		February 29, 2012		February 28, 2011

Net income available to common shareholders (000’s)	$	137	$	73

Weighted average number of common shares outstanding used in calculation of basic earnings per share		995,135		610,661
Incremental shares from the assumed exercise of dilutive stock options		-		-

Weighted average number of common shares outstanding used in calculating diluted earnings per share		995,135		610,661

		For the Nine Months Ended
		February 29, 2012		February 28, 2011


Net income available to common shareholders (000’s)	$	377	$	292

Weighted average number of common shares outstanding used in calculation of basic earnings per share		995,135		610,661
Incremental shares from the assumed exercise of dilutive stock options		-		-

Weighted average number of common shares outstanding used in calculating diluted earnings per share		995,135		610,661

For the three and nine month periods ending February 29, 2012, 10,000 options and for the three and nine months ending February 28, 2011, 4,750 options, respectively, to purchase common shares were anti-dilutive and were excluded from the above calculation.

The Company’s comprehensive income includes accumulated foreign currency translation adjustments. The comprehensive income was as follows (in thousands):


		Three Month Periods Ended
		February 29, 2012		February 28, 2011

Net income	$	137	$	73
Changes in:
Foreign currency translation adjustment		14		(45)

Comprehensive income	$	151	$	28


		Nine Month Periods Ended
		February 29, 2012		February 28, 2011

Net income	$	377	$	292
Changes in:
Foreign currency translation adjustment		(15)		(37)

Comprehensive income	$	362	$	255