Scientific Learning (SCIL)

Goodwill

We recorded goodwill and purchased intangible assets when we acquired the assets of Soliloquy. The cost of the acquisition was allocated to the assets and liabilities acquired, including purchased intangible assets, and the remaining amount was classified as goodwill. Goodwill arising from purchase transactions is not amortized to expense, but rather periodically assessed for impairment. The allocation of the acquisition cost to purchased intangible assets and goodwill, therefore, has a significant impact on our operating results. The allocation process involves an extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets.

We follow SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill be tested annually for impairment or more frequently if events and circumstances warrant. This impairment testing involves a two-step process as follows:

Based on the annual impairment tests performed in the fourth quarter of 2008, we determined that the carrying value of our recorded goodwill had not been impaired and no impairment charge was recorded. We will continue to assess goodwill for impairment on an interim basis when indicators exist that goodwill may be impaired. Conditions that indicate that goodwill may be impaired include our market capitalization declining below net book value or a sustained decline in our stock price. A significant impairment could have a material adverse effect on the Company’s consolidated financial position and results of operations.

Goodwill

We recorded goodwill and purchased intangible assets when we acquired the assets of Soliloquy. The cost of the acquisition was allocated to the assets and liabilities acquired, including purchased intangible assets, and the remaining amount was classified as goodwill. Goodwill arising from purchase transactions is not amortized to expense, but rather periodically assessed for impairment. The allocation of the acquisition cost to
purchased intangible assets and goodwill, therefore, has a significant impact on our operating results. The allocation process involves an extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets.

We follow SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill be tested annually for impairment or more frequently if events and circumstances warrant. This impairment testing involves a two-step process as follows:

Based on the annual impairment tests performed in the fourth quarter of 2008, we determined that the carrying value of our recorded goodwill had not been impaired and no impairment charge was recorded. We will continue to assess goodwill for impairment on an interim basis when indicators exist that goodwill may be impaired. Conditions that indicate that goodwill may be impaired include our market capitalization declining below
net book value or a sustained decline in our stock price. A significant impairment could have a material adverse effect on the Company’s consolidated financial position and results of operations.