Scientific Learning (SCIL)

Liquidity and Capital Resources

Our cash, cash equivalents and short term investments were $6.0 million at March 31, 2009, compared to $7.6 million at December 31, 2008.

We expect that during at least the next twelve months our cash flow from operations together with our current cash balances will be our primary source of liquidity and will be sufficient to provide the necessary funds for our operations and capital expenditures. Historically, we have used cash in our operations during the first half of the year and built cash in the second half. This pattern results largely from our seasonally low sales in the first calendar quarter, which reflects our industry pattern, and the time needed to collect on sales made towards the end of the second quarter. We expect that this pattern will continue, and that we will use cash in operations during the first half of 2009. However, we expect that our current cash balances together with the borrowing capacity under our credit line, if required, will be sufficient to fund our operating requirements during the first half of fiscal 2009. Accomplishing this will require us to meet specific booked sales targets. We cannot assure you that we will meet our targets with respect to booked sales, revenues, expenses or operating results.

On January 30, 2009 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 31, 2009.

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Liquidity and Capital Resources

Our cash, cash equivalents and short term investments were $6.1 million at September 30, 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, we used $5.2 million of cash in operating activities in the nine months ended September 30, 2008.

We expect that during at least the next twelve months our cash flow from operations together with our current cash balances will be our primary source of liquidity and will be sufficient to provide the necessary funds for our operations and capital expenditures. Historically, we have used cash in our operations during the first half of the year and built cash in the second half. In the three months ended September 30, 2008, we generated $3.6 million of cash from operations. This pattern results largely from our seasonally low sales in the first calendar quarter, which reflects our industry pattern, and the time needed to collect on sales made towards the end of the second quarter. We expect that this pattern will continue, and that we will generate cash from operations during the remainder of 2008 that, together with the borrowing capacity under our credit line, will be sufficient to fund our operating requirements during the first half of fiscal 2009. 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.

We have a revolving line of credit agreement with Comerica Bank that expires on July 1, 2009. 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 1.25 and a minimum net worth of $1 million. The agreement allows us to issue

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Liquidity and Capital Resources

Our cash, cash equivalents and short term investments were $2.3 million at June 30, 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, we used $8.8 million of cash in operating activities in the six months ended June 30, 2008.

We expect that during at least the next twelve months our cash flow from operations together with our current cash balances will be our primary source of liquidity and will be sufficient to provide the necessary funds for our operations and capital expenditures. Historically, we have used cash in our operations during the first half of the year and built cash in the second half. This pattern results largely from our seasonally low sales in the first calendar quarter, which reflects our industry pattern, and the time needed to collect on sales made towards the end of the second quarter. We expect that this pattern will continue, and that we will generate substantial cash from operations during the second half of 2008. 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.

We have a revolving line of credit agreement with Comerica Bank that expires on July 1, 2009. 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 1.25 and a minimum net worth of $1 million. The agreement allows us to issue letters of credit not to exceed $1.0 million. At June 30, 2008, we have an outstanding letter of credit for $206,000. There were no borrowings outstanding on the line of credit at June 30, 2008 and we were in compliance with all related covenants.

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. 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 six months ended June 30, 2008 was $8.8 million compared to cash used of $7.1 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 six months ended June 30, 2008 was $10.3 million, due to the acquisition of the assets of Soliloquy Learning. Net cash used in investing activities for the six months ended June 30, 2007 was $563,000, due to capital spending.

Financing activities generated $215,000 for the six months ended June 30, 2008, compared to $695,000 for the six months ended June 30, 2007 from the sale of stock upon option exercises.

For the six months ended June 30, 2008 and June 30, 2007 we had no borrowings.

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.

Liquidity and Capital Resources

Our cash and cash equivalents and short-term investments were $21.2 million at December 31, 2007 compared to $16.4 million at December 31, 2006 and $12.1 million at December 31, 2005. At December 31, 2007 there were no borrowings outstanding under our credit line. In January 2008 we expended $9.7 million of our cash for the acquisition of the assets of Soliloquy Learning.

Net cash provided by operations in 2007 was $6.1 million, compared to cash provided by operations of $4.3 million in 2006 and $2.1 million used in operations in 2005. Overall, our receivable collection experience has remained strong throughout 2007. We collected $51.7 million of receivables in 2007, compared to $40.3 million of receivables in 2006 and $34.1 million in 2005.

Net cash used in investing activities in 2007 was $2.4 million, consisting of net purchases of property and equipment of $1.1 million, a loan to JTT Holdings of $1.0 million in connection with the January 2008 acquisition of Soliloquy Learning, and acquisition costs incurred of $319,000.

During the year ended December 31, 2006, we purchased an enterprise-wide customer relationship management system. As of December 31, 2007 and 2006, a net book value of $1.4 million and $463,000, respectively, related to the purchase and subsequent implementation of this system was included in property and equipment. These costs will be depreciated over the initial estimated useful life of five years.

Net cash generated by investing activities in 2006 was $2.4 million, consisting of the maturity of short-term investments of $3.0 million and officer loan repayments of $0.2 million, partially offset by property and equipment purchases of $0.8 million.

Net cash generated by investing activities in 2005 was $0.4 million, consisting of the purchase of $3.0 million of short-term investments and the purchase of hardware and software for $0.2 million, which were more than offset by the repayment of $3.6 million of officer loans.

Net cash generated by financing activities in 2007, 2006 and 2005 was $1.2 million, $0.6 million, and $0.5 million respectively. Net cash generated by financing activities in all three years resulted from the sale of stock upon option exercises and through purchases of stock through the employee stock purchase plan. There was no borrowing on our credit line in 2007 or 2006.

Because our booked sales tend to be seasonal, we may have negative cash flows in particular quarters, particularly the first quarter, when booked sales tend to be substantially lower than in other quarters.

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 various covenants. The agreement includes a letter of credit sublimit not to exceed $1.0 million. At December 31, 2007, we have an outstanding letter of credit for $206,000. There were no borrowings outstanding on the line of credit at December 31, 2007 and we were in compliance with all our covenants.

We expect that cash flow from operations will continue to be our primary source of funds for the next several years. Again, this will require us to achieve certain levels of booked sales. If we are unable to achieve sufficient levels of cash flow from operations, we may seek other sources of debt or equity financing, or may be required 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.

Liquidity and Capital
Resources

Our cash and cash equivalents
and short-term investments were $21.2 million at December 31, 2007 compared to $16.4
million at December 31, 2006 and $12.1 million at December 31, 2005. At December 31,
2007 there were no borrowings outstanding under our credit line. In January 2008 we
expended $9.7 million of our cash for the acquisition of the assets of Soliloquy
Learning.

Net cash provided by operations
in 2007 was $6.1 million, compared to cash provided by operations of $4.3 million in
2006 and $2.1 million used in operations in 2005. Overall, our receivable collection
experience has remained strong throughout 2007. We collected $51.7 million of
receivables in 2007, compared to $40.3 million of receivables in 2006 and $34.1 million
in 2005.

Net cash used in investing
activities in 2007 was $2.4 million, consisting of net purchases of property and
equipment of $1.1 million, a loan to JTT Holdings of $1.0 million in connection with
the January 2008 acquisition of Soliloquy Learning, and acquisition costs incurred of
$319,000.

During the year ended December
31, 2006, we purchased an enterprise-wide customer relationship management system. As
of December 31, 2007 and 2006, a net book value of $1.4 million and $463,000,
respectively, related to the purchase and subsequent implementation of this system was
included in property and equipment. These costs will be depreciated over the initial
estimated useful life of five years.

Net cash generated by investing
activities in 2006 was $2.4 million, consisting of the maturity of short-term
investments of $3.0 million and officer loan repayments of $0.2 million, partially
offset by property and equipment purchases of $0.8 million.

Net cash generated by investing
activities in 2005 was $0.4 million, consisting of the purchase of $3.0 million of
short-term investments and the purchase of hardware and software for $0.2 million,
which were more than offset by the repayment of $3.6 million of officer
loans.

Net cash generated by financing
activities in 2007, 2006 and 2005 was $1.2 million, $0.6 million, and $0.5 million
respectively. Net cash generated by financing activities in all three years resulted
from the sale of stock upon option exercises and through purchases of stock through the
employee stock purchase plan. There was no borrowing on our credit line in 2007 or
2006.

Because our booked sales tend to
be seasonal, we may have negative cash flows in particular quarters, particularly the
first quarter, when booked sales tend to be substantially lower than in other
quarters.

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 various covenants. The agreement
includes a letter of credit sublimit not to exceed $1.0 million. At December 31, 2007,
we have an outstanding letter of credit for $206,000. There were no borrowings
outstanding on the line of credit at December 31, 2007 and we were in compliance with
all our covenants.

We expect that cash flow from
operations will continue to be our primary source of funds for the next several years.
Again, this will require us to achieve certain levels of booked sales. If we are unable
to achieve sufficient levels of cash flow from operations, we may seek other sources of
debt or equity financing, or may be required 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.

Liquidity and Capital Resources

Our cash and cash equivalents were $19.9 million at September 30, 2007, compared to $16.4 million at December 31, 2006 and to $13.3 million at September 30, 2006. 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 12 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.

We have a line of credit currently available through December 2, 2008 with Comerica Bank totaling $5.0 million. The line is subject to limitations based on our quick ratio and tangible net worth. Borrowings under the line are subject to various covenants, which may limit our financial and operating flexibility. At September 30, 2007, there were no borrowings outstanding under the line, other than an outstanding letter of credit for $0.2 million. As of September 30, 2007, we were in compliance with all our covenants.

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. 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.

Historically, our first quarter is our lowest booked sales quarter, reflecting school purchasing cycles and a trend in our industry. Therefore, we may have negative cash flow in some quarters, particularly the first quarter, and may borrow funds from time to time. We generally use cash in operations during the first quarter and this trend continued in 2007. Our second quarter is historically our highest booked sales quarter, and the timing of sales and the payment terms given determine whether we generate or use cash. In the three months ended September 30, 2007 we generated significant cash from operations, driven largely by collection of receivables from second quarter sales.

Net cash from operating activities for the nine months ended September 30, 2007 was $3.5 million compared to $1.3 million during the same period in 2006. This difference was primarily the result of increased sales, and the timing of receipts from customers.

Net cash used in investing activities for the nine months ended September 30, 2007 was $991,000, entirely due to capital spending. Net cash generated by investing activities for the nine months ended September 30, 2006 was $2.7 million, primarily due to the maturity of $3.0 million of short term investments. We also received the final payment on our outstanding officer loans during the three months ended March 31, 2006 of $213,000. Capital spending for the nine months ended September 30, 2006 was $581,000.

Financing activities generated $1.0 million for the nine months ended September 30, 2007, compared to $335,000 for the nine months ended September 30, 2006, from proceeds from option exercises and the employee stock purchase plan.