What changed in this filing

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Item 1. Financial Statements

2011-11-09 compared with 2011-08-10 · 542 added, 501 removed, 339 unchanged (75% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

Current assets:

27 unchanged sentences

15,041,274 and 14,585,261

shares outstanding at June 30, 2011 and December 31, 2010, respectively

shares outstanding at September 30, 2011 and December 31, 2010, respectively

Additional paid-in capital

7 unchanged sentences

Consolidated Statements of Operations

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended Sept.

Nine Months Ended Sept.

Strategic services

8 unchanged sentences

Depreciation and amortization

Impairment loss

Other (income) and expense:

12 unchanged sentences

Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

Operating Activities:

1 unchanged sentence

Adjustments to reconcile net loss attributable to Innovaro stockholders to net cash flows from operating

Goodwill and intangible asset impairment

Fixed asset impairment

Net loss attributable to noncontrolling interest

5 unchanged sentences

Deferred income taxes

Loss (gain) on disposal of fixed assets

Bad debt expense

Changes in operating assets and liabilities:

2 unchanged sentences

Deferred revenue

Accounts payable and accrued expenses

Accounts payable, accrued expenses and accrued bonus

Net cash flows from operating activities

1 unchanged sentence

Capital expenditures

Capitalization of software development costs

Proceeds from sale of available-for-sale securities

Proceeds from redemption of certificates of deposit

Net cash flows from investing activities

Financing Activities:

Proceeds from borrowings on bank line of credit

Net repayments on bank line of credit

Payments on long-term debt

Gross proceeds from private equity securities offering

Offering costs paid from private equity securities offering

Net cash flows from financing activities

Effect of foreign exchange rates

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

3 unchanged sentences

Consolidated Statements of Cash Flows (continued)

Six Months Ended June 30,

Nine Months Ended September 30,

Supplemental Disclosures of Non-Cash Investing and Financing Activities

1 unchanged sentence

Derivative liability extinguished in connection with exercise of investor warrants

The Company issued 23,484 shares of common stock in connection with certain acquisition earnout contingencies

The Company transferred certain equity interests in a subsidiary to satisfy a severance obligation resulting in the

2 unchanged sentences

The Company issued 243,933 shares of common stock in connection with its investment in Verdant Ventures Advisors,

Warrants issued as direct offering costs in connection with private equity securities offering

Supplemental Disclosures of Cash Flow Information

7 unchanged sentences

The financial information for Innovaro, Inc.

(the Company, we, us or Innovaro) as of June 30, 2011 and 2010 and for the three and six month periods

then ended is unaudited, but includes all adjustments (consisting only of normal recurring accruals), which, in the opinion of management are necessary in order to make the consolidated financial statements not misleading at such dates and for those

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and, therefore, do not include all

information and notes required by GAAP for complete consolidated financial statements.

These consolidated financial statements should be read in conjunction with the consolidated audited financial statements and related notes included in the

Companys Annual Report on Form 10-K for the year ended December 31, 2010.

Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the entire year.

We commenced operations in

1997 and were originally incorporated under the laws of the State of Florida, and subsequently under the laws of the State of Delaware in July 1999.

The Company provides services that help clients become stronger innovators,

develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their intellectual property (IP) and gain foresight into marketplace and technology developments that affect

their business.

These services are provided internationally from our offices in the United States and the United Kingdom.

Principles of

Consolidation

The consolidated financial statements include the accounts of Innovaro and its wholly owned subsidiaries:

Innovaro Europe,

(the Company, we, us or Innovaro) as of September 30, 2011 and for the three and nine month periods ended

September 30, 2011 and 2010 is unaudited, but includes all adjustments (consisting only of normal recurring accruals), which, in the opinion of management are necessary in order to make the consolidated financial statements not misleading at

such dates and for those periods.

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and,

therefore, do not include all information and notes required by GAAP for complete consolidated financial statements.

These consolidated financial statements should be read in conjunction with the consolidated audited financial statements and related

notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.

Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the

We commenced operations in 1997 and were originally incorporated under the laws of the State of Florida, and subsequently under the laws of the State of

Delaware in July 1999.

Innovaro is The Innovation Solutions Company.

The focus of the business is to help clients innovate and grow.

Innovaro offers a comprehensive set of services and software to assure the success of any

innovation project, regardless of the size or intent.

The Companys unique combination of consulting services provide innovation expertise, its new LaunchPad software product provides an integrated innovation environment, and technology

services provide any business with the innovation support they need to drive success.

These services are provided internationally from offices in the United States and the United Kingdom.

Principles of Consolidation

The consolidated financial statements include the accounts of

Innovaro and its wholly owned subsidiaries:

Innovaro Europe, Ltd.

(formerly UTEK Europe, Ltd.) and UTEK Real Estate Holdings, Inc.

and its subsidiaries:

Ybor City Group, Inc., 22nd Street of Ybor City, Inc., ABM of Tampa Bay, Inc., and Cortez 114, LLC (collectively UTEK Real Estate).

intercompany transactions and balances are eliminated in consolidation.

Ybor City Group, Inc., 22nd Street of Ybor City, Inc., ABM of Tampa Bay, Inc., and Cortez 114,

LLC (collectively UTEK Real Estate).

All intercompany transactions and balances are eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the 2010 balances to conform to the 2011 financial statement presentation.

In particular, reclassifications

were made to the revenue line items in the consolidated statements of operations for the three and six months ended June 30, 2010 to conform to the Companys new business segments.

Reclassifications were also made to the expense line items

in the consolidated statements of operations for the three and six months ended June 30, 2010 to move the direct costs associated with these business lines into two separately captioned line items:

direct costs of revenue strategic

services and direct costs of revenue technology services.

In addition, reclassifications were made to the equity section of the

December 31, 2010 consolidated balance sheet to conform to the June 30, 2011 presentation.

Reclassifications were made to combine the total accumulated loss under investment company accounting of $(52,073,915) with the accumulated deficit

under operating company accounting of $(19,755,429) into one accumulated deficit line item with a balance of $(71,829,344) as of December 31, 2010.

reclassifications have been made to the 2010 balances to conform to the 2011 financial statement presentation.

In particular, reclassifications were made to the revenue line items in the consolidated statements of operations for the three and nine

months ended September 30, 2010 to conform to the Companys new business segments.

Reclassifications were also made to the expense line items in the consolidated statements of operations for the three and nine months ended

September 30, 2010 to move the direct costs associated with these business lines into two separately captioned line items:

direct costs of revenue strategic services and direct costs of revenue technology services.

In addition, reclassifications were made to the equity section of the December 31, 2010 consolidated balance sheet to conform to the

September 30, 2011 presentation.

Reclassifications were made to combine the total accumulated loss under investment company accounting of $(52,073,915) with the accumulated deficit under operating company accounting of $(19,755,429) into one

accumulated deficit line item with a balance of $(71,829,344) as of December 31, 2010.

Significant Accounting Policies

3 unchanged sentences

The Company charges off accounts receivable against the allowance for losses when an account is deemed to be uncollectible.

The Company determines the allowance based on historical bad debt experience,

current receivables aging, expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

It is not the Companys policy to accrue interest on past due receivables.

expense associated with the allowance for doubtful accounts is recognized as a component of general and administrative expense in the consolidated statements of operations.

The allowance for doubtful accounts and notes was approximately $27,000 and

$15,000 as of June 30, 2011 and December 31, 2010, respectively.

The Company determines the allowance based on historical

bad debt experience, current receivables aging, expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

It is not the

Companys policy to accrue interest on past due receivables.

The expense associated with the allowance for doubtful accounts is recognized as a component of general and administrative expense in the consolidated statements of operations.

allowance for doubtful accounts and notes was approximately $14,000 and $15,000 as of September 30, 2011 and December 31, 2010, respectively.

Cost Method Investments

Cost method investments were not evaluated for impairment as of June 30, 2011.

The Company does not estimate the fair value of a cost method

investment if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value because it is not practicable to estimate fair value on a quarterly basis.

Research and Development

In accordance

with Accounting Standards Codification (ASC) Subtopic 985-20 Costs of Software to Be Sold, Leased, or Marketed , the Company expenses all costs incurred to establish the technological feasibility of a computer product to be sold,

leased, or otherwise marketed as research and development costs.

Research and development costs incurred through the second quarter of 2011 have been expensed in the accompanying statements of operations.

As of June 29, 2011, Version 1.0 of the

Innovaro LaunchPad software (LaunchPad) reached technological feasibility with the introduction of a working model.

As such, any further costs that the Company incurs related to the refinement of Version 1.0 will be capitalized as an

intangible asset in the consolidated balance sheet.

Cost method investments were not evaluated for impairment as of

September 30, 2011.

The Company does not estimate the fair value of a cost method investment, before its annual impairment evaluation date of December 31, if there are no identified events or changes in circumstances that may have a

significant adverse effect on the fair value because it is not practicable to estimate fair value on a quarterly basis.

Development Costs

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic

985-20 Costs of Software to Be Sold, Leased or Marketed , requires companies to expense all software development costs incurred until technological feasibility has been established, at which time those costs are capitalized until the product

is available for general release to customers.

In addition, costs incurred to enhance existing software products or after the general release of the product are required to be expensed as incurred as research and development costs.

In accordance with ASC Subtopic 985-20, the Company has expensed all costs incurred to establish the technological feasibility of Version 1.0 of the

Innovaro LaunchPad software (LaunchPad) as research and development costs.

As of June 29, 2011, LaunchPad Version 1.0 reached technological feasibility with the introduction of a working model.

The Company is now incurring costs

related to the refinement of Version 1.0, which will be capitalized until the product is available for general release to market.

The Company capitalized $185,000 in software development costs for each of the three and nine months ended

September 30, 2011.

The Company has begun development of the next components of LaunchPad with Version 2.0.

Costs related to the development of this and other versions of the software will continue to be expensed in the accompanying statements of operations until they too reach technological feasibility.

Costs related to the

development of this and other versions of the software will continue to be expensed until they too reach technological feasibility.

Earnings per Share (EPS)

5 unchanged sentences

per share data are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

September 30,

Weighted-average outstanding shares of common stock

2 unchanged sentences

Shares excluded from calculation of diluted EPS (1)

These shares attributable to outstanding stock options, warrants and unvested restricted stock were excluded from the calculation of diluted EPS because their inclusion

would have been anti-dilutive, primarily as a result of the net loss during the periods presented.

These shares attributable to outstanding stock options, warrants and unvested restricted stock were excluded from the calculation of diluted EPS

because their inclusion would have been anti-dilutive, primarily as a result of having incurred a net loss during the periods presented.

Financial Instruments and Concentrations of Credit Risk

The Companys financial instruments consist of investments, cash and cash equivalents, accounts receivable, accounts payable, accrued expenses,

long-term debt and derivative liabilities.

The fair value of accounts receivable, accounts payable and certain accrued expenses approximate their carrying amounts in the financial statements due to the short-term nature of such instruments.

estimated fair value of the Companys long-term debt as of June 30, 2011 and December 31, 2010 is not materially different from its carrying values at such dates.

The fair value of available-for-sale securities and derivative

liabilities are determined as described in Note 6.

Financial instruments with significant credit risk include investments and cash and cash

The Company maintains its cash and cash equivalents with high credit quality financial institutions in the United States and, at times, balances may exceed federally insured limits.

The Company has not experienced any losses related to

these balances.

The Company had two major customers during each of the three and six months ended June 30, 2011, three major customers

during the three months ended June 30, 2010, and one major customer during the six months ended June 30, 2010, all of which were customers of the strategic services line of business.

Major customers, those generating greater than 10% of

total revenue, accounted for approximately 49% and 38% of the Companys revenue during the three months ended June 30, 2011 and 2010, respectively.

Major customers accounted for approximately 55% and 13% of the Companys revenue

during the six months ended June 30, 2011 and 2010, respectively.

In addition, three customers accounted for approximately 59% of accounts receivable as of June 30, 2011.

Use of Estimates

The preparation of the Companys consolidated financial statements

in conformity with GAAP requires management to make estimates and assumptions that could 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 revenue and expenses during the reporting period.

The Companys most significant estimates relate to revenue recognition, the valuation and impairment of certain investments, stock-based compensation, the valuation and

impairment of goodwill and intangible assets, and the valuation of derivative liabilities.

The Companys financial

instruments consist of investments, cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, long-term debt and derivative liabilities.

The fair value of accounts receivable, accounts payable and certain accrued expenses

approximate their carrying amounts in the financial statements due to the short-term nature of such instruments.

The estimated fair value of the Companys long-term debt as of September 30, 2011 and December 31, 2010 is not materially

different from its carrying values at such dates.

The fair value of available-for-sale securities and derivative liabilities are determined as described in Note 6.

Financial instruments with significant credit risk include investments and cash and cash equivalents.

Company maintains its cash and cash equivalents with high credit quality financial institutions in the United States and, at times, balances may exceed federally insured limits.

The Company has not experienced any losses related to these balances.

The Company had four major customers during each of the three months ended September 30, 2011 and 2010 and two major customers during

each of the nine months ended September 30, 2011 and 2010, all of which were customers of the strategic services line of business.

Major customers, those generating greater than 10% of total revenue, accounted for approximately 80% and 62% of

the Companys revenue during the three months ended September 30, 2011 and 2010, respectively.

Major customers accounted for approximately 54% and 26% of the Companys revenue during the nine months ended September 30, 2011 and

2010, respectively.

In addition, two customers accounted for approximately 65% of accounts receivable as of September 30, 2011.

The preparation of the Companys consolidated financial statements in conformity with GAAP requires management to make

estimates and assumptions that could 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 revenue and expenses during the

reporting period.

The Companys most significant estimates relate to revenue recognition, the valuation and impairment of certain investments, stock-based compensation, the valuation and impairment of goodwill and intangible assets, and the

valuation of derivative liabilities.

Actual results could differ from these estimates.

Recently Issued Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2011-02 A

Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring for the purpose of measuring the impairment of old receivables and evaluating whether a troubled debt restructuring has occurred.

An entity should disclose

the total amount of receivables and the allowances for credit losses as of the end of the period of adoption related to those receivables that are considered newly impaired under ASC Section 310-10-35 for which impairment was previously

measured under ASC Subtopic 450-20, Contingencies Loss Contingencies .

The ASU is effective for the Company with the reporting period beginning July 1, 2011.

The adoption of this ASU is not expected to have an impact on the

Companys financial statements or disclosures.

In May 2011, the FASB issued ASU 2011-04 Amendments to Achieve Common Fair Value

Measurement and Disclosure Requirements in U.S.

In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04 Amendments to Achieve Common Fair Value Measurement

and Disclosure Requirements in U.S.

GAAP and IFRSs .

The ASU expands ASC Topic 820s existing disclosure requirements for fair value measurements and makes other amendments that could change how the fair value measurement

guidance in ASC Topic 820 is applied.

The ASU expands ASC Topic 820s existing disclosure requirements for fair value measurements and makes other amendments that could change how the fair value measurement guidance in ASC

Topic 820 is applied.

The ASU is effective for the Company with the reporting period beginning January 1, 2012.

The adoption of this ASU is not expected to have a significant impact on the Companys financial statements or

In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income , which revises the manner in which

entities present comprehensive income in their financial statements.

The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but

consecutive statements.

The adoption of this ASU is not expected to have a significant impact on the Companys financial statements or disclosures.

In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income , which revises the manner in which entities present

comprehensive income in their financial statements.

The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive

The ASU is effective for the Company with the reporting period beginning January 1, 2012.

The adoption of this ASU will change the way the Company presents comprehensive income in its financial statements.

In September 2011, the FASB issued ASU 2011-08 Testing Goodwill for Impairment.

Under the revised guidance, entities testing goodwill for

impairment have the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test.

If entities determine, on the basis of qualitative factors, that the fair value of the

reporting unit is more likely than not greater than the carrying amount, a quantitative calculation is not needed.

The ASU is effective for the Companys annual and interim goodwill impairment tests performed with the reporting period beginning

January 1, 2012 with early adoption permitted.

The adoption of this ASU is not expected to have a significant impact on the Companys financial statements.

Accounts Receivable

Accounts receivable consist of the following as of June 30, 2011 and December 31, 2010:

Accounts receivable consist of the following as of September 30, 2011 and December 31, 2010:

September 30,

Trade accounts receivable

3 unchanged sentences

Contracts in Process

Contracts in process consist of the following as of June 30, 2011 and December 31, 2010:

Contract costs and estimated profits on contracts in process

Contracts in process consist of the following as of September 30, 2011 and December 31, 2010:

September 30,

Contract costs and estimated earnings on uncompleted contracts

advances and progress payments

Total contracts in process

Components of contracts in process consist of the following as of June 30, 2011 and December 31, 2010:

Components of contracts in process consist of the following as of September 30, 2011 and December 31, 2010:

September 30,

Billings in excess of costs and estimated earnings on uncompleted contracts

4 unchanged sentences

Investments Debt and Equity Securities and its intentions regarding these instruments.

A summary of the estimated fair value of available-for-sale securities is as follows as of June 30, 2011 and December 31, 2010.

A summary of the estimated fair value of available-for-sale securities as of September 30, 2011 and December 31, 2010 is presented below.

Unrealized (1)

As of June 30, 2011

As of September 30, 2011

As of December 31, 2010

The net unrealized gain (loss) is included in equity as a component of accumulated other comprehensive income in the consolidated balance sheets.

As of June 30, 2011, none of our five available-for-sale securities were in an unrealized loss position.

The Company had

no sales of available-for-sale securities during the three and six months ended June 30, 2011.

Proceeds from the sale of available-for-sale securities were approximately $214,000 and $249,000 for the three and six months ended June 30,

2010, respectively.

The Company recognized an impairment loss of $201 on available-for-sale securities during the six months ended June 30, 2011.

Gross realized gain (loss) as a result of the sale of available-for-sale securities was

approximately $100,000 and $111,000 for the three and six months ended June 30, 2010, respectively.

In addition, the Company recognized an impairment loss to available-for-sale securities of approximately $146,000 during the six months ended

June 30, 2010.

As of September 30, 2011, none of our five available-for-sale securities were in an unrealized loss position.

Company had no sales of available-for-sale securities during the three and nine months ended September 30, 2011.

Proceeds from the sale of available-for-sale securities were approximately $63,000 and $312,000 for the three and nine months ended

September 30, 2010, respectively.

The Company recognized an impairment loss of $201 on available-for-sale securities during the nine months ended September 30, 2011.

Gross realized gain (loss) as a result of the sale of available-for-sale

securities was approximately $(57,000) and $54,000 for the three and nine months ended September 30, 2010, respectively.

In addition, the Company recognized an impairment loss to available-for-sale securities of approximately $146,000 during

the nine months ended September 30, 2010.

The realized gain (loss) related to available-for-sale securities is included as a component of other (income) expense in the consolidated statements of operations.

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Fair Value Measurements

1 unchanged sentence

and Disclosures .

Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

When determining the fair

1 unchanged sentence

pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Topic 820 establishes a fair value

hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist.

When there are multiple inputs for determining the fair value of an investment, the Company classifies

the investment in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

ASC Topic 820 establishes a fair

value hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist.

When there are multiple inputs for determining the fair value of an investment, the Company

classifies the investment in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

Inputs are classified into one of three categories:

Level 1Unadjusted quoted prices in active markets for identical assets or liabilities.

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Level 2Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in

1 unchanged sentence

Level 3Unobservable inputs for the asset or liability.

Assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2011 and December 31, 2010 are as follows:

Fair Value Measurements at

Assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2011 and December 31, 2010 are as follows:

Fair Value Measurements

September 30, 2011 (1)

Fair Value Measurements at

5 unchanged sentences

Total liabilities

The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of June 30, 2011 or

December 31, 2010.

The Companys investments in available-for-sale securities are classified within Level 2 of the

fair value hierarchy.

The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of September 30,

2011 or December 31, 2010.

The Companys investments in available-for-sale securities are classified within Level

2 of the fair value hierarchy.

Our equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active.

The determined values are generally

discounted to account for the illiquid nature of the investment and minority ownership positions.

The value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for similar

instruments in an active market.

The determined values are

generally discounted to account for the illiquid nature of the investment and minority ownership positions.

The value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for

similar instruments in an active market.

These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale.

The Company utilizes the market approach in determining the fair value of these

The Company utilizes the market approach in determining the fair value of

these securities.

The Companys derivative liabilities are classified within Level 2 of the fair value hierarchy.

The Company utilizes the

Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Companys common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility.

The Company considered the use of a binomial model, but determined that the probability of the exercise price adjusting downward was remote.

The Company utilizes

the Black-Scholes Model to value the derivative liabilities utilizing observable inputs such as the Companys common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility.

considered the use of a binomial model, but determined that the probability of the exercise price adjusting downward was remote.

The Black-Scholes Model employs the market approach in determining fair value.

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Derivative Liabilities

4 unchanged sentences

The Company recognized a gain (loss) related to the adjustment of these derivatives to fair value of approximately $513,000 and $776,000 for the three months ended

June 30, 2011 and 2010, respectively, and $(1,424,000) and $42,000 for the six months ended June 30, 2011 and 2010, respectively.

The Company uses the Black-Scholes option pricing model to estimate the fair value of the derivative instrument.

The Company employed the following

assumptions for the Black-Scholes model at June 30, 2011 and December 31, 2010:

September 30, 2011 and 2010, respectively, and $(911,000) and $818,000 for the nine months ended September 30, 2011 and 2010, respectively.

The Company uses the Black-Scholes Model to estimate the fair value of the derivative instrument.

The Company employed the following assumptions for the Black-Scholes Model at September 30, 2011 and

December 31, 2010:

September 30,

Expected dividend yield

1 unchanged sentence

Risk-free interest rate

Expected life of options

Expected life

3.8 - 5.0 years

0.35 - $ 1.42

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Warrant Exercise

5 unchanged sentences

Accumulated Other Comprehensive Income

Components comprising accumulated other comprehensive income as of and for the six months ended June 30, 2011 are as follows:

Components comprising accumulated other comprehensive income as of and for the nine months ended September 30, 2011 are as follows:

Unrealized gain

5 unchanged sentences

Gain (loss) for the period

Balances at June 30, 2011

Balances at September 30, 2011

Other (Income) Expense

Components comprising other (income) expense for the three and six months ended June 30, 2011 and 2010 are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Components comprising other (income) expense for the three and nine months ended September 30, 2011 and 2010 are as follows:

September 30,

Loss (gain) on sale and impairment of investments

2 unchanged sentences

Other (income) expense

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Comprehensive Income (Loss)

Comprehensive income (loss) for the six months ended June 30, 2011 and 2010 is as follows:

Six Months Ended June 30,

Comprehensive income (loss) for the nine months ended September 30, 2011 and 2010 is as follows:

Nine Months Ended September 30,

Net loss attributable to Innovaro stockholders

Other comprehensive income (loss):

3 unchanged sentences

Comprehensive loss

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Segment Reporting

5 unchanged sentences

A summary of revenue and other financial information by reportable geographic operating segment is shown below:

United States

Long-lived assets June 30, 2011

Total assets June 30, 2011

Long-lived assets December 31, 2010

Total assets December 31, 2010

For the Three Months Ended June 30, 2011

0000000000000,

For the Three Months Ended September 30, 2011

United States

1 unchanged sentence

Depreciation and amortization

For the Three Months Ended June 30, 2010

For the Three Months Ended September 30, 2010

United States

1 unchanged sentence

Depreciation and amortization

For the Six Months Ended June 30, 2011

000000000000,,

For the Nine Months Ended September 30, 2011

United States

1 unchanged sentence

Depreciation and amortization

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For the Six Months Ended June 30, 2010

For the Nine Months Ended September 30, 2010

United States

1 unchanged sentence

Depreciation and amortization

From time to time, the Company will reorganize its internal organizational structure to better align its service

Loss before income

taxes for the United Kingdom segment included impairment charges of approximately $2.9 million for each of the three and nine months ended September 30, 2010.

Loss before income taxes for the United States segment included impairment charges of approximately $8.7 million for each of the three and nine months

ended September 30, 2010.

From time to time, the Company will reorganize its internal organizational structure to

better align its service offerings.

In 2011, we reorganized into two new lines of business:

Strategic Services and Technology Services.

As a result, business segment information for the six months ended June 30, 2010 has been restated to reflect the new business

As a result, line of business segment information for the three and nine months ended September 30, 2010 has

been restated to reflect these new segments.

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A summary of revenue and other financial information by reportable line of business segment is shown below:

For the Three Months Ended June 30, 2011

0000000000000,

For the Three Months Ended September 30, 2011

Administrative

Income (loss) before income taxes

For the Three Months Ended June 30, 2010

For the Three Months Ended September 30, 2010

Administrative

Income (loss) before income taxes

For the Six Months Ended June 30, 2011

Loss before income taxes

For the Nine Months Ended September 30, 2011

Administrative

Income (loss) before income taxes

For the Six Months Ended June 30, 2010

Administrative00,

Income (loss) before income taxes

Page 14 of 31

Management Changes

Appointment of Chief Executive Officer

Effective April 17, 2011, the Companys Board of Directors appointed Mr.

Asa Lanum as the Companys permanent Chief Executive Officer and a member of the Board of Directors.

Lanum has served as the Interim Chief Executive Officer since August 2010.

The Company agreed to pay Mr.

Lanum an annual base salary of $325,000 and awarded him options to purchase 250,000 shares of the Companys common stock.

Departure of Managing Director

Effective April 22, 2011, Peter C.

Skarzynski resigned from his position as Managing Director of the strategic services division.

In accordance with the terms of his employment agreement,

Skarzynski remains bound by a covenant regarding the protection of our confidential information and a one-year covenant not to solicit our clients or employees.

Skarzynski continues to act as a consultant to the Company.

On April 22, 2011, the Company appointed Mr.

Gary Getz as Managing Director of the strategic services division.

held a management position at Innovaro since its acquisition of Strategos in 2008, and held a management position at Strategos since the companys founding.

Administrative00,

For the Nine Months Ended September 30, 2010

Administrative

Loss before income taxes

Loss before income taxes for the strategic services segment included impairment charges of approximately $4.9 million for each of the three and nine

months ended September 30, 2010.

Loss before income taxes for the technology services segment included impairment charges of approximately $5.5 million for each of the three and nine

months ended September 30, 2010.

Loss before income taxes for administrative and other included impairment charges of approximately $1.3 million for each of the three and nine months

ended September 30, 2010.

Stock Compensation Plans

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Page 14 of 30

Managements Discussion and Analysis of Financial Condition

and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the

notes thereto included elsewhere in this Form 10-Q.

This Form 10-Q contains forward-looking statements regarding the plans and objectives of management for future operations.

These forward-looking statements may involve known and unknown risks,

uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.

Forward-looking

statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words may, will, should, expect, anticipate,

estimate, believe, intend or project or the negative of these words or other variations on these words or comparable terminology.

These forward-looking statements are based on assumptions that may be

incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass.

Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of

various factors.

Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.

This Form 10-Q contains forward-looking

statements regarding the plans and objectives of management for future operations.

These forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements

to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.

Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are

generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.

forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass.

Our actual results could differ materially from those expressed

or implied by the forward-looking statements as a result of various factors.

Business Overview

We provide services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their

intellectual property and gain foresight into marketplace and technology developments that affect their business.

Innovaro is The Innovation Solutions Company.

The focus of our business is to help clients innovate and grow.

Innovaro offers a comprehensive set of

services and software to assure the success of any innovation project, regardless of the size or intent.

Our unique combination of consulting services provide innovation expertise, our new LaunchPad software product provides an integrated innovation

environment, and technology services provide any business with the innovation support they need to drive success.

These services are provided internationally from our offices in the United States and the United Kingdom.

We have two business segments:

Strategic Services and Technology Services.

Our clients require strategies to help them embrace improved innovation capabilities.

We apply innovation insights;

build those strategies with supporting infrastructure, processes and mechanisms;

create a culture primed for repeatable innovation success.

We help organizations create and realize new, breakthrough growth strategies, create and execute non-incremental new growth platforms and opportunities, and develop the capability for

ongoing creation and execution of those growth platforms and concepts.

We provide strategic services to enable our clients to become more

efficient by finding new avenues to grow, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation.

Business value is delivered to clients through working with a team of seasoned

and experienced professionals capable of unlocking an organizations capacity by:

People are the key to providing innovation expertise though our consulting services.

Our people have defined and refined our methodology for over 15

years with more than 250 clients in over 750 engagements, which has created a proven effective process to get a company through the innovation cycle.

This process has served to develop our Leading Edge Innovation Practices (LEIPs)

contained within our methodology.

We provide strategic services to enable our clients to become more efficient by finding new avenues to

grow, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation.

Business value is delivered to clients through working with a team of seasoned and experienced professionals capable

of unlocking an organizations capacity by:

Identifying and developing new segments and markets;

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Assessing a companys innovation capability.

Our technology services segment offers expansive networks, experts in scouting, partner sourcing and licensing expertise, and world leading online marketplaces.

We also provide an important foundation to

successful licensingunderstanding the true potential value of our clients intellectual property IP and IP portfolio.

We access that value and build a roadmap for our clients use, and uncover opportunities and options to

realize any latent value.

We have an online information service, purpose-built for those who need it mosttechnology transfer, business

development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences.

provide the insight and intelligence our clients require, applied to their markets today and into the future.

From current market research to predictive intelligence, we help our clients find insights at the intersections affecting their business.

Our research identifies and explains key consumer trendsincluding emerging trends not covered by other sourcesand delivers insights about how these trends will shape the future operating environment.

These services include:

Futures scenario development and planning

Custom and syndicated research

Online information services

IP consulting

IP and market landscape analysis

Technology search

Our technology services business provides information to assist clients in gaining insights and making decisions.

We offer expansive networks, experts in scouting, partner sourcing and licensing

expertise, and world leading online marketplaces.

We also provide an important foundation to successful licensingunderstanding the true potential value of our clients intellectual property IP and IP portfolio.

We access that

value and build a roadmap for our clients use, and uncover opportunities and options to realize any latent value.

We have an online

information service, purpose-built for those who need it mosttechnology transfer, business development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences.

We also provide the insight and intelligence our clients require, applied to their markets today and into the future.

From current market research to

predictive intelligence, we help our clients find insights at the intersections affecting their business.

Our research identifies and explains key consumer trendsincluding emerging trends not covered by other sourcesand delivers insights

about how these trends will shape the future operating environment.

Our LaunchPad software product provides an integrated innovation

environment which embodies our LEIPs to offer a process that is repeatable, reliable and scalable.

LaunchPad helps innovation teams by making their jobs better, faster and easier.

Page 15 of 30

In- and out-licensing

Online marketplaces

Partner search and profiling

Innovaro LaunchPad

We are continuing the development of our innovation management software

platform, Innovaro LaunchPad (LaunchPad), which is designed to enhance and complement our innovation service offerings to clients.

We have completed an external review by users of Version 1.0 of LaunchPad, which continues to evolve based

on their feedback, and have introduced this version to the market.

We are continuing the development of the next components of LaunchPad, which are designed to take the outputs from the current product and extend them further into the

organizations product delivery process.

We are continuing the development of our innovation management software platform, Innovaro LaunchPad (LaunchPad), which is designed to enhance and complement our innovation service offerings

Previously in 2011, we introduced a working model of Version 1.0 of the LaunchPad software to certain customers.

We will continue to incur costs related to the refinement of Version 1.0 while proceeding with the development of

the next components of LaunchPad with Version 2.0.

The next components of LaunchPad are designed to take the outputs from the current product and extend them further into the organizations product delivery process.

Recent Developments

On April 18, 2011, our Board of the Directors increased its size from four to five directors and, upon the recommendation of the Nominating and Corporate Governance Committee, elected

Asa Lanum as a new director.

In addition, our Board of Directors appointed Mr.

2011, our Board of the Directors increased its size from four to five directors and, upon the recommendation of the Nominating and Corporate Governance Committee, elected Asa Lanum as a new director.

In addition, our Board of

Directors appointed Mr.

Lanum, who has served as our interim Chief Executive Officer since August 2010, as our permanent Chief Executive Officer.

In connection with such appointment,

we agreed to pay Mr.

Lanum an annual base salary of $325,000 and awarded him options to purchase 250,000 shares of the Companys common stock.

In connection with such appointment, we agreed to pay Mr.

Lanum an annual base salary of

$325,000 and awarded him options to purchase 250,000 shares of the Companys common stock.

Effective April 22, 2011, Peter C.

Skarzynski resigned from his position as Managing Director of the strategic services division.

In accordance with the terms of his employment agreement,

Skarzynski remains bound by a covenant regarding the protection of our confidential information and a one-year covenant not to solicit our clients or employees.

In accordance with the terms of his employment agreement, Mr.

Skarzynski remains bound by a covenant regarding the protection of our confidential

information and a one-year covenant not to solicit our clients or employees.

Skarzynski continues to act as a consultant for us.

On April 22, 2011, we appointed Mr.

Gary Getz as Managing Director of the strategic services division.

Getz has held a management

position at Innovaro since its acquisition of Strategos in 2008, and held a management position at Strategos since the companys founding.

In June 2011, our stockholders approved an amendment and restatement of our three existing equity compensation plans as one plan, the Innovaro, Inc.

April 22, 2011, we appointed Gary Getz as Managing Director of the strategic services division.

Getz has held a management position at Innovaro since its acquisition of Strategos in 2008, and held a management position at Strategos

since that companys founding.

In June 2011, our stockholders approved an amendment and restatement of our three existing equity

compensation plans as one plan, the Innovaro, Inc.

Equity Compensation Plan (the Equity Compensation Plan).

The maximum number of shares available for issuance under the Equity Compensation Plan is 4,626,274, which is the total number of shares available under the existing Non-Qualified

Option Plan, Employee Option Plan and Restricted Stock Plan.

The options and restricted stock previously granted under the three existing equity compensation plans are counted in determining the shares that remain available for issuance under the

The maximum number of shares available for issuance under the Equity Compensation Plan is 4,626,274, which is the total number of

shares available under the existing Non-Qualified Option Plan, Employee Option Plan and Restricted Stock Plan.

The options and restricted stock previously granted under the three existing equity compensation plans are counted in determining the

shares that remain available for issuance under the Equity Compensation Plan.

The Compensation Committee of the Companys Board of Directors determines those officers, employees, directors and consultants who are eligible to participate in the

Equity Compensation Plan.

The Compensation Committee of the Companys Board of Directors determines those officers, employees, directors and consultants who are eligible to participate in the Equity Compensation Plan.

The amendment and

restatement of the three existing plans as the Equity Compensation Plan did not increase the number of shares of common stock authorized for issuance as stock-based incentive compensation, but gives the Compensation Committee greater flexibility to

make grants of non-qualified options, incentive stock options or restricted stock as it deems appropriate, since one maximum limit will apply to all three types of stock-based incentive compensation.

The amendment and restatement of the three existing plans as the Equity Compensation Plan did not increase the number of shares of common stock authorized for issuance as stock-based incentive compensation, but gives the

Compensation Committee greater flexibility to make grants of non-qualified options, incentive stock options or restricted stock as it deems appropriate, since one maximum limit will apply to all three types of stock-based incentive compensation.

Financial Condition

Our total assets

were $25.0 million as of June 30, 2011 and $24.7 million as of December 31, 2010.

As of June 30, 2011, we had $633,000 in cash and cash equivalents, $2.9 million in accounts receivable and contracts in process, $3.4 million in

accounts payable, accrued expenses and accrued bonus and $5.5 million in total debt outstanding.

As of December 31, 2010, we had $263,000 in cash and cash equivalents, $2.0 million in accounts receivable and contracts in process, $1.5 million

in accounts payable and accrued expenses and $5.8 million in total debt outstanding.

As of June 30, 2011, we had a working capital deficit of $402,000 and an accumulated deficit of $74.7 million.

total assets were $24.1 million as of September 30, 2011 and $24.7 million as of December 31, 2010.

As of September 30, 2011, we had $1.5 million in cash and cash equivalents, $1.2 million in accounts receivable and contracts in

process, $3.7 million in accounts payable, accrued expenses and accrued bonus and $5.4 million in total debt outstanding.

As of December 31, 2010, we had $263,000 in cash and cash equivalents, $2.0 million in accounts receivable and contracts

in process, $1.5 million in accounts payable and accrued expenses and $5.8 million in total debt outstanding.

As of September 30, 2011, we had a working capital deficit of $1.4 million and an accumulated deficit of $75.4 million.

Page 16 of 30

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Our strategic services revenue is derived from consulting services we provide to our clients.

Our strategic services revenue increased by $2.6 million for the three months ended June 30, 2011 in

comparison to the three months ended June 30, 2010.

In addition, our strategic services revenue increased by $4.2 million for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

These increases are

the result of this division having a significant number of new contracts with a higher average value during the three and six months ended June 30, 2011 than we had during the three and six months ended June 30, 2010.

We attribute the

increased contract level in 2011 to a renewed interest in innovation efficiency and new product development in the U.S.

In addition, certain of the contracts have required the work of a specialist consultant who bills out at a

significantly higher rate than that of the other consultants, which contributed to an increase in revenue of approximately $450,000 for both the three and six months ended June 30, 2011.

An increase in reimbursable expenses related to overseas

travel and lodging contributed to an increase in revenue of approximately $600,000 for both the three and six months ended June 30, 2011.

Our strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment

contracts with us expired in April 2011.

We were able to retain the majority of these consulting professionals under new employment contracts or consulting contracts in order to maintain the level of strategic services revenue we have generated in

recent years.

We expect that our strategic services revenue will continue to increase over 2010 levels for the remainder of 2011, although we

do not expect the increase to be at the level experienced for the second quarter of 2011.

Our strategic services revenue decreased by $438,000 for the three months ended September 30, 2011 in

comparison to the three months ended September 30, 2010.

The decrease is the result of this division having a 40% decline in the value of contracts in process during the three months ended September 30, 2011 in comparison to the same

period of 2010.

However, certain of the current year contracts have required the work of a specialist consultant who bills out at a significantly higher rate than that of the other consultants, which partially offset the decrease in revenue by

approximately $225,000 for the three months ended September 30, 2011 over the same period of 2010.

Our strategic services revenue

increased by $3.8 million for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The increase is the result of this division having a significant number of new contracts with a higher

average value during the nine months ended September 30, 2011 in comparison to the same period of 2010.

We attribute the increased contract level in 2011 to a renewed interest in innovation efficiency and new product development in the U.S.

In addition, certain of the current year contracts have required the work of a specialist consultant who bills out at a significantly higher rate than that of the other consultants, which contributed to an increase in revenue of

approximately $574,000 for nine months ended September 30, 2011 over the same period of 2010.

An increase in billable expenses related to overseas travel and lodging contributed to an increase in revenue of approximately $714,000 for the nine

months ended September 30, 2011 over the same period of 2010.

Our strategic services revenue in recent years has largely been dependent

on the efforts of certain key consulting professionals whose employment contracts with us expired in April 2011.

We were able to retain the majority of these consulting professionals under new employment contracts or consulting contracts in order to

maintain the level of strategic services revenue we have generated in recent years.

We expect that our strategic services revenue will

decrease from that of the three months ended September 30, 2011 for the remainder of 2011.

Technology Services

Our technology services revenue is derived from a combination of global technology partnering search retainer fees, online subscription fees, online

information services revenue, foresight and trend research revenue and IP consulting revenue.

Our technology services revenue decreased by $214,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30,

The decreased revenue is primarily a result of a reduction of $10,000 in monthly fees for our global technology partnering services, a reduction of $93,000 in online marketplace fees and a reduction of $142,000 in intellectual property

analytics research revenue, partially offset by an increase in our online report store sales.

Our technology services revenue is derived from a combination of global technology licensing services, online marketplace fees, foresight and trend

research revenue and intellectual property (IP) consulting revenue.

Our technology services revenue decreased by $348,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The decreased revenue is primarily a result of a reduction of $27,000 in monthly fees for our global technology licensing services, a reduction of $26,000 in online marketplace fees, and a reduction of $342,000 in foresight and trend research

revenue, partially offset by an increase of $44,000 in intellectual property consulting revenue.

Our technology services revenue decreased by

$479,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

The decreased revenue is primarily a result of a reduction of $50,000 in monthly fees for our global technology partnering services, a

reduction of $269,000 in online marketplace fees and a reduction of $154,000 in foresight and trend research revenue.

The decreased revenue throughout this division for the three and six months ended June 30, 2011 in comparison to the same

periods of 2010 results from a reduction in the number of personnel selling and fulfilling projects, which has had a direct impact on new sales for this business.

Consequently, we have not been able to replace prior year contracts with new contracts

as they come up for renewal.

We expect that our technology services revenue will remain consistent with the six months ended June 30,

2011 for the remainder of 2011.

$828,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decreased revenue is primarily a result of a reduction of $75,000 in monthly fees for our global technology licensing

services, a reduction of $110,000 in online marketplace fees, a reduction of $530,000 in foresight and trend research revenue, and a reduction of $103,000 in intellectual property consulting revenue.

The decreased revenue throughout this division

for the three and nine months ended September 30, 2011 in comparison to the same periods of 2010 results from a reduction in the number of personnel selling and fulfilling projects, as well as budget cuts for a large group of our customers.

This has had a significant, direct impact on new sales and renewals for this line of business.

We expect that our technology services revenue

will remain consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Page 17 of 30

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(in thousands, except percentages)

September 30,

Direct costs of revenue - strategic services

Direct costs of revenue - technology services

Total direct costs of revenue

Direct Costs of Revenue - Strategic Services

Direct costs of revenue for strategic services are comprised of salaries and related taxes, bonuses, certain outside services and other business development costs related to our strategic services

The most significant portion of direct costs of revenue for strategic services is comprised of consulting personnel compensation, which includes bonuses.

Direct costs of strategic services revenue included a $1.5 million bonus accrual as a

result of the high level of revenue for the three and six months ended June 30, 2011.

In comparison, there was no bonus accrual for the three and six months ended June 30, 2010.

In connection with the expiration of certain of the strategic services managers contracts in the second quarter of 2011, we have retained certain of these former managers as consultants.

rate these consultants receive is higher than the pay rate of most other consultants we use due to their experience and relationship with the customers.

In addition, certain of the contracts have required the work of a specialist consultant whose

cost is much higher than that of the other consultants.

We also needed to hire more consultants during the second quarter of 2011 as a result of the high number of contracts in process.

Direct costs of revenue for strategic services increased by $3.3 million for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010.

The increase is primarily

related to a $1.5 million increase in the bonus accrual, a $1.1 million increase in outside consultant expenditures and a $600,000 increase in overseas travel and lodging during the three months ended June 30, 2011.

The gross margin for the strategic services business decreased to 2% for the three months ended June 30, 2011 in comparison to 39% for the three

months ended June 30, 2010.

The decrease in the gross margin down to 2% in the three months ended June 30, 2011 is a direct result of the bonus accrual.

The first quarter that a bonus is recorded in any given year results in a skewed gross

margin because the cost is recorded in one quarter for a bonus that relates to year-to-date revenue.

Direct costs of revenue for strategic

services increased by $4.0 million for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

The increase is primarily related to a $1.5 million increase in the bonus accrual, a $1.7 million increase in

outside consultant expenditures and a $600,000 increase in overseas travel and lodging during the six months ended June 30, 2011.

gross margin for the strategic services business decreased to 19% for the six months ended June 30, 2011 in comparison to 35% for the six months ended June 30, 2010.

The decrease is primarily related to the bonus accrual and utilization of

contractors at higher than normal rates.

We expect that our direct costs of revenue for strategic services will decrease from the six months

ended June 30, 2011 for the remainder of 2011.

Direct costs of revenue - strategic services are comprised of salaries and related taxes, bonuses, certain outside services and other business development costs related to our strategic services business.

The most significant portion of direct costs of revenue - strategic services is comprised of consulting personnel compensation, which includes bonuses.

Direct costs of revenue - strategic services included a bonus accrual of $805,000 and $2.3

million for the three and nine months ended September 30, 2011, respectively.

In comparison, direct costs of revenue - strategic services included a bonus accrual of $1.8 million for each of the three and nine months ended September 30,

In connection with the expiration of the employment contracts for the management team of the strategic services division in the second

quarter of 2011, we have retained certain of these former professionals as consultants.

The pay rate these consultants receive is higher than the pay rate of most other consultants we use due to their experience and relationship with the customers.

In addition, certain of the contracts have required the work of a specialist consultant whose cost is much higher than that of the other consultants.

We also needed to hire more consultants during 2011 as a result of the high number of contracts in

process and a reduction in the number of employees.

Direct costs of revenue - strategic services decreased by $369,000 for the three months

ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The decrease is primarily related to a $1.0 million decrease in the bonus accrual and a $250,000 decrease in salaries, partially offset by an $859,000

increase in outside consultant expenditures as discussed above.

The gross margin for the strategic services business decreased to 5% for the

three months ended September 30, 2011 in comparison to 6% for the three months ended September 30, 2010.

This gross margin level for the three months ended September 30, 2011 and 2010 is a direct result of the bonus accrual during

these periods.

Direct costs of revenue - strategic services increased by $3.6 million for the nine months ended September 30, 2011 in

comparison to the nine months ended September 30, 2010.

The increase is primarily related to a $533,000 increase in the bonus accrual, a $2.5 million increase in outside consultant expenditures as discussed above, and a $714,000 increase in

overseas travel and lodging, partially offset by a $135,000 decrease in salaries.

The gross margin for the strategic services business

decreased to 15% for the nine months ended September 30, 2011 in comparison to 21% for the nine months ended September 30, 2010.

The decrease is primarily related to the bonus accrual and utilization of consultants at higher than normal

We expect that our direct costs of revenue - strategic services will decrease from that of the three months ended September 30,

2011 for the remainder of 2011.

Direct Costs of Revenue - Technology Services

Direct costs of revenue for technology services are comprised of certain salaries and related taxes, commissions, certain outside services and other

direct costs related to technology services.

Direct costs of technology services revenue decreased by $65,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010.

In addition, direct costs of

revenue for technology services decreased by $176,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

The majority of the decrease relates to a reduction in sales and project management

personnel, as well as the reduced utilization of outside contractors related to the reduced amount of revenue.

Direct costs of revenue - technology services are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to technology services.

of revenue - technology services decreased by $61,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

In addition, direct costs of revenue - technology services decreased by

$237,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decreases primarily relate to a reduction in sales and project management personnel, as well as the reduced utilization of

outside contractors, related to the decline in revenue.

The gross margin for the technology services business decreased to 42% for the three

months ended September 30, 2011 in comparison to 58% for the three months ended September 30, 2010.

In addition, the gross margin for the technology services

Page 18 of 30

The gross margin for the technology services business decreased to 46% for the three months ended

June 30, 2011 in comparison to 51% for the three months ended June 30, 2010.

In addition, the gross margin for the technology services business decreased to 44% for the six months ended June 30, 2011 in comparison to 49% for the six

months ended June 30, 2010.

The decrease is related to the aforementioned reduction in sales personnel having had a negative impact on new sales for this business.

We expect that our direct costs of revenue for technology services will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.

business decreased to 43% for the nine months ended September 30, 2011 in comparison to 52% for the nine months ended September 30, 2010.

These decreases are related to the

aforementioned reduction in sales personnel and certain customer budgets having had a more negative impact on new sales and renewals for this business as compared to the impact on the direct costs of revenue for this business.

We expect that our direct costs of revenue - technology services will remain consistent with that of the three months ended September 30, 2011 for

the remainder of 2011.

Salaries and Wages

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Salaries and wages include non-sales employee and officer salaries and related benefits, including bonuses and stock-based compensation that are not otherwise allocated to direct costs of

Salaries and wages decreased by $305,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010.

The decrease relates to a $55,000 reduction in officers salaries as a result of a

CEO change and a $282,000 reduction in administrative staff, partially offset by a $34,000 increase in stock compensation expense as a result of certain options issued to our new CEO during the three months ended June 30, 2011.

Salaries and wages decreased by $659,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

decrease relates to a $133,000 reduction in officers salaries as a result of a CEO change, a $495,000 reduction in administrative staff, and a $31,000 reduction in stock compensation expense as a result of a change in estimate made in

conjunction with the valuation of our stock option issuances.

We expect that our salaries and wages will increase over the six months ended

June 30, 2011 for the remainder of 2011 as a result of the permanent hire of our interim CEO in April 2011.

Salaries and wages decreased by $211,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The decrease relates to a $209,000 reduction in officers salaries as a

result of severance expense related to our former CEO in the third quarter of 2010 and a $130,000 reduction in administrative staff, partially offset by an increase of $226,000 in stock compensation expense that resulted from a change in estimate

related to stock options in the third quarter of 2010.

Salaries and wages decreased by $870,000 for the nine months ended September 30,

2011 in comparison to the nine months ended September 30, 2010.

The decrease relates to a $342,000 reduction in officers salaries as a result of a CEO change and a $407,000 reduction in administrative staff, partially offset by an

increase of $194,000 in stock compensation expense that resulted from a change in estimate related to stock options in the third quarter of 2010.

We expect that our salaries and wages will remain consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Professional Fees

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Professional fees

decreased by $69,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010.

The majority of this decrease is related to a reduction in accounting fees as a result of our having become a smaller

reporting company (a designation under the federal securities laws that impacts the level of our disclosure requirement thereunder) during 2010.

As a smaller reporting company, we are subject to a more streamlined reporting regime than the reporting

regime for larger companies, including the elimination of the requirement to have our auditors audit our internal control over financial reporting.

Professional fees decreased by $182,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

Valuation expenses were reduced by $34,000 because our

investments no longer require outside valuations on a quarterly basis.

decreased by $40,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The majority of the decrease is related to a $53,000 reduction in accounting fees as a result of our having

become a smaller reporting company (a designation under the federal securities laws that impacts the level of our disclosure requirement thereunder) during 2010.

As a smaller reporting company, we are subject to a more streamlined reporting regime

than the reporting regime for larger companies, including the elimination of the requirement to have our auditors audit our internal control over financial reporting.

Professional fees decreased by $223,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

Valuation expenses were reduced by $38,000 because

our investments no longer require outside valuations on a quarterly basis.

Accounting fees were reduced by $132,000 as a result of our having become a smaller reporting company during 2010.

Legal fees were reduced by $69,000 because of costs incurred

during the six months ended June 30, 2010 related to the preparation of our restricted stock plan and the settlement of a severance liability related to our former CEO that were not repeated during the six months ended June 30, 2011.

Legal fees were reduced by $52,000 because of costs

incurred during the nine months ended September 30, 2010 related to the preparation of our restricted stock plan and the settlement of a severance liability related to our former CEO that were not repeated during the nine months ended

September 30, 2011.

Page 19 of 30

We expect that our professional fees will remain consistent with the six months ended June 30, 2011

for the remainder of 2011.

We expect that our professional fees will remain consistent with that of the three months ended

September 30, 2011 for the remainder of 2011.

Research and Development

3 unchanged sentences

Research and development costs include salaries, outside services, travel and other costs related to the development of

our innovation management software platform, which is designed to enhance and complement our innovation services offerings to clients.

Research and development costs decreased by $21,000 for the three months ended June 30, 2011 in comparison to

the three months ended June 30, 2010.

The decrease is related to a $66,000 decrease in salaries and related costs and a $16,000 reduction in travel, partially offset by a $53,000 increase in outside service providers and an $8,000 increase in

marketing costs.

Research and development costs increased by $83,000 for the six months ended June 30, 2011 in comparison to the six

months ended June 30, 2010.

The increase is related to a $140,000 increase in outside service providers and a $9,000 increase in marketing costs, partially offset by a $34,000 decrease in salaries and related costs and a $29,000 reduction in

In accordance with accounting guidance, we expense all costs incurred to establish the technological feasibility of our software

platform as research and development expenses.

With the established working model of LaunchPad Version 1.0, all costs related to the refinement of this product will be capitalized.

We have begun development of the next components of LaunchPad with

Version 2.0 and the costs related to the development of this product will be expensed as research and development.

We expect to incur an additional $300,000 on product development of Version 2.0 and refinement of Version 1.0 of LaunchPad during the

third quarter of 2011.

Since a portion of these costs will be capitalized, we expect that research and development expense will decrease from current levels for the remainder of 2011.

our LaunchPad software platform, which is designed to enhance and complement our innovation services offerings to clients.

Research and development costs decreased by $270,000 and $187,000 for the three and nine months ended September 30, 2011

in comparison to the three and nine months ended September 30, 2010, respectively.

The decreases are primarily related to the capitalization of $185,000 in software costs in the third quarter of 2011 rather than the allocation of such costs to

research and development expense.

In addition, we scaled back the amount of resources allocated to the development of LaunchPad to approximately $200,000 in the third quarter of 2011.

In accordance with accounting guidance, we expense all costs incurred to establish the technological feasibility of our LaunchPad software platform as research and development expenses.

Having established

a working model of LaunchPad Version 1.0, all costs related to the refinement of this product will be capitalized until general release of the product to customers.

We will continue to incur costs related to the refinement of Version 1.0 while

proceeding with the development of the next components of LaunchPad with Version 2.0.

The costs related to the development of Version 2.0 will be expensed as research and development until we have completed a working model.

We expect to incur an

additional $150,000 in product development of Version 2.0 and refinement of Version 1.0 during the fourth quarter of 2011.

Since a portion of these costs will be capitalized, we expect that research and development expense will remain relatively

consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Sales and Marketing

4 unchanged sentences

travel and other business development expenses.

Sales and marketing expenses decreased by $139,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010.

The decrease relates primarily to certain

marketing costs incurred in the second quarter of 2010, including $43,000 in rebranding costs and $75,000 for partnering with external search partners, which were not repeated in the second quarter of 2011.

We also participated in and sponsored

conferences totaling $6,000 during the second quarter of 2010 that we did not participate in or sponsor during the second quarter of 2011.

Sales and marketing expenses decreased by $324,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

The decrease relates primarily to certain marketing costs incurred during the six months ended June 30, 2010, including $89,000 in rebranding costs and $150,000 for partnering with external search partners, which were not repeated during the

six months ended June 30, 2011.

We also participated in and sponsored conferences totaling $61,000 during the six months ended June 30, 2010 that we did not participate in or sponsor during the six months ended June 30, 2011.

We expect that our sales and marketing costs will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.

Sales and marketing expenses increased by $95,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The increase relates primarily to

$86,000 in marketing costs incurred during the three months ended September 30, 2011 in connection with an increase in marketing efforts.

In addition, we received a $45,000 credit against previously paid marketing costs during the three months

ended September 30, 2010, which reduced the expense in that period.

Sales and marketing expenses decreased by $229,000 for the nine

months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decrease relates primarily to certain marketing costs incurred during the nine months ended September 30, 2010, including $89,000 in

rebranding costs and $150,000 for partnering with external search partners, which were not repeated during the nine months ended September 30, 2011.

This decrease in costs was partially offset by $86,000 in marketing costs incurred during the

nine months ended September 30, 2011 in connection with an increase in marketing efforts.

We expect that our sales and marketing costs

for the remainder of 2011 will remain consistent with that of the three months ended September 30, 2011.

Page 20 of 30

3 unchanged sentences

As a percent of revenue

General and administrative expenses decreased by $58,000 for the three months ended June 30, 2011 in comparison to

the three months ended June 30, 2010.

General and administrative expenses decreased by $86,000 for the three months ended September 30, 2011 in comparison

to the three months ended September 30, 2010.

The decrease relates to a $17,000 reduction in insurance and other employee related costs due to having fewer employees;

a $34,000 reduction in printing costs related to the proxy and annual report;

as a continued overall company plan to reduce all aspects of overhead;

partially offset by a $14,000 increase in investment banking costs.

General and administrative expenses decreased by $150,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30,

a $28,000 reduction in investor relations costs;

a $56,000 decrease in

outside services as a result of having hired our CEO in the second quarter of 2011 as opposed to paying him as a consultant;

as well as a continued overall company plan to reduce all aspects of overhead;

partially offset by a $28,000 increase in

real estate taxes.

General and administrative expenses decreased by $235,000 for the nine months ended September 30, 2011 in comparison

to the nine months ended September 30, 2010.

The decrease relates to a $148,000 reduction in insurance and other employee related costs due to having fewer employees;

a $31,000 reduction in printing costs related to the proxy and annual report;

as well as a continued overall company plan

to reduce all aspects of overhead;

partially offset by a $23,000 increase related to moving and relocation expenses.

We expect that our

general and administrative costs will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.

a $46,000 reduction in investor relations costs;

an $81,000 decrease in outside services as a result of having hired our CEO in the second quarter of 2011 as opposed to paying him as a consultant;

as well as a continued overall company plan to

reduce all aspects of overhead;

partially offset by a $38,000 increase in real estate taxes and a $25,000 increase related to moving and relocation expenses for our new CEO and Senior VP of Sales.

We expect that our general and administrative costs will remain consistent with that of the three months ended September 30, 2011 for the remainder

Depreciation and Amortization

2 unchanged sentences

As a percent of revenue

Depreciation and amortization decreased by $57,000 for the three months ended June 30, 2011 in comparison to the

three months ended June 30, 2010.

Depreciation and amortization decreased by $91,000 for the three months ended September 30, 2011 in comparison to

the three months ended September 30, 2010.

Amortization expense decreased by $77,000 as a result of impairment charges related to our intangible assets that were incurred in 2010.

Depreciation expense decreased by $12,000 as a result of impairment

charges related to our fixed assets that were incurred in 2010.

Depreciation and amortization decreased by $116,000 for the six months ended

June 30, 2011 in comparison to the six months ended June 30, 2010.

Depreciation expense decreased by $14,000 as a result of

impairment charges related to our fixed assets that were incurred in 2010.

Depreciation and amortization decreased by $208,000 for the nine

months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

Amortization expense decreased by $172,000 as a result of impairment charges related to our intangible assets that were incurred in 2010.

Depreciation expense decreased by

$21,000 as a result of impairment charges related to our fixed assets that were incurred in 2010.

We expect that our depreciation and

amortization will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.

Depreciation expense decreased by $36,000 as a result of impairment charges related to our fixed assets that were incurred in 2010.

that our depreciation and amortization will remain consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Impairment Loss

(In thousands, except percentages)

Impairment loss

Page 21 of 30

At the end of the third quarter of 2010, management concluded that the significant decline in our stock

price subsequent to June 30, 2010 was other than short-term in nature.

This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of our next scheduled annual impairment evaluation date of

December 31, 2010.

A decline in stock price may be an indicator of an adverse change in business climate and it affects market capitalization and may affect fair value measurements for reporting units.

Due to the reduction in our market

capitalization, third party valuations were obtained to assist in the determination of fair value for our reporting units.

As a result of a reduction in fair value of our reporting units, management determined that the implied fair value of our

goodwill and intangible assets was less than their respective carrying values by approximately $10.3 million.

We recognized impairment of approximately $9.4 million to our goodwill and impairment of approximately $971,000 to our intangible assets in

the three and nine months ended September 30, 2010.

We also recorded impairment of approximately $1.3 million to our fixed assets during

the three and nine months ended September 31, 2010.

The commercial real estate market for certain of our properties had taken a significant downturn that was not expected to reverse in the near future.

As a result, management determined that

the decrease in fair value of the property was other-than-temporary.

The impairment loss was determined based on third party valuations of the respective property.

We did not have any events occur during the nine months ended September 30, 2011 that would trigger a review for impairment outside of our next scheduled annual impairment evaluation date of

December 31, 2011.

Other (Income) Expense

1 unchanged sentence

Other (income) expense

Page 22 of 31

Other (income) expense includes rental income, gains and losses related to adjusting our derivative

liabilities to fair value each reporting period, capital gains and losses and other miscellaneous income (losses).

Other (income) expense increased by $345,000 for the three months ended June 30, 2011 in comparison to the three months ended

June 30, 2010.

This increase is attributable to a $45,000 increase in rental income, a $382,000 increase in net gain/loss on adjustment of our derivative liabilities, and a $17,000 increase in miscellaneous income, partially offset by a

$100,000 decrease in net capital gain/loss.

Other (income) expense decreased by $1.39 million for the six months ended June 30, 2011 in

comparison to the six months ended June 30, 2010.

This decrease is attributable to a $1.47 million decrease in net gain/loss on adjustment of our derivative liabilities, partially offset by a $54,000 increase in rental income and a $35,000

increase in net capital gain/loss.

Other (income) expense includes rental income, gains and losses related to adjusting our derivative liabilities to fair

value each reporting period, capital gains and losses and other miscellaneous income.

Other (income) expense changed by $(881,000) for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The variance is primarily attributable to a $44,000 increase in rental income and a $1.1 million decrease in net capital loss, partially offset by a $263,000 decrease in net gain on adjustment of our derivative liabilities.

Other (income) expense changed by $505,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30,

The variance is attributable to a $1.7 million decrease in net gain on adjustment of our derivative liabilities, partially offset by a $98,000 increase in rental income and a $1.1 million decrease in net capital loss.

Other (income) expense may continue to fluctuate significantly as the value of our derivative liability increases or decreases in connection with changes

in our stock price.

Interest Expense, Net

1 unchanged sentence

Interest expense, net

Interest expense, net decreased by $60,000 for the three months ended June 30, 2011 in comparison to the three

months ended June 30, 2010.

The decrease is attributable to lower interest expense on long-term debt of $23,000, lower amortization of our debt discount of $13,000, and higher interest income on our note receivable of $24,000.

Interest expense, net decreased by $54,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.

decrease is attributable to lower interest expense on long-term debt of $33,000 and lower amortization of our debt discount of $26,000, partially offset by lower interest income on our note receivable of $5,000.

Interest expense, net decreased by $129,000 for the three months ended September 30, 2011 in comparison to the three

months ended September 30, 2010.

The decrease is primarily attributable to lower interest expense from the amortization of our debt discount of $122,000.

Interest expense, net decreased by $182,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decrease is primarily attributable to

lower interest expense on long-term debt of $42,000 and lower interest expense from the amortization of our debt discount of $148,000.

Page 22 of 30

Liquidity and Capital Resources

Cash flows from

operating activities of $783,000 for the six months ended June 30, 2011 increased $2,562,000 from $(1,779,000) for the six months ended June 30, 2010.

Total cash flows from operations of $783,000 in the current period are primarily

attributable to:

$1.4 million loss on derivative liabilities;

$746,000 in non-cash depreciation and amortization;

$268,000 in non-cash stock-based compensation expense related to vesting options;

Cash flows from operating activities of $2,031,000 for the nine months

ended September 30, 2011 increased $4,891,000 from $(2,860,000) for the nine months ended September 30, 2010.

Total cash flows from operations of $2,031,000 in this period are primarily attributable to:

$1.1 million in non-cash depreciation and amortization;

$911,000 non-cash loss on derivative liabilities;

$408,000 in non-cash stock-based compensation expense related to vesting options and restricted stock;

$775,000 decrease in accounts receivable and contracts in process;

$219,000 decrease in prepaid expenses and other assets;

$1.9 million increase in accounts payable and accrued expenses.

Partially offset by:

$2.9 million net operating loss;

$846,000 increase in accounts receivable and contracts in process.

Cash flows from investing activities of $(23,000) for the six months ended June 30, 2011 decreased $242,000 from $219,000 for the six months ended June 30, 2010.

There were no significant

investing transactions during the current period.

Cash flows from financing activities of $(383,000) for the six months ended June 30,

2011 decreased $389,000 from $6,000 for the six months ended June 30, 2010.

Total cash flows from financing of $(383,000) are related to principal payments on long-term debt.

Research and Development Expenditures

As of June 29, 2011, Version 1.0 of the

Innovaro LaunchPad software (LaunchPad) reached technological feasibility with the introduction of a working model.

In addition, we have begun development of the next components of LaunchPad with Version 2.0.

As of June 30, 2011, we

have invested $1.8 million in this software platform.

We expect to incur approximately $300,000 in additional expenditures for product development of Version 2.0 and refinement of Version 1.0 during the third quarter of 2011.

$2.2 million increase in accounts payable, accrued expenses and accrued bonus;

partially offset by a $3.5 million net loss.

Cash flows from investing activities of $(220,000) for the nine months ended September 30, 2011 decreased $985,000 from $765,000 for the nine months

ended September 30, 2010.

Total cash flows from investing activities of $(220,000) in this period are primarily related to the capitalization of software development costs.

Cash flows from financing activities of $(525,000) for the nine months ended September 30, 2011 decreased $2,690,000 from $2,165,000 for the nine months ended September 30, 2010.

flows from financing activities of $(525,000) in this period are related to principal payments on long-term debt.

Software Development

We are continuing the development of our LaunchPad software, which is designed to enhance and complement our innovation service

offerings to clients.

We will continue to incur costs related to the refinement of Version 1.0 while proceeding with the development of the next components of LaunchPad with Version 2.0.

As of September 30, 2011, we had invested $2.1

million in this software platform.

We expect to incur approximately $150,000 in additional expenditures for product development of Version 2.0 and refinement of Version 1.0 during the fourth quarter of 2011.

Our primary cash

requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee bonuses.

Our primary sources of funds are cash received from customers in connection with operations and, to a

lesser extent, proceeds from the sale from time to time of our investments.

As of September 30, 2011, we had $1.5 million in cash and cash equivalents, $1.2 million in accounts receivable and contracts in process, $510,000 in investments, and a

working capital deficit of $1.4 million.

We currently intend to fund our liquidity needs, including our software development costs, with

existing cash and cash equivalent balances, cash generated from operations, collections of our existing receivables and the potential sales of our investments.

We expect that our recent reductions in costs, coupled with our expected revenue, will be

sufficient to fund our scheduled debt service payments of $109,000 and our operating requirements for the next twelve months.

However, we are also exploring opportunities for obtaining a credit facility with certain financial institutions.

face a more restricted cash flow scenario than projected during the next twelve months, we have the capability to delay all cash intensive activities, including our software development costs, and will look to reduce costs further.

However, if such

measures prove inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek additional equity capital, and we may be

unable to take any of these actions on satisfactory terms or in a timely manner.

Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business.

Our failure to generate

sufficient cash from our operations could have a material adverse effect on us.

Page 23 of 30

Accounts Receivable Balances

Our accounts receivable balance as of June 30, 2011 was significantly higher than our historical accounts receivable balance.

The increase in our accounts receivable balance during the second quarter of

2011 is a result of a significant increase in revenue.

Revenue increased because we had a significant number of new contracts in the second quarter of 2011.

Revenue for the three and six months ended June 30, 2011 increased 87% and 74%,

respectively, over revenue for the three and six months ended June 30, 2010.

It is not unusual for our accounts receivable to sustain an elevated balance during periods of increased revenues.

Of the outstanding receivables balance of $2.7 million at June 30, 2011, only 24%, or $632,000, was past due, but only by 1 to 30 days.

As of the date of this filing, we have collected all but

$577,000 of the total accounts receivable balance outstanding at June 30, 2011.

Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and

employee bonuses.

Our primary sources of funds are cash received from customers in connection with operations and, to a lesser extent, proceeds from the sale from time to time of our investments.

As of June 30, 2011, we had $633,000 in cash and

cash equivalents, $2.9 million in accounts receivable and contracts in process, $521,000 in investments, and a working capital deficit of $402,000.

We currently intend to fund our liquidity needs, including our research and development expenditures, with existing cash and cash equivalent balances, cash generated from operations, collections of our

existing receivables and the potential sales of our investments.

We expect that our recent reductions in costs, coupled with our expected revenue, will be sufficient to fund our scheduled debt service payments of $174,000 and operations for the next

twelve months.

Should we face a more restricted cash flow scenario than projected during the next twelve months, we have the capability to delay all cash intensive activities, including our research and development expenditures, and will look to

reduce costs further.

However, if such measures prove inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek

additional equity capital, and we may be unable to take any of these actions on satisfactory terms or in a timely manner.

Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact

on our business.

Our failure to generate sufficient cash from our operations could have a material adverse effect on us.

Critical Accounting Estimates

preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements.

We evaluate the accounting policies and estimates used

to prepare the financial statements on an ongoing basis.

Critical accounting estimates are those that require managements most difficult, complex, or subjective judgments and have the most potential to impact our financial position and

operating results.

For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make assessments, estimates

and assumptions that affect the amounts reported in the financial statements.

We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis.

Critical accounting estimates are those that

require managements most difficult, complex, or subjective judgments and have the most potential to impact our financial position and operating results.

For a detailed discussion of our critical accounting estimates, see our Annual Report on

Form 10-K for the year ended December 31, 2010.

Recently Issued Accounting Pronouncements

In April 2011, the FASB issued new guidance for

the purpose of measuring the impairment of old receivables and evaluating whether a troubled debt restructuring has occurred.

An entity should disclose the total amount of receivables and the allowances for credit losses as of the end of the period

of adoption related to those receivables that are considered newly impaired under the new guidance for which impairment was previously measured under previously authoritative guidance.

The guidance is effective for us for with the reporting period

beginning in July 1, 2011.

The adoption of this guidance is not expected to have an impact on our operations.

In May 2011, the FASB

issued new guidance that expands existing disclosure requirements for fair value measurements and makes other amendments that could change how the fair value measurement guidance is applied.

The guidance is effective for us with the reporting period

beginning in January 1, 2012.

The adoption of this guidance is not expected to have an impact on our operations.

In June 2011, the FASB

issued new guidance that revises the manner in which entities present comprehensive income in their financial statements.

The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of

comprehensive income or (2) two separate but consecutive statements.

In May 2011, the Financial Accounting Standards Board (FASB) issued new guidance that expands existing disclosure requirements for fair value

measurements and makes other amendments that could change how the fair value measurement guidance is applied.

The guidance is effective for us with the reporting period beginning in January 1, 2012.

The adoption of this guidance will change the way we present comprehensive income

in our financial statements.

Page 24 of 31

The adoption of this guidance is not expected

to have an impact on our operations.

In June 2011, the FASB issued new guidance that revises the manner in which entities present

comprehensive income in their financial statements.

The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive

The guidance is effective for us with the reporting period beginning in January 1, 2012.

The adoption of this guidance will change the way we present comprehensive income in our financial statements.

In September 2011, the FASB issued new guidance for goodwill impairment testing .

Under the revised guidance, entities testing goodwill for

impairment have the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test.

If entities determine, on the basis of qualitative factors, that the fair value of the

reporting unit is more likely than not greater than the carrying amount, a quantitative calculation is not needed.

The guidance is effective for us with the reporting period beginning in January 1, 2012 with early adoption permitted.

adoption of this guidance is not expected to have an impact on our operations.

Quantitative and Qualitative Disclosures about Market Risks

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements