About Scientific Learning Corporation

Scientific Learning creates educational software that accelerates learning by improving the processing efficiency of the brain. Based on more than 30 years of neuroscience and cognitive research, the Fast ForWord(R) family of products provides struggling readers with computer-delivered exercises that build the cognitive skills required to read and learn effectively. Scientific Learning Reading Assistant(TM) combines advanced speech recognition technology with scientifically-based courseware to help students strengthen fluency, vocabulary and comprehension to become proficient, life-long readers. The efficacy of the products has been established by more than 550 research studies and publications. For more information, visit http://www.scientificlearning.com/ or call toll-free 888-358-0212.

SOURCE: Scientific Learning Corporation

Scientific Learning Corporation 
Media: 
Jessica Lindl, 510-625-6784 
Vice President of Marketing and Product Management 
jlindl@scilearn.com 
or 
Investor: 
Bob Feller, 510-625-2281 
Chief Financial Officer 
investorrelations@scilearn.com

Through its research-validated speech recognition technology, Reading Assistant "listens" as students read aloud, and provides assistance and feedback whenever students are challenged by a word. "Some schools don't have the staff for intensive small-group intervention lessons," explained Roberts. "Reading Assistant makes oral reading practice possible even when their teacher cannot be nearby."

Roberts also stated that the software's capacity for saying unfamiliar words aloud at students' request, as well as its ability to provide contextual sentences and picture representations, are among the features that she and the review committee believe will be of special benefit to struggling readers. Other features the committee cited as particularly beneficial for Kanawha students are the software's abilities to model selected reading so pupils can hear the correct pronunciation and inflection beforehand; record oral reading so users can privately play back and assess their own efforts; and display quiz scores, fluency scores and more so students can take ownership of their own advancement while teachers are updated on their development.

The district purchased the software licenses in the second quarter 2009 and plans to implement Reading Assistant in Kanawha County's 26 Title I elementary schools during the 2009-10 school year.

About Scientific Learning Corp.

Scientific Learning creates educational software that accelerates learning by improving the processing efficiency of the brain. Based on more than 30 years of neuroscience and cognitive research, the Fast ForWord(R) family of products provides struggling readers with computer-delivered exercises that build the cognitive skills required to read and learn effectively. Scientific Learning Reading Assistant(TM) combines advanced speech recognition technology with scientifically-based courseware to help students strengthen fluency, vocabulary and comprehension to become proficient, life-long readers. The efficacy of the products has been established by more than 550 research studies and publications. For more information, visit www.scientificlearning.com or call toll-free 888-358-0212.

This press release contains forward-looking statements that are subject to the safe harbor created by the federal securities laws. Such statements include, among others, statements relating to the future implementation of and benefits to be derived from the software. Such statements are subject to substantial risks and uncertainties. Actual events or results may differ materially as a result of many factors, including but not limited to: the resources available to and other factors impacting the school district, the manner in which the district implements the software, and other risks detailed in Scientific Learning's SEC reports, including but not limited to the Report on Form10-Q for the quarter ended June 30, 2009 (Part II, Item 1A, Risk Factors), filed August 15, 2009.

SOURCE: Scientific Learning Corporation

Scientific Learning Corporation 
Media Contact: 
Jessica Lindl 
Sr. Vice Pres., Marketing & Product Management 
510-625-6784 
jlindl@scilearn.com 
or 
Investor Contact: 
Bob Feller 
Chief Financial Officer 
510-625-2281 
investorrelations@scilearn.com

Third Quarter Summary (3Q09 vs. 3Q08)

-- Total revenues increased 60% to $20.3 million, total booked sales increased 72% to $26.1 million and K-12 booked sales increased 83% to $25.3 million;

-- Gross profit increased 76% to $17.0 million and gross margin increased to 84.0% of total revenues from 76.3% of total revenues;

-- Operating income increased to $6.8 million from $413,000 and EBITDAS increased to $7.5 million from $1.3 million;

-- Net earnings per diluted share increased to $0.35 from $0.03;

-- Cash and cash equivalents were $16.9 million and there were no borrowings under the line of credit.

Andy Myers, Chief Executive Officer stated, "Our third quarter results reflect improvement in both our organization and the funding environment. Over the last 18 months, our sales team succeeded in building a strong pipeline despite widespread K-12 budget shortfalls and economic uncertainty. Due to their efforts and the operational improvements we have made over the past 18 months, Scientific Learning was prepared to take advantage of the temporary increase in federal funding and deliver strong top-line growth and profitability for the quarter. While the positive impact of the education stimulus program should continue in the fourth quarter, this is a seasonally slower period for our business. Additionally, as we noted previously, a large sale in Florida in July 2009 and the delay in purchases from the second quarter to the third added to our third quarter growth."

Mr. Myers continued: "Just as changes in performance management, processes, messaging and incentives have helped us achieve this recent success, we expect that additional investments we will be making to improve product management, development and information technology will help support our long-term growth goal of online accessibility and scalability for a wider audience of learners -- in schools, in learning centers, and at home. Educators and parents alike are focused on improving achievement results for their students, and we believe we have one of the most unique and effective approaches available."

Operating Results

Total revenues increased 60% to $20.3 million in the third quarter of 2009 compared to $12.7 million in the third quarter of 2008. Product revenues increased 107% to $15.5 million and service and support revenue decreased 8% to $4.8 million. Total booked sales increased 72% to $26.1 million in the third quarter of 2008 and include a $6.9 million transaction that we closed in July.

Gross profit increased 76% to $17.0 million in the third quarter of 2009 compared to $9.7 million in the third quarter of 2008. Gross profit margin increased 770 basis points to 84.0% from 76.3% of total revenues. The increase was primarily driven by a shift in revenue mix toward higher margin product sales. Product gross profit margin increased to 93.5% from 92.0% and service and support gross profit margin decreased to 53.3% from 53.8%.

Total operating expenses increased 11% to $10.3 million in the third quarter of 2009 compared to $9.3 million in the third quarter of 2008. Sales and marketing expenses increased 17% to $6.2 million, research and development expenses increased 19% to $1.8 million, and general and administrative expenses decreased 10% to $2.2 million.

Earnings before interest, taxes, depreciation, amortization, and stock compensation (EBITDAS) increased to $7.5 million in the third quarter of 2009 from $1.3 million in the third quarter of 2008. Operating income in the third quarter of 2009 was $6.8 million versus operating income of $413,000 in the third quarter of 2008. Net income was $6.4 million, or $0.35 per share, in the third quarter of 2009 compared to net income of $590,000, or $0.03 per share, in the third quarter of 2008.

The company believes that booked sales and EBITDAS (both non-GAAP measures) are important measures of operating performance and has chosen to disclose these figures as part of the earnings results. EBITDAS and booked sales should not be considered in isolation from net income and revenue and are not intended to represent substitute measures of performance calculated under GAAP. Reconciliations of booked sales, revenue and deferred revenue, and EBITDAS and net income (net loss) are included at the end of this earnings release and in the investor information section of our website, www.scientificlearning.com.

Select Balance Sheet Information

As of September 30, 2009, cash and cash equivalents were $16.9 million compared to $4.9 million at June 30, 2009 and $6.1 million at September 30, 2008. The increase was driven by the increase in sales and net income. Net accounts receivable were $10.3 million at September 30, 2009 compared to $9.1 million at June 30, 2009 and $11.0 million at September 30, 2008. As of September 30, 2009, there were no short-term borrowings under our line of credit compared to $2.5 million on June 30, 2009 and no borrowings on September 30, 2008.

Conference Call Information

A conference call to discuss third quarter results and the outlook for 2009 is scheduled for today, on Tuesday, October 27, 2009 at 5:00 p.m. EDT / 2:00 p.m. PDT. The conference call will be available live on the Investor Information portion of the Company's website at www.scilearn.com/investorinfo. The conference call can also be accessed at 866-652-3154 (domestic) or 706-634-7311 (international), conference ID number 36258664. Please dial in or visit the website at least 10 minutes prior to the commencement of the call to ensure your participation. A replay of this teleconference will be made available on the Scientific Learning website approximately two hours following the conclusion of the call. To hear the replay by phone, please call 800-642-1687 (domestic) and 706-645-9291 (international) and enter conference ID: 36258664.

About Scientific Learning Corporation

Scientific Learning creates educational software that accelerates learning by improving the processing efficiency of the brain. Based on more than 30 years of neuroscience and cognitive research, the Fast ForWord(R) family of products provides struggling readers with computer-delivered exercises that build the cognitive skills required to read and learn effectively. Scientific Learning's Reading Assistant(TM)combines advanced speech recognition technology with scientifically-based courseware to help students strengthen fluency, vocabulary and comprehension to become proficient, life-long readers. The efficacy of the products has been established by more than 550 research studies and publications. For more information, visit www.scientificlearning.com or call toll-free 888-452-7323.

Forward-Looking Statements

This press release contains forward-looking statements that are subject to the safe harbor created by the federal securities laws. Such statements include, among others, statements relating to the Company's fourth quarter sales, future growth, future financial results and the school funding environment. Such statements are subject to substantial risks and uncertainties. Actual events or results may differ materially as a result of many factors, including but not limited to: general economic and financial conditions (including current adverse conditions in the general economy and in the financial and credit markets); availability of funding to purchase the Company's products and generally available to schools, including the amount and duration of federal stimulus funding; unexpected challenges in product development; the acceptance of new products and product changes; seasonality and sales cycles in Scientific Learning's markets; competition; the extent to which the Company's marketing, sales and implementation strategies are successful; the Company's ability to continue to demonstrate the efficacy of its products, and other risks detailed in the Company's SEC reports, including but not limited to the Report on Form 10-Q for the quarter ended June 30, 2009 (Part II, Item 1A, Risk Factors), filed August 15, 2009. The Company disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise.

SCIENTIFIC LEARNING CORPORATION
CONDENSED BALANCE SHEET
(In thousands)
Unaudited
                                             September 30,      December 31,       September 30,
                                                  2009               2008               2008
Assets
Current assets:
Cash and cash equivalents                    $    16,908        $    7,550         $    6,071
Accounts receivable, net                          10,284             7,717              11,004
Prepaid expenses and other current assets         1,726              1,341              1,476
Total current assets                              28,918             16,608             18,551
Property and equipment, net                       1,671              1,552              1,591
Goodwill                                          4,568              4,568              4,568
Other intangible assets, net                      5,715              6,424              6,621
Other assets                                      2,096              1,108              1,043
Total assets                                 $    42,968        $    30,260        $    32,374
Liabilities and stockholders' equity
Current liabilities:
Accounts payable                             $    953           $    674           $    489
Accrued liabilities                               6,365              3,964              4,816
Deferred revenue                                  18,902             15,521             18,048
Total current liabilities                         26,220             20,159             23,353
Deferred revenue, long-term                       6,274              4,431              5,063
Other liabilities                                 713                625                581
Total liabilities                                 33,207             25,215             28,997
Stockholders' equity:
Common stock and additional paid-in capital       86,534             85,098             84,627
Accumulated deficit                               (76,773 )          (80,053 )          (81,250 )
Total stockholders' equity:                       9,761              5,045              3,377
Total liabilities and stockholders' equity   $    42,968        $    30,260        $    32,374

SCIENTIFIC LEARNING CORPORATION
STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
                                                              Three months ended September 30,    Nine months ended September 30,
                                                                   2009              2008               2009      2008
Revenues:
Products                                                      $    15,510       $    7,475        $     25,630  $ 21,009
Service and support                                                4,783             5,220              13,904    14,252
Total revenues                                                     20,293            12,695             39,534    35,261
Cost of revenues:
Cost of products                                                   1,015             599                1,961     1,686
Cost of service and support                                        2,236             2,411              6,442     7,279
Total cost of revenues                                             3,251             3,010              8,403     8,965
Gross profit                                                       17,042            9,685              31,131    26,296
Operating expenses:
Sales and marketing                                                6,243             5,329              16,967    18,461
Research and development                                           1,846             1,545              4,588     5,267
General and administrative                                         2,169             2,398              6,019     6,346
Total operating expenses                                           10,258            9,272              27,574    30,074
Operating income (loss)                                            6,784             413                3,557     (3,778 )
Interest and other income (expense)                                (28    )          141                90        473
Income (loss) before income tax                                    6,756             554                3,647     (3,305 )
Income tax expense                                                 301               (36    )           367       1,207
Net income (loss)                                             $    6,455        $    590          $     3,280   $ (4,512 )
Basic net income (loss) per share                             $    0.36         $    0.03         $     0.18    $ (0.26  )
Shares used in computing basic net income (loss) per share         18,077            17,552             17,980    17,438
Diluted net income (loss) per share                           $    0.35         $    0.03         $     0.18    $ (0.26  )
Shares used in computing diluted net income (loss) per share       18,648            18,283             18,506    17,438

SCIENTIFIC LEARNING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
                                                             Three months      Three months     Nine months       Nine months
                                                             ended             ended            ended             ended
                                                             September 30,     September 30,    September 30,     September 30,
                                                             2009              2008             2009              2008
Operating Activities:
Net income                                                   $    6,455        $    590         $    3,280        $    (4,512  )
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization                                     472               337              1,183             932
Stock based compensation                                          286               443              1,034             1,618
Increase in deferred tax asset valuation allowance                -                 -                -                 1,191
Changes in operating assets and liabilities:
Accounts receivable                                               (1,229 )          (302  )          (2,567 )          (4,580  )
Prepaid expenses and other current assets                         (279   )          (89   )          (385   )          (164    )
Other assets                                                      80                (24   )          (11    )          (117    )
Accounts payable                                                  (99    )          (377  )          279               (444    )
Accrued liabilities                                               2,413             394              2,401             682
Deferred revenue                                                  6,562             2,490            5,224             46
Other liabilities                                                 28                104              88                128
Net cash provided by (used in) operating activities          $    14,689       $    3,566       $    10,526       $    (5,220  )
Investing Activities:
Purchases of property and equipment, net                          (67    )          (7    )          (584   )          (206    )
Additions to capitalized software                                 (234   )          -                (986   )          -
Purchase of Soliloquy                                             -                 (3    )          -                 (10,133 )
Net cash provided by (used in) investing activities               (301   )          (10   )          (1,570 )          (10,339 )
Financing Activities:
Borrowings under bank line of credit                              -                 -                2,500             -
Repayment of borrowings                                           (2,500 )                           (2,500 )
Proceeds from issuance of common stock, net                       71                236              402               451
Net cash provided by financing activities                         (2,429 )          236              402               451
Increase (decrease) in cash and cash equivalents                  11,959            3,792            9,358             (15,108 )
Cash and cash equivalents at beginning of period                  4,949             2,279            7,550             21,179
Cash and cash equivalents at end of period                   $    16,908       $    6,071       $    16,908       $    6,071

Scientific Learning Corporation
Supplemental Information
Reconciliation of Booked Sales, Revenue and Change in Deferred
Revenue
$s in thousands
                                                     Three months ended September 30, Nine months ended September 30,
                                                             2009           2008           2009              2008
Booked Sales                                         $       26,122   $     15,185    $    45,115       $    35,417
Less Revenue                                                 20,293         12,695         39,534            35,261
Other adjustments                                            733            -              (357   )          -
Net increase in current and long-term deferred       $       6,562    $     2,490     $    5,224        $    156
Beginning balance in current and long-term deferred          18,614         20,621         19,952            22,955
Ending balance in current and long-term deferred     $       25,176   $     23,111    $    25,176       $    23,111
Booked sales is a non-GAAP financial measure that we believe to be a
useful measure of the current level of business activity both for
management and for investors. Booked sales equals the total value
(net of allowances) of software and services invoiced in the period.
Because a significant portion of our revenue is recognized over a
period of months, booked sales is a good indicator of current
activity. The table above shows the reconciliation of booked sales,
revenue, and changes in deferred revenue.
Reconciliation of Net Income to EBITDAS
$s in thousands
                                                     Three months ended September 30, Nine months ended September 30,
                                                             2009           2008           2009              2008
Net income (loss)                                    $       6,455    $     590       $    3,280        $    (4,512 )
Adjustments to reconcile to EBITDAS:
Income tax provision                                         301            (36    )       367               1,207
Interest (income) expense, net                               5              (13    )       24                (97    )
Depreciation and amortization                                472            337            1,183             932
Stock compensation expense                                   286            443            1,034             1,618
Adjusted EBITDAS                                     $       7,519    $     1,321     $    5,888        $    (852   )
Earnings before interest, taxes, depreciation, amortization and
stock compensation expense (EBITDAS) is a non-GAAP financial measure
we believe to be a useful measure of the resources available to the
company in the current period. We also believe that EBITDAS will be
useful in allowing investors to compare our performance with that of
other companies. The table above shows a reconciliation of EBITDAS
to Net Income, the closest GAAP measure.
Non-Cash Charges
$s in thousands                                      Three months ended September 30,                   Nine months ended September 30,
                                                             2009                                            2009
                                                     Depreciation &   Stock-based     Total             Depreciation &    Stock-based    Total
                                                     Amortization     Compensation                      Amortization      Compensation
Cost of Products                                             168            -              168               479                 -           479
Cost of Service and Support                                  31             36             66                84                  106         190
Operating Expenses                                           273            250            524               620                 928         1,548
Total                                                $       472      $     286       $    758          $    1,183        $      1,034   $   2,217
$s in thousands                                      Three months ended September 30,                   Nine months ended September 30,
                                                             2008                                            2008
                                                     Depreciation &   Stock-based     Total             Depreciation &    Stock-based    Total
                                                     Amortization     Compensation                      Amortization      Compensation
Included in:
Cost of Products                                             125            -              125               360                 -           360
Cost of Service and Support                                  36             55             91                103                 159         262
Operating Expenses                                           176            388            564               469                 1,459       1,928
Total                                                $       337      $     443       $    780          $    932          $      1,618   $   2,550

SOURCE: Scientific Learning Corporation

Scientific Learning Corporation 
Jessica Lindl, 510-625-6784 (Media) 
Senior Vice President, Marketing and Product Management 
jlindl@scilearn.com 
Bob Feller, 510-625-2281 (Investors) 
Chief Financial Officer 
investorrelations@scilearn.com

A replay of this teleconference will be made available on the Scientific Learning website approximately two hours following the conclusion of the call. To hear the replay by phone, please call 800-642-1687 (domestic) or 706-645-9291(international) and enter the replay passcode: 36258664.

To obtain future announcements of quarterly releases and other event calls, call the Investor Relations department of Scientific Learning at 1-888-665-9707 ext. 3 or email investorrelations@scilearn.com.

Scientific Learning makes its third quarter financial results webcast available to the general public in accordance with the Securities and Exchange Commission's fair disclosure policies.

About Scientific Learning Corporation

Scientific Learning creates educational software that accelerates learning by improving the processing efficiency of the brain. Based on more than 30 years of neuroscience and cognitive research, the Fast ForWord(R) family of products provides struggling readers with computer-delivered exercises that build the cognitive skills required to read and learn effectively. Scientific Learning Reading Assistant(TM) combines advanced speech recognition technology with scientifically-based courseware to help students strengthen fluency, vocabulary and comprehension to become proficient, life-long readers. The efficacy of the products has been established by more than 550 research studies and publications. For more information, visit http://www.scientificlearning.com/ or call toll-free 888-358-0212.

SOURCE: Scientific Learning Corporation

Scientific Learning Corporation 
Media Contact: 
Jessica Lindl, 510-625-6784 
Vice President of Marketing and Product Management 
jlindl@scilearn.com 
Investor Contact: 
Bob Feller, 510-625-2281 
Chief Financial Officer 
investorrelations@scilearn.com