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PART I. FINANCIAL INFORMATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Streamline Health Solutions, Inc. (“Streamline Health^® or the Company”), pursuant to the rules and regulations applicable to quarterly reports on Form 10-Q of the U. S. Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the most recent Streamline Health Solutions, Inc. Annual Report on Form 10-K, Commission File Number 0-28132. Operating results for the three and six months ended July 31, 2010,2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2011.2012.

A summary of the Company’s significant accounting policies is presented beginning on page 45 of itsin “Note B — Significant Accounting Policies” in the fiscal year 2010 Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes contained in the Annual Report when reviewing interim financial results.

ASU 2009-13. In the fourth quarter of fiscalOctober 2009, the Company madeFinancial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2009-13 —Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 requires a vendor to allocate revenue to each unit of accounting in many arrangements involving multiple deliverables based on the relative selling price of each deliverable. It also changes the level of evidence of stand-alone selling price required to separate deliverables by allowing a vendor to make its fifth generation software, accessANYware 5.0, generally available. In the first quarter of fiscal 2010, subsequent to the release, the Company completed a review by productbest estimate of the estimated useful livesstand-alone selling price of its capitalized software development costs. After reviewing strategic plans, analyzing the historical useful lifedeliverables when more objective evidence of the software products, forecasting product life cycles and demand expectations, the Company assigned a five year estimated useful life for costs capitalized for accessANYware 5.0, and revised the estimated useful lives of certain other products from three years to five years.selling price is not available.

The product life cycleCompany adopted ASU 2009-13 for accessANYware versions prior to the latest version 5.0, have lasted longer than five years. Historical productall new and customer data shows that many customers remainmaterially modified arrangements on the same primary version for five years or more after purchase, or product support and development continue for five years or more. The Company expects accessANYware 5.0 to also have a five year or longer product life cycle based on this historical data, and the estimated product development lifecycle. In addition, the useful life of the unamortized balance of development costs for prior accessANYware versions should also reflect an approximate five year life from their documented general release dates. The Company intends to actively sell and support these products for a minimum five years while version 5.0 is being rolled out. This same policy will be applied to FolderView as it is generally a primary add-on component to accessANYware, and has had a similar historical life cycle.prospective basis beginning February 1, 2011. Upon Company review of the revenue projections,primary accounting literature, if the Company is unable to establish selling price using VSOE (vendor specific objective evidence) or third-party evidence, the Company will establish an estimated life cycleselling price. The estimated selling price is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes a best estimate of accessANYware 5.0,selling price by considering internal factors relevant to pricing practices such as costs and margin objectives, stand-alone sales prices of similar services and percentage of the remaining life cyclefee charged for prior accessANYwarea primary service relative to a particular piece of licensed software. Additional consideration is also given to market conditions such as competitor pricing strategies and FolderView releases, a five yearmarket trends. The Company regularly reviews VSOE for professional services in addition to estimated life is reasonable and proper.selling price.

The Company accounted for the change in useful life ashas not experienced a change in units of accounting estimate whichnor was there a change in allocation of fair value to the various units of accounting. Historically, the Company has been able to obtain VSOE or third-party evidence for significant service deliverables. No material changes in assumptions, inputs or methodology used in determining VSOE or third-party evidence have been made. The pattern of revenue recognition is accounted forexpected to remain consistent with prior periods and the Company does not expect a material change in the timing of revenue recognition from previous generally accepted accounting principles as applied in the prior period.

Provided that the undelivered elements in arrangements that include multiple elements are fixed and determinable, the Company allocates the total revenue to be earned under the arrangement to the elements based on a prospective basis effective February 1, 2010. Fortheir relative fair value of vendor specific objective evidence (“VSOE”), third-party evidence or estimated selling price, relative to the three andhierarchy. The amounts representing the fair value of the undelivered items are deferred until delivered, or recognized pro rata over the service contract.

During the six months ended July 31, 2010 the change resulted in a reduction of amortization expense of approximately $251,000 and $502,000, respectively; an increase in income from continuing operations and net income of $251,000 and $502,000, respectively; and a decrease in basic and diluted loss per share of $0.02 and $0.06, respectively. Amortization expense for capitalized software development costs is included in cost of system sales in the consolidated statement of operations.

The fair value of each option grant during the quartersix months ended July 31, 20102011 was estimated at the date of the grants using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 2.50%, a dividend yield of zero percent; and a current weighted average volatility factor of the expected market price of Streamline Health’s Common Stock of 0.541 in 2010. The weighted average expected life of stock options are five years and have a forfeiture rate of zero.

During the first six months of the current fiscal year,ended July 31, 2011, the Company granted 209,000110,412 restricted stock shares with a weighted average fair value of $1.94$1.68 per share. These shares are subject to the 2005 Incentive Compensation Plan as amended, and are granted to certain independent members of the Board of Directors and employees.Directors. The shares have an approximate one-year restriction period. During the same period 25,000223,090 restricted shares had their restriction period lapse; these shares had a weighted average fair value of $2.95$1.92 per share. In addition, 1,600

During the six months ended July 31, 2011, the Company granted 25,000 restricted stock shares were forfeited prior to the lapse of the restriction period; these shares hadas executive inducement grants with a weighted average fair value of $2.00$1.91 per share. The restrictions lapsed immediately upon the grant of the shares, and the Company recognized $48,000 of compensation expense for the six months ended July 31, 2011 relating to these inducement grants. These executive inducement grants were approved by the board pursuant to Nasdaq Marketplace Rule 5635(c)(4). The terms of the grants are nearly as practicable identical to the terms and conditions of the Company’s 2005 Incentive Compensation Plan.

The following table details the remaining obligations including accrued interest, by fiscal year, as of the end of the quarter:

In connection with the entering into of the revisedsecond amended and restated revolving note in April 2011, the Company also entered into an amendment to the amended and restated continuing guaranty agreement. The terms of the continuing guarantyguarantee agreement remain the same as set forth in the guaranty agreement entered into on July 31, 2008, as amended on January 6, 2009 and on October 21, 2009, except thatthat: (i) the minimum fixed charge coverage ratio covenant that formerly requiredhas been revised, whereas the Company shall maintain a minimum trailing twelve months fixed charge coverage ratio of 1.25, measured each fiscal quarter; (ii) the funded indebtedness to maintain certain levels of minimum tangible net worthEBITDA covenant has been eliminated.revised, whereas the Company shall report a funded indebtedness to EBITDA ratio no greater than 2.0, measured each fiscal quarter and; (iii) a covenant has been added whereas the Company’s EBITDA shall cover its capitalized software development costs each fiscal quarter. The covenant becomes effective on October 31, 2011 and is calculated based on the trailing nine months. As of January 31, 2012 and thereafter, the calculation will be based on the trailing twelve months.

The note also continues to be secured by a first lien on all of the assets of the Company pursuant to security agreements entered into by the Company.

The Company was in compliance with all of the covenants at July 31, 2010.2011. The Company pays a commitment fee on the unused portion of the facility of 0.06%.06%. The Company had outstanding borrowings of $2,000,000$1,250,000 and $1,200,000 under this revolving loan as of July 31, 2010.2011 and January 31, 2011, respectively.

Foreign currency hedge instruments are from time to time used to partially offsetStreamline Health has entered into employment agreements with its business exposure to foreign exchange riskofficers and certain employees that generally provide annual salary, a minimum bonus, discretionary bonus, and stock incentive provisions.

As a result of a reduction in force implemented by management during the Canadian dollar for the Company’s transactions with a current Canadian customer. The Company may enter into foreign currency forward and option contracts to offset some of the foreign exchange risk of expected future cash flows on certain forecasted revenue and cost of sales, and on certain existing accounts receivable and payable. However,quarter ended July 31, 2011, the Company may choose not to hedge certain foreign exchange exposures for a varietyexpensed $100,000 in the second quarter of reasons, including but not limited to immateriality. There were no outstanding foreign currency forward contracts at July 31, 2010.fiscal 2011, in accordance with severance agreements.

In addition to historical information contained herein, this Report on Form 10-Q contains forward-looking statements relating to the Company’s plans, strategies, expectations, intentions, etc. and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are no guarantee of future performance and are subject to certain risks and uncertainties that are difficult to predict and actual results could differ materially from those reflected in the forward-looking statements. These risks and uncertainties include, but are not limited to, the timing of contract negotiations and executions and the related timing of the revenue recognition related thereto, the potential cancellation of existing contracts or clients not completing projects included in the backlog, the impact of competitive products and pricing, product demand and market acceptance, new product development, key strategic alliances with vendors that resell Streamline Health solutions, the ability of Streamline Health to control costs, availability of products obtained from third-party vendors, the healthcare regulatory environment, potential changes in legislation, regulatory and government funding affecting the healthcare industry, healthcare information system budgets, availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems, fluctuations in operating results and other risk factors that might cause such differences including those discussed herein, and including, effects of critical accounting policies and judgments, changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other similar entities, changes in economic, business and market conditions impacting the healthcare industry, the markets in which the Company operates, and nationally, and the Company’s ability to maintain compliance with the terms of its credit facilities, but not limited to, discussions in the most recent Form 10-K, Part I, “Item 1.1 Business”, “Item 1A.1A Risk Factors”, Part II, “Item 7.7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8.8 Financial Statements and Supplemental Data.” In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date thereof. The Registrant undertakes no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in this and other documents Streamline Health Solutions, Inc. files from time to time with the Securities and Exchange Commission, including future Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Streamline Health’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Streamline Health to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent liabilities. On an ongoing basis, Streamline Health evaluates its estimates, including those related to product revenues, bad debts, capitalized software development costs, income taxes, support contracts, contingencies, and litigation. Streamline Health bases its estimates on historical experience and on various other assumptions that Streamline Health believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and revenue and expense recognition. Actual results may differ from these estimates under different assumptions or conditions.

Founded in 1989, Streamline Health Solutions, Inc. (“Streamline Health^®” or the “Company”) is a healthcare informationleading developer of workflow and document management technology company, which is focused on developing and licensing proprietary software solutions that improve document-centric information flowsdrive process efficiencies and complementcost reductions for leading healthcare facilities throughout North America. Since our inception in 1989, Streamline Health’s technology solutions have seamlessly interfaced with our customers’ existing enterprise or departmental electronic medical record systems. The Company’s solutions efficiently integrate paper-based and enhance existing transaction-centric hospital healthcare information systems. In additionunstructured data with electronic data in the areas of Health Information Management, Patient Financial Services, Human Resources, and Supply Chain Management to provide real-time comprehensive patient profiles and generate substantial operational savings. Streamline Health’s workflow and document management solutions assist hospitals in meeting the requirements of “meaningful use” to become eligible for significant incentive payments as outlined in the HITECH act (a provision of American Recovery and Reinvestment Act of 2009), and they are an integral part of an enterprise-wide Electronic Health provides consulting services specializing in enterprise connectivity, systems integration, and departmental process improvement.Record (EHR). The Company sells its products and services in North America to remarketers, hospitals, clinical and ambulatory services through its direct sales force, and its reseller partnerships. The Company also sells to direct remarketers, hospitals, clinical and ambulatory services.

Streamline Health’s core technology is a secure document management repository called accessANYware^TM that collects, indexes, and intelligently routes unstructured, document-based medical and financial data throughout the enterprise. The accessANYware family of solutions create a permanent document-based repository of historical health information that iswork complementary to, and can be seamlessly integrated with existing disparatetransaction-centric clinical, financial and administrativemanagement information systems, providing convenient electronic access to all forms of patient information from any location, including secure web-based access. These integrated solutions allow providers and administrators to link existing systems with documents, which can dramatically improve the availability of patient information while decreasing direct costs associated with document retrieval, work-in-process, chart processing, document retention, and archiving.

The Company continuesrecognized revenues in the three and six month periods ending July 31, 2011 of $4,146,000 and $8,286,000, compared to actively pursue remarketing agreements with other companies.$4,676,000 and $8,220,000; a decrease of $530,000 and an increase of $66,000 respectively. The revenues recognized are derived primarily from recurring revenues recognized from SaaS subscriptions and recurring maintenance contracts. The Company earned an operating profit of $20,000 in the second quarter of fiscal 2011 and incurred an operating loss of $234,000 for the six month period ended July 31, 2011. In the prior year comparable periods the Company incurred operating losses of $28,000 and $1,229,000, respectively. Operating expenses for the three and six month periods ending July 31, 2011 were $4,126,000 and $8,519,000, compared to $4,704,000 and $9,449,000 in the comparable prior periods; a decrease of $578,000 or 12% and $930,000 or 10%, respectively over the prior comparable periods.

Revenues consisted of the following (in thousands):

Operating expensesCost of sales consisted of the following (in thousands):

Cost of systems sales includes amortization of capitalized software expenditures, royalties, and the cost of third-party hardware and software. The increasequarterly and year-to-date decrease in the cost of systems sales during the three and six month periods ended July 31, 2010, over the prior comparable quarter, is primarily the result of the increasesquarterly and year-to-date decreases in capitalized software amortization of capitalized software development costs$132,000 and $253,000, respectively; primarily due to the general releaseproducts released in prior years becoming fully amortized in fiscal 2011. Cost of accessANYware 5.0. Additionally, thissystems sales was offset byalso reduced on a quarterly and year-to-date basis due to a decrease in third-party hardware and third party software sales andover the associated direct costs.prior year comparable periods.

Cost of services, maintenance and support includes compensation and benefits for support and professional services personnel and the cost of third party maintenance contracts. The increasequarterly and year-to-date decrease is primarily due to reduced salary and benefits expenses during fiscal 2011, primarily through the increased investmentreduction in professional services staffforce in the second quarter; and support for continued growth of the BPM services.

The cost of software as a service operations is relatively fixed, but is generally subject to annual increases for the goods and services required. The quarterly and year-to-date decrease is primarily attributable to increased compensation, depreciationreductions in salary and related benefits through reduced staffing; as well as several annual third party provider license and maintenance expenses as a result of the growing hosting center operations, as well as typical annualagreements that were re-negotiated, resulting in quarterly and year-to-date cost increases.savings.

Selling, General and Administrative expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the Company’s sales, marketing and administrative personnel; advertising and marketing expenses, including trade shows and similar type sales and marketing expenses; and general corporate expenses, including occupancy costs. ThisThe quarterly and year-to-date increase over the respective comparable prior periodsperiod is due to the investment in customer initiatives; increases in equity awards expense, performance bonus accruals, increased travel and living expenses, and increased investor relations costs. These quarterly and year-to-date increases were offset by reduced commissions expense, reduced use of third-party outside consultants, and other compensation expenses; re-instatement of bonuses; increasedreduced bad debt expense; severance costs; and professional fees relating to increased compliance and administration costs.expense.

Product research and development costs are summarized as followsexpenses consisted of the following (in thousands):

Quarterly and year-to-date interest expense forin the threesecond quarter of fiscal 2011 was $22,000 and six months ended July 31, 2010 was$42,000 respectively, compared to $34,000 and $56,000 respectively, compared to $11,000 and $18,000 in the comparable prior periods. The increase in interestInterest expense was related tofrom the working capital facility interest and fees. The increasewas $17,000 in the interest expense resultssecond quarter of fiscal 2011 compared with $22,000 in the comparable prior quarter, primarily fromdue to a larger average balance outstanding than in the prior comparable periods and the interestquarter. Interest expense from the capital lease for equipment entered into in January 2010.decreased by $7,000 and $12,000, respectively over the prior comparable three and six month periods; primarily due to a lower principal balance.

The quarterly and year-to-date tax provision in the first quarter of fiscal 20102011 and 20092010 is comprised of primarily state and local provisions.

The Company incurred quarterly and year-to-date net losses of $7,000 and $288,000 respectively in fiscal 2011; as compared to quarterly and year-to-date net losses of $76,000 and $1,252,000 respectively in fiscal 2010.

Streamline Health’s primary metrics used to assess the threeperformance of the business include gross margin, cash flow from operations, non-GAAP Adjusted EBITDA (A non-GAAP measure meaning, “Earnings before Interest, Tax, Depreciation, Amortization, and six month periods ended July 31, 2010, compared to net lossesStock-based compensation expense”; for explanation and reconciliation of $18,000 and $2,000 in the comparable prior periods ended July 31, 2009. Increases in proprietary software sales and recurring application-hosting revenues were offset by increased investment in customer initiatives, compensation, and increased expense relating to amortizationall non-GAAP financial measures, see “Use of Non-GAAP Financial Measures”), non-GAAP Adjusted EBITDA less capitalized software development costs, and non-GAAP Adjusted EBITDA margin. Management uses these measures as i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and, ii) as a performance evaluation metric in determining achievement of certain executive and employee incentive compensation programs.

Additionally, the Company’s lenders use Adjusted EBITDA, to assess operating performance. The Company’s working capital credit agreement requires compliance with financial covenants certain of which contributedare based on an Adjusted EBITDA measurement that is the same as the Adjusted EBITDA measurement reviewed by Company management. The current metrics are outlined in the table below:

The following table sets forth a reconciliation of EBITDA and six month periods.its variants used by management, as described to assess the Company’s on-going operating performance (amounts in thousands, except per share data):