================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 --------------

                                   FORM 10-QSB
                                 --------------

|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2006

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                        For the transition period from to

                         Commission File Number: 0-21683
                                 --------------
                               GraphOn Corporation
        (Exact name of small business issuer as specified in its charter)
                                 --------------

           Delaware                                 13-3899021
(State or other jurisdiction of                    (IRS Employer
incorporation or organization)                  Identification No.)

                          5400 Soquel Avenue, Suite A2
                              Santa Cruz, CA 95062
                    (Address of principal executive offices)
                    Issuer's telephone number: (800) 472-7466

      Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No [ ]

          Indicate by check mark whether the issuer is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No |X|

      As of August 3, 2006, there were issued and outstanding 46,792,250 shares
of the issuer's Common Stock, par value $0.0001.

      Transitional Small Business Disclosure Format (Check one): Yes [ ] No |X|


<PAGE>



                               GRAPHON CORPORATION
                                   FORM 10-QSB
                                Table of Contents



PART I.   FINANCIAL INFORMATION                                             Page
                                                                            ----
Item 1.   Financial Statements

          Unaudited Condensed Consolidated Balance Sheet as of
            June 30, 2006                                                      2

          Unaudited Condensed Consolidated Statements of
            Operations and Comprehensive Loss for the Three and
            Six Months Ended June 30, 2006 and 2005                            3

          Unaudited Condensed Consolidated Statements of Cash
            Flows for the Six Months Ended June 30, 2006 and 2005              4

          Notes to Unaudited Condensed Consolidated Financial
            Statements                                                         5

Item 2.   Management's Discussion and Analysis or Plan of
            Operation                                                          9

Item 3.   Controls and Procedures                                             21

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings                                                   22

Item 2.   Unregistered Sales of Equity Securities and Use of
            Proceeds                                                          22

Item 6.   Exhibits                                                            22

          Signatures



<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements


<TABLE>
<CAPTION>
                               GraphOn Corporation
                  Condensed Consolidated Balance Sheet

                                                        (Unaudited; $000s)
    Assets                                                June 30, 2006
    Current Assets                                        -------------
<S>                                                       <C>
    Cash and cash equivalents                             $      3,138
    Accounts receivable, net                                       837
    Other current assets                                            92
                                                          -------------
            Total Current Assets                                 4,067
    Patents, net                                                 4,075
    Property and equipment, net, and other assets                  160
                                                          -------------
            Total Assets                                  $      8,302
                                                          =============
    Liabilities and Shareholders' Equity
    Current Liabilities
    Accounts payable and accrued expenses                 $        610
    Deferred revenue                                             1,110
                                                          -------------
            Total Current Liabilities                            1,720
    Deferred revenue                                             1,025
                                                          -------------
            Total Liabilities                                    2,745

    Commitments and contingencies                                    -

    Shareholders' Equity
    Common stock, $0.0001 par value, 195,000,000
    shares authorized, 46,192,250 shares issued and
    outstanding                                                      5
    Additional paid-in capital                                  58,562
    Note receivable - shareholder                                 (260)
    Accumulated deficit                                        (52,750)
                                                          ------------
            Total Shareholders' Equity                           5,557
                                                          ------------
            Total Liabilities and Shareholders'
            Equity                                        $      8,302
                                                          ============

<FN>

See accompanying notes to unaudited condensed consolidated financial statements
</FN>
</TABLE>




                                       2
<PAGE>


<TABLE>
<CAPTION>
                                       GraphOn Corporation
              Condensed Consolidated Statements of Operations and Comprehensive Loss

                                                     (Unaudited; $000s, except per share data)
                                           Three months ended June 30,      Six months ended June 30,
                                           ---------------------------     ---------------------------
                                              2006             2005           2006            2005
                                           ----------       ----------     ----------       ----------
<S>                                        <C>              <C>            <C>              <C>
Revenue                                    $    1,451       $    1,276     $    2,757       $    2,456
Cost of Revenue                                   151              131            262              252
                                           ----------       ----------     ----------       ----------
Gross Profit                                    1,300            1,145          2,495            2,204
                                           ----------       ----------     ----------       ----------
Operating Expenses
Selling and marketing                             426              342            840              677
General and administrative                        925              768          1,915            1,495
Research and development                          452              313            846              636
                                           ----------       ----------     ----------       ----------
        Total Operating Expenses                1,803            1,423          3,601            2,808
                                           ----------       ----------     ----------       ----------
Loss From Operations                             (503)            (278)        (1,106)            (604)
                                           ----------       ----------     ----------       ----------
Other Income, net                                  12               11             22               18
                                           ----------       ----------     ----------       ----------
Loss Before Provision for Income Tax             (491)            (267)        (1,084)            (586)
Provision for income tax                            3                -              3                -
                                           ----------       ----------     ----------       ----------
Net Loss                                         (494)            (267)        (1,087)            (586)
Other Comprehensive Income (Loss)                   -                -              -                -
                                           ----------       ----------     ----------       ----------
Comprehensive Loss                               (494)            (267)        (1,087)            (586)
Deemed Dividend on Preferred Stock                  -                -              -           (4,000)
                                           ----------       ----------     ----------       ----------
Loss Attributable to Common Shareholders   $     (494)      $     (267)    $   (1,087)      $   (4,586)
                                           ==========       ==========     ==========       ==========

Basic and Diluted Loss per Common Share    $    (0.01)      $    (0.01)    $    (0.02)      $    (0.12)
                                           ==========       ==========     ==========       ==========
Weighted Average Common Shares
Outstanding                                46,192,250       46,147,047     46,188,073       37,432,395
                                           ==========       ==========     ==========       ==========

<FN>

       See accompanying notes to unaudited condensed consolidated financial statements
</FN>
</TABLE>



                                       3
<PAGE>

<TABLE>
<CAPTION>
                               GraphOn Corporation
                 Condensed Consolidated Statement of Cash Flows
                                                                     (Unaudited; $000s)
                                                                  Six Months Ended June 30,
Cash Flows From operating Activities                                 2006           2005
------------------------------------                             ----------      ----------
<S>                                                              <C>             <C>
Net loss                                                         $   (1,087)     $     (586)
Adjustments to reconcile net loss to net cash (used in)
  provided by operating activities:
Depreciation and amortization                                           514             492
Amortization of deferred compensation                                     -               1
Stock-based compensation expense                                        226               -
Provision for doubtful accounts                                           -              15
Proceeds from accrued interest on directors' notes
  receivable                                                              -               4
Proceeds from accrued interest on note receivable -
shareholder                                                               -               1
Interest accrued on note receivable - shareholder                        (5)             (6)
Changes in operating assets and liabilities:
  Accounts receivable                                                   (73)           (229)
  Other assets                                                          (48)             11
  Accounts payable and accrued liabilities                             (159)            134
  Deferred revenue                                                      343             239
                                                                 ----------      ----------
Net Cash (Used In) Provided By Operating Activities                    (289)             76
                                                                 ----------      ----------
Cash Flows Used In Investing Activities
---------------------------------------
Acquisition costs                                                         -           (675)
Capital expenditures and other assets                                   (48)           (19)
                                                                 ----------      ----------
Net Cash Used In Investing Activities                                   (48)          (694)
                                                                 ----------      ----------
Cash Flows (Used In) Provided By Financing Activities
-----------------------------------------------------
Employee stock purchases                                                  5               5
Proceeds from note receivable - shareholder                               -               3
Repayment of directors' notes receivable                                  -              50
Proceeds from private placement of preferred stock and warrants           -           3,335
Costs of private placement of preferred stock and warrants              (58)          (316)
                                                                 ----------      ----------
Net Cash (Used In) Provided By Financing Activities                     (53)          3,077
                                                                 ----------      ----------
Effect of exchange rate fluctuations on cash and cash
  equivalents                                                             -              (1)
                                                                 ----------      ----------
Net (Decrease) Increase in Cash and Cash Equivalents                   (390)          2,458
Cash and Cash Equivalents, beginning of period                        3,528             675
                                                                 ----------      ----------
Cash and Cash Equivalents, end of period                         $    3,138      $    3,133
                                                                 ==========      ==========
<FN>

  See accompanying notes to unaudited condensed consolidated financial statements
</FN>
</TABLE>


                                       4
<PAGE>


                               GRAPHON CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1. Basis of Presentation

The unaudited condensed consolidated financial statements included herein have
been prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all information and footnotes necessary for a complete
presentation of results of operations, financial position and cash flows.

The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments in the
three and six-month periods ended June 30, 2006 and 2005) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. This Quarterly Report on Form 10-QSB should be read in conjunction
with the audited consolidated financial statements of GraphOn Corporation (the
"Company") contained in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2005, which was filed with the Securities and Exchange
Commission (the "SEC") on April 17, 2006, and amended on June 12, 2006. The
interim results presented herein are not necessarily indicative of the results
of operations that may be expected for the full fiscal year ending December 31,
2006, or any future period.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that 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. These estimates include the allowance for doubtful
accounts, the estimated lives of intangible assets, depreciation of fixed
assets, determination of stock-based compensation expense and accrued
liabilities, among others. Actual results could differ materially from those
estimates.

Significant intercompany accounts and transactions are eliminated upon
consolidation.

2. Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for its stock-based compensation
plans under the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
and related interpretations, as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123").
The Company did not recognize compensation cost related to stock options granted
to its employees and non-employee directors that had an exercise price equal to
or above the market value of the underlying common stock on the date of grant in
its condensed consolidated statement of operations and comprehensive loss prior
to January 1, 2006.

Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based
Payment," ("FAS123R") and related interpretations using the modified prospective
transition method. Under that method, compensation cost recognized in the three
and six-month periods ended June 30, 2006 includes (a) compensation cost for all
stock-based awards granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value estimated in accordance with the original
provisions of FAS No. 123 and (b) compensation cost for all stock-based awards
granted on or subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of FAS123R.

Results for prior periods have not been restated.

As a result of adopting FAS123R on January 1, 2006, the Company's loss from
operations, loss before provision for income taxes and net loss for the
three-months ended June 30, 2006 are each $116 thousand higher than if the
Company had continued to account for stock-based compensation under APB No. 25.
The Company's loss from operations, loss before provision for income taxes and
net loss for the six-months ended June 30, 2006 are each $226 thousand higher
than if the Company had continued to account for stock-based compensation under
APB No. 25.

Pro Forma Information under FAS No. 123 for Periods Prior to January
1, 2006

The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of FAS No. 123 to
stock-based awards in the three and six-month periods ended June 30, 2005:



                                       5
<PAGE>

<TABLE>
<CAPTION>
                                               (Unaudited; $000s, except per share data)
                                                Three Months Ended     Six Months Ended
                                                  June 30, 2005         June 30, 2005
                                                ------------------    -----------------
<S>                                             <C>                   <C>
    Net loss, as reported:                      $             (267)   $            (586)
    Less: deemed preferred dividends                             -               (4,000)

    Add: stock-based compensation expense
    included in net loss, net of related tax
    effects                                                      1                     1

    Deduct: total stock-based compensation
    expense determined under the fair-value
    method for all awards, net of related tax
    effects                                                   (111)                (194)
                                                ------------------    -----------------
    Pro forma net loss                          $             (377)   $          (4,779)
                                                ==================    =================
    Basic and diluted loss per share
    As reported                                 $            (0.01)    $          (0.12)
    Pro forma                                   $            (0.01)    $          (0.13)
</TABLE>

For purposes of the pro forma calculations, the fair value of each option was
estimated on the date of the grant using the Black-Scholes option-pricing model,
assuming no dividends, expected volatility of 60%, risk free interest rate of
1.5% and an expected term of five years. The weighted average fair value of
stock-based awards granted during the three and six-month periods ended June 30,
2005 were $0.39 and $0.50, respectively. No stock options were exercised during
either the three or six-month periods ended June 30, 2005 and forfeitures were
recognized as they occurred.

Valuation and Expense Information under FAS123R

The Company recorded stock-based compensation expense of $116 thousand and $226
thousand in the three and six-month periods ended June 30, 2006, respectively.
As required by FAS123R, the Company estimates forfeitures of employee
stock-based awards and recognizes compensation cost only for those awards
expected to vest. Forfeiture rates are estimated based on an analysis of
historical experience and are adjusted to actual forfeiture experience as
needed.

The following table illustrates the stock-based compensation expense recorded
during the three and six-month periods ended June 30, 2006 by income statement
classification ($000s):

<TABLE>
<CAPTION>
                                              Three months        Six months
                                                 ended              ended
                                             June 30, 2006      June 30, 2006
 Income statement classification             -------------      -------------
<S>                                          <C>                <C>
 Cost of revenue                             $           4      $           8
 Selling and marketing expense                           3                 17
 General and administrative expense                     97                181
 Research and development expense                       12                 20
                                             -------------      -------------
                                             $         116      $         226
                                             =============      =============
</TABLE>

In connection with the adoption of FAS123R, the Company estimated the fair value
of each stock option granted during the three-month period ended June 30, 2006
on the date of grant using a binomial model, with the following assumptions: no
dividends, an approximate risk free annual interest rate of 5.02%, estimated
forfeiture rate of 10% and an estimated exercise factor of 10%. For stock option
grants, the following additional assumptions were also used: expected volatility
of 157% and an expected term of 7.5 years. For employee stock purchase plan
("ESPP") grants, the assumptions previously listed in this paragraph were also
used, except as follows: expected volatility of 147%, risk free interest rate of
3.73% and an expected term of 0.5 years. For assumptions used for grants made
during the three-month period ended March 31, 2006, please refer to our
Quarterly Report on Form 10-QSB as filed with the SEC on May 15, 2006.

The Company does not anticipate paying dividends on its common stock for the
foreseeable future. The Company used the historical volatility of its daily
closing price since it went public (July 13, 1999) through June 30, 2006 as the


                                       6
<PAGE>

basis of its calculation for stock option grants. The volatility calculation for
ESPP grants was based on the historical volatility of the Company's daily
closing price from August 1, 2005 to January 31, 2006 as these were the two most
recent dates used in determining the purchase price of the shares sold under the
ESPP.

The approximate risk free interest rate was based on the implied yield available
on U.S. Treasury issues with remaining terms equivalent to the Company's
expected term on its options. The expected term of the Company's stock options
was based on the historical option holder exercise patterns and considered the
market performance of the Company's common stock and other items. The expected
term of the ESPP shares was six months, which is the length of time between the
ESPP grant date and the purchase date.

The estimated forfeiture rate was based on an analysis of historical data and
considered the impact of events such as the work force reductions the Company
carried out during previous years. The estimated exercise factor was based on an
analysis of historical data and included a comparison of historical and current
share prices.

For grants made during the three and six-month periods ended June 30, 2006, the
weighted average fair value of stock options was $0.21 and $0.21, respectively,
and for ESPP shares was $0.1785 and $0.1785, respectively.

The following table presents a summary of the status and activity of the
Company's stock option awards for the three and six-month periods ended June 30,
2006.

<TABLE>
<CAPTION>
                                                                                 Weighted
                                                                  Weighted        Average        ($000s)
                                                                   Average       Remaining      Aggregate
                                                                  Exercise      Contractual     Intrinsic
                                                    Shares          Price       Term (Years)      Value
                                                  ---------      ----------     -----------     ---------
<S>                                               <C>            <C>   <C>             <C>      <C>    <C>
Outstanding at December 31, 2005                  5,716,272      $     0.53
Granted                                             985,000            0.21
Exercised                                                 -               -
Forfeited or expired                                      -               -
                                                  ---------

Outstanding at March 31, 2006                     6,701,272      $     0.48            7.98     $      74
Granted                                              10,000            0.21
Exercised                                                 -               -
Forfeited or expired                                (16,217)
                                                  ---------
Outstanding at June 30, 2006                      6,695,055      $     0.48            7.73     $      55
                                                  =========
Vested or expected to vest at June 30, 2006 (1)   6,438,408      $     0.49            7.68     $      55
                                                  =========
Exercisable at June 30, 2006 (2)                  6,695,055      $     0.48            7.73     $      55
                                                  =========
</TABLE>

(1) Of the options outstanding as of June 30, 4,025,123 were vested and
2,413,285 were estimated to vest in future periods, prior to their estimated
forfeiture.

(2) All options are exercisable immediately upon grant. Options vest, generally
ratably over a 33-month period commencing in the fourth month after the grant
date. The Company has the right to repurchase exercised options that have not
vested upon their forfeiture at the respective option's exercise price.

No stock-based compensation awards were exercised during either the three or
six-month periods ended June 30, 2006. As of June 30, 2006, there was $597
thousand of total unrecognized compensation cost related to stock-based
compensation. That cost is expected to be recognized over a weighted-average
period of approximately 1.0 year.


                                       7
<PAGE>

3. Revenue

Revenue for the three-month periods ended June 30, 2006 and 2005 was comprised
as follows:


<TABLE>
<CAPTION>
                                                                      Change in
         Revenue ($000s)             2006          2005         Dollars       Percent
         ---------------          ---------     ---------      ---------     --------
         Product licenses
         <S>                      <C>           <C>            <C>              <C>
         Windows                  $     433     $     520      $     (87)       (16.7)%
         Unix                           605           429            176         41.0
                                  ---------     ---------      ---------
                                      1,038           949             89          9.4
                                  ---------     ---------      ---------
         Service Fees
         Windows                        204           161             43         26.7
         Unix                           195           154             41         26.6
                                  ---------     ---------      ---------
                                        399           315             84         26.7
                                  ---------     ---------      ---------
         Other                           14            12              2         16.7
                                  ---------     ---------      ---------
         Total Revenue            $   1,451     $   1,276      $     175         13.7
                                  =========     =========      =========
</TABLE>

Revenue for the six-month periods ended June 30, 2006 and 2005 was comprised as
follows:


<TABLE>
<CAPTION>
                                                                      Change in
         Revenue ($000s)             2006          2005         Dollars       Percent
         ---------------          ---------     ---------      ---------     --------
         Product licenses
         <S>                      <C>           <C>            <C>              <C>
         Windows                  $   1,060     $   1,141      $     (81)        (7.1)%
         Unix                           863           696            167         24.0
                                  ---------     ---------      ---------
                                      1,923         1,837             86          4.7
                                  ---------     ---------      ---------
         Service Fees
         Windows                        417           304            113          37.2
         Unix                           378           297             81          27.3
                                  ---------     ---------      ---------
                                        795           601            194          32.3
                                  ---------     ---------      ---------
         Other                           39            18             21         116.7
                                  ---------     ---------      ---------
         Total Revenue            $   2,757     $   2,456      $     301          12.3
                                  =========     =========      =========
</TABLE>

4. Patents

As of June 30, 2006, patents consisted of the following:

<TABLE>
<CAPTION>
                                     (000s)
                                 -----------
       <S>                       <C>
       Patents                   $     5,340
       Accumulated amortization       (1,265)
                                 -----------
                                 $      4,075
                                 ===========
</TABLE>

Patent amortization, which aggregated $223 thousand and $445 thousand during the
three and six-month periods ended June 30, 2006, respectively, is a component of
general and administrative expenses.

5. Supplemental Disclosure of Cash Flow Information

The Company disbursed no cash for the payment of income taxes or interest during
either of the six-month periods ended June 30, 2006 or 2005.

6. Loss Per Share

Potentially dilutive securities have been excluded from the computation of
diluted loss per common share, as their effect is antidilutive. For the three
and six-month periods ended June 30, 2006 and 2005, 19,544,255 and 22,457,157
shares, respectively, of common stock equivalents were excluded from the
computation of diluted loss per share since their effect would be antidilutive.


                                       8
<PAGE>


ITEM 2. Management's Discussion and Analysis or Plan of Operation

Forward-Looking Statements

The following discussion of our financial condition and results of operations
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including:

      o our history of operating losses, and expectation that those losses will
        continue;
      o the uncertainty as to whether or not we will realize the anticipated
        benefits of acquiring Network Engineering Software, Inc. ("NES");
      o that a significant portion of our revenue has been and continues to be
        earned from a very limited number of significant customers;
      o that our stock price has been volatile and you could lose
        your investment; and
      o other factors, including those set forth under Item 6. "Management's
        Discussion and Analysis or Plan of Operation - Risk Factors" in our
        Annual Report on Form 10-KSB for the year ended December 31, 2005 and
        in other documents we filed with the Securities and Exchange
        Commission, could have a material adverse effect upon our business,
        results of operations and financial condition.

Overview

We are developers of business connectivity software, including Unix, Linux and
Windows server-based software, with an immediate focus on web-enabling
applications for use by independent software vendors (ISVs), application service
providers (ASPs), corporate enterprises, governmental and educational
institutions, and others.

Server-based computing, sometimes referred to as thin-client computing, is a
computing model where traditional desktop software applications are relocated to
run entirely on a server, or host computer. This centralized deployment and
management of applications reduces the complexity and total costs associated
with enterprise computing. Our software architecture provides application
developers with the ability to relocate applications traditionally run on the
desktop to a server, or host computer, where they can be run over a variety of
connections from remote locations to a variety of display devices. With our
server-based software, applications can be web-enabled, without any modification
to the original application software required, allowing the applications to be
run from browsers or portals. A variety of Unix, Linux or Windows applications
can be web-enabled with our server-based technology.

We continue to manage our operations to bring our cash expenditures in line with
our revenues in order to determine the most cost effective use of our cash on
hand. We are simultaneously looking at ways to improve our revenue stream.
Additionally, we continue to review potential merger opportunities as they
present themselves to us and at such time as a merger might make financial sense
and add value for our shareholders, we will pursue that merger opportunity. We
believe that improving or maintaining our current revenue stream, coupled with
our cash on hand, including the cash raised in the 2005 private placement will
sufficiently support our operations during 2006. If we are unsuccessful in
maintaining our current revenue level or finding additional alternative sources
of financing, we will face a severe constraint on our ability to sustain
operations in a manner that creates future growth and viability.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our
historical and future performance. We refer to these policies as "critical"
because these specific areas generally require us to make judgments and
estimates about matters that are uncertain at the time we make the estimates,
and different estimates, which also would have been reasonable, could have been
used, which would have resulted in different financial results.

The critical accounting policies listed below should be read in conjunction with
those identified in our most recent Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005, as amended, which included: the allowance for
doubtful accounts, patents, capitalized software development costs, impairment
of intangible assets, loss contingencies and stock compensation. With the
adoption of FAS123R, on January 1, 2006, we have identified the estimates and
assumptions that accompany the fair value determination of our stock-based


                                       9
<PAGE>

compensation awards as critical, as discussed below. Our discussion of revenue
recognition has been revised in order to disclose polices that have been applied
for the first time during the current reporting period. It is important that the
discussion of our operating results that follows be read in conjunction with the
critical accounting policies discussed below as well as those disclosed in our
Annual Report on Form 10-KSB, as filed with the SEC on April 17, 2006, and
Amendment Number 1 to our Annual Report on Form 10-KSB, as filed with the SEC on
June 12, 2006.

Revenue Recognition
Generally, software license revenues are recognized when:

     o  Persuasive evidence of an arrangement exists, i.e., when we sign a
        non-cancelable license agreement wherein the customer acknowledges an
        unconditional obligation to pay, or upon receipt of the customer's
        purchase order.
     o  Delivery has occurred or services have been rendered and there are no
        uncertainties surrounding product acceptance, i.e., when the title and
        risk of loss have been transferred to the customer, which generally
        occurs when the media containing the licensed programs is provided to a
        common carrier or in the case of electronic delivery, delivery occurs
        when the customer is given access to the licensed program.
     o  Our price to the customer is fixed or determinable, as typically
        evidenced in the signed non-cancelable contract, or the customer's
        purchase order.
     o  Collectibility is reasonably assured.  If collectiblity is not
        considered probable, revenue is recognized when the fee is collected.

Revenue recognized on software arrangements involving multiple elements is
allocated to each element of the arrangement based on vendor-specific objective
evidence ("VSOE") of the fair values of the elements; such elements include
licenses for software products, maintenance, consulting services or customer
training. We limit our assessment of VSOE for each element to either the price
charged when the same element is sold separately or the price established by
management having the relevant authority to do so, for an element not yet sold
separately.

If sufficient VSOE of fair values does not exist so as to permit the allocation
of revenue to the various elements of the arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. If evidence of VSOE of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue.

Certain of our ISV, VAR or ASP customers (who we refer to as "resellers") prepay
for licenses they intend to resell. Upon receipt of the prepayment, if all other
revenue recognition criteria outlined above have been met, we recognize
licensing revenue when the reseller is given access to the licensed programs.
The resellers provide us with monthly sell-through reports that detail, for the
respective month, various items, such as the number of licenses purchased from
us, the number they have sold to other parties, the ending balance of licenses
they hold as inventory available for future sale and certain information
pertaining to their customers such as customer name, licenses purchased,
purchase date and contact information. We monitor and reconcile the resellers'
inventory records to our records via the monthly sell-through reports.

Other resellers will only purchase licenses from us when they have already
closed a deal to sell our product to another party. These resellers will
typically submit a purchase order to us in order to receive product that they
can deliver to their customer. In these cases, assuming all other revenue
recognition criteria, as set forth above, have been satisfied, we recognize
licensing revenue when the reseller has been given access to the licensed
programs. There are no rights of return granted to resellers or other purchasers
of our software programs.

We recognize revenue from service contracts ratably over the related contract
period, which generally ranges from one to five years.


                                       10
<PAGE>

Stock-Based Compensation
Prior to January 1, 2006, we accounted for our stock-based compensation plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and
related interpretations, as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." ("FAS No. 123") We
did not recognize compensation cost related to stock options granted to our
employees and non-employee directors that had an exercise price equal to or
above the market value of the underlying common stock on the date of grant in
our condensed consolidated statement of income prior to January 1, 2006.

Effective January 1, 2006, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment,"
("FAS123R") and related interpretations using the modified prospective
transition method. Under that method, compensation cost recognized in the three
and six-month periods ended June 30, 2006 includes (a) compensation cost for all
stock-based awards granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value estimated in accordance with the original
provisions of FAS No. 123 and (b) compensation cost for all stock-based awards
granted on or subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of FAS123R.

Results for prior periods have not been restated.

As a result of adopting FAS123R on January 1, 2006, our loss from operations,
loss before provision for income taxes and net loss for the three and six-months
ended June 30, 2006 are $116 thousand and $226 thousand higher, respectively,
than if we had continued to account for stock-based compensation under APB No.
25.

The valuation of employee stock options is an inherently subjective process,
since market values are generally not available for long-term, non-transferable
employee stock options. Accordingly, an option pricing model is utilized to
derive an estimated fair value. In calculating the estimated fair value of our
stock options, we used a binomial pricing model which requires the consideration
of the following variables for purposes of estimating fair value:

    o the expected volatility of our common stock,
    o the annualized forfeiture/termination rate,
    o the prior forfeiture/termination rate,
    o the expected term of the option,
    o the exercise factor for optionees,
    o the risk free interest rate for the expected option term, and
    o expected dividends on our common stock (we do not anticipate paying
      dividends for the foreseeable future).

Of the variables above, the selection of an expected term, an annualized
forfeiture rate and expected stock price volatility are the most subjective. Our
estimate of the expected option term was 7.5 years and was derived based on our
analysis of historical data and future projections. We derived an annualized
forfeiture rate of 10% by analyzing our historical forfeiture data, including
consideration of the impact of certain non-recurring events, such as reductions
in work force. In estimating our stock price volatility for grants awarded
during the three-month period ended June 30, 2006, we analyzed our historic
volatility since we became a public entity (July 13, 1999) through June 30,
2006, by reference to actual stock prices during this period and calculated an
estimated volatility of approximately 157%. We believe that each of these
estimates is reasonable in light of the data we analyzed. However, as with any
estimate, the ultimate accuracy of these estimates is only verifiable over time.

We also recognized compensation costs for shares purchased under our Employee
Stock Purchase Plan ("ESPP") during the three months ended June 30, 2006. We
applied the same variables to the calculation of the costs associated with the
ESPP shares purchased as the stock option grants noted above, except as follows:
expected stock price volatility was 147%, the risk free interest rate was 3.73%
and the expected term was 0.5 years. In estimating stock price volatility for
the ESPP shares purchased, we analyzed our historical volatility from August 1,
2005 to January 31, 2006. These are the two dates whose closing prices were used
as the basis of determining the purchase price for shares most recently
purchased under the ESPP. Since August 1, 2005 to January 31, 2006 is a
six-month period, the estimated term was deemed to be 0.5 years.

The specific valuation assumptions noted above were applied to stock options
that we granted during the three-month period ended June 30, 2006 and ESPP
shares that were granted February 1, 2006. For assumptions used for grants made
during the three-month period ended March 31, 2006, please refer to our
Quarterly Report on Form 10-QSB as filed with the SEC May 15, 2006. We expect
that stock-based compensation expense will continue to have a material impact on
our financial results for the remainder of the fiscal year. For the remainder of
fiscal 2006 we expect to incur stock-based compensation expense of approximately
$120 thousand per quarter.


                                       11
<PAGE>

Results of Operations for the Three and Six Month Periods Ended June 30, 2006
and 2005.

Revenue

The changes in both Windows and Unix-based product licenses revenue for the
three and six-month periods ended June 30, 2006 and 2005 were reflective of how
such revenue varies because a significant portion of this revenue has been, and
continues to be earned from a limited number of significant customers, most of
whom are VARs. Consequently, if any of these significant customers change their
order level or fail to order during the reporting period, our revenue could be
materially impacted. We expect this situation to continue throughout the next
several quarterly reporting periods.

Revenue for the three-month periods ended June 30, 2006 and 2005 was as follows:


<TABLE>
<CAPTION>
                                                                      Change in
         Revenue ($000s)             2006          2005         Dollars       Percent
         ---------------          ---------     ---------      ---------     --------
         Product licenses
         <S>                      <C>           <C>            <C>              <C>
         Windows                  $     433     $     520      $     (87)       (16.7)%
         Unix                           605           429            176         41.0
                                  ---------     ---------      ---------
                                      1,038           949             89          9.4
                                  ---------     ---------      ---------
         Service Fees
         Windows                        204           161             43         26.7
         Unix                           195           154             41         26.6
                                  ---------     ---------      ---------
                                        399           315             84         26.7
                                  ---------     ---------      ---------
         Other                           14            12              2         16.7
                                  ---------     ---------      ---------
         Total Revenue            $   1,451     $   1,276      $     175         13.7
                                  =========     =========      =========
</TABLE>

      (1) Amortization of private labeling and other fees. Private labeling fees
      are derived when we contractually agree to allow a customer to brand our
      product with their name. We defer these fees upon contract signing and
      recognize the revenue ratably over the initial term of the contract,
      typically, three years.

During the three-month period ended June 30, 2006, fifteen Windows customers
purchased an aggregate $274 thousand of Windows product, which accounted for
63.3% of Windows product license revenue for the period. These fifteen
customers' purchases were $188 thousand lower than their purchases during the
same period of 2005, which aggregated $462 thousand, or 88.8% of Windows product
license revenue.

The decrease in revenue is primarily due to our decision to defer revenue
recognition for a purchase made during the three-month period ended June 30,
2006 by a significant customer who is a reseller. We determined that sufficient
VSOE did not exist for the allocation of revenue to the various elements of the
purchase. When such evidence exists we will recognize revenue from this
transaction. We expect that future purchases by this customer will also be
deferred for the foreseeable future.

Five Unix product customers, including our most significant Unix customer
(Alcatel - all worldwide locations) and the new enterprise customer discussed
below, purchased an aggregate $477 thousand of Unix products, which accounted
for 78.8% of Unix product license revenue for the three-month period ended June
30, 2006. These five customers' purchases were an aggregate $318 thousand higher
than their purchases during the same period of 2005, which aggregated $159
thousand, or 37.1% of Unix product license revenue for the prior period. During
the three-month period ended June 30, 2006, one new enterprise customer made a
one-time purchase of an aggregate $250 thousand of Unix product licenses, all of
which was recognized as revenue during the period.

Our customers typically purchase a maintenance contract at the time they license
our product. Our Windows-based maintenance contracts vary in term from one to
three years and generally are renewed upon expiration. Our Unix-based
maintenance contracts vary in term from one to five years and generally are
renewed upon expiration. Service fees associated with maintenance contracts are
deferred and recognized as revenue ratably over the underlying service period of
the maintenance contract.

The increase in both Windows and Unix-based service fees for the three-month
period ended June 30, 2006, as compared with the same period of the prior year
was primarily due to higher levels of maintenance contract purchases that
occurred during 2005 and has continued through the first six months of 2006. We
expect this trend to continue throughout 2006.


                                       12
<PAGE>


Revenue for the six-month periods ended June 30, 2006 and 2005 was comprised as
follows:


<TABLE>
<CAPTION>
                                                                      Change in
         Revenue ($000s)             2006          2005         Dollars       Percent
         ---------------          ---------     ---------      ---------     --------
         Product licenses
         <S>                      <C>           <C>            <C>              <C>
         Windows                  $   1,060     $   1,141      $     (81)        (7.1)%
         Unix                           863           696            167         24.0
                                  ---------     ---------      ---------
                                      1,923         1,837             86          4.7
                                  ---------     ---------      ---------
         Service Fees
         Windows                        417           304            113          37.2
         Unix                           378           297             81          27.3
                                  ---------     ---------      ---------
                                        795           601            194          32.3
                                  ---------     ---------      ---------
         Other                           39            18             21         116.7
                                  ---------     ---------      ---------
         Total Revenue            $   2,757     $   2,456      $     301          12.3
                                  =========     =========      =========
</TABLE>

During the six-month period ended June 30, 2006, eighteen Windows customers
purchased an aggregate $728 thousand of Windows product, which accounted for
68.7% of Windows product license revenue for the period. These eighteen
customers' purchases were $146 thousand lower than their purchases during the
same period of 2005, which aggregated $874 thousand, or 76.6% of Windows product
license revenue. As discussed previously, we made the decision to defer revenue
recognition for a purchase made during the three-month period ended June 30,
2006 by a significant customer who is a reseller. We determined that sufficient
VSOE did not exist for the allocation of revenue to the various elements of the
purchase. When such evidence exists we will recognize revenue from this
transaction. We expect that future purchases by this customer will also be
deferred for the foreseeable future.

Twelve Unix product customers, including our most significant Unix customer
(Alcatel - all worldwide locations) and the new enterprise customer previously
discussed, purchased an aggregate $681 thousand of Unix products, which
accounted for 78.9% of Unix product license revenue for the six-month period
ended June 30, 2006. These twelve customers' purchases were an aggregate $158
thousand higher than their purchases during the same period of 2005, which
aggregated $523 thousand, or 75.1% of Unix product license revenue.

The increase in both Windows and Unix-based service fees for the six-month
period ended June 30, 2006, as compared with the same period of the prior year
was primarily due to higher levels of maintenance contract purchases that
occurred during 2005 and has continued through the first six months of 2006. We
expect this trend to continue throughout 2006

Cost of Revenue

Cost of revenue is comprised primarily of service costs, which represent the
costs of customer service, and product costs, which are primarily the
amortization of capitalized technology developed in-house. Shipping and
packaging materials are immaterial as virtually all of our deliveries are made
via electronic means over the Internet. Under accounting principles generally
accepted in the United States, research and development costs for new product
development, after technological feasibility is established, are recorded as
"capitalized software" on our balance sheet. Such capitalized costs are
subsequently amortized as cost of revenue over the shorter of three years or the
remaining estimated life of the products.

Cost of revenue for the three-month periods ended June 30, 2006 and 2005 was as
follows:

<TABLE>
<CAPTION>
       ($000s)                                Change in
                         2006     2005    Dollars   Percent
                        ------   ------   -------   -------
       <S>              <C>      <C>      <C>        <C>
       Product costs    $   30   $   53   $   (23)   (43.4)%
       Service costs       121       78        43     55.1
                        ------   ------   -------
                        $  151   $  131   $    20     15.3%
                        ======   ======   =======
</TABLE>

Cost of revenue increased by $20 thousand, or 15.3%, to $151 thousand for the
three months ended June 30, 2006, from $131 thousand for the comparable period
of 2005. Service costs increased by $43 thousand, or 55.1%, from $78 thousand to
$121 thousand. Partially offsetting this increase was a $23 thousand decrease,
or 43.4%, in product costs from $53 thousand to $30 thousand.

The decrease in product costs for the three-month period ended June 30, 2006, as
compared with the same period in 2005 was primarily due to a decrease in the
amortization of capitalized software development costs. We expect product costs


                                       13
<PAGE>

to remain lower throughout 2006, as compared with 2005, as certain elements of
our capitalized software development costs became fully amortized during 2005
and others will become fully amortized during 2006.

The increase in service costs for the three-month period ended June 30, 2006, as
compared with the same period in 2005, resulted primarily from increasing the
number of engineers performing customer service and from the adoption of
FAS123R, as explained elsewhere in this Form 10-QSB. In order to better meet the
needs of our customers, as we have sold more maintenance contracts over the
course of the last several quarters, we increased the number of engineers
providing customer service to our customers to eight during the three months
ended June 30, 2006, from four for the same period of the prior year.
Additionally, in accordance with FAS123R, we expensed $4 thousand of stock-based
compensation expense related to our customer service engineers during the
three-month period ended June 30, 2006. No such expense was recorded during the
same period of the prior year. We expect service costs to remain higher
throughout 2006, as compared with 2005.

Cost of revenue for the six-month periods ended June 30, 2006 and 2005 was as
follows:

<TABLE>
<CAPTION>
       ($000s)                                Change in
                         2006     2005    Dollars   Percent
                        ------   ------   -------   -------
       <S>              <C>      <C>      <C>        <C>
       Product costs    $   65   $  104   $   (39)   (37.5)%
       Service costs       197      148        49     33.1
                        ------   ------   -------
                        $  262   $  252   $    10      4.0%
                        ======   ======   =======
</TABLE>

Cost of revenue increased by $10 thousand, or 4.0%, to $262 thousand for the six
months ended June 30, 2006, from $252 thousand for the comparable period of
2005. Product costs decreased by $39 thousand, or 37.5%, from $104 thousand to
$65 thousand. This decrease was partially offset by an increase in service
costs, which increased by $49 thousand, or 33.1%, to $197 thousand from $148
thousand.

The decrease in product costs for the six-month period ended June 30, 2006, as
compared with the same period in 2005 was primarily due to a decrease in the
amortization of capitalized software development costs. We expect product costs
to remain lower throughout 2006, as compared with 2005, as certain elements of
our capitalized software development costs became fully amortized during 2005
and others will become fully amortized during 2006.

The increase in service costs for the six-month period ended June 30, 2006, as
compared with the same period in 2005, resulted primarily from increasing the
number of engineers performing customer service and from the adoption of
FAS123R, as explained elsewhere in this Form 10-QSB. In order to better meet the
needs of our customers, as we have sold more maintenance contracts over the
course of the last several quarters, we increased the number of engineers
providing customer service to our customers to eight during the three months
ended June 30, 2006, from four for the same period of the prior year.
Additionally, in accordance with FAS123R, we expensed $8 thousand of stock-based
compensation expense related to our customer service engineers during the
six-month period ended June 30, 2006. No such expense was recorded during the
same period of the prior year. We expect service costs to remain higher
throughout 2006, as compared with 2005.

Selling and Marketing Expenses

Selling and marketing expenses primarily consist of employee costs, outside
services, travel and entertainment, tradeshow expense and stock-based
compensation expense.

Selling and marketing expenses were 29.4% and 26.8% of revenue for the three
months ended June 30, 2006 and 2005, respectively, and 30.5% and 27.6% of
revenue for the six months ended June 30, 2006 and 2005, respectively. Selling
and marketing expenses for the three months ended June 30, 2006 increased by $84
thousand, or 24.6%, to $426 thousand from $342 thousand for the same period of
2005. For the six months ended June 30, 2006, selling and marketing expenses
increased $163 thousand, or 24.1%, to $840 thousand from $677 thousand for the
same period of 2005.


                                       14
<PAGE>


Selling and marketing expenses for the three months ended June 30, 2006 and 2005
were as follows:

<TABLE>
<CAPTION>
    ($000s)                                Change in
                        2006    2005    Dollars   Percent
                      ------   ------   -------   -------
    <S>               <C>      <C>      <C>          <C>
    Employee costs    $  305   $  257   $    48      18.7%
    Outside services      52       53        (1)     (1.9)
    Travel &
    entertainment         41       23        18      78.3
    Tradeshow expense      6        1         5     500.0
    Stock-based
    compensation           3        -         3        na
    Other                 19        8        11     137.5
                      ------   ------   -------
                      $  426   $  342   $    84     24.6%
                      ======   ======   =======
</TABLE>

The increase in employee costs for the three-month period ended June 30, 2006,
as compared with the same period in 2005, resulted primarily from increased
commissions and the hiring of a sales engineer.

The increase in travel & entertainment and tradeshow expense for the three-month
period ended June 30, 2006, as compared with the same period in 2005, resulted
from increased tradeshow participation as well as an increase in visiting
customers and prospects. We expect these trends to continue; consequently, we
expect 2006 travel and entertainment and tradeshow expense levels to exceed 2005
levels.

We adopted FAS123R as of January 1, 2006, as explained elsewhere in this Form
10-QSB, and as a result began recording stock-based compensation expense. For
the three-month period ended June 30, 2006, such selling and marketing
stock-based compensation expense amounted to $3 thousand. No such stock-based
compensation expense was recorded during 2005.

Selling and marketing expenses for the six months ended June 30, 2006 and 2005
were as follows:

<TABLE>
<CAPTION>
    ($000s)                                Change in
                        2006    2005    Dollars   Percent
                      ------   ------   -------   -------
    <S>               <C>      <C>      <C>          <C>
    Employee costs    $  591   $  522   $    69      13.2%
    Outside services     108       93        15      16.1
    Travel &
    entertainment         73       34        39     114.7
    Tradeshow expense     21        5        16     320.0
    Stock-based
    compensation          17        -        17        na
    Other                 30       23         7      30.4
                      ------   ------   -------
                      $  840   $  677   $   163     24.1%
                      ======   ======   =======
</TABLE>

The increase in employee costs for the six-month period ended June 30, 2006, as
compared with the same period in 2005, was primarily the result of higher
commissions and a new sales engineer hired during 2006.

The increase in outside services for the six-months ended June 30, 2006, as
compared with the same period in 2005, was the result of the increased activity
of our outside Asian sales representative and increasing overall marketing
activities. We expect this trend to continue as we anticipate increasing our
outside Asian sales representative's activities in 2006 over 2005 levels and to
continue increased overall marketing efforts.

                                       15
<PAGE>

The increases in travel and entertainment and tradeshow expense for the six
months ended June 30, 2006, as compared with the same period in 2005, were
primarily as a result of our participation in more tradeshows and undertaking
more visits to customers and prospects. Of note, we participated in CeBIT in
Hanover, Germany during the six months ended June 30, 2006. This is one of, if
not the largest technology tradeshow in Europe annually. Although we attended
CeBIT during 2005, we did not set up a display; consequently, our 2006 CeBIT
participation costs were greater than those in 2005. We expect this trend to
continue as we anticipate setting up our display at other tradeshows during
2006.

Based on the above items and trends, we anticipate that 2006 selling and
marketing expense will exceed 2005 selling and marketing expense.

General and Administrative Expenses

General and administrative expenses primarily consist of employee costs,
amortization and depreciation, stock-based compensation expense, legal,
professional and other outside services (including those related to realizing
benefits from our patent-related assets), travel and entertainment, certain
costs associated with being a publicly held corporation, and bad debts expense.

General and administrative expenses were approximately 63.7% and 60.2% of
revenues for the three-month periods ended June 30, 2006 and 2005, respectively.
For the six-month periods ended June 30, 2006 and 2005, general and
administrative expenses were approximately 69.5% and 60.9% of revenues,
respectively. General and administrative expenses increased by $157 thousand, or
20.4%, to $925 thousand from $768 thousand for the three-month period ended June
30, 2006, as compared with the same period in 2005. For the six-month period
ended June 30, 2006, general and administrative expenses increased by $420
thousand, or 28.1%, to $1,915 thousand from $1,495 thousand for the six-month
period ended June 30, 2005.

General and administrative expenses for the three months ended June 30, 2006 and
2005 were as follows:

<TABLE>
<CAPTION>
    ($000s)                                 Change in
                        2006     2005    Dollars   Percent
                       ------   ------   -------   -------
    <S>                <C>      <C>      <C>          <C>
    Employee costs     $  313   $  249   $    64      25.7%
    Depreciation
    and amortization      228      225         3       1.3
    Outside services      169      198       (29)    (14.6)
    Travel &
    entertainment          56       10        46     460.0
    Stock-based
    compensation           97        1        96     960.0
    Other                  62       85       (23)    (27.1)
                       ------   ------   -------
                       $  925   $  768   $   157      20.4%
                       ======   ======   =======
</TABLE>


The increase in employee costs in the three months ended June30, 2006, as
compared with the same period of 2005, was primarily due to having approximately
three more employees and salary adjustments made subsequent to June 30, 2005.
Partially offsetting these items was a decrease in accrued bonuses. We expect
2006 employee costs to exceed 2005 levels.

Outside services decreased by $29 thousand during the three months ended June
30, 2006, as compared with the same period of 2005 primarily as a result of
hiring an in-house attorney during 2005, to oversee the administration of our
patents. Partially offsetting these cost savings was an increase in consulting
fees charged to us by our CEO (Chief Executive Officer). During 2006, our CEO
significantly increased his activities in our general business operations in
addition to pursuing business development opportunities as they presented
themselves. We expect these trends to continue during 2006.

                                       16
<PAGE>

The $46 thousand increase in travel and entertainment during the three months
ended June 30, 2006, as compared with the same period of the previous year, was
primarily a result of our CEO's travels to our various facilities, as well as
travel incurred by management while exploring potential business development
opportunities. We expect 2006 travel and entertainment levels to exceed those of
2005.

We adopted FAS123R as of January 1, 2006, as explained elsewhere in this Form
10-QSB, and as a result, began recording stock-based compensation expense. For
the three-month period ended June 30, 2006 such general and administrative
stock-based compensation expense amounted to $97 thousand. During the
three-month period ended June 30, 2005, we recorded $1 thousand of compensation
expense in accordance with FAS123, which was derived from stock options that had
been previously issued to our CEO. We anticipate 2006 stock-based compensation
expense to exceed 2005 levels as we continue to comply with FAS123R.

General and administrative expenses for the six months ended June 30, 2006 and
2005 were as follows:

<TABLE>
<CAPTION>
    ($000s)                                   Change in
                         2006      2005    Dollars   Percent
                       -------   -------   -------   -------
    <S>                <C>       <C>       <C>          <C>
    Employee costs     $   628   $   469   $   159      33.9%
    Depreciation
    and amortization       452       372        80      21.5
    Outside services       373       462       (89)    (19.3)
    Travel &
    entertainment          105        30        75     250.0
    Stock-based
    compensation           181         1       180   1,800.0
    Other                  176       161        15       9.3
                       -------   -------   -------
                       $ 1,915   $ 1,495   $   420      28.1%
                       =======   =======   =======
</TABLE>

The increase in employee costs for the six months ended June30, 2006, as
compared with the same period of 2005, was primarily due to having
approximately three more employees and salary adjustments made subsequent to
June 30, 2005. Partially offsetting these items was a decrease in accrued
bonuses. We expect 2006 employee costs to exceed 2005 levels.

Depreciation and amortization expense increased during the six months ended June
30, 2006, as compared with the same period in 2005, primarily as a result of
increased patent amortization. Costs associated with acquiring the patents from
NES were capitalized at various times throughout the six month period ended June
30, 2005 and since costs can not be amortized until they are capitalized, the
cost basis upon which the patent amortization was calculated grew larger
throughout the six-month period ended June 30, 2005. All patent costs were
capitalized prior to 2006; consequently, all such costs were included in the
cost basis upon which the patent amortization was calculated during the six
months ended June 30, 2006.

Outside services decreased during the six months ended June 30, 2006, as
compared with the same period of 2005 primarily as a result of hiring an
in-house attorney during 2005, to oversee the administration of our patents.
Partially offsetting these cost savings was an increase in consulting fees
charged to us by our CEO (Chief Executive Officer). During 2006, our CEO
significantly increased his activities in our general business operations in
addition to pursuing business development opportunities on our behalf as they
presented themselves. We expect these trends to continue during 2006.

The increase in travel and entertainment during the six months ended June 30,
2006, as compared with the same period of the previous year, was primarily a
result of our CEO's travels to our various facilities, as well as travel
incurred by management while exploring potential business development
opportunities. We expect 2006 travel and entertainment levels to exceed those of
2005.

We adopted FAS123R as of January 1, 2006, as explained elsewhere in this Form
10-QSB, and as a result, began recording stock-based compensation expense. For
the six-month period ended June 30, 2006 such general and administrative


                                       17
<PAGE>

stock-based compensation expense amounted to $181 thousand. During the six-month
period ended June 30, 2005, we recorded $1 thousand of compensation expense in
accordance with FAS123, which was derived from stock options that had been
previously issued to our CEO. We anticipate 2006 stock-based compensation
expense to exceed 2005 levels as we continue to comply with FAS123R.

We anticipate that aggregate general and administrative expenses for 2006 will
be higher than 2005, primarily due to the additional personnel, the amortization
of the patents, stock option compensation expense we will record as a result of
adopting FAS123R, and increased activity by certain executive managers.

Research and Development Expenses

Research and development expenses consist primarily of employee costs, payments
to contract programmers, rent, stock-based compensation expense, depreciation
and computer related supplies.

Research and development expenses were approximately 31.2% and 24.5% of revenues
for the three-month periods ended June 30, 2006 and 2005, respectively, and
approximately 30.7% and 25.9% of revenues for the six-month periods ended June
30, 2006 and 2005, respectively. Research and development expenses for the
three-month period ended June 30, 2006 increased by $139 thousand, or 44.4%, to
$452 thousand from $313 thousand for the three-month period ended June 30, 2005.
Research and development expenses for the six-month period ended June 30, 2006
increased by $210 thousand, or 33.0%, to $846 thousand from $636 thousand for
the six-month period ended June 30, 2005.

Under accounting principles generally accepted in the United States, all costs
of product development incurred once technological feasibility has been
established, but prior to general release of the product, are typically
capitalized and amortized to expense over the estimated life of the underlying
product, rather than being charged to expense in the period incurred. No product
development costs were capitalized during either the three or six-month periods
ended June 30, 2006 or 2005.

Research and development expenses for the three-months ended June 30, 2006 and
2005 were as follows:

<TABLE>
<CAPTION>
     ($000s)                                 Change in
                         2006     2005    Dollars   Percent
                        ------   ------   -------   -------
     <S>                <C>      <C>      <C>         <C>
     Employee costs     $  227   $  224   $     3       1.3%
     Outside services      169       50       119     238.0
     Stock-based            12        -        12        na
     compensation
     Other                  44       39         5      12.8
                        ------   ------   -------
                        $  452   $  313   $   139      44.4
                        ======   =======   =======
</TABLE>

Employee costs for the three-month periods ended June 30, 2006 and 2005 are net
of $116 thousand and $77 thousand, respectively, which related to employee costs
reported as customer service cost of revenue. The increase in employee costs
noted in the table immediately preceding this paragraph was primarily due to
salary adjustments enacted subsequent to June 30, 2005 and increases in employee
benefits, which were partially offset by the customer service employee costs
that were reported as cost of revenue.

More than half of the increase in outside services for the three-month period
ended June 30, 2006, as compared with the same period of 2005, related to fees
paid to an executive recruiting agency assisting us in our search for a new
vice-president of engineering. The balance of the increase was incurred
primarily by expanding our use of consulting engineers to help enhance our
product development efforts. Subsequent to June 30, 2006 we hired a new
vice-president of engineering. We expect to continue making greater use of
consulting engineers throughout 2006 to assist in product development efforts.
Based on these items, we anticipate that expenses related to outside services in
2006 will exceed 2005 levels.

We adopted FAS123R as of January 1, 2006, as explained elsewhere in this Form
10-QSB, and as a result began recording stock-based compensation expense. For
the three-month period ended June 30, 2006 such research and development
stock-based compensation expense amounted to $16 thousand, of which $4 thousand


                                       18
<PAGE>

was reported as customer service cost of revenue. No such stock-based
compensation expense was recorded during 2005. We anticipate 2006 stock-based
compensation expense to exceed 2005 levels as we continue to comply with
FAS123R.

Research and development expenses for the six-months ended June 30, 2006 and
2005 were as follows:


<TABLE>
<CAPTION>
     ($000s)                                 Change in
                         2006     2005    Dollars   Percent
                        ------   ------   -------   -------
     <S>                <C>      <C>      <C>         <C>
     Employee costs     $  489   $  447   $    42       9.4%
     Outside services      245      105       140     133.3
     Stock-based            20        -        20        na
     compensation
     Other                  92       84         8       9.5
                        ------   ------   -------
                        $  846   $  636   $   210      33.0
                        ======   ======   =======
</TABLE>

Employee costs for the six-month periods ended June 30, 2006 and 2005 are net of
$188 thousand and $148 thousand, respectively, which related to employee costs
reported as customer service cost of revenue. The increase in employee costs
noted in the table immediately preceding this paragraph was primarily due to the
hiring of two additional engineers during 2006, salary adjustments enacted
subsequent to June 30, 2005 and increases in employee benefits, which were
partially offset by the customer service employee costs that were reported as
cost of revenue.

The increase in outside services for the six-month period ended June 30, 2006,
as compared with the same period of 2005, was primarily related to fees paid to
an executive recruiting agency assisting us in our search for a new
vice-president of engineering. The balance of the increase was incurred
primarily by expanding our use of consulting engineers to help enhance our
product development efforts. Subsequent to June 30, 2006 we hired a new
vice-president of engineering. We expect to continue making greater use of
consulting engineers throughout 2006 to assist in product development efforts.
Based on these items, we anticipate that expenses related to outside services in
2006 will exceed 2005 levels.

We adopted FAS123R as of January 1, 2006, as explained elsewhere in this Form
10-QSB, and as a result began recording stock-based compensation expense. For
the six-month period ended June 30, 2006 such research and development
stock-based compensation expense amounted to $28 thousand, of which $8 thousand
was reported as customer service cost of revenue. No such stock-based
compensation expense was recorded during 2005. We anticipate 2006 stock-based
compensation expense to exceed 2005 levels as we continue to comply with
FAS123R.

During the three-months ended June 30, 2006, we established an engineering
facility in Israel that will conduct business under the name GraphOn Research
Labs, Ltd. No significant costs were incurred during the period to establish
this wholly-owned subsidiary. It commenced operations during July 2006.

Based on the above factors, we anticipate that research and development expenses
for 2006 will be higher than those incurred during 2005.

Other Income

During the three and six-month periods ended June 30, 2006 and 2005, other
income consisted primarily of interest income on excess cash and note receivable
- shareholder. During the six-month period ended June 30, 2005, other income
also included interest income on notes receivable - directors.

Other income for the three-month period ended June 30, 2006 increased by $1
thousand, or 9.1%, to $12 thousand from $11 thousand for the same period of
2005. For the six-month period ended June 30, 2006, other income increased by $4
thousand, or 22.2%, to $22 thousand from $18 for the same period of 2005.

We anticipate that interest and other income for 2006 will approximate 2005
levels as we anticipate having similar or lower average cash balances for the
remainder of the year, partially offset by higher interest rates.

                                       19
<PAGE>

Net Loss

As a result of the foregoing items, net loss for the three-month period ended
June 30, 2006 was $494 thousand, an increase of $227 thousand, or 85.0%, from a
net loss of $267 thousand for the same period of 2005. Net loss for the
six-month period ended June 30, 2006 was $1,087 thousand, an increase of $501
thousand, or 85.5%, from a net loss of $586 for the same period of 2005. As a
result of our continued operating loss we intend to continue to pursue revenue
growth opportunities through all available means.

Net loss attributable to common shareholders for the six-month period ended June
30, 2006 was $1,087 thousand, a decrease of $3,499 thousand, or 76.3%, from
$4,586 thousand for the same period of 2005. The decrease for the six-month
period ended June 30, 2006, as compared with the same period of the prior year
was due to the deemed dividends on preferred stock, as discussed below.

Deemed Dividends on Preferred Stock

On February 2, 2005, we completed the 2005 private placement, which raised a
total of $4,000 thousand through the sale of 148,148 shares of Series A
preferred stock and five-year warrants to purchase 74,070 shares of Series B
preferred stock.

The deemed fair value of the Series A preferred stock was estimated based on the
market price and underlying number of common shares they would have converted
into had the conversion occurred immediately upon their issuance. The market
price for our common stock on February 2, 2005 was $0.46 and the Series A
preferred stock would have converted into 14,814,800 common shares, thus
deriving an estimated fair value of approximately $6,815 thousand at that date.

The fair value of the warrants was estimated to be $1,878 thousand and was
calculated using the Black-Scholes option pricing model with the following
weighted average assumptions: a risk free interest rate of 1.5%, a volatility
factor of 60%, a dividend yield of 0% and a five year contractual life.

Based on the relative fair values of the Preferred Shares and the warrants at
the time of their issuance, we allocated $3,136 thousand of the $4,000 thousand
proceeds of the 2005 Private Placement to the Preferred Shares and $864 thousand
to the warrants.

The Preferred Shares we issued contained a non-detachable conversion feature
(the "Beneficial Conversion Feature") that was in-the-money upon completion of
the 2005 Private Placement, in that the deemed fair value of Common Stock into
which the Preferred Shares could be converted exceeded the allocated value of
$3,136 thousand by $3,679 thousand (using the intrinsic value method). This
discount resulting from recording the Beneficial Conversion Feature was limited
to the allocated proceeds of $3,136 thousand and has been recognized as if this
amount had been declared a non-cash dividend to the preferred shareholders
during the quarter ended March 31, 2005.

Additionally, the approximate $864 thousand discount resulting from the
allocation of the proceeds of the 2005 Private Placement on a relative fair
value basis to the Series A preferred shares and the warrants issued in the 2005
Private Placement has also been recognized as if this amount had been declared a
non-cash dividend to the preferred shareholders during the quarter ended March
31, 2005.

Liquidity and Capital Resources

During 2006 we anticipate increasing our net cash investments in our operations
by approximately $1.0 million over our 2005 levels. We anticipate increasing our
net cash investments in our research and development efforts internally through
our newly-established Israeli subsidiary (GraphOn Research Labs, Ltd.) and
externally through greater use of consulting engineers to help enhance our
product development efforts. Additionally, we expect that our net cash
administrative investments will increase as we devote more resources to the
continued growth of our business internally and through the exploration of
potential business combinations and other opportunities. We also expect our net
cash administrative investments to grow in relation to increases in the costs of
doing business as a public entity. Our net cash sales and marketing investments
will increase as we continue with our general plan of increasing our sales and
marketing endeavors.

We are simultaneously looking at ways to improve our revenue stream. We believe
that improving or maintaining our current revenue stream, coupled with our cash
on hand, including the cash raised in the 2005 private placement will
sufficiently support our operations over the course of the next several
quarterly reporting periods.

                                       20
<PAGE>

On January 31, 2005, we acquired NES for 9,599,993 shares of common stock, the
assumption of approximately $233 thousand of NES' indebtedness and the
reimbursement to AIGH Investment Partners, LLC ("AIGH"), an affiliate of a
principal stockholder (Orin Hirschman), of $665 thousand for its advance on our
behalf of a like sum in December 2004 to settle certain third party litigation
against NES. We reimbursed the advance through a partial credit against the
price of our securities acquired by AIGH in the 2005 private placement.

The 2005 private placement, which was consummated on February 2, 2005, raised a
total of $4,000 thousand, inclusive of the $665 thousand credit issued to AIGH.
As of June 30, 2006, we had consumed approximately $525 thousand and $700
thousand of the cash raised paying for expenses related to the 2005 private
placement and the NES acquisition, respectively. We estimate that we will have
no further disbursements of cash related to either the 2005 private placement or
the NES acquisition.

We anticipate incurring further costs associated with the development of our
patents for the next several reporting periods. We expect to fund these
development costs through working capital. Additionally, we anticipate
increasing our rate of investment in our both our research and development and
sales and marketing activities in 2006 over 2005 levels and to fund these costs
through working capital.

Working Capital

As of June 30, 2006, we had current assets of $4,067 thousand and current
liabilities of $1,720 thousand, which netted to working capital of $2,347
thousand. Included in current liabilities was the current portion of deferred
revenue of $1,110 thousand.

Based on our current operating revenues, operating cost structure, and the cash
raised in the 2005 private placement, we believe that we will be able to support
our operational needs with currently available resources for at least the next
twelve months. However, due to inherent uncertainties associated with predicting
future operations, there can be no assurances that these resources will be
sufficient to fund our anticipated expenses during the next twelve months.

ITEM 3. Controls and Procedures

Our management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of June 30, 2006. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

There has not been any change in our internal control over financial reporting
in connection with the evaluation required by Rule 13a-15(d) under the Exchange
Act that occurred during the quarter ended June 30, 2006 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


                                       21
<PAGE>


PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

On November 23, 2005, we initiated a proceeding against AutoTrader.com in the
United States District Court in the Eastern District of Texas, (the "Court")
alleging that Autotrader.com was infringing two of our patents, namely Nos.
6,324,538 and 6,850,940 (the "538" and "940" patents, respectively), which
protect our unique method of maintaining an automated and network accessible
database, on its AutoTrader.com website. We seek preliminary and permanent
injunctive relief along with unspecified damages and fees. Autotrader.com filed
its Answer and Counterclaims on January 17, 2006 seeking a declaratory judgment
that it does not infringe the 538 and 940 patents and that both patents are
invalid. On March 24, 2006, Autotrader.com filed a motion for summary judgment
seeking to invalidate the 538 and 940 patents. On May 1, 2006 we filed a
response in opposition to AutoTrader's motion. On August 8, 2006, AutoTrader's
motion for summary judgment was denied. On August 9, 2006, the Court filed a
Docket Control Order setting forth proposed pretrial deadlines. The most
significant dates set were for the Markman Hearing (May 31, 2007) and jury
selection (December 3, 2007).

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three-month period ended June 30, 2006, we granted the
following stock options:

   o  stock options to purchase an aggregate 10,000 shares of common
      stock, at exercise prices ranging from $0.18 to $0.23, were granted to
      two non-executive employees.

The grant of such stock options to the above-listed persons was not registered
under the Securities Act of 1933, because the stock options either did not
involve an offer or sale for purposes of Section 2(a)(3) of the Securities Act,
in reliance on the fact that the stock options were granted for no
consideration, or were offered and sold in transactions not involving a public
offering, exempt from registration under the Securities Act pursuant to Section
4(2).

ITEM 6. Exhibits

Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications

Exhibit 32 - Section 1350 Certifications


                                       22
<PAGE>


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                             GraphOn Corporation
                                                (Registrant)

Date: August 11, 2006
                                           By: /s/ Robert Dilworth
                                               -------------------
                                               Robert Dilworth
                                           Chief Executive Officer
                                                (Interim) and
                                            Chairman of the Board
                                        (Principal Executive Officer)

Date: August 11, 2006
                                            By: /s/ William Swain
                                                -----------------
                                                William Swain
                                           Chief Financial Officer
                                      (Principal Financial Officer and
                                        (Principal Accounting Officer)