UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For
the Quarterly Period Ended September 30, 2009




Commission
File Number: 0-21683









GraphOn
Corporation


(Exact
name of registrant as specified in its charter)







Delaware
            13-3899021(State
      or jurisdiction of
            (IRS
      Employerincorporation
      or organization)
            Identification
      No.)







5400
Soquel Avenue, Suite A2


Santa
Cruz, CA 95062


(Address
of principal executive offices)





Registrant’s
telephone number: (800) 472-7466




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YesxNo
[   ]




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).       Yes [   ] No
[   ]




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer
            [   ]
            
            Accelerated
      filer
            [   ]Non-accelerated
      filer
            [   ]
            
            Smaller
      reporting company
            [X]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[   ] Nox




As of
November 16, 2009 there were issued and outstanding 46,834,292 shares of the
issuer’s common stock, par value $0.0001.









GRAPHON
CORPORATION




FORM
10-Q




Table of Contents




PART
      I.
            
            FINANCIAL
      INFORMATION
            
            PAGEItem
      1.
            
            Financial StatementsCondensed Consolidated Balance Sheets as of September
      30, 2009 (unaudited) and December 31, 2008 (audited)
            
            2Unaudited Condensed Consolidated Statements of
      Operations for the Three and Nine Months Ended September 30, 2009 and
      2008
            
            3Unaudited Condensed Consolidated Statements of Cash
      Flows for the Nine Months Ended September 30, 2009 and
      2008
            
            4Notes to Unaudited Condensed Consolidated Financial
      Statements
            
            5Item
      2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            17Item
      3.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            27Item
      4T.
            
            Controls and Procedures
            
            27PART
      II.
            
            OTHER
      INFORMATIONItem
      1.
            
            Legal Proceedings
            
            28Item
      1A.
            
            Risk Factors
            
            29Item
      2.
            
            Unregistered Sales of Equity Securities and Use
      of Proceeds
            
            29Item
      3.
            
            Defaults Upon Senior Securities
            
            30Item
      4.
            
            Submission of Matters to a Vote of Security
      Holders
            
            30Item
      5.
            
            Other Information
            
            30Item
      6.
            
            Exhibits
            
            30Signatures
            
            30








Table of Contents







PART I. FINANCIAL INFORMATION




ITEM
1. Financial Statements







GraphOn CorporationCondensed Consolidated Balance
      SheetsSeptember
      30, 2009
            
            
            December
      31, 2008Assets
            
            (Unaudited)
            
            
            (Audited)Current
      Assets:Cash
      and cash equivalents
            
            $
            3,848,700
            
            
            $
            3,742,200Accounts
      receivable, net
            
            
            691,700
            
            
            
            970,000Prepaid
      expenses
            
            
            80,000
            
            
            
            63,400Total
      Current Assets
            
            
            4,620,400
            
            
            
            4,775,600Patents,
      net
            
            
            629,800
            
            
            
            984,000Property
      and equipment, net
            
            
            137,400
            
            
            
            182,700Other
      assets
            
            
            12,600
            
            
            
            20,200Total
      Assets
            
            $
            5,400,200
            
            
            $
            5,962,500Liabilities and Stockholders’
      EquityCurrent
      Liabilities:Accounts
      payable and accrued expense
            
            $
            952,600
            
            
            $
            795,700Deferred
      revenue
            
            
            1,764,300
            
            
            
            1,744,600Total
      Current Liabilities
            
            
            2,716,900
            
            
            
            2,540,300Deferred
      revenue
            
            
            833,600
            
            
            
            858,500Other
      liabilities
            
            
            —
            
            
            
            28,400Total
      Liabilities
            
            
            3,550,500
            
            
            
            3,427,200Commitments
      and contingencies
            
            
            —
            
            
            
            —Stockholders'
      Equity:Common
      stock, $0.0001 par value, 195,000,000 shares authorized, 46,832,292 and
      47,322,292 shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively
            
            
            4,700
            
            
            
            4,700Additional
      paid-in capital
            
            
            58,857,600
            
            
            
            59,662,100Accumulated
      deficit
            
            
            (57,012,600
            )
            
            
            (57,131,500
            )Total
      Stockholders' Equity
            
            
            1,849,700
            
            
            
            2,535,300Total
      Liabilities and Stockholders' Equity
            
            $
            5,400,200
            
            
            $
            5,962,500














See
accompanying notes to unaudited condensed consolidated financial
statements





2
 Table of Contents











GraphOn CorporationCondensed Consolidated Statements of
      OperationsThree
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Revenue
            
            $
            1,930,900
            
            
            $
            1,594,100
            
            
            $
            6,611,000
            
            
            $
            4,279,500Costs
      of revenue
            
            
            277,800
            
            
            
            136,600
            
            
            
            1,267,700
            
            
            
            441,900Gross
      profit
            
            
            1,653,100
            
            
            
            1,457,500
            
            
            
            5,343,300
            
            
            
            3,837,600Operating
      expenses:Selling
      and marketing
            
            
            448,900
            
            
            
            473,700
            
            
            
            1,396,100
            
            
            
            1,309,400General
      and administrative
            
            
            1,071,900
            
            
            
            1,015,000
            
            
            
            2,604,700
            
            
            
            2,925,500Research
      and development
            
            
            585,300
            
            
            
            628,600
            
            
            
            2,097,300
            
            
            
            1,714,400Total
      operating expenses
            
            
            2,106,100
            
            
            
            2,117,300
            
            
            
            6,098,100
            
            
            
            5,949,300Loss
      from operations
            
            
            (453,000
            )
            
            
            (659,800
            )
            
            
            (754,800
            )
            
            
            (2,111,700
            )Other
      income, net
            
            
            8,200
            
            
            
            17,700
            
            
            
            16,000
            
            
            
            70,300Loss
      before provision for income tax
            
            
            (444,800
            )
            
            
            (642,100
            )
            
            
            (738,800
            )
            
            
            (2,041,400
            )Provision
      for income tax
            
            
            100
            
            
            
            1,100
            
            
            
            1,600
            
            
            
            2,700Net
      loss
            
            $
            (444,900
            )
            
            $
            (643,200
            )
            
            $
            (740,400
            )
            
            $
            (2,044,100
            )Loss
      per share – basic and diluted
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.04
            )Average
      weighted common shares outstanding – basic and diluted
            
            
            47,184,575
            
            
            
            47,084,241
            
            
            
            47,160,570
            
            
            
            47,090,128











See
accompanying notes to unaudited condensed consolidated financial
statements











3
 Table of Contents





GraphOn CorporationCondensed Consolidated Statements of Cash
      FlowsNine
      Months Ended September 30,2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)Cash
      Flows Provided By (Used In) Operating Activities:Net
      Loss
            
            $
            (740,400
            )
            
            $
            (2,044,100
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            419,500
            
            
            
            726,800Stock-based
      compensation expense
            
            
            139,300
            
            
            
            286,800Provision
      for doubtful accounts
            
            
            —
            
            
            
            12,600Gain
      on derivative instruments – warrants
            
            
            4,700
            
            
            
            —Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            278,300
            
            
            
            21,600Prepaid
      expense
            
            
            (24,200
            )
            
            
            (19,500
            )Accounts
      payable and accrued expense
            
            
            128,500
            
            
            
            25,500Deferred
      revenue
            
            
            (5,200
            )
            
            
            87,300Net
      Cash Provided By (Used In) Operating Activities
            
            
            200,500
            
            
            
            (903,000
            )Cash
      Flows Used In Investing Activities:Purchases
      of equipment
            
            
            (14,200
            )
            
            
            (76,300
            )Other
      assets
            
            
            —
            
            
            
            (200
            )Net
      Cash Used In Investing Activities
            
            
            (14,200
            )
            
            
            (76,500
            )Cash
      Flows Provided By (Used In) Financing Activities:Proceeds
      from sale of common stock - employee stock purchase plan
            
            
            1,700
            
            
            
            8,300Cost
      of stock purchased and retired through stock buy back
    program
            
            
            (81,500
            )
            
            
            (87,700
            )Net
      Cash Used In Financing Activities
            
            
            (79,800
            )
            
            
            (79,400
            )Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            106,500
            
            
            
            (1,058,900
            )Cash
      and Cash Equivalents, Beginning of Period
            
            
            3,742,200
            
            
            
            5,260,800Cash
      and Cash Equivalents, End of Period
            
            $
            3,848,700
            
            
            $
            4,201,900








See
accompanying notes to unaudited condensed consolidated financial
statements





4
 Table of Contents


GraphOn Corporation


Notes
to Unaudited Condensed Consolidated Financial Statements





1.
Basis of Presentation




The
unaudited condensed consolidated financial statements included herein have been
prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) applicable to interim financial information and the rules
and regulations promulgated by the Securities and Exchange Commission (the
“SEC”).  Accordingly, such financial statements do not include all
information and footnote disclosures required in annual financial
statements.




The
unaudited condensed consolidated financial statements included herein reflect
all adjustments, which include only normal, recurring adjustments, that are, in
the opinion of management, necessary to state fairly the results for the periods
presented. This Quarterly Report on Form 10-Q 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-K for the year
ended December 31, 2008, which was filed with the SEC on March 31, 2009 (“2008
10-K Report”). 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, 2009, or any future period.





2.
Significant Accounting Policies




Use
of Estimates




The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
unaudited condensed consolidated financial statements and accompanying
notes.  While the Company believes that such estimates are fair when
considered in conjunction with the unaudited condensed consolidated financial
statements and accompanying notes, the actual amount of such estimates, when
known, may vary from those estimates.




Intercompany
Accounts and Transactions




Significant
intercompany accounts and transactions are eliminated upon
consolidation.




Revenue
Recognition




The
Company markets and licenses products through various means, such as: channel
distributors, independent software vendors (“ISVs”), value-added resellers
(“VARs”) (collectively “resellers”) and direct sales to enterprise end
users.  Its product licenses are generally perpetual.  The
Company also separately sells intellectual property licenses, maintenance
contracts, which are comprised of license updates and customer service access,
private-label branding kits, software developer kits (“SDKs”) and product
training services.





Generally,
software license revenues are recognized when:




Persuasive
  evidence of an arrangement exists, (i.e., when the Company signs a
  non-cancelable license agreement wherein the customer acknowledges an
  unconditional obligation to pay, or upon receipt of the customer’s purchase
  order), and
        Delivery
  has occurred or services have been rendered and there are no uncertainties
  surrounding product acceptance (i.e., when 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, when the customer is given access to the licensed
  programs), and
        The
  price to the customer is fixed or determinable, as typically evidenced in a
  signed non-cancelable contract, or a customer’s purchase order,
  and
        Collectibility
  is probable. If collectibility 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, and customer training.  The Company
limits its 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.


5
 Table of Contents





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
resellers purchase product licenses that they hold in inventory until they are
resold to the ultimate end user (an “inventory stocking order”). The Company
provides maintenance services to these resellers for such licenses at no
charge.  Generally, the Company defers the recognition of revenue for
inventory stocking orders until the underlying licenses are sold to the end
user. The Company allocates revenue to the service fee (maintenance) component
based on VSOE prorated to the time period between the inventory order date and
date of sale to the end user.




There are
no rights of return granted to resellers or other purchasers of the Company’s
software programs.




Revenue
from maintenance contracts is recognized ratably over the related contract
period, which generally ranges from one to five years.





Intellectual
property license agreements provide for the payment of a fully paid licensing
fee to the Company in consideration for the grant of a one-time, non-exclusive,
license to manufacture and/or sell products covered by patented technologies
owned by the Company. Generally, the execution of these license agreements also
provides for the release of the licensee from certain past and future claims,
and the dismissal of any pending litigation between the Company and the
licensee. Pursuant to the terms of these license agreements, the Company has no
further obligation with respect to the grant of the license, including no
express or implied obligation to maintain or upgrade the patented technologies,
or provide future support or services to the licensee. As such, the earnings
process is complete upon the execution of the license agreement, and revenue is
recognized upon execution of the agreement, and the determination that
collectibility is probable.




Long-Lived
Assets




Long-lived
assets, which consist primarily of patents, are assessed for possible impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable, whenever the Company has committed to a plan to dispose
of the assets or, at a minimum, as it relates to the Company’s patents,
annually. Measurement of the impairment loss is based on the fair value of the
assets. Generally, fair value is determined based on appraisals, current market
value, comparable sales value, and undiscounted future cash flows, as
appropriate. Assets to be held and used affected by such impairment loss are
depreciated or amortized at their new carrying amount over the remaining
estimated life; assets to be sold or otherwise disposed of are not subject to
further depreciation or amortization. No such impairment charge was recorded
during either of the three or nine-month periods ended September 30, 2009 or
2008.




Patents




The
Company’s patents are being amortized over their estimated remaining economic
lives, currently estimated to be until approximately January 2011. Costs
associated with filing, documenting or writing method patents are expensed as
incurred. Contingent legal fees paid in connection with a patent lawsuit, or
settlements thereof, are charged to cost of goods sold. All other non-contingent
legal fees and costs incurred in connection with a patent lawsuit, or
settlements thereof, are charged to general and administrative expense as
incurred.




3.
Stock-Based Compensation




The
following table summarizes the stock-based compensation expense recorded by the
Company during the three and nine-month periods ended September 30, 2009 and
2008 by income statement classification:




6
 Table of Contents




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,Income
      Statement Classification
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Costs
      of revenue
            
            $
            1,300
            
            
            $
            4,100
            
            
            $
            5,700
            
            
            $
            14,900Selling
      and marketing
            
            
            3,200
            
            
            
            6,500
            
            
            
            12,000
            
            
            
            25,500General
      and administrative
            
            
            17,100
            
            
            
            17,900
            
            
            
            64,400
            
            
            
            139,100Research
      and development
            
            
            11,500
            
            
            
            43,600
            
            
            
            57,200
            
            
            
            107,300$
            33,100
            
            
            $
            72,100
            
            
            $
            139,300
            
            
            $
            286,800





The
Company estimated the fair value of each stock-based award granted during the
three and nine-month periods ended September 30, 2009 and 2008, as of the
respective dates of grant, using a binomial model with the assumptions set forth
in the following table:




Estimated
      Volatility
            
            Annualized
      Forfeiture Rate
            
            Expected
      Option Term (Years)
            
            Estimated
      Exercise Factor
            
            Risk-Free
      Interest Rate
            
            DividendsFor the three months ended September
      30,2009
            
            185%
            
            4%
            
            7.5
            
            10%
            
            3.12%
            
            —2008
            
            160%
            
            4%
            
            7.5
            
            10%
            
            3.44%
            
            —For the nine months ended September
      30,2009
            
            180%
      - 185%
            
            4%
            
            7.5
            
            10%
            
            2.24%
      - 3.12%
            
            —2008
            
            158%
      - 160%
            
            4%
            
            7.5
            
            10%
            
            3.15%
      - 3.46%
            
            —





The
Company also recognized compensation expense for common shares purchased under
its Employee Stock Purchase Plan (“ESPP”) during the three and nine-month
periods ended September 30, 2009 and 2008, applying the same variables as noted
in the table above to the calculation of such costs, except that the expected
term was 0.5 years for each respective period and for shares purchased during
the three-month periods ended September 30, 2009 and 2008 the risk-free interest
rate was 0.25% and 3.79%, respectively. For shares purchased during the
nine-month period ended September 30, 2009 the risk-free interest rate was
between 0.25% and 0.40% and for shares purchased during the nine-month period
ended September 30, 2008 such rate was between 3.15% and 3.79%. The time span
from the date of grant of ESPP shares to the date of purchase is six
months.




The
Company does not anticipate paying dividends on its common stock for the
foreseeable future. Expected volatility is based on the historical volatility of
the Company’s common stock over the 7.5 year period ended on the end of each
respective quarterly reporting periods noted in the above table.




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 stock-based awards. The expected term of the Company’s stock-based
option awards was based on historical award holder exercise patterns and
considered the market performance of the Company’s common stock and other items.
The annualized 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
stock-based awards granted during the three-month periods ended September 30,
2009 and 2008, exclusive of common shares purchased pursuant to the Company’s
ESPP, the weighted average fair value was $0.08 and $0.22, respectively, per
share. For stock-based awards granted during the nine-month periods ended
September 30, 2009 and 2008, exclusive of common shares purchased pursuant to
the Company’s ESPP, the weighted average fair values were $0.05 and $0.34 per
share, respectively.




The
weighted average fair values of common shares purchased pursuant to the
Company’s ESPP during the three-month periods ended September 30, 2009 and 2008
were $0.03 and $0.24, respectively. The weighted average fair values of common
shares purchase pursuant to the Company's ESPP during the nine-month periods
ended September 30, 2009 and 2008 were $0.15 and $0.21,
respectively.


7
 Table of Contents




The
following table presents a summary of the status and activity of the Company’s
stock option awards for the three and nine-month periods ended September 30,
2009.




Number
      of
              Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contractual Term (Years)
            
            
            Aggregate
      Intrinsic ValueFor the Three Months Ended September 30,
      2009Outstanding
      – June 30, 2009
            
            
            7,301,513
            
            
            $
            0.39
            
            
            
            6.19
            
            
            $
            27,900Granted
            
            
            20,000
            
            
            $
            0.09Exercised
            
            
            —
            
            
            
            —Forfeited
      or expired
            
            
            (9,277
            )
            
            $
            0.36Outstanding
      – September 30, 2009
            
            
            7,312,236
            
            
            $
            0.39
            
            
            
            5.96
            
            
            $
            37,300For the Nine Months Ended September 30,
      2009Outstanding
      – December 31, 2008
            
            
            7,501,255
            
            
            $
            0.45
            
            
            
            6.11
            
            
            
            —Granted
            
            
            958,500
            
            
            $
            0.05Exercised
            
            
            —
            
            
            
            —Forfeited
      or expired
            
            
            (1,147,519
            )
            
            $
            0.47Outstanding
      – September 30, 2009
            
            
            7,312,236
            
            
            $
            0.39
            
            
            
            5.96
            
            
            $
            37,300




Of the
options outstanding as of September 30, 2009, 5,931,703 were vested, 1,330,720
were estimated to vest in future periods and 49,813 were estimated to be
forfeited prior to their vesting.




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 common stock issued upon the exercise of an
option upon an optionee’s termination of service to the Company prior to full
vesting at the option’s exercise price.




As of
September 30, 2009, there was approximately $74,200 of total unrecognized
compensation cost, net of estimated forfeitures, related to stock-based
compensation. That cost is expected to be recognized over a weighted-average
period of approximately one year.





4.
Revenue




Revenue
for the three-month periods ended September 30, 2009 and 2008 was comprised as
follows:




Revenue
            
            2009
            
            
            2008
            
            
            2009
      Over (Under) 2008
              Dollars
            
            
            PercentProduct
      LicensesWindows
            
            $
            599,200
            
            
            $
            751,800
            
            
            $
            (152,600
            )
            
            
            -20.3
            %Unix
            
            
            250,700
            
            
            
            246,200
            
            
            
            4,500
            
            
            
            1.8
            %849,900
            
            
            
            998,000
            
            
            
            (148,100
            )
            
            
            -14.8
            %Intellectual
      property licenses
            
            
            450,000
            
            
            
            —
            
            
            
            450,000
            
            
            naService
      FeesWindows
            
            
            296,400
            
            
            
            271,700
            
            
            
            24,700
            
            
            
            9.1
            %Unix
            
            
            282,500
            
            
            
            285,300
            
            
            
            (2,800
            )
            
            
            -1.0
            %578,900
            
            
            
            557,000
            
            
            
            21,900
            
            
            
            3.9
            %Other
            
            
            52,100
            
            
            
            39,100
            
            
            
            13,000
            
            
            
            33.2
            %Total
      Revenue
            
            $
            1,930,900
            
            
            $
            1,594,100
            
            
            $
            336,800
            
            
            
            21.1
            %





8
 Table of Contents




Revenue
for the nine-month periods ended September 30, 2009 and 2008 was comprised as
follows:





Revenue
            
            2009
            
            
            2008
            
            
            2009
      Over (Under) 2008
              Dollars
            
            
            PercentProduct
      LicensesWindows
            
            $
            1,546,000
            
            
            $
            1,657,500
            
            
            $
            (111,500
            )
            
            
            -6.7
            %Unix
            
            
            911,200
            
            
            
            947,400
            
            
            
            (36,200
            )
            
            
            -3.8
            %2,457,200
            
            
            
            2,604,900
            
            
            
            (147,700
            )
            
            
            -5.7
            %Intellectual
      property licenses
            
            
            2,300,000
            
            
            
            —
            
            
            
            2,300,000
            
            
            naService
      FeesWindows
            
            
            867,400
            
            
            
            763,800
            
            
            
            103,600
            
            
            
            13.6
            %Unix
            
            
            859,300
            
            
            
            839,700
            
            
            
            19,600
            
            
            
            2.3
            %1,726,700
            
            
            
            1,603,500
            
            
            
            123,200
            
            
            
            7.7
            %Other
            
            
            127,100
            
            
            
            71,100
            
            
            
            56,000
            
            
            
            78.8
            %Total
      Revenue
            
            $
            6,611,000
            
            
            $
            4,279,500
            
            
            $
            2,331,500
            
            
            
            54.5
            %





On April
24, 2009, April 28, 2009, May 26, 2009, and September 21, 2009, the Company
entered into settlement and licensing agreements with CareerBuilder, LLC,
Classified Ventures, LLC, Google, Inc., and Yahoo! Inc., respectively, which
ended all legal disputes between the Company and these entities and granted to
each of these entities irrevocable, perpetual, world-wide, non-exclusive
licenses to all of the Company’s patents and patent applications.





5.
Patents




Patents
consisted of the following:




September
      30, 2009
            
            
            December
      31, 2008Patents
            
            $
            2,839,000
            
            
            $
            2,839,000Accumulated
      amortization
            
            
            (2,209,200
            )
            
            
            (1,855,000
            )$
            629,800
            
            
            $
            984,000




Patent
amortization, which aggregated $118,100 and $222,300 during the three-month
periods ended September 30, 2009 and 2008, respectively, and $354,200 and
$666,800 during the nine-month periods ended September 30, 2009 and 2008,
respectively, is a component of general and administrative
expenses.





6.
Accounts Receivable, Net




Accounts
receivable were net of an allowance totaling $32,000 as of both September 30,
2009 and December 31, 2008.




7.
Liability Attributable to Warrants




On
January 1, 2009, the Company adopted the guidance set forth in Financial
Accounting Standards Board (“FASB”) Codification Subtopic 815-40, “Contracts in an Entity’s Own
Equity” (“ASC 815-40”), formerly EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock.” As part of the adoption of
such guidance, the Company determined that FASB ASC 815-40 applies to warrants
the Company had previously issued and that such warrants were not indexed to the
Company’s own stock; therefore, the value of the warrants has been recorded as a
liability. The cumulative effect of the accounting entries the Company recorded
pursuant to its adoption of this guidance is set forth in the following
table:


9
 Table of Contents







Derivative
      Liability
            
            
            Additional
      Paid-in Capital
            
            
            Accumulated
      DeficitIncrease
      / (Decrease)Record
      the reversal of the prior accounting treatment related to the
      warrants
            
            $
            —
            
            
            $
            (864,000
            )
            
            $
            (864,000
            )Record
      the January 1, 2009 derivative instrument related to the
      warrants
            
            
            4,700
            
            
            
            —
            
            
            
            4,700$
            4,700
            
            
            $
            (864,000
            )
            
            $
            (859,300
            )




The
Company currently does not have a material exposure to either commodity prices
or interest rates; accordingly, it does not currently use derivative instruments
to manage such risks. The Company evaluates all of its financial instruments to
determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. All derivative financial instruments are recognized in
the balance sheet at fair value. Changes in fair value are recognized in
earnings if they are not eligible for hedge accounting or in other comprehensive
income if they qualify for cash flow hedge accounting.




The
Company used a binomial pricing model to determine the fair value of its
warrants as of September 30, 2009 using the following assumptions:




Estimated
      volatility
            
            
            85
            %Annualized
      forfeiture rate
            
            
            0
            %Expected
      term (years)
            
            
            0.36Estimated
      exercise factor
            
            
            10
            %Approximate
      risk-free interest rate
            
            
            0.32
            %Expected
      dividend yield
            
            
            0
            %




The fair
value calculation of these warrants indicated that the fair value of the
liability attributable to these warrants was insignificant and the Company
elected to write such fair value down to $0 as of September 30,
2009.




The
Company reported $4,200 and $4,700 of other income in its condensed consolidated
statement of operations for the three and nine-month periods ended September 30,
2009, respectively, related to the change in fair value of the liability
attributable to warrants during such periods.




The
Company did not record a liability attributable to warrants on its condensed
consolidated balance sheet as of September 30, 2008, nor did it record any
change in fair value for such liability for either of the three or nine-month
periods then ended as the effective date for the adoption of FASB ASC 815-40 was
January 1, 2009.




8.
Fair Value Measurements




FASB
Codification Subtopic 820-10, “Fair Value Measurements and
Disclosures” (“ASC 820-10”), formerly SFAS No. 157, Fair Value Measurements,”
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy, as defined below, gives
the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable
inputs.




·
            Level
      1: Defined as observable inputs, such as quoted prices in active markets
      for identical assets.




·
            Level
      2: Defined as observable inputs other than Level 1 prices. This includes
      quoted prices for similar assets or liabilities in an active market,
      quoted prices for identical assets and liabilities in markets that are not
      active, or other inputs that are observable or can be corroborated by
      observable market data for substantially the full term of the assets or
      liabilities.




·
            Level
      3: Defined as unobservable inputs for which little or no market data
      exists, therefore requiring an entity to develop its own
      assumptions.


10
 Table of Contents


As of
September 30, 2009, all of the Company’s inputs used in the fair value valuation
process of its liability attributable to warrants were categorized as Level 3
inputs.




Fair
Value of Financial Instruments




The
carrying amounts of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable, and accounts payable and accrued expense,
approximate fair value because of their generally short maturities.




9.
Stockholders’ Equity – Stock Buy Back Program




On
January 8, 2008, the Company’s Board of Directors authorized a stock buy back
program to repurchase up to $1,000,000 of its outstanding common stock. During
the three and nine-month periods ended September 30, 2009, the Company
repurchased 580,000 shares of its common stock, at an average price of
approximately $0.14, for an aggregate cost of $81,500. As of September 30, 2009,
approximately $830,800 remained available for future purchases. The Company is
not obligated to repurchase any specific number of shares and the program may be
suspended or terminated at the Company’s discretion.




During
the three and nine-month periods ended September 30, 2008, the Company
repurchased 294,000 shares of its common stock, at an average price of $0.29,
for an aggregate cost of $87,700.




10.
Commitments and Contingencies




On April
24, April 28, May 26, and September 21, 2009, the Company entered into
settlement and licensing agreements with CareerBuilder, LLC, Classified
Ventures, LLC, Google, Inc., and Yahoo! Inc., respectively, which ended all
legal disputes between the Company and these entities, and granted to each of
these entities irrevocable, perpetual, world-wide, non-exclusive licenses to all
of the Company’s patents and patent applications.




The
paragraphs that follow summarize the status of all currently active legal
proceedings involving the Company. In all such proceedings the Company has
retained the services of various outside counsel. All such counsel have been
retained under contingency fee arrangements that require the Company to only pay
for certain non-contingent fees, such as services for expert consultants, and
travel, prior to a verdict or settlement of the respective underlying
proceeding.




GraphOn
Corporation v. Juniper Networks, Inc.




On August
28, 2007, the Company filed a proceeding against Juniper Networks, Inc.
(“Juniper”) in the United States District Court in the Eastern District of Texas
(the “court”) alleging that certain of Juniper’s products infringe three of the
Company’s patents, namely; U.S. Patent Nos. 5,826,014, 6,061,798 and 7,028,336,
(the “’014,” “’798” and “’336” patents, respectively) which protect the
Company’s fundamental network security and firewall technologies. The Company
seeks preliminary and permanent injunctive relief along with unspecified damages
and fees.  Juniper filed its Answer and Counterclaims on October 26,
2007 seeking a declaratory judgment that it does not infringe any of these
patents, and that all of these patents are invalid and unenforceable. On
September 29, 2009, the court issued a series of orders that: (i) denied
Juniper’s motions to transfer the case to the Northern District of California;
(ii) denied Juniper’s request to stay the case pending the reexamination
proceedings in the PTO; (iii) granted the Company’s request to remove the ‘336
patent from the case; and (iv) denied the Company’s motion to consolidate this
case with the case discussed below under Juniper Networks, Inc. v. GraphOn
Corporation et al.. As a result, the case filed on August 28, 2007 will
proceed in the Eastern District Court of Texas with jury selection set for July
6, 2010.




Separately,
Juniper has petitioned the United States Patent and Trademark Office (the “PTO”)
to reexamine two of the Company’s patents (the’014 and’798 patents). On April 6,
2008, the PTO ordered the reexamination of the ‘798 patent, and on July 25,
2008, the PTO ordered the reexamination of the ‘014 patent.




On
January 26, 2009, the PTO issued a non-final rejection of the single claim of
the ‘798 patent. On March 26, 2009, the Company responded with a detailed
disagreement with the PTO’s non-final rejection and added 30 new claims to the
‘798 patent. On September 24, 2009, the PTO issued a final rejection. The
Company is currently preparing a response.




On May
26, 2009, the PTO issued a non-final rejection of the ‘014 patent. On July 27,
2009, the Company responded with a detailed disagreement with the PTO’s
non-final rejection and added 15 new claims to the ‘014 patent. On August 14,
2009, the PTO issued a final rejection. On October 14, 1009, the Company
responded with proposed amendments. The PTO has not yet responded to the
Company’s response.




11
 Table of Contents




The
Company believes that the patentability of each of these patents will ultimately
be confirmed by the PTO, and the Company is committed to pursuing the
confirmation of these patents through all channels of appeal, if
necessary.




Juniper
Networks, Inc.  v. GraphOn Corporation et al




On March
16, 2009, Juniper Networks, Inc. initiated a proceeding against the Company and
one of its resellers in the United States District Court in the Eastern District
of Virginia alleging infringement of one of their patents, namely; U.S. Patent
No. 6,243,752 (the “’752 Patent”), which protects Juniper’s unique method of
transmitting data between a host computer and a terminal computer. On May 1,
2009, the Company filed an answer in which it asked the court to declare that
the ‘752 Patent is not infringed and/or is invalid under the patent laws. The
Company also asserted a counterclaim against Juniper, alleging infringement of
four of the Company’s patents, namely; U.S. Patent Nos. 7,249,378, 7,269,847,
7,383,573, and 7,424,737. On June 18, 2009, the United States District Court in
the Eastern District of Virginia granted a motion filed by Juniper to transfer
the Company’s counterclaim of patent infringement to the United States District
Court in the Eastern District of Texas. No trial date has been set by the court
yet.  On August 12, 2009 the Company filed a motion to consolidate the
patents transferred from the Virginia case into the pending case in the Eastern
District of Texas. The motion to consolidate was denied on September 29,
2009.




On
October 9, 2009, the Company filed a motion for summary judgment asking the
court to find that the Company does not infringe the ‘752 patent, and that the
‘752 patent is invalid. A hearing for this motion is set for November 20,
2009.




GraphOn
Corporation v. Classified Ventures, LLC et al




On March
10, 2008, the Company initiated a proceeding against Classified Ventures, LLC;
IAC/InterActiveCorp; Match.com (an operating business of IAC/InterActiveCorp);
Yahoo! Inc.; eHarmony.com; and CareerBuilder, LLC in the United States District
Court in the Eastern District of Texas alleging infringement of four of the
Company’s patents, namely; U.S. Patent Nos. 6,324,538, 6,850,940, 7,028,034 and
7,269,591, which protect the Company’s unique method of maintaining an automated
and network-accessible database. The suit alleges that the named companies
infringe the Company’s patents on each of their Web sites. The suit seeks
permanent injunctive relief along with unspecified damages. During late April
and early May 2008, the opposing parties in the proceeding filed their Answers
and Counterclaims seeking a declaratory judgment that they do not infringe the
patents in the suit and that each of the patents in the suit are invalid and
unenforceable. On June 5, 2008, the Company filed its answers to each of the
opposing parties’ counterclaims. On August 21, 2008, IAC/interactive Corp. was
dismissed from the lawsuit without prejudice. On December 2, 2008 the court
issued a Docket Control Order setting the dates of April 27, 2011 for the
Markman Hearing, in which the court will define any disputed claim terms, and
November 7, 2011 for jury selection. On May 11, 2009, in conjunction with
settlements reached with the Company, the court granted a joint motion to
dismiss Classified Ventures, LLC and CareerBuilder, LLC from the case. On
September 30, 2009, the court granted a joint motion to dismiss Yahoo! Inc. from
the case, as a result of a settlement with the Company, thus leaving eHarmony
and Match.com as the only remaining defendants to this proceeding.




11.
Supplemental Disclosure of Cash Flow Information




The
Company disbursed $0 and $2,200 for the payment of interest expense during the
three and nine-month periods ended September 30, 2009. These amounts were
unchanged from the amounts disbursed for the payment of interest expense during
the corresponding periods of 2008.




The
Company disbursed $2,500 and $800 for the payment of income taxes during the
three-month periods ended September 30, 2009 and 2008, respectively. The Company
disbursed $4,100 and $43,600 for the payment of income taxes during the
nine-month periods ended September 30, 2009 and 2008, respectively.




As more
fully explained in Note 7, the Company adopted FASB ASC 815-40 effective January
1, 2009. Accordingly, the Company recorded a non-cash liability of $4,700, which
it classified as a liability attributable to warrants, as part of the cumulative
effect of a change in accounting principle upon the adoption of FASB ASC 815-40.
Pursuant to FASB ASC 815-40, such liability was charged to opening retained
earnings (accumulated deficit).




Additionally,
the Company recorded as other income a $4,200 non-cash fair value adjustment to
its liability attributable to warrants during the three-month period ended
September 30, 2009. During the nine-month period ended September 30, 2009, the
Company recorded as other income an aggregate $4,700 non-cash fair value
adjustment to its liability attributable to warrants, which reduced the fair
value of such liability to $0, as of September 30, 2009. No such adjustment was
recorded during either the three-month or nine-month periods of the prior year
as the effective date for the adoption of FASB ASC 815-40 was January 1,
2009.


12
 Table of Contents




During
the nine-month periods ended September 30, 2009, the Company capitalized
approximately $5,800 of fixed assets, primarily machinery and equipment, for
which no cash was disbursed. As of September 30, 2009 the Company had recorded
approximately $5,800 as current liabilities for these items.




During
the nine-month period ended September 30, 2008, the Company capitalized
approximately $28,200 of fixed assets, related to software purchased for
internal use, and recorded approximately $15,200 of other assets, related to
future support services for the software purchased, for which no cash was
disbursed. As of September 30, 2008, the Company accrued $15,000 as a current
liability, and $28,400 as a long term liability, for these items.




As of
September 30, 2009, the Company has reclassified $7,600 of other assets to
prepaid expense. The amount so reclassified, which was originally recorded as a
component of other assets during the year ended December 31, 2008, and was
related to support services for software purchased for internal use, was paid
for during the nine-month period ended September 30, 2009, contemporaneously
with the reclassification.




Also as
of September 30, 2009, the Company has reclassified $28,400 of other liabilities
to accrued liabilities. The amount so reclassified, which is due and payable in
April 2010, is the third and final payment due under a contract entered into
during April 2008 related to software purchased for internal use. No cash has
been disbursed in connection with the reclassification.




12.
Loss Per Share




Potentially
dilutive securities have been excluded from the computation of diluted loss per
share, as their effect is antidilutive. For each of the three and nine-month
periods ended September 30, 2008, 21,118,788 shares of common stock equivalents
were excluded from the computation of diluted loss per share since their effect
would be antidilutive. For the three and nine-month periods ended September 30,
2009, 16,651,940 and 16,726,940 shares of common stock equivalents,
respectively, were excluded from the computation of diluted loss per share since
their effect would be antidilutive.




13.
Segment Information




FASB
Codification Subtopic 280-10, “Segment Reporting” (“ASC
280-10”) establishes standards for reporting information about operating
segments. This standard requires segmentation based on the Company’s internal
organization and reporting of revenue and operating income based on internal
accounting methods. The Company’s financial reporting systems present various
data for management to operate the business prepared in methods consistent with
GAAP. The Company’s segments were defined in order to allocate resources
internally. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or the decision making group, in deciding
how to allocate resources and in assessing performance. The Company’s chief
operating decision maker is its Chief Executive Officer. The Company has
determined that it operates its business in two segments: software and
intellectual property.




Segment
revenue was as follows:


Three
      Month Ended September 30,
              
              
              Nine
      Months Ended September30,Revenue
              
              2009
              
              
              2008
              
              
              2009
              
              2008Software
              
              $
              1,480,900
              
              
              $
              1,594,100
              
              
              $
              4,311,000
              
              
              $
              4,279,500Intellectual
      Property
              
              
              450,000
              
              
              
              —
              
              
              
              2,300,000
              
              
              
              —Consolidated
      Revenue
              
              $
              1,930,900
              
              
              $
              1,594,100
              
              
              $
              6,611,000
              
              
              $
              4,279,500


Segment
gain (loss) from operations was as follows:


Three
      Month Ended September 30,
            
            
            Nine
      Months Ended September30,Gain
      (Loss) From Operations
            
            2009
            
            
            2008
            
            
            2009
            
            2008Software
            
            $
            (202,900
            )
            
            $
            (126,500
            )
            
            $
            (1,064,900
            )
            
            $
            (711,600
            )Intellectual
      Property
            
            
            (250,100
            )
            
            
            (533,300
            )
            
            
            310,100
            
            
            
            (1,400,100
            )Consolidated
      Loss From Operations
            
            $
            (453,000
            )
            
            $
            (659,800
            )
            
            $
            (754,800
            )
            
            $
            (2,111,700
            )





The
Company does not allocate interest and other income, interest and other expense
or income tax to its segments.


13
 Table of Contents


Segment
fixed assets (long-lived assets) was as follows:




Fixed
      Assets
            
            Cost
      Basis
            
            
            Accumulated
      Depreciation /Amortization
            
            
            Net,
      as ReportedSoftware
            
            $
            1,281,700
            
            
            $
            (1,136,700
            )
            
            $
            145,000Intellectual
      Property
            
            
            2,839,000
            
            
            
            (2,209,200
            )
            
            
            629,800Unallocated
            
            
            5,000
            
            
            
            —
            
            
            
            5,000$
            4,125,700
            
            
            $
            (3,345,900
            )
            
            $
            779,800




The
Company does not allocate certain other assets, primarily deposits, to its
segments.




Products
and services provided by the software segment include all currently available
versions of GO-Global for Windows, GO-Global for Unix, OEM private labeling
kits, software developer’s kits, maintenance contracts and product training and
support. The intellectual property segment provides licenses to the Company’s
intellectual property. The Company’s two segments do not engage in cross-segment
transactions.




14. Subsequent
Events




The
Company has evaluated all subsequent events through November 16, 2009, the date
the financial statements were issued.




15.
New Accounting Pronouncements




The FASB
implemented the FASB Accounting Standards Codification (the “Codification”)
effective July 1, 2009. The Codification has become the source of authoritative
GAAP recognized by FASB to be applied to nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities law are also sources of authoritative GAAP for
SEC registrants, including the Company. On the effective date of the
Codification, the Codification superseded all then-existing non-SEC accounting
and reporting standards. All other non-grand-fathered non-SEC accounting
literature not included in the Codification has become
non-authoritative.




Following
the effective date of the Codification, FASB will not release new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
abstracts, but instead will issue Accounting Standards Updates (“ASU’s”). ASU’s
will not be considered authoritative in their own right, but will serve only to
update the Codification, provide background information about the guidance in
the Codification, and provide the basis for the conclusions on the changes in
the Codification.




In June
2009, FASB issued ASU 2009-01, “Generally Accepted Accounting
Principles (Topic 105).” ASU 2009-01 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. ASU 2009-01 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of ASU 2009-01 did not have a material impact on results of
operations, cash flows, or financial position.




In August
2009, the FASB issued ASU 2009–05, “Measuring Liabilities at Fair
Value.” ASU 2009–05 amends FASB ASC 820, “Fair Value Measurements.”
Specifically, ASU 2009–05 provides clarification that in circumstances in which
a quoted price in an active market for the identical liability is not available,
a reporting entity is required to measure fair value using one or more of the
following methods: (1) a valuation technique that uses a) the quoted price of
the identical liability when traded as an asset or b) quoted prices for similar
liabilities or similar liabilities when traded as assets and/or (2) a valuation
technique that is consistent with the principles of FASB ASC Topic 820 (e.g. an
income approach or market approach). ASU 2009–05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
include inputs relating to the existence of transfer restrictions on that
liability. The adoption of this standard did not have a material impact on
results of operations, cash flows, or financial position.




In
October 2009, FASB issued ASU 2009-13 “Revenue Recognition (Topic
605).” ASU
2009-13 provides accounting and financial reporting disclosure amendments for
multiple-deliverable revenue arrangements. ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is allowed. The
new guidance states that if vendor specific objective evidence or third party
evidence for deliverables in an arrangement cannot be determined, companies will
be required to develop a best estimate of the selling price to separate
deliverables and allocate arrangement consideration using the relative selling
price method. Under the previous guidance, if the fair value of all of the
elements in an arrangement was not determinable, then revenue was deferred until
all of the items were delivered or fair value was determined. The adoption of
ASU 2009-13 is not anticipated to have a material impact on results of
operations, cash flows, or financial position.


14
 Table of Contents


In May
2009, FASB issued FASB ASC 855, “Subsequent Events,” formerly
Statement of Financial Accounting Standards No. 165 “Subsequent Events,”which
establishes general standards of accounting for, and disclosure of, events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In particular, FASB ASC 855 sets forth (a) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (b) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements, and (c) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. FASB ASC 855 is effective for interim or annual financial
reporting periods ending after June 15, 2009. The adoption of FASB ASC 855 did
not have a material impact on results of operations, cash flows or financial
position.




In April
2009, FASB issued FASB ASC 825-10-50, “Financial Instruments,
Disclosure,” formerly Staff position 107-1 and Accounting Principles
Board 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” which increases
the frequency of fair value disclosures to a quarterly instead of annual basis.
The guidance within FASB ASC 825-10-50 relates to fair value disclosures for any
financial instruments that are not currently reflected on an entity’s balance
sheet at fair value. FASB ASC 825-10-50 is effective for interim and annual
periods ending after June 15, 2009. The adoption of FASB ASC 825-10-50 did not
have a material impact on results of operations, cash flows or financial
position.




In June
2008, FASB ratified FASB ASC 815-40, “Derivatives and Hedging, Contracts
in Entity’s Own Equity,”formerly the Emerging Issues Task Force’s Issue
No. 07-5,”Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,”
which provides that an entity should use a two step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its
own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. It also clarifies on the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. FASB ASC 815-40 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. See Note 7 for additional information.




In April
2008, FASB issued FASB ASC 350-30, “Goodwill and Other, General
Intangibles Other than Goodwill,” formerly FASB Staff Position 142-3,
“Determination of the Useful
Life of Intangible Assets” (“FSP”), which amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The intent of FASB ASC
..350-30 is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset under FASB ASC 850, “Business Combinations,”
formerly FASB Statement No. 141 (revised 2007), “Business Combinations,” and
other accounting principles generally accepted in the United States. FASB ASC
350-30 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The
adoption of FASB ASC 350-30 did not have a material impact on results of
operations, cash flows or financial position.




In March
2008, FASB issued FASB ASC 815, Derivatives and Hedging,”
formerly Statement of Financial Accounting Standard No. 161, “Disclosures about Derivatives
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133” (“SFAS 161”). FASB ASC 815 requires enhanced disclosures about a
company’s derivative and hedging activities. FASB ASC 815 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Adoption of FASB ASC 815 did not have a material impact on
results of operations, cash flows or financial position.




In
December 2007, FASB issued FASB ASC 815, “Business Combinations,”
formerly Statement of Financial Accounting Standards No. 141 (revised 2007),
“Business
Combinations,” which replaced SFAS No. 141, “Business Combinations.”FASB
ASC 815 establishes principles and requirements for recognizing and measuring
identifiable assets and goodwill acquired, liabilities assumed, and any
noncontrolling interest in a business combination at their fair value at
acquisition date. FASB ASC 815 alters the treatment of acquisition related
costs, business combinations achieved in stages (referred to as a step
acquisition), the treatment of gains from a bargain purchase, the recognition of
contingencies in business combinations, the treatment of in-process research and
development in a business combination as well as the treatment of recognizable
deferred tax benefits. FASB ASC 815 is effective for business combinations
closed in fiscal years beginning after December 15, 2008. The Company has
evaluated the impact of FASB ASC 815 and has concluded that results of
operations, cash flows or financial position will only be impacted in relation
to future business combination activities, if any.


15
 Table of Contents




In
September 2006, FASB issued FASB ASC 820, “Fair Value Measurements and
Disclosures,”formerly Statement of Financial Accounting Standards No.
157, “Fair Value
Measurements,” which defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about fair value
measurements. FASB ASC 820 applies under other accounting pronouncements that
require or permit fair value measurements, FASB having previously concluded in
those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, FASB ASC 820 does not require any new fair value
measurements, however, for some entities; application of FASB ASC 820 will
change current practice.  FASB ASC 820 was effective for financial
statements issued for the first fiscal year beginning after November 15, 2007
and interim periods within those fiscal years.  Adoption of FASB ASC
820 did not have a material impact on results of operations, cash flows or
financial position. In February 2008, FASB issued FASB ASC 820-10, “Fair Value Measures and
Disclosures,” formerly FASB Staff Position No. 157-2 that deferred the
effective date of FASB ASC 820-10 for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis, to fiscal years, and interim
periods within those fiscal years, beginning after November 15, 2008. In
addition, FASB also agreed to exclude from the scope of FASB ASC 820 fair value
measurements made for purposes of applying FASB ASC 840, Leases,” formerly Statement
of Financial Accounting Standards No. 13, “Accounting for Leases” and
related interpretive accounting pronouncements. The adoption of FASB ASC 820 did
not have a material impact on results of operations, cash flows or financial
position.





16
 Table of Contents





ITEM 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations




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:




·
            our
      history of operating losses, and expectation that those losses will
      continue;·
            our
      substantial accumulated deficit;·
            that
      a significant portion of our operating revenue has been and continues to
      be earned from a very limited number of significant
    customers;·
            that
      our stock price has been volatile; and·
            other
      factors, including those set forth under Item 1A, “Risk Factors” in our
      Annual Report on Form 10-K for the year ended December 31, 2008, which was
      filed with the Securities and Exchange Commission (“SEC”) on March 31,
      2009, and in other documents we have filed with the
  SEC.




These
factors 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 and/or resale by independent software vendors (“ISVs”), corporate
enterprises, governmental and educational institutions, and others. We have also
made significant investments in intellectual property and have pursued various
means of monetizing such investments. We conduct and manage our business based
on these two segments, which we refer to as our “software” and “Intellectual
Property” segments, respectively.




Server-based
computing, which is 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.  Our server-based technology can
web-enable a variety of Unix, Linux or Windows applications.




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.  Our critical accounting policies are identified in our 2008
10-K Report, and include: revenue recognition, long-lived assets, patents, and
stock-based compensation.  The following operating results should be
read in conjunction with our critical accounting policies.




Results
of Operations for the Three and Nine-Month Periods Ended September 30, 2009 and
2008.




Revenue




Revenue
for the three-month periods ended September 30, 2009 and 2008 was comprised as
follows:




17
 Table of Contents




Revenue
            
            2009
            
            
            2008
            
            
            2009
      Over (Under) 2008
              Dollars
            
            
            PercentProduct
      LicensesWindows
            
            $
            599,200
            
            
            $
            751,800
            
            
            $
            (152,600
            )
            
            
            -20.3
            %Unix
            
            
            250,700
            
            
            
            246,200
            
            
            
            4,500
            
            
            
            1.8
            %849,900
            
            
            
            998,000
            
            
            
            (148,100
            )
            
            
            -14.8
            %Intellectual
      property licenses
            
            
            450,000
            
            
            
            —
            
            
            
            450,000
            
            
            naService
      FeesWindows
            
            
            296,400
            
            
            
            271,700
            
            
            
            24,700
            
            
            
            9.1
            %Unix
            
            
            282,500
            
            
            
            285,300
            
            
            
            (2,800
            )
            
            
            -1.0
            %578,900
            
            
            
            557,000
            
            
            
            21,900
            
            
            
            3.9
            %Other
            
            
            52,100
            
            
            
            39,100
            
            
            
            13,000
            
            
            
            33.2
            %Total
      Revenue
            
            $
            1,930,900
            
            
            $
            1,594,100
            
            
            $
            336,800
            
            
            
            21.1
            %




Revenue
for the nine-month periods ended September 30, 2009 and 2008 was comprised as
follows:





Revenue
            
            2009
            
            
            2008
            
            
            2009
      Over (Under) 2008
              Dollars
            
            
            PercentProduct
      LicensesWindows
            
            $
            1,546,000
            
            
            $
            1,657,500
            
            
            $
            (111,500
            )
            
            
            -6.7
            %Unix
            
            
            911,200
            
            
            
            947,400
            
            
            
            (36,200
            )
            
            
            -3.8
            %2,457,200
            
            
            
            2,604,900
            
            
            
            (147,700
            )
            
            
            -5.7
            %Intellectual
      property licenses
            
            
            2,300,000
            
            
            
            —
            
            
            
            2,300,000
            
            
            naService
      FeesWindows
            
            
            867,400
            
            
            
            763,800
            
            
            
            103,600
            
            
            
            13.6
            %Unix
            
            
            859,300
            
            
            
            839,700
            
            
            
            19,600
            
            
            
            2.3
            %1,726,700
            
            
            
            1,603,500
            
            
            
            123,200
            
            
            
            7.7
            %Other
            
            
            127,100
            
            
            
            71,100
            
            
            
            56,000
            
            
            
            78.8
            %Total
      Revenue
            
            $
            6,611,000
            
            
            $
            4,279,500
            
            
            $
            2,331,500
            
            
            
            54.5
            %




Software
Revenue




Our
software revenue has historically been primarily derived from product licensing
fees and service fees from maintenance contracts. Other sources of software
revenue include private labeling fees, sales of software development kits and
training. Software development kits are tools that allow end users to develop,
interface and brand their own applications for use in conjunction with either
our Windows or Unix/Linux products.




During
the three-month period ended September 30, 2009 five of our customers decreased
their aggregate sales orders for our Windows-based product licenses by
approximately $197,000 as compared with the same period of the prior year. These
aggregate decreases were the main factor in the decreased Windows-based product
licenses revenue for the nine-month period ended September 30, 2009, as compared
with the same period of the prior year.




For the
three and nine-month periods ended September 30, 2009, the aggregate decreases
in Windows-based product licenses revenue, discussed above, were partially
offset by aggregate increases in such revenue from other customers, as compared
with the same periods of the prior year.




There was
also a small decrease noted in the sales of our Unix products during the
nine-month period ended September 30, 2009, as compared to the same period of
the prior year, which was primarily attributable to one of our larger Unix
customers decreasing their order level by $36,000.




We
believe that the decreases in our software revenue for the three and nine-month
periods ended September 30, 2009, as compared with the respective periods of the
prior year, are primarily due to the challenges our resellers face in selling to
their end users in the current economy. Our software revenue can vary from
period to period, sometimes by a material amount, because a significant portion
of this revenue has historically been earned, and continues to be earned, from a
limited number of significant customers, most of whom are


18
 Table of Contents


resellers.
Consequently, if any of these significant customers change their order level, or
fail to order during the reporting period, our product licenses revenue could be
materially impacted. We expect this situation to continue throughout the next
several quarterly reporting periods.




The
increases in service fees for the three and nine-month periods ended September
30, 2009, as compared with the same periods of the prior year, were primarily a
result of the continued growth of the number of licenses our end-user customers
have installed. Since our customers typically purchase maintenance contracts,
and, subsequently, renew them upon expiration, as end-user customers continue to
deploy more and more of our products, the revenue we are able to recognize from
the sale of such maintenance contracts increases. We expect aggregate service
fees revenue for 2009 to exceed those of 2008.




Other
revenue for the three and nine-month periods ended September 30, 2009 increased,
as compared with the same periods of the prior year, primarily as a result of
the sale of private labeling kits. We have entered into four such sales during
2009, as compared with only three such sales during 2008.




Intellectual
Property Revenue




We
derived $450,000 and $2,300,000 from our intellectual property segment during
the three and nine-month periods ended September 30, 2009. We entered into no
such licensing agreements during either of the comparable periods of the prior
year. We entered into one and four licensing agreements during the three and
nine-month periods ended September 30, 2009, respectively, each of which
generated revenue for us.




Revenues
from our intellectual property segment are non-predictable and are dependent
upon the outcome of our currently pending litigation efforts.




Cost
of Revenue




Software
Cost of Revenue




Software
cost of revenue is comprised primarily of service costs, which represent the
costs of customer service, and product costs. We incur no shipping or packaging
costs as all of our deliveries are made via electronic means over the Internet.
Under accounting principles generally accepted in the United Sates (“GAAP”),
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. No such costs were capitalized during either of the three or
nine-month periods ended September 30, 2009 or 2008.




Software
cost of revenue was 6% and 9% of total revenue for the three months ended
September 30, 2009 and 2008, respectively, and 6% and 10% of total revenue for
the nine months ended September 30, 2009 and 2008, respectively.




Software
cost of revenue for the three-month periods ended September 30, 2009 and 2008
was as follows:




Three
      Months Ended September 30,Description
            
            2009
            
            
            2008
            
            
            2009
      Over (Under) 2008
              Dollars
            
            
            PercentService
      costs
            
            $
            101,300
            
            
            $
            132,600
            
            
            $
            (31,300
            )
            
            
            -24
            %Product
      costs
            
            
            5,500
            
            
            
            4,000
            
            
            
            1,500
            
            
            
            38
            %$
            106,800
            
            
            $
            136,600
            
            
            $
            (29,800
            )
            
            
            -22
            %





Software
cost of revenue for the nine-month periods ended September 30, 2009 and 2008 was
as follows:




19
 Table of Contents




Nine
      Months Ended
              September
      30,Description
            
            2009
            
            
            2008
            
            
            2009
      Over (Under) 2008
              Dollars
            
            
            PercentService
      costs
            
            $
            355,200
            
            
            $
            402,200
            
            
            $
            (47,000
            )
            
            
            -12
            %Product
      costs
            
            
            16,500
            
            
            
            39,700
            
            
            
            (23,200
            )
            
            
            -58
            %$
            371,700
            
            
            $
            441,900
            
            
            $
            (70,200
            )
            
            
            -16
            %




Service
costs and product costs both decreased during the nine-month period ended
September 30, 2009, as compared with the same period of the prior year. The
decrease in service costs was reflective of the maturity of our current product
offerings. Such products typically require less customer service support as
evidenced by a decrease in the amount of time necessary to provide such
services. Also adding to the decrease in service costs was a change in the mix
of employees providing customer service as less expensive employees performed an
increased amount of such services. The decrease in product costs was as a result
of the timing of the renewal of a service contract for certain software that we
license and incorporate into our product offerings, coupled with a change in the
composition of the software programs so licensed.




Similar
to the decrease in service costs for the nine-month period ended September 30,
2009, the decrease in service costs for the three-month period ended September
30, 2009, as compared with the same period of the prior year, was primarily due
to the maturity of our current product offerings, a decrease in the overtime
required to perform such services, and an increase in the performance of such
services by less expensive employees. Also, during the three-month period ended
September 30, 2009 there was one less employee providing customer service, as
opposed to the same period of the prior year.




Service
costs include non-cash stock-based compensation. Such costs aggregated
approximately $1,300 and $4,100 for the three-month periods ended September 30,
2009 and 2008, respectively, and $5,700 and $14,900 for the nine-month periods
ended September 30, 2009 and 2008, respectively.




We expect
2009 software cost of revenue to be somewhat lower than 2008
levels.




Intellectual
Property Cost of Revenue




For the
three and nine-month periods ended September 30, 2009, we incurred $171,000 and
$896,000, respectively, of contingent legal fees in conjunction with the
intellectual property licenses entered into during such periods. No such fees
were incurred during either of the comparable periods of the prior year as we
did not enter into any intellectual property licenses during those
periods.




Cost of
revenue from intellectual property sales are non-predictable and are dependent
upon the outcome of our currently pending litigation efforts. We do not
anticipate entering into any further intellectual property licenses during the
remainder of 2009.





Selling
and Marketing Expenses




Selling
and marketing expenses primarily consist of employee costs (inclusive of
non-cash stock-based compensation expense), outside services and travel and
entertainment expense.




Selling
and marketing expenses for the three-month period ended September 30, 2009
decreased by $24,800, or 5%, to $448,900, from $473,700 for the same period of
2008. Selling and marketing expenses were 23% and 30% of revenue for the
three-month periods ended September 30, 2009 and 2008,
respectively.




For the
nine-month period ended September 30, 2009 selling and marketing expenses
increased by $86,700, or 7%, to $1,396,100, from $1,309,400 for the same period
of 2008. Selling and marketing expenses were 21% and 31% of revenue for the
nine-month periods ended September 30, 2009 and 2008, respectively.




Employee
costs decreased during the three-month period ended September 30, 2009, as
compared with the same period of the prior year, by approximately $19,800,
primarily due to lower commissions, which resulted from a lower level of sales
bookings, and lower non-cash stock-based compensation expense, which mainly
resulted from the low price of our common stock throughout 2009. Travel and
entertainment also decreased during the three-month period ended September 30,
2009, as compared with the same period of the prior year, by approximately
$7,400. This resulted from an overall decrease in the number of visits made to
customers and prospects. Partially offsetting these decreases was an increase in
the costs


20
 Table of Contents


of
outside services for the three-months ended September 30, 2009, as compared with
the same period of the prior year. The costs of outside services were increased
mainly as a result of certain costs associated with implementing an integrated
sales management software package.




For the
nine-month period ended September 30, 2009, employee costs, costs of outside
services and travel and entertainment were all higher by approximately $19,000,
$63,600, and $6,700, respectively, as compared with the same period of the prior
year. Employee costs were higher primarily due to increased employee benefits,
which resulted mainly from increased health care costs, and bonuses, which
resulted from the timing of certain sales bookings. Costs associated with
outside services were higher primarily due to certain costs associated with
implementing an integrated sales management software package. Travel and
entertainment costs were higher primarily as a result of more members of our
sales force visiting customers and prospects in Asia during the nine-month
period ended September 30, 2009, as compared with the same period of
2008.




Included
in employee costs were non-cash stock-based compensation costs aggregating
approximately $3,200 and $6,500, respectively, for the three-month periods ended
September 30, 2009 and 2008, and $12,000 and $25,500 for the nine-month periods
ended September 30, 2009 and 2008, respectively.




We
currently expect our full-year 2009 sales and marketing expense to be somewhat
higher than 2008 levels.




General
and Administrative Expenses




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




General
and administrative expenses increased by $56,900 or 6%, to $1,071,900, for the
three-month period ended September 30, 2009, from $1,015,000 for the same period
of 2008. General and administrative expenses were approximately 56% and 64% of
revenue for the three-month periods ended September 30, 2009 and 2008,
respectively.




For the
nine-month period ended September 30, 2009, general and administrative expenses
decreased by $320,800, or 11%, to $2,604,700 from $2,925,500 for the same period
of 2008. General and administrative expenses were approximately 39% and 68% of
revenue for the nine-month periods ended September 30, 2009 and 2008,
respectively.




The main
factors that contributed to the increase in general and administrative expense
for the three-month period ended September 30, 2009, as compared with the same
period of 2008, were aggregate increases in legal, professional and other
outside services, which were approximately $184,700 higher due to costs
associated with our on-going Juniper lawsuit efforts and Sarbanes-Oxley
implementation, and travel and entertainment, which was approximately $24,700
higher as a result of increased time being spent by our Chief Executive Officer
in our New Hampshire engineering facility.




Partially
offsetting these increases during the three-month period ended September 30,
2009 was an aggregate decrease of approximately $53,500 in employee costs, which
resulted mainly from the termination of one employee in our patent group earlier
in 2009 and the non-recurrence of a discretionary bonus that was awarded to an
employee in the three-month period ended September 30, 2008. Also partially
offsetting the aforementioned increases during the three-month period ended
September 30, 2009 was an aggregate decrease of approximately $105,400 in
depreciation and amortization that resulted primarily from the reduction in net
book value of our patent portfolio after the recording of an impairment charge
against the portfolio in the fourth quarter of the year ended December 31,
2008.




The main
contributing factors to the decrease in general and administrative expenses for
the nine-month period ended September 30, 2009, as compared with the same period
of 2008, were aggregate decreases in employee costs of approximately $199,100,
and depreciation and amortization of approximately $316,200. Employee costs were
lower during the nine-month period mainly due to the employee termination and
non-recurring discretionary bonus, both discussed in the immediately preceding
paragraph, as well as lower non-cash stock based compensation expense. Such
compensation expense was lower mainly due to certain stock options becoming
fully vested before and/or during the nine-month period ended September 30, 2009
as well as the lower fair value associated with new grants issued during 2009,
as compared with those granted during 2008.




Partially
offsetting these decrease during the nine-month period was increased legal,
professional and other outside services, aggregating approximately $201,900. As
set forth above, legal, professional and other outside services have increased
due to costs associated with our on-going Juniper lawsuit efforts and
Sarbanes-Oxley implementation.


21
 Table of Contents


Costs
associated with other individual components of general and administrative
expense, notably; insurance, rent, costs associated with being a public entity
and bad debts expense did not change significantly during either the three or
nine-month periods ended September 30, 2009, as compared with the same periods
of the prior year.




Included
in general and administrative employee costs was non-cash stock-based
compensation expense aggregating $17,100 and $17,900, respectively, for the
three-month periods ended September 30, 2009 and 2008, respectively, and $64,400
and $139,100 for the nine-month periods ended September 30, 2009 and 2008,
respectively.




As noted
above, general and administrative expenses have significantly decreased during
the nine-month period ended September 30, 2009 as compared with the same period
of the prior year. We do not expect this trend to continue throughout the
remainder of 2009. We expect that certain non-contingent legal fees associated
with our Juniper lawsuit will continue to increase throughout the remainder of
2009 such that aggregate general and administrative expenses for 2009 will be
somewhat lower than 2008 levels.




Research
and Development Expenses




Research
and development expenses consist primarily of employee costs (inclusive of
stock-based compensation expense), payments to contract programmers, rent, and
depreciation




Research
and development expenses decreased by $43,300, or 7%, to $585,300, for the
three-month period ended September 30, 2009, from $628,600 for the same period
of 2008. Research and development expenses were approximately 30% and 39% of
revenue for the three-month periods ended September 30, 2009 and 2008,
respectively.




For the
nine-month period ended September 30, 2009, research and development expenses
increased by $382,900, or 22%, to $2,097,300 from $1,714,400 for the same period
of the prior year. Research and development expenses were approximately 32% and
40% of revenue for the nine-month periods ended September 30, 2009 and 2008,
respectively.




Under
GAAP, 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 such
product development costs were capitalized during either of the three or
nine-month periods ended September 30, 2009 or 2008.




Factors
contributing to the decrease in research and developments costs during the
three-month period ended September 30, 2009, as compared with the same period of
the prior year, included: decreased outside services of approximately $40,600,
which resulted from certain contract engineers completing the projects they had
been hired to perform, decreased travel and entertainment of approximately
$11,000, which mainly resulted from fewer trips by our Israeli-based engineers
to our New Hampshire engineering facility, and decreased rent of approximately
$2,800, which resulted from the closure of our office in Israel during
2008.




Partially
offsetting these decreases during the three-month period was an aggregate
increase of approximately $11,800 in employee costs, which resulted from having
three more employees. Partially offsetting the increased employee costs was a
decrease in employee costs related to our Israeli employees as one such employee
transitioned from full to part-time, and decreased non-cash stock-based
compensation expense mainly due to certain stock options becoming fully vested
before and/or during the three-month period ended September 30, 2009, as well as
the lower fair value associated with new grants issued during 2009, as compared
with those granted during 2008.




The
increase in research and development costs for the nine-months ended September
30, 2009, as compared with the same period of the prior year was mainly due to
increases in employee costs of approximately $229,400 and outside services of
approximately $203,200 that were partially offset by decreases in rent of
approximately $20,700 and travel and entertainment of $19,900.




Employee
costs were higher during the nine-month period primarily due to having four more
employees than in the prior year, and outside services were higher as we
increased our use of contract engineers to assist in research and development
activities surrounding GO-Global for Windows. These costs were partially offset
by decreased rent, related to the closure of our Israeli office in 2008, and
decreased travel and entertainment, related to fewer trips to our New Hampshire
engineering facility by our Israeli-based engineers.




Included
in research and development employee costs was non-cash stock-based compensation
expense aggregating $11,500 and $43,600, respectively, for the three-month
periods ended September 30, 2009 and 2008, respectively, and $57,200 and
$107,300 for the nine-month periods ended September 30, 2009 and 2008,
respectively.


22
 Table of Contents




We
currently expect 2009 research and development expenses to be higher than 2008
levels as a result of the increases to our engineering staff, our continued use
of outside consultants, and our overall investments in this area.




Segment
Operating Gain (Loss)




Segment
operating gain (loss) for the three and nine-month periods ended September 30,
2009 and 2008 was as follows:




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,Gain
      (Loss) From Operations
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Software
            
            $
            (202,900
            )
            
            $
            (126,500
            )
            
            $
            (1,064,900
            )
            
            $
            (711,600
            )Intellectual
      Property
            
            
            (250,100
            )
            
            
            (533,300
            )
            
            
            310,100
            
            
            
            (1,400,100
            )Consolidated
      Loss From Operations
            
            $
            (453,000
            )
            
            $
            (659,800
            )
            
            $
            (754,800
            )
            
            $
            (2,111,700
            )




The
increased operating loss we experienced from our software segment for the
three-month period ended September 30, 2009, as compared with the same period of
the prior year, was primarily due to decreased product revenue. The increased
operating loss we experienced from our software segment for the nine-month
period ended September 30, 2009, as compared with the same period of the prior
year, was primarily due to increased selling and marketing and research and
development expenses.




The
decreased operating loss we experienced from our intellectual property segment
for the three-month period ended September 30, 2009, as compared with the same
period of the prior year, was primarily due to entering into a licensing and
settlement agreement during such period, whereas no such agreement was entered
into during the same period of the prior year.




The
operating gain we experienced during the nine-month period ended September 30,
2009, as compared to the operating loss we experienced during the same period of
the prior year, was primarily due to entering into four licensing and settlement
agreements during the current year, whereas no such agreements were entered into
during the prior year.




Other
Income, net




During
the three and nine-month periods ended September 30, 2009, other income, net,
included $4,200 and $4,700, respectively, of income related to the fair value
adjustment recorded against our liability attributable to warrants (see Note 7
of the condensed consolidated financial statements). Also included in other
income, net was interest income earned on excess cash balances. During the three
and nine-month periods ended September 30, 2008, other income, net, was
primarily comprised of interest income earned on excess cash
balances.




Net
Income (Loss)




As a
result of the foregoing items, net loss for the three-month period ended
September 30, 2009 was $444,900, a decrease of $198,300, or 31%, from a net loss
of $643,200 for the same period of 2008.  For the nine-month period
ended September 30, 2009, net loss was $740,400, a decrease of $1,303,700, or
64%, from a net loss of $2,044,100 for the same period of 2008.




Liquidity
and Capital Resources




We have
increased investments in our software segment during the nine-month period ended
September 30, 2009, as compared with the same period of the prior year, and
anticipate this trend to continue for the remainder of 2009. We have funded and
expect to continue to fund these increases through our cash on hand, as of
September 30, 2009, and our anticipated 2009 revenue streams. We are continually
looking at ways to improve our revenue streams, including through the
development of new products and further acquisitions. We continue to review
potential acquisition and other investment opportunities as they present
themselves to us. We believe that maintaining our current revenue streams,
coupled with judicial use of our cash on hand, will be sufficient to support our
operational plans for the next twelve months.




During
the nine-month periods ended September 30, 2009 and 2008, our reported net
losses of $740,400 and $2,044,100, respectively, included significant non-cash
items, such as; depreciation and amortization of $419,500 and $726,800,
respectively, which were primarily related to amortization of our patents; and
stock-based compensation expense of $139,300 and $286,800,
respectively.




23
 Table of Contents




During
the nine-month periods ended September 30, 2009 and 2008 we closely monitored
our investing activities, spending approximately $14,200 and $76,500,
respectively, primarily in fixed asset purchases that were mainly computer
equipment and software. Our financing activities for the nine-month periods
ended June 30, 2009 and 2008 were comprised of receiving proceeds from the sale
of stock to our employees under the terms of our employee stock purchase plan
and the purchase of outstanding shares of our common stock under the terms of
our board-approved stock buy back program.




Cash
and Cash Equivalents




As of
September 30, 2009, cash and cash equivalents were $3,848,700, as compared with
$3,742,200 as of December 31, 2008, an increase of $106,500, or 3%. The majority
of this increase was due to the proceeds of the intellectual property settlement
licenses entered into during the period, which were partially offset by the
consumption of cash by other elements of our operations.




Accounts
Receivable, net




At
September 30, 2009 and December 31, 2008, we had approximately $691,700 and
$970,000, respectively, in accounts receivable, net of allowances totaling
$32,000 at each respective date. From time to time, we could have individually
significant accounts receivable balances due us from one or more of our
significant customers. If the financial condition of any of these significant
customers should deteriorate, our operating results could be materially
affected.




Stock
Buy Back Program




As of
September 30, 2009, we had repurchased 874,000 shares of common stock for
$169,200 under terms of the Board approved stock buy back program. Under this
program, the Board approved up to $1,000,000 to be used in repurchasing our
stock, however; we are not obligated to repurchase any specific number of shares
and the program may be suspended or terminated at our discretion. During the
three and nine-month periods ended September 30, 2009 we repurchased 580,000
shares at an average price of approximately $0.14 per share. As of September 30,
2009, $830,800 remains authorized but unused.




Working
Capital




As of
September 30, 2009, we had current assets of $4,620,400 and current liabilities
of $2,716,900, which netted to working capital of $1,903,500. Included in
current liabilities was the current portion of deferred revenue of
$1,764,300.




Segment
Fixed Assets




As of
September 30, 2009 and December 31, 2008, segment fixed assets (long-lived
assets) were as follows:





June
      30, 2009
            
            
            December
      31, 2008Software
            
            $
            1,281,700
            
            
            $
            1,254,200Accumulated
      depreciation/amortization
            
            
            (1,136,700
            )
            
            
            (1,071,500
            )145,000
            
            
            
            182,700Intellectual
      Property
            
            
            2,839,000
            
            
            
            2,839,000Accumulated
      depreciation/amortization
            
            
            (2,209,200
            )
            
            
            (1,855,000
            )629,800
            
            
            
            984,000Unallocated
            
            
            5,000
            
            
            
            20,200Total
      Fixed Assets, net
            
            $
            779,800
            
            
            $
            1,186,900





New
Accounting Pronouncements




The
Financial Accounting Standards Board (“FASB”) implemented the FASB Accounting
Standards Codification (the “Codification”) effective July 1, 2009. The
Codification has become the source of authoritative GAAP recognized by FASB to
be applied to nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
law are also sources of authoritative GAAP for SEC registrants, including the
Company. On the effective date of the Codification, the


24
 Table of Contents




Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other non-grand-fathered non-SEC accounting literature not included in the
Codification has become non-authoritative.




Following
the effective date of the Codification, FASB will not release new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
abstracts, but instead will issue Accounting Standards Updates (“ASU’s”). ASU’s
will not be considered authoritative in their own right, but will serve only to
update the Codification, provide background information about the guidance in
the Codification, and provide the basis for the conclusions on the changes in
the Codification.




In June
2009, FASB issued ASU 2009-01, “Generally Accepted Accounting
Principles (Topic 105).” ASU 2009-01 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. ASU 2009-01 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of ASU 2009-01 did not have a material impact on results of
operations, cash flows, or financial position.





In August
2009, the FASB issued ASU 2009–05, “Measuring Liabilities at Fair
Value.” ASU 2009–05 amends FASB ASC 820, “Fair Value Measurements.”
Specifically, ASU 2009–05 provides clarification that in circumstances in which
a quoted price in an active market for the identical liability is not available,
a reporting entity is required to measure fair value using one or more of the
following methods: (1) a valuation technique that uses a) the quoted price of
the identical liability when traded as an asset or b) quoted prices for similar
liabilities or similar liabilities when traded as assets and/or (2) a valuation
technique that is consistent with the principles of FASB ASC Topic 820 (e.g. an
income approach or market approach). ASU 2009–05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
include inputs relating to the existence of transfer restrictions on that
liability. The adoption of this standard did not have a material impact on
results of operations, cash flows, or financial position.





In
October 2009, FASB issued ASU 2009-13 “Revenue Recognition (Topic
605).” ASU
2009-13 provides accounting and financial reporting disclosure amendments for
multiple-deliverable revenue arrangements. ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is allowed. The
new guidance states that if vendor specific objective evidence or third party
evidence for deliverables in an arrangement cannot be determined, companies will
be required to develop a best estimate of the selling price to separate
deliverables and allocate arrangement consideration using the relative selling
price method. Under the previous guidance, if the fair value of all of the
elements in an arrangement was not determinable, then revenue was deferred until
all of the items were delivered or fair value was determined. The adoption of
ASU 2009-13 is not anticipated to have a material impact on results of
operations, cash flows, or financial position.





In May
2009, FASB issued FASB ASC 855, “Subsequent Events,” formerly
Statement of Financial Accounting Standards No. 165. “Subsequent Events,”which
establishes general standards of accounting for, and disclosure of, events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In particular, FASB ASC 855 sets forth (a) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (b) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements, and (c) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. FASB ASC 855 is effective for interim or annual financial
reporting periods ending after June 15, 2009. The adoption of FASB ASC 855 did
not have a material impact on results of operations, cash flows or financial
position.




In April
2009, FASB issued FASB ASC 825-10-50, “Financial Instruments,
Disclosure,” formerly Staff position 107-1 and Accounting Principles
Board 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” which increases
the frequency of fair value disclosures to a quarterly instead of annual basis.
The guidance within FASB ASC 825-10-50 relates to fair value disclosures for any
financial instruments that are not currently reflected on an entity’s balance
sheet at fair value. FASB ASC 825-10-50 is effective for interim and annual
periods ending after June 15, 2009. The adoption of FASB ASC 825-10-50 did not
have a material impact on results of operations, cash flows or financial
position.




In June
2008, FASB ratified FASB ASC 815-40, “Derivatives and Hedging, Contracts
in Entity’s Own Equity,”formerly the Emerging Issues Task Force’s Issue
No. 07-5,”Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,”
which provides that an entity should use a two step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its
own stock, including evaluating the instrument’s contingent exercise and
settlement





25
 Table of Contents





provisions.
It also clarifies on the impact of foreigncurrency denominated
strike prices and market-based employee stock option valuation instruments on
the evaluation. FASB ASC 815-40 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. See Note 7 for
additional information.




In April
2008, FASB issued FASB ASC 350-30, “Goodwill and Other, General
Intangibles Other than Goodwill,” formerly FASB Staff Position 142-3,
“Determination of the Useful
Life of Intangible Assets” (“FSP”), which amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The intent of FASB ASC
..350-30 is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset under FASB ASC 850, “Business Combinations,”
formerly FASB Statement No. 141 (revised 2007), “Business Combinations,” and
other accounting principles generally accepted in the United States. FASB ASC
350-30 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The
adoption of FASB ASC 350-30 did not have a material impact on results of
operations, cash flows or financial position.




In March
2008, FASB issued FASB ASC 815, Derivatives and Hedging,”
formerly Statement of Financial Accounting Standard No. 161, “Disclosures about Derivatives
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133” (“SFAS 161”). FASB ASC 815 requires enhanced disclosures about a
company’s derivative and hedging activities. FASB ASC 815 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Adoption of FASB ASC 815 did not have a material impact on
results of operations, cash flows or financial position.




In
December 2007, FASB issued FASB ASC 815, “Business Combinations,”
formerly Statement of Financial Accounting Standards No. 141 (revised 2007),
“Business
Combinations,” which replaced SFAS No. 141, “Business Combinations.”FASB
ASC 815 establishes principles and requirements for recognizing and measuring
identifiable assets and goodwill acquired, liabilities assumed, and any
noncontrolling interest in a business combination at their fair value at
acquisition date. FASB ASC 815 alters the treatment of acquisition related
costs, business combinations achieved in stages (referred to as a step
acquisition), the treatment of gains from a bargain purchase, the recognition of
contingencies in business combinations, the treatment of in-process research and
development in a business combination as well as the treatment of recognizable
deferred tax benefits. FASB ASC 815 is effective for business combinations
closed in fiscal years beginning after December 15, 2008. The Company has
evaluated the impact of FASB ASC 815 and has concluded that results of
operations, cash flows or financial position will only be impacted in relation
to future business combination activities, if any.




In
September 2006, FASB issued FASB ASC 820, “Fair Value Measurements and
Disclosures,”formerly Statement of Financial Accounting Standards No.
157, “Fair Value
Measurements,” which defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about fair value
measurements. FASB ASC 820 applies under other accounting pronouncements that
require or permit fair value measurements, FASB having previously concluded in
those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, FASB ASC 820 does not require any new fair value
measurements, however, for some entities; application of FASB ASC 820 will
change current practice.  FASB ASC 820 was effective for financial
statements issued for the first fiscal year beginning after November 15, 2007
and interim periods within those fiscal years.  Adoption of FASB ASC
820 did not have a material impact on results of operations, cash flows or
financial position. In February 2008, FASB issued FASB ASC 820-10, “Fair Value Measures and
Disclosures,” formerly FASB Staff Position No. 157-2 that deferred the
effective date of FASB ASC 820-10 for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis, to fiscal years, and interim
periods within those fiscal years, beginning after November 15, 2008. In
addition, FASB also agreed to exclude from the scope of FASB ASC 820 fair value
measurements made for purposes of applying FASB ASC 840, Leases,” formerly Statement
of Financial Accounting Standards No. 13, “Accounting for Leases” and
related interpretive accounting pronouncements. The adoption of FASB ASC 820 did
not have a material impact on results of operations, cash flows or financial
position.


26
 Table of Contents




ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk




Not
applicable




ITEM 4T. Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of September 30, 2009.




There has
not been any change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30,
2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.




27
 Table of Contents


PART
II. OTHER INFORMATION




ITEM 1. Legal Proceedings




On April
24, April 28, May 26, and September 21, 2009, we entered into settlement and
licensing agreements with CareerBuilder, LLC, Classified Ventures, LLC, Google,
Inc., and Yahoo! Inc., respectively, which ended all legal disputes between us
and these entities, and granted to each of these entities irrevocable,
perpetual, world-wide, non-exclusive licenses to all of our patents and patent
applications.




The
paragraphs that follow summarize the status of all of our currently active legal
proceedings. In all such proceedings, we have retained the services of various
outside counsels. All such counsels have been retained under contingency fee
arrangements that require us to only pay for certain non-contingent fees, such
as services for expert consultants, and travel, prior to a verdict or settlement
of the respective underlying proceeding.




GraphOn
Corporation v. Juniper Networks, Inc.




On August
28, 2007, we filed a proceeding against Juniper Networks, Inc. (“Juniper”) in
the United States District Court in the Eastern District of Texas (the “court”)
alleging that certain of Juniper’s products infringe three of our patents,
namely; U.S. Patent Nos. 5,826,014, 6,061,798 and 7,028,336, (the “’014,” “’798”
and “’336” patents, respectively) which protect our fundamental network security
and firewall technologies. We seek preliminary and permanent injunctive relief
along with unspecified damages and fees.  Juniper filed its Answer and
Counterclaims on October 26, 2007 seeking a declaratory judgment that it does
not infringe any of these patents, and that all of these patents are invalid and
unenforceable. On September 29, 2009, the court issued a series of orders that:
(i) denied Juniper’s motions to transfer the case to the Northern District of
California: (ii) denied Juniper’s request to stay the case pending the
reexamination proceedings in the PTO: (iii) granted our request to remove the
‘336 patent from the case: and (iv) denied our motion to consolidate this case
with the case discussed below under Juniper Networks, Inc. v. GraphOn
Corporation et al. As a result, the case filed on August 28, 2007 will
proceed in the Eastern District Court of Texas with jury selection set for July
6, 2010.




Separately,
Juniper has petitioned the United States Patent and Trademark Office (the “PTO”)
to reexamine two of our patents (the ’014 and ’798 patents). On April 6, 2008,
the PTO ordered the reexamination of the ‘798 patent, and on July 25, 2008, the
PTO ordered the reexamination of the ‘014 patent.




On
January 26, 2009, the PTO issued a non-final rejection of the single claim of
the ‘798 patent. On March 26, 2009, we responded with a detailed disagreement
with the PTO’s non-final rejection and added 30 new claims to the ‘798 patent.
On September 24, 2009, the PTO issued a final rejection. We are currently
preparing a response.




On May
26, 2009, the PTO issued a non-final rejection of the ‘014 patent. On July 27,
2009, we responded with a detailed disagreement with the PTO’s non-final
rejection and added 15 new claims to the ‘014 patent. On August 14, 2009, the
PTO issued a final rejection. On October 14, 1009, we responded with proposed
amendments. The PTO has not yet responded to our response.




We
believe that the patentability of each of these patents will ultimately be
confirmed by the PTO, and we are committed to pursuing the confirmation of these
patents through all channels of appeal, if necessary.




Juniper
Networks, Inc.  v. GraphOn Corporation et al




On March
16, 2009, Juniper Networks, Inc. initiated a proceeding against us and one of
our resellers in the United States District Court in the Eastern District of
Virginia alleging infringement of one of their patents, namely; U.S. Patent No.
6,243,752 (the “’752 Patent”), which protects Juniper’s unique method of
transmitting data between a host computer and a terminal computer. On May 1,
2009, we filed an answer in which we asked the court to declare that the ‘752
Patent is not infringed and/or is invalid under the patent laws. We also
asserted a counterclaim against Juniper, alleging infringement of four of our
patents, namely; U.S. Patent Nos. 7,249,378, 7,269,847, 7,383,573, and
7,424,737. On June 18, 2009, the United States District Court in the Eastern
District of Virginia granted a motion filed by Juniper to transfer our
counterclaim of patent infringement to the United States District Court in the
Eastern District of Texas. No trial date has been set by the court
yet.  On August 12, 2009 we filed a motion to consolidate the patents
transferred from the Virginia case into the pending case in the Eastern District
of Texas. The motion to consolidate was denied on September 29,
2009.




On
October 9, 2009, we filed a motion for summary judgment asking the court to find
that we do not infringe the ‘752 patent, and that the ‘752 patent is invalid. A
hearing for this motion is set for November 20, 2009.




28
 Table of Contents


GraphOn
Corporation v. Classified Ventures, LLC et al




On March
10, 2008, we initiated a proceeding against Classified Ventures, LLC;
IAC/InterActiveCorp; Match.com (an operating business of IAC/InterActiveCorp);
Yahoo! Inc.; eHarmony.com; and CareerBuilder, LLC in the United States District
Court in the Eastern District of Texas alleging infringement of four of our
patents, namely; U.S. Patent Nos. 6,324,538, 6,850,940, 7,028,034 and 7,269,591,
which protect our unique method of maintaining an automated and
network-accessible database. The suit alleges that the named companies infringe
our patents on each of their Web sites. The suit seeks permanent injunctive
relief along with unspecified damages. During late April and early May 2008, the
opposing parties in the proceeding filed their Answers and Counterclaims seeking
a declaratory judgment that they do not infringe the patents in the suit and
that each of the patents in the suit are invalid and unenforceable. On June 5,
2008, we filed our answers to each of the opposing parties’ counterclaims. On
August 21, 2008, IAC/interactive Corp. was dismissed from the lawsuit without
prejudice. On December 2, 2008 the court issued a Docket Control Order setting
the dates of April 27, 2011 for the Markman Hearing, in which the court defines
any disputed claim terms, and November 7, 2011 for jury selection. On May 11,
2009, in conjunction with settlements reached with us, the court granted a joint
motion to dismiss Classified Ventures, LLC and CareerBuilder, LLC from the case.
On September 30, 2009, the court granted a joint motion to dismiss Yahoo! Inc.
from the case, as a result of a settlement with us, thus leaving eHarmony and
Match.com as the only remaining defendants to this proceeding.




ITEM 1A. Risk Factors




There
have been no material changes in our risk factors from those set forth under
Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2008, which was filed with the Securities and Exchange Commission
on March 31, 2009.




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




During
the three-month period ended September 30, 2009, stock options to purchase
20,000 shares of common stock, at an exercise price of $0.09, were granted to a
non-executive employee.




The grant
of such stock option to the above-listed person was not registered under the
Securities Act of 1933, because the stock options were offered and sold in a
transaction not involving a public offering, exempt from registration under the
Securities Act pursuant to Section 4(2).




On
January 8, 2008, our Board of Directors authorized a stock buy back program to
repurchase up to $1,000,000 of our outstanding common stock. Under terms of the
program, we are not obligated to repurchase any specific number of shares and
the program may be suspended or terminated at management’s
discretion.




The
following is a summary of our share repurchases of our common stock during the
three-month period ended September 30, 2009 under the buy back
program:




Period
            
            Total
      Number of Shares Purchased
            
            
            Average
      Price Per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced
      Program
            
            
            Total
      Dollars Purchased Under the Program
            
            
            Approximate
      Dollar Value of Shares That May Yet Be Purchased Under the
      ProgramJuly
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            912,300August
            
            
            580,000
            
            
            $
            0.14
            
            
            
            580,000
            
            
            $
            81,500
            
            
            $
            830,800September
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            830,800Total
            
            
            580,000
            
            
            $
            0.14
            
            
            
            580,000
            
            
            $
            81,500






29
 Table of Contents


ITEM 3. Defaults Upon Senior Securities




Not
Applicable




ITEM 4. Submission of Matters to a Vote of Security
Holders




Not
Applicable




ITEM 5. Other Information




Not
Applicable




ITEM 6. Exhibits




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




Exhibit
32 – Section 1350 Certifications




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:   November
      16, 2009
            Date:   November
      16, 2009By:     /s/ Robert Dilworth
            By:     /s/ William SwainRobert
      Dilworth
            William
      SwainChief
      Executive Officer and
            Chief
      Financial OfficerChairman
      of the Board
            (Principal
      Financial Officer and(Principal
      Executive Officer)
            (Principal
      Accounting Officer)