UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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xQUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

|o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
      EXCHANGE ACT For the transition period from | to
|------------------------------------------------------------------------------------------------------ | --

Commission File Number: 0-21683



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GraphOn Corporation

(Exact name of small business issuer as specified in its
charter)



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

5400 Soquel Avenue, Suite A2

Santa Cruz, California 95062

(Address of principal executive offices)

Issuer's telephone number: (800) 472-7466

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

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

As of May 2, 2006, there were issued and outstanding 46,192,250 shares of
the issuer's Common Stock, par value $0.0001.

Transitional Small Business Disclosure Format (Check one):

Yes o Nox



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GRAPHON CORPORATION

FORM 10-QSB

Table of Contents

|PART I.  |  | FINANCIAL INFORMATION                                                                                                                           | Page
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- | ----
|         |  |                                                                                                                                                 |     
|Item 1.  |  | Financial Statements                                                                                                                            |     
|         |  |                                                                                                                                                 |     
|         |  | Unaudited Condensed Consolidated Balance Sheet as of March 31,
      2006                                                                       | 2   
|         |  |                                                                                                                                                 |     
|         |  | Unaudited Condensed Consolidated Statements of Operations and
      Comprehensive Loss for the Three Months Ended March 31, 2006 and
      2005 | 3   
|         |  |                                                                                                                                                 |     
|         |  | Unaudited Condensed Consolidated Statements of Cash Flows for the
      Three Months Ended March 31, 2006 and 2005                              | 4   
|         |  |                                                                                                                                                 |     
|         |  | Notes to Unaudited Condensed Consolidated Financial
      Statements                                                                            | 5   
|         |  |                                                                                                                                                 |     
|Item 2.  |  | Management's Discussion and Analysis or Plan of
    Operation                                                                                   | 9   
|         |  |                                                                                                                                                 |     
|Item 3.  |  | Controls and Procedures                                                                                                                         | 17  
|         |  |                                                                                                                                                 |     
|PART II. |  | OTHER INFORMATION                                                                                                                               |     
|         |  |                                                                                                                                                 |     
|Item 1.  |  | Legal Proceedings                                                                                                                               | 18  
|         |  |                                                                                                                                                 |     
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of
      Proceeds                                                                               | 18  
|Item 6.  |  | Exhibits                                                                                                                                        | 18  
|         |  | Signatures                                                                                                                                      |     
|         |  |                                                                                                                                                 |     





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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements



|GraphOn Corporation                                                                                                                              
|-------------------------------------------------------------------------------------------------------------------------------------------------
|Condensed Consolidated Balance
Sheet                                                                                                             
|                                                                                                                                                 
|                                                                                                                                                 
|Assets                                                                                                                                           
|Current Assets                                                                                                                                   
|                                                                                                                                                 
|Cash and cash equivalents                                                                                                                        
|Other current assets                                                                                                                             
|                                                                                                                                                 
|Total Current Assets                                                                                                                             
|                                                                                                                                                 
|                                                                                                                                                 
|Patents, net                                                                                                                                     
|Other assets                                                                                                                                     
|                                                                                                                                                 
|Total Assets                                                                                                                                     
|                                                                                                                                                 
|                                                                                                                                                 
|Liabilities and Shareholders' Equity                                                                                                             
|Current Liabilities                                                                                                                              
|Accounts payable and accrued expenses                                                                                                            
|Deferred revenue                                                                                                                                 
|                                                                                                                                                 
|Total Current Liabilities                                                                                                                        
|                                                                                                                                                 
|                                                                                                                                                 
|Deferred revenue                                                                                                                                 
|                                                                                                                                                 
|Total Liabilities                                                                                                                                
|                                                                                                                                                 
|                                                                                                                                                 
|Commitments and contingencies                                                                                                                    
|                                                                                                                                                 
|Shareholders' Equity                                                                                                                             
|Common stock, $0.0001 par value, 195,000,000 shares authorized,
      46,192,250 and 46,167,047 shares issued and outstanding,
      respectively
|Additional paid-in capital                                                                                                                       
|Deferred compensation                                                                                                                            
|Note receivable - shareholder                                                                                                                    
|Accumulated deficit                                                                                                                              
|                                                                                                                                                 
|Total Shareholders' Equity                                                                                                                       
|                                                                                                                                                 
|Total Liabilities and Shareholders' Equity                                                                                                       
|                                                                                                                                                 
|                                                                                                                                                 
|See accompanying notes to condensed consolidated financial
      statements                                                                      





2



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|GraphOn Corporation                                                         
|----------------------------------------------------------------------------
|Condensed Consolidated Statements of Operations and Comprehensive
      Loss
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Revenue                                                                     
|Cost of Revenue                                                             
|                                                                            
|Gross Profit                                                                
|                                                                            
|                                                                            
|Operating Expense                                                           
|Selling and marketing                                                       
|General and administrative                                                  
|Research and development                                                    
|                                                                            
|Total Operating Expense                                                     
|                                                                            
|                                                                            
|Loss From Operations                                                        
|                                                                            
|                                                                            
|Other Income                                                                
|                                                                            
|Loss Before Provision for Income Tax                                        
|Provision for income tax                                                    
|                                                                            
|Net Loss                                                                    
|Other comprehensive loss                                                    
|                                                                            
|Comprehensive Loss                                                          
|Deemed dividend on preferred stock                                          
|                                                                            
|Loss Attributable to Common Shareholders                                    
|                                                                            
|                                                                            
|Basic and Diluted Loss per Common Share                                     
|                                                                            
|                                                                            
|Weighted Average Common Shares Outstanding                                  
|                                                                            
|                                                                            
|See accompanying notes to condensed consolidated financial
      statements 





3



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|GraphOn Corporation                                                                            
|-----------------------------------------------------------------------------------------------
|Condensed Consolidated Statement of Cash
      Flows                                           
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Cash Flows From Operating Activities                                                           
|                                                                                               
|Net loss                                                                                       
|Adjustments to reconcile net loss to net cash provided by (used in)
      operating activities:
|Depreciation and amortization                                                                  
|Amortization of deferred compensation                                                          
|Stock-based compensation expense                                                               
|Proceeds from directors' notes receivable                                                      
|Interest accrued on directors' notes receivable                                                
|Proceeds from accrued interest on directors' notes
      receivable                            
|Proceeds from note receivable - shareholder                                                    
|Interest accrued on note receivable - shareholder                                              
|Changes in operating assets and liabilities:                                                   
|Accounts receivable                                                                            
|Prepaid expenses and other assets                                                              
|Accounts payable                                                                               
|Accrued expenses                                                                               
|Accrued wages                                                                                  
|Deferred revenue                                                                               
|                                                                                               
|Net Cash Provided By (Used In) Operating Activities                                            
|                                                                                               
|                                                                                               
|Cash Flows Used In Investing
Activities                                                        
|Acquisition costs                                                                              
|Capital expenditures                                                                           
|                                                                                               
|Net Cash Used In Investing Activities                                                          
|                                                                                               
|                                                                                               
|Cash Flows Provided By (Used In) Financing
      Activities                                    
|Employee stock purchases                                                                       
|Proceeds from private placement of preferred stock and
      warrants                          
|Costs of private placement of preferred stock and
      warrants                               
|                                                                                               
|Net Cash Provided By (Used In) Financing Activities                                            
|                                                                                               
|                                                                                               
|Effect of exchange rate fluctuations on cash and dash
      equivalents                        
|Net Increase (Decrease) in Cash and Cash Equivalents                                           
|                                                                                               
|Cash and Cash Equivalents, beginning of period                                                 
|                                                                                               
|Cash and Cash Equivalents, end of period                                                       
|                                                                                               
|                                                                                               
|See accompanying notes to condensed consolidated financial
      statements                    





4



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GRAPHON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

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

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

Significant intercompany accounts and transactions are eliminated upon
consolidation.

2. Stock-Based Compensation

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

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

Results for prior periods have not been restated.

As
a result of adopting FAS123R on January 1, 2006, the Company's loss from
operations, loss before provision for income taxes and net loss for the
three-months ended March 31, 2006 are each $110 thousand higher than if the
Company had continued to account for stock-based compensation under APB No.
25.

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

The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of FAS No. 123
to stock-based awards in the first quarter of 2005 ($000s, except per share
data):



|                       | Three Months Ended
      March 31, 2005
|---------------------- | ---------------------------------------
|                       |                                        
|Net loss, as reported: | $ (318)                                





5



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|                                                                                                                                       |          
|-------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Less: deemed preferred dividends                                                                                                       | (4,000)  
|                                                                                                                                       |          
|Deduct: total stock-based compensation expense determined under the
      fair-value method for all awards, net of related tax effects | (84)     
|                                                                                                                                       |          
|                                                                                                                                       |          
|Pro forma net loss                                                                                                                     | $ (4,402)
|                                                                                                                                       |          
|                                                                                                                                       |          
|Basic and diluted loss per share                                                                                                       |          
|As reported                                                                                                                            | $ (0.15) 
|Pro forma                                                                                                                              | $ (0.15) 
|                                                                                                                                       |          

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

Valuation and Expense Information Under FAS123R

The Company recorded stock-based compensation expense of $110 thousand in
the first quarter of 2006. As required by FAS123R, the Company estimates
forfeitures of employee stock-based awards and recognizes compensation cost only
for those awards expected to vest. Forfeiture rates are estimated based on an
analysis of historical experience and are adjusted to actual forfeiture
experience as needed.

The following table illustrates the stock-based compensation expense
recorded during the first quarter of 2006 by income statement classification
($000s):



|Income statement classification    |      
|---------------------------------- | -----
|Cost of revenue                    | $ 4  
|Selling and marketing expense      | 13   
|General and administrative expense | 85   
|Research and development expense   | 8    
|                                   |      
|                                   | $ 110
|                                   |      



In
connection with the adoption of FAS123R, the Company estimated the fair value of
each stock option grant on the date of grant using a binomial model, with the
following assumptions: no dividends, an approximate risk free interest rate of
4.46%, estimated forfeiture rate of 10% and an estimated exercise factor of 10%.
For stock option grants, the following additional assumptions were also used:
expected volatility of 159% and an expected term of 7.5 years. For employee
stock purchase plan ("ESPP") grants, the assumptions listed in the preceeding
sentence were also used, except as follows: expected volatility of 147%, risk
free interest rate of 3.73% and an expected term of 0.5 years.

The Company does not anticipate paying dividends on its common stock for
the foreseeable future. The Company used the historical volatility of its daily
closing price since it went public (July 13, 1999) through March 31, 2006 as the
basis of its calculation for stock option grants. The volatility calculation for
ESPP grants was based on the historical volatility of the Company's daily
closing price from August 1, 2005 to January 31, 2006 as these were the two
dates used in determining the purchase price of the shares sold under the
ESPP.

The approximate risk free interest rate was based on the implied yield
available on U.S. Treasury issues with remaining terms equivalent to the
Company's expected term on its options. The expected term of the Company's stock
options was based on the historical option holder exercise patterns and
considered the market performance of the Company's common stock and other items.
The expected term of the ESPP shares was six months, which was the length of
time between the ESPP grant date (August 1, 2005) and the purchase date (January
31, 2006).



6



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

The weighted average fair value of stock options granted and ESPP shares
purchased during the first quarter of 2006 was $0.21 and $0.1785,
respectively.

The following table presents a summary of the status and activity of the
Company's stock option awards.



|                                                 | Shares    | Weighted Average Exercise
      Price | Weighted Average Remaining Contractual Term | ($000s)
      Aggregate Intrinsic Value as of
      March 31, 2006
|------------------------------------------------ | --------- | ------------------------------------- | ------------------------------------------- | ------------------------------------------------------------------
|                                                 |           |                                       |                                             |                                                                   
|Outstanding at December 31, 2005                 | 5,716,272 | $ 0.53                                | 7.90                                        |                                                                   
|Granted                                          | 985,000   | 0.21                                  |                                             |                                                                   
|Exercised                                        | -         | -                                     |                                             |                                                                   
|Forfeited or expired                             | -         | -                                     |                                             |                                                                   
|                                                 |           |                                       |                                             |                                                                   
|Outstanding at March 31, 2006                    | 6,701,272 | $ 0.48                                | 7.98                                        | $ 74                                                              
|                                                 |           |                                       |                                             |                                                                   
|                                                 |           |                                       |                                             |                                                                   
|Vested or expected to vest at March 31, 2006 (1) | 6,376,784 | $ 0.49                                | 7.91                                        | $ 74                                                              
|                                                 |           |                                       |                                             |                                                                   
|                                                 |           |                                       |                                             |                                                                   
|Exercisable at
      March 31, 2006 (2)          | 6,701,272 | $ 0.48                                | 7.98                                        | $ 74                                                              
|                                                 |           |                                       |                                             |                                                                   



(1) Of the options outstanding as of March 31, 2006, 3,670,152 were
vested and 2,706,632 were estimated to vest in future periods, prior to their
estimated forfeiture.

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

No
stock-based compensation awards were exercised during the first quarter of 2006.
As of March 31, 2006, there was $808 thousand of total unrecognized compensation
cost related to stock-based compensation. That cost is expected to be recognized
over a weighted-average period of 1.11 years.

3. Revenue

Revenue for the three-month periods ended March 31, 2006 and 2005 was
comprised as follows:



|Revenue($000s)   |         | Change in
|---------------- | ------- | ---------
|                 |         |          
|Product licenses | 2006    | 2005     
|                 |         |          
|Windows          | $ 627   | $ 621    
|Unix             | 258     | 267      
|                 |         |          
|                 | 885     | 888      
|                 |         |          
|Service fees     |         |          
|Windows          | 213     | 143      
|Unix             | 183     | 144      
|                 |         |          
|                 | 396     | 287      
|                 |         |          
|Other            | 25      | 6        
|                 |         |          
|Total Revenue    | $ 1,306 | $ 1,181  
|                 |         |          

4. Patents

As
of March 31, 2006, patents consisted of the following:

|        | (000s) 
|------- | -------
|        |        
|Patents | $ 5,340





7



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|Accumulated amortization | (1,043)
|------------------------ | -------
|                         |        
|                         | $ 4,297
|                         |        

Patent amortization, which aggregated $222 thousand during the
three-month period ended March 31, 2006, is a component of general and
administrative expenses.

5. Supplemental Disclosure of Cash Flow Information

The Company disbursed no cash for the payment of income taxes or interest during
either of the three-month periods ended March 31, 2006 or 2005.

As
of March 31, 2006, the Company had included approximately $5 thousand of costs
in accrued expenses related to a private placement it completed during the first
quarter of 2005.

6. Loss Per Share

Potentially
dilutive securities have been excluded from the computation of diluted loss per common share,
as their effect is antidilutive.  For the three-month periods ended March 31, 2006 and 2005,
19,550,468 and 19,217,157 shares, respectively, of common stock equivalents were excluded from the
computation of diluted loss per share since their effect would be antidilutive.



8



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

Forward-Looking Statements

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

| |  | our history of operating losses, and expectation that those losses
      will continue;               | 
| | - | ----------------------------------------------------------------------------------------------------- | 
| |  | the uncertainty as to whether or not we will realize the
      anticipated benefits of acquiring NES;

| |  | that a significant portion of our revenue has been and continues to
      be earned from a very limited number of significant
    customers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | that our stock price has been volatile and you could lose your
      investment; and
| | - | ------------------------------------------------------------------------------------

| |  | other factors, including those set forth under Item 6.
      "Management's Discussion and Analysis or Plan of Operation - Risk Factors"
      in our Annual Report on Form 10-KSB for the year ended December 31, 2005
      and in other documents we filed with the Securities and Exchange
      Commission, could have a material adverse effect upon our business,
      results of operations and financial
condition.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Overview

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

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

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

Critical Accounting Policies

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

The critical accounting policies we identified in our most recent Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2005 related to
revenue recognition, the allowance for doubtful accounts, patents, capitalized
software development costs, impairment of intangible assets, loss contingencies
and stock compensation. With the adoption of FAS123R, on January 1, 2006, we
have identified the estimates and assumptions that accompany the fair value
determination of our stock-based compensation awards as critical, as discussed
below. It is important that the



9



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discussion of our operating results that follows be read in conjunction
with the critical accounting policy discussed below as well as those disclosed
in our Annual Report on Form 10-KSB, as filed with the SEC on April 17,
2006.

Stock-Based Compensation

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

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

Results for prior periods have not been restated.

As
a result of adopting FAS123R on January 1, 2006, our loss from operations, loss
before provision for income taxes and net loss for the three-months ended March
31, 2006 are each $110 thousand higher than if we had continued to account for
stock-based compensation under APB No. 25.

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



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



Of
the variables above, the selection of an expected term, an annualized forfeiture
rate and expected stock price volatility are the most subjective. Our estimate
of the expected option term was 7.5 years and was derived based on our analysis
of historical data and future projections. We derived an annualized forfeiture
rate of 10% by analyzing our historical forfeiture data, including consideration
of the impact of certain non-recurring events, such as reductions in work force.
In estimating our stock price volatility, we analyzed our historic volatility
since we became a public entity (July 13, 1999) through March 31, 2006, by
reference to actual stock prices during this period and calculated an estimated
volatility of approximately 159%. We believe that each of these estimates is
reasonable in light of the data we analyzed. However, as with any estimate, the
ultimate accuracy of these estimates is only verifiable over time.

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



10



---



The specific valuation assumptions noted above were applied to stock
options that we granted and ESPP shares that were purchased, respectively,
subsequent to our adoption of SFAS 123(R). The majority of the stock-based
compensation expense recorded in the quarter ended March 31, 2006 related to
options granted in the quarter ended March 31, 2006. We expect that stock-based
compensation expense will continue to have a material impact on our financial
results for the remainder of the fiscal year. For the remainder of fiscal 2006
we expect to incur stock-based compensation expense of approximately $100
thousand per quarter.

Results of Operations for the Three-Month Periods Ended March 31, 2006
and 2005.

Revenue

Product line revenue for the three-month periods ended March 31, 2006 and
2005 was as follows:



|Revenue ($000s)  |         | Change in
|---------------- | ------- | ---------
|                 |         |          
|Product licenses | 2006    | 2005     
|                 |         |          
|Windows          | $ 627   | $ 621    
|Unix             | 258     | 267      
|                 |         |          
|                 | 885     | 888      
|                 |         |          
|Service fees     |         |          
|Windows          | 213     | 143      
|Unix             | 183     | 144      
|                 |         |          
|                 | 396     | 287      
|                 |         |          
|Other (1)        | 25      | 6        
|                 |         |          
|Total Revenue    | $ 1,306 | $ 1,181  
|                 |         |          



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

The changes in both Windows and Unix-based product licenses revenue for
the three-month periods ended March 31, 2006 and 2005 were reflective of how
such revenue varies because a significant portion of this revenue has been, and
continues to be earned from a limited number of significant customers, most of
whom are VARs. Consequently, if any of these significant customers change their
order level or fail to order during the reporting period, our revenue could be
materially impacted. We expect this situation to continue throughout
2006.

During the three-month period ended March 31, 2006, nine Windows
customers, including our two most significant Windows customers (KitASP and
FrontRange) purchased an aggregate $425 thousand of Windows product, which
accounted for 67.8% of Windows product license revenue for the period. These
nine customers' purchases were $83 thousand lower than their purchases during
the same period of 2005, which aggregated $508 thousand, or 81.8% of Windows
product license revenue. Offsetting this decrease was an $89 thousand aggregate
net increase in Windows product licenses revenue from our numerous smaller
Windows customers.

Three Unix product customers, including our most significant Unix
customer (Alcatel - all worldwide locations) purchased an aggregate of $173
thousand of Unix products, which accounted for 67.1% of Unix product license
revenue for the three-month period ended March 31, 2006. These three customers'
purchases were an aggregate $25 thousand higher than their purchases during the
same period of 2005, which aggregated $148 thousand, or 55.4% of Unix product



11



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license revenue for the prior period. Offsetting this increase was a $34
thousand aggregate net decrease in Unix product licenses revenue from our
numerous smaller Unix customers.

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

The increase in both Windows and Unix-based service fees for the
three-month period ended March 31, 2006, as compared with the same period of the
prior year was primarily due to higher levels of maintenance contract purchases
that occurred during 2005 and has continued through the first three months of
2006. We expect this trend to continue throughout 2006.

The increase in other revenue for the three-month period ended March 31,
2006, as compared with the same period in 2005 was primarily due to the
recognition of private labeling fees revenue. Private labeling fees are
recognized as revenue over the underlying contract period, which is typically
three years. During 2005, however, we entered into three private labeling
agreements, aggregating $30 thousand, wherein the underlying contract period for
each agreement was only one year. During the three-month period ended March 31,
2006, we recognized $12 thousand more in revenue from these three contracts than
we did during the same period in 2005.

During the three-month period ended March 31, 2006 we recognized $5
thousand of private labeling fees revenue from contracts entered into after the
end of the same period of the prior year.

Cost of Revenue

Cost of revenue for the three-month periods ended March 31, 2006 and 2005
was as follows:



|($000s)       |       |       | Change in
|------------- | ----- | ----- | ---------
|              |       |       |          
|              | 2006  | 2005  | Dollars  
|              |       |       |          
|Product costs | $ 35  | $ 50  | $ (15)   
|Service costs | 76    | 71    | 5        
|              |       |       |          
|              | $ 111 | $ 121 | $ (10)   
|              |       |       |          



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

Cost of revenue decreased by $10 thousand, or 8.3%, to $111 thousand for
the three months ended March 31, 2006, from $121 thousand for the comparable
period of 2005. Product costs decreased by $15 thousand, or 30.0%, from $50
thousand to $35 thousand. This decrease was partially offset by an increase in
service costs, which increased by $5 thousand, or 7.0%, to $76 thousand, from
$71 thousand.

The decrease in product costs for the three-month period ended March 31,
2006, as compared with the same period in 2005 was primarily due to a decrease
in the amortization of capitalized software development costs. We expect product
costs to remain lower throughout 2006, as compared with 2005, as certain
elements of our capitalized software development costs became fully amortized
during 2005 and others will become fully amortized during 2006.

The increase in service costs for the three-month period ended March 31,
2006, as compared with the same period in 2005, resulted primarily from our
adoption of FAS123R, as explained more fully elsewhere in this Form 10-QSB, as
of January 1, 2006. In accordance with FAS123R, we expensed $4 thousand of
stock-based compensation expense related to our customer service engineers
either on or before March 31, 2006 during the three-month period ended March 31,
2006. No such expense was recorded during the three-month period ended March 31,
2005. We expect service costs to remain higher throughout 2006, as compared with
2005, as we continue to comply with FAS123R.



12



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Selling and Marketing Expenses

Selling and marketing expenses were 31.7% and 28.4% of revenue for the
three-months ended March 31, 2006 and 2005, respectively. Selling and marketing
expenses for the three months ended March 31, 2006 increased by $79 thousand, or
23.6%, to $414 thousand from $335 thousand for the same period of
2005.

Selling and marketing expenses primarily consist of employee costs,
outside services, travel and entertainment, stock-based compensation expense and
tradeshow expense. Expense categories that were primary contributors to the net
increase in the first quarter of 2006 as compared with the same period of 2005
are summarized as follows:



|($000s)                          | Increase
      From 2005
|-------------------------------- | ------------------------
|                                 |                         
|Employee costs                   | $ 21                    
|Travel & entertainment           | 20                      
|Stock-based compensation expense | 13                      
|Tradeshow expense                | 10                      
|Outside services                 | 9                       
|Other                            | 6                       
|                                 |                         
|Total                            | $ 79                    
|                                 |                         



The increase in employee costs for the three-month period ended March 31,
2006, as compared with the same period in 2005, resulted primarily from
increased employee benefits, principally health insurance, which were partially
offset by lower commissions. We expect 2006 employee costs to exceed those of
2005 as we anticipate increasing our sales force in addition to absorbing higher
health insurance costs.

The increase in travel & entertainment for the three-month period
ended March 31, 2006, as compared with the same period in 2005, resulted from
increased tradeshow participation as well as an increase in visiting customers
and prospects. We expect these trends to continue; consequently, we expect 2006
travel and entertainment levels to exceed 2005 levels.

We
adopted FAS123R as of January 1, 2006, as explained more fully elsewhere in this
Form 10-QSB, and as a result began recording stock-based compensation expense.
For the three-month period ended March 31, 2006, such selling and marketing
stock-based compensation expense amounted to $13 thousand. No such stock-based
compensation expense was recorded during 2005. We anticipate 2006 stock-based
compensation expense to exceed 2005 levels as we continue to comply with
FAS123R.

Tradeshow expense for the three months ended March 31, 2006 was $10
thousand higher than those for the same period in 2005 primarily as a result of
our participation in CeBIT in Hanover, Germany during March 2006. This is one
of, if not the largest technology tradeshow in Europe annually. Although we
attended CeBIT during 2005, we did not set up a display; consequently, our 2006
CeBIT participation costs were greater than those in 2005. We expect this trend
to continue as we anticipate setting up our display at other tradeshows during
2006.

Outside services increased during the three-month period ended March 31,
2006, as compared with the same period in 2005, due to increased activity of our
outside Asian sales representative. We expect this trend to continue as we
anticipate increasing our outside Asian sales representative's activities in
2006 over 2005 levels.

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

General and Administrative Expenses

General and administrative expenses were approximately 75.8% and 61.6% of
revenues for the first quarter of 2006 and 2005, respectively. General and
administrative expenses for the first quarter of 2006 increased by $263
thousand, or 36.2%, to $990 thousand from $727 thousand for the first quarter of
2005.

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



13



---

bad debts expense. Expense categories that were primary contributors to
the net increase in general and administrative expense for the first quarter
2006 as compared with 2005 are summarized as follows:



|($000s)                          | Increase
      (Decrease)
      From 2005
|-------------------------------- | -----------------------------------------
|                                 |                                          
|Employee costs                   | $ 95                                     
|Stock-based compensation expense | 85                                       
|Amortization expense             | 76                                       
|Legal                            | (107)                                    
|Outside services                 | 29                                       
|Travel and entertainment         | 24                                       
|Insurance                        | 23                                       
|Other                            | 38                                       
|                                 |                                          
|Total                            | $ 263                                    
|                                 |                                          

The increase in employee costs in the first quarter of 2006, as compared
with the first quarter of 2005, was primarily due to the having four more
employees. One of these employees has been tasked with the administrative
management of our patents. Two employees were hired into the accounting
department during 2005, one of whom replaced an outside consultant. One
managerial employee was hired to oversee the general development of business
opportunities. We expect 2006 employee costs to exceed 2005 levels.

We
adopted FAS123R as of January 1, 2006, as more fully explained elsewhere in this
Form 10-QSB, and as a result, began recording stock-based compensation expense.
For the three-month period ended March 31, 2006 such general and administrative
stock-based compensation expense amounted to $85 thousand. No such stock-based
compensation expense was recorded during 2005. We anticipate 2006 stock-based
compensation expense to exceed 2005 levels as we continue to comply with
FAS123R.

Amortization expense increased during the three-month period ended March
31, 2006, as compared with the same period in 2005, primarily because we
amortized the patents we acquired on February 1, 2005 for only two months during
the first quarter of 2005 whereas we amortized them for three months during the
first quarter of 2006. We expect aggregate amortization to be higher in 2006, as
compared with 2005.

Legal expense decreased by $107 thousand during the first quarter of
2006, as compared with the first quarter of 2005, primarily due to a reduction
in legal fees related to patent administration. During 2005 we hired an attorney
to manage this process in-house.

Outside services increased by $29 thousand during the three-months ended
March 31, 2006, as compared with the same period of 2005 primarily as a result
of increased activity by our Interim Chief Executive Officer in our general
business affairs. Partially offsetting this increase was a decrease in
consulting fees from an administrative consultant whose contract was terminated
during the second quarter of 2005. We subsequently replaced this consultant with
a full time employee during 2005.

The $24 thousand increase in travel and entertainment during the first
quarter of 2006, as compared with the first quarter of 2005, was primarily a
result of an increase in travel by our Interim Chief Executive Officer as he
increased his activities in our general business affairs and by our Vice
President of Business Development as he reviewed various business opportunities
that had presented themselves to us.

Insurance increased by $23 thousand in the three months ended March 31,
2006, as compared with the same period of the prior year, primarily as a result
of initiating Director's and Officer's insurance coverage. We had no such
insurance coverage during 2005; consequently, we expect insurance expense to be
higher during 2006 than it was during 2005.

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



14



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Research and Development Expenses

Research and development expenses were approximately 30.2% and 27.4% of
revenues for the first quarter of 2006 and 2005, respectively. Research and
development expenses for the first quarter of 2006 increased by $70 thousand, or
21.6%, to $394 thousand from $324 thousand for the first quarter of
2005.

Under accounting principles generally accepted in the United States, all
costs of product development incurred once technological feasibility has been
established, but prior to general release of the product, are typically
capitalized and amortized to expense over the estimated life of the underlying
product, rather than being charged to expense in the period incurred. No product
development costs were capitalized during the three-month periods ended March
31, 2006 or 2005.

Research and development expenses consist primarily of employee costs,
payments to contract programmers, rent, stock-based compensation expense,
depreciation and computer related supplies. Expense categories that were primary
contributors to the net increase in the first quarter 2006 as compared with the
first quarter of 2005 are summarized as follows:



|($000s)                          | Increase
      From 2005
|-------------------------------- | ------------------------
|                                 |                         
|Employee costs                   | $ 40                    
|Consulting services              | 21                      
|Stock-based compensation expense | 8                       
|Other                            | 1                       
|                                 |                         
|Total                            | $ 70                    
|                                 |                         



The increase in employee costs for the three-month period ended March 31,
2006, as compared with the same period of 2005, was primarily due to salary
adjustments enacted after March 31, 2005, the hiring of an additional engineer
during 2006 and increased benefits, principally health insurance. We expect 2006
employee costs to exceed 2005 levels.

The increase in consulting services for the first quarter of 2006, as
compared with the first quarter of 2005, was due to the timing and volume of
work we contracted the consultants to perform. We anticipate 2006 consulting
services levels to exceed those of 2005 as we strive to make our products more
competitive in the market place.

We
adopted FAS123R as of January 1, 2006, as more fully explained elsewhere in this
Form 10-QSB, and as a result began recording stock-based compensation expense.
For the three-month period ended March 31, 2006 such research and development
stock-based compensation expense amounted to $8 thousand. No such stock-based
compensation expense was recorded during 2005. We anticipate 2006 stock-based
compensation expense to exceed 2005 levels as we continue to comply with
FAS123R.

As
outlined above, we anticipate that research and development expenses for 2006
will be higher than those incurred during 2005.

Interest and other income

Interest and other income for the first quarter of 2006 increased by $2
thousand, or 25.0%, to $10 thousand from $8 thousand for the first quarter of
2005.

During the first quarters of 2006 and 2005, interest and other income
consisted primarily of interest income on excess cash and note receivable -
shareholder. During the first quarter of 2005, interest and other income also
included interest income on notes receivable - directors.

Interest and other income was higher during the first quarter of 2006, as
compared with the first quarter of 2005, primarily as a result of having higher
average daily cash balances. We began 2005 with approximately $675 thousand of
cash on hand, whereas we began 2006 with approximately $3,528
thousand.

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



15



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Net Loss

As
a result of the foregoing items, net loss for the first quarter of 2006 was $593
thousand, an increase of $275 thousand, or 86.5%, from a net loss of $318
thousand for the first quarter of 2005. As a result of our continued operating
loss we intend to continue to pursue revenue growth opportunities through all
available means.

Net loss attributable to common shareholders for the first quarter of
2006 was $593 thousand, a decrease of $3,725 thousand, or 86.3%, from a net loss
attributable to common shareholders of $4,318 thousand for the first quarter of
2005. The decrease in net loss attributable to common shareholders for the first
three months of 2006 was due to the deemed dividends on preferred stock, as
discussed below.

Deemed Dividends on Preferred Stock

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

The 2005 private placement, which was consummated on February 2, 2005,
raised a total of $4,000 thousand, inclusive of the $665 thousand credit issued
to AIGH. As of March 31, 2006 we had consumed approximately $525 thousand and
$700 thousand of the cash raised paying for expenses related to the 2005 private
placement and the NES acquisition,



---

16



respectively. We estimate that we will have no further disbursements of
cash related to either the 2005 private placement or the NES acquisition,
respectively; however, there can be no guarantees that these amounts will be
final.

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

Working Capital

As
of March 31, 2006, we had current assets of $3,919 thousand and current
liabilities of $1,684 thousand, which netted to working capital of $2,235
thousand. Included in current liabilities was the current portion of deferred
revenue of $1,091 thousand.

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

ITEM 3. Controls and Procedures

Our management carried out an evaluation, with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of March 31, 2006. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

There has not been any change in our internal control over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended March 31, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.



17



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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

On
November 23, 2005, we initiated a proceeding against AutoTrader.com in the
United States District Court in the Eastern District of Texas, alleging that
Autotrader.com was infringing two of our patents, namely Nos. 6,324,538 and
6,850,940 (the "538" and "940" patents, respectively), which protect our unique
method of maintaining an automated and network accessible database, on its
AutoTrader.com website. We seek preliminary and permanent injunctive relief
along with unspecified damages and fees. Autotrader.com filed its Answer and
Counterclaims on January 17, 2006 seeking a declaratory judgment that it does
not infringe the 538 and 940 patents and that both patents are invalid. On March
24, 2006, Autotrader.com filed a motion for summary judgment seeking to
invalidate the 538 and 940 patents. On May 1, 2006 we filed a response in
opposition to AutoTrader's motion.

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

During the three-month period ended March 31, 2006, we granted the
following stock options:

| |  | stock options to purchase an aggregate 560,000 shares of common
      stock, at exercise prices ranging from $0.21 to $0.25 per share, were
      granted to 24 non-executive employees;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | stock options to purchase an aggregate 425,000 shares of common
      stock, at an exercise price of $0.21, were granted to our four directors
      and one executive officer.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

ITEM 6. Exhibits

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

Exhibit 32 - Section 1350 Certifications



18



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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: May 15, 2006                   
| | By: /s/ Robert Dilworth              
| |                                      
| | Robert Dilworth                      
| | Chief Executive Officer (Interim) and
| | Chairman of the Board                
| | (Principal Executive Officer)        
| |                                      
| | Date: May 15, 2006                   
| | By: /s/ William Swain                
| |                                      
| | William Swain                        
| | Chief Financial Officer              
| | (Principal Financial Officer and     
| | (Principal Accounting Officer)       







19