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


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

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

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

                For the quarterly period ended September 30, 2006

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

                        For the transition period from to

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

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

                          5400 Soquel Avenue, Suite A2
                              Santa Cruz, CA 95062
                    (Address of principal executive offices)

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

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

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

      As of November 6, 2006, there were issued and outstanding 46,819,722
shares of the issuer's Common Stock, par value $0.0001.

      Transitional Small Business Disclosure Format (Check one):

      Yes [ ] No |X|


<PAGE>


                               GRAPHON CORPORATION


                                   FORM 10-QSB

                                Table of Contents

<TABLE>
<CAPTION>

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

<S>       <C>                                                                                                    <C>
          Unaudited Condensed Consolidated Balance Sheet as of September 30, 2006                                 2

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

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

          Notes to Unaudited Condensed Consolidated Financial Statements                                          5

Item 2.   Management's Discussion and Analysis or Plan of Operation                                              11

Item 3.   Controls and Procedures                                                                                23

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings                                                                                      25

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                                            25
Item 6.   Exhibits                                                                                               25
          Signatures

</TABLE>





<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements


                               GraphOn Corporation
                      Condensed Consolidated Balance Sheet


<TABLE>
<CAPTION>
                                                          (Unaudited; $000s)
Assets                                                    September 30, 2006
------                                                    -------------------
Current Assets
<S>                                                       <C>          <C>
  Cash and cash equivalents ...........................   $             3,049
  Accounts receivable, net ............................                   614
  Other current assets ................................                    59
                                                          -------------------
    Total Current Assets ..............................                 3,722
                                                          -------------------
  Patents, net ........................................                 3,853
  Property and equipment, net, and other assets .......                   136
                                                          -------------------
Total Assets ..........................................   $             7,711
                                                          ===================
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
  Accounts payable and accrued expenses ...............   $               589
  Deferred revenue ....................................                 1,135
                                                          -------------------
    Total Current Liabilities .........................                 1,724
                                                          -------------------
  Deferred revenue ....................................                 1,301
                                                          -------------------
    Total Liabilities .................................                 3,025
                                                          -------------------
Shareholders' Equity
   Common stock, $0.0001 par value, 195,000,000 shares
   authorized, 46,819,722 shares issued and outstanding                     5
  Additional paid-in capital ..........................                58,685
  Note receivable - shareholder .......................                  (260)
  Accumulated deficit .................................               (53,744)
                                                          -------------------
    Shareholders' Equity ..............................                 4,686
                                                          -------------------
    Total Liabilities and Shareholders' Equity ........   $             7,711
                                                          ===================



<FN>

See accompanying notes to unaudited condensed consolidated financial statements

</FN>
</TABLE>





                                       2
<PAGE>


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

                                               (Unaudited; $000s, except per share data)
                                             --------------------------------------------
                                              Three months ended      Nine months ended
                                                 September 30,           September 30,
                                             --------------------    --------------------
                                                2006       2005         2006       2005
                                             --------    --------    --------    --------
<S>                                          <C>         <C>         <C>         <C>
Revenue ..................................   $  1,142    $  1,176    $  3,899    $  3,633
Cost of Revenue ..........................        116         115         378         367
                                             --------    --------    --------    --------
Gross Profit .............................      1,026       1,061       3,521       3,266
                                             --------    --------    --------    --------
Operating Expenses
  Selling and marketing ..................        373         337       1,213       1,014
  General and administrative .............      1,061         757       2,976       2,252
  Research and development ...............        595         333       1,441         970
                                             --------    --------    --------    --------
    Total Operating Expenses .............      2,029       1,427       5,630       4,236
                                             --------    --------    --------    --------
Loss From Operations .....................     (1,003)       (366)     (2,109)       (970)
                                             --------    --------    --------    --------
Other Income, net ........................         10           7          32          25
                                             --------    --------    --------    --------
Loss Before Provision for Income Tax .....       (993)       (359)     (2,077)       (945)
Provision for income tax .................          2           -           5           -
                                             --------    --------    --------    --------
Net Loss .................................       (995)       (359)     (2,082)       (945)
Other Comprehensive Income ...............          1           -           1           -
                                             --------    --------    --------    --------
Comprehensive Loss .......................       (994)       (359)     (2,081)       (945)
Deemed Dividend on Preferred Stock .......          -           -           -      (4,000)
                                             --------    --------    --------    --------
Loss Attributable to Common Shareholders .   $   (994)   $   (359)   $ (2,081)   $ (4,945)
                                             ========    ========    ========    ========
Basic and Diluted Loss per Common Share ..   $  (0.02)   $  (0.01)   $  (0.04)   $  (0.12)
                                             ========    ========    ========    ========
Weighted Average Common Shares Outstanding     46,706      46,159      46,363      40,373
                                             ========    ========    ========    ========


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



                                       3
<PAGE>


<TABLE>
<CAPTION>
                               GraphOn Corporation
                 Condensed Consolidated Statements of Cash Flows

                                                                      (Unaudited; $000s)
                                                                      Nine months ended
                                                                        September 30,
                                                                     -----------------
                                                                      2006       2005
                                                                    -------    -------
Cash Flows (Used In) Provided By Operating Activities
<S>                                                                 <C>        <C>
Net Loss ........................................................   $(2,082)   $  (945)
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
Depreciation and amortization ...................................       769        777
Amortization of deferred compensation ...........................         -          2
Stock option compensation expense ...............................       347          -
Provision for doubtful accounts .................................         -         15
Repayment of directors' notes receivable ........................         -         50
Other items .....................................................         -          8
Interest accrued on note receivable shareholder .................        (7)       (10)
Changes in operating assets and liabilities
  Accounts receivable ...........................................       150         45
  Prepaid expenses and other assets .............................       (15)        14
  Accounts payable ..............................................        18         12
  Accrued expenses ..............................................       (41)       (39)
  Accrued wages .................................................      (157)        67
  Deferred revenue ..............................................       644        270
                                                                    -------    -------
Net Cash (Used In) Provided By Operating Activities .............      (374)       266
                                                                    -------    -------
Cash Flows Used In Investing Activities
Acquisition costs - NES .........................................         -       (698)
Capital expenditures ............................................       (59)       (56)
Other assets ....................................................         3         (4)
                                                                    -------    -------
Net Cash Used In Investing Activities ...........................       (56)      (758)
                                                                    -------    -------
Cash Flows (Used In) Provided By Financing Activities
Proceeds from sale of common stock under ESPP ...................         8         10
Proceeds from private placement of preferred stock and warrants .         -      3,335
Costs of private placement of preferred stock and warrants ......       (58)      (402)
                                                                    -------    -------
Net Cash (Used In) Provided By Financing Activities .............       (50)     2,943
                                                                    -------    -------
Effect of exchange rate fluctuations on cash and cash equivalents         1         (1)
                                                                    -------    -------
Net (Decrease) Increase in Cash and Cash Equivalents ............      (479)     2,451
Cash and Cash Equivalents, beginning of period ..................     3,528        675
                                                                    -------    -------
Cash and Cash Equivalents, end of period ........................   $ 3,049    $ 3,126
                                                                    =======    =======

<FN>

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


                                       4
<PAGE>


                               GRAPHON CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                               September 30, 2006

1. Basis of Presentation

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

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

2. Significant Accounting Policies

Use of Estimates

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 amounts reported in the condensed
consolidated financial statements and accompanying notes. While the Company
believes that such estimates are fair when considered in conjunction with the
condensed consolidated financial statements and accompanying notes, the actual
amount of such estimates, when known, will 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"), application service providers ("ASPs") (collectively
"resellers") and direct sales to enterprise end users. The Company's product
licenses are generally perpetual. The Company also separately sells 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:

  o   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
  o   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
  o   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
  o   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


                                       5
<PAGE>

licenses for software products, maintenance, or customer training. The Company
limits it assessment of VSOE for each element to either the price charged when
the same element is sold separately or the price established by management
having the relevant authority to do so, for an element not yet sold separately.

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

Certain resellers prepay for licenses they intend to resell bundled together
with maintenance that provides the reseller with license updates and customer
service. Upon receipt of the prepayment, if all other revenue recognition
criteria outlined above have been met, product licensing revenue is recognized
when the reseller is given access to the licensed program(s). The resellers are
required to provide periodic (monthly or quarterly) sell-through reports that
detail, for the respective period, various items, such as the number of licenses
purchased, the number sold to other parties and the ending balance of licenses
held as inventory available for future sale. The recognition of maintenance
revenue for these resellers is based on estimated reseller inventory turnover
levels reconciled to actual upon receipt of the sell-through report.

There are no rights of return granted to resellers or other purchasers of our
software programs.

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

3. Stock-Based Compensation

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

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

Results for prior periods have not been restated.

As a result of adopting FAS123R on January 1, 2006, the Company's loss from
operations, loss before provision for income taxes and net loss for the
three-months ended September 30, 2006 are each $121 thousand higher than if the
Company had continued to account for stock-based compensation under APB No. 25.
The Company's loss from operations, loss before provision for income taxes and
net loss for the nine-months ended September 30, 2006 are each $347 thousand
higher than if the Company had continued to account for stock-based compensation
under APB No. 25.

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

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


                                       6
<PAGE>

<TABLE>
<CAPTION>

                                                                             Three Months   Nine Months
                                                                                Ended          Ended
                                                                             September 30,  September 30,
(Unaudited; $000s, except per share data)                                        2006           2005
                                                                             ------------   ------------
<S>                                                                          <C>            <C>
Net loss, as reported: ...................................................   $       (359)  $       (945)
Less: deemed preferred dividends .........................................              -         (4,000)
Add: stock-based compensation expense included in
 net loss, net of related tax effects ....................................              -              2

Deduct: total stock-based compensation expense
 determined under the fair-value method for all
 awards, net of related tax effects ......................................           (123)          (317)
                                                                             ------------   ------------
Pro forma net loss .......................................................   $       (482)  $     (5,260)
                                                                             ============   ============
Basic and diluted loss per share
As reported ..............................................................   $      (0.01)       $ (0.12)
Pro forma ................................................................   $      (0.01)       $ (0.13)

</TABLE>

For purposes of the pro forma calculations, the fair value of each option was
estimated on the date of the grant using the Black-Scholes option-pricing model,
assuming no dividends, expected volatility of 60%, risk free interest rate of
1.5% and an expected term of five years. The weighted average fair value of
stock-based awards granted during the three and nine-month periods ended
September 30, 2005 were $0.36 and $0.45, respectively. No stock options were
exercised during either the three or nine-month periods ended September 30, 2005
and forfeitures were recognized as they occurred.

Valuation and Expense Information under FAS123R

The Company recorded stock-based compensation expense of $121 thousand and $347
thousand in the three and nine-month periods ended September 30, 2006,
respectively. As required by FAS123R, the Company estimates forfeitures of
employee stock-based awards and recognizes compensation cost only for those
awards expected to vest. Forfeiture rates are estimated based on an analysis of
historical experience and are adjusted to actual forfeiture experience as
needed.

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

<TABLE>
<CAPTION>
                                          Three months     Nine months
                                             Ended            Ended
     ($000s)                              September 30,   September 30,
     Income statement classification          2006            2006
     ----------------------------------   ------------    ------------
     <S>                                  <C>             <C>
     Cost of revenue ..................   $          4    $         13
     Selling and marketing expense ....             10              26
     General and administrative expense             77             258
     Research and development expense .             30              50
                                          ------------    ------------
                                          $        121    $        347
                                          ============    ============
</TABLE>

In connection with the adoption of FAS123R, the Company estimated the fair value
of each stock-based award and employee stock purchase plan ("ESPP") share
granted during the three-month period ended September 30, 2006 on the date of
grant using a binomial model, with the following assumptions: no dividends, an
approximate risk-free annual interest rate of 4.85%, estimated forfeiture rate
of 5%, an estimated exercise factor of 10%, expected volatility of 155% and an
expected term of 7.5 years (6 months for ESPP shares - see below). For
assumptions used for grants made during the three-month periods ended March 31
and June 30, 2006, please refer to our Quarterly Reports on Form 10-QSB as filed
with the SEC on May 15 and August 14, 2006, respectively.

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 September 30, 2006 as
the basis of its calculation for stock-based compensation expense.

                                       7
<PAGE>

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 awards was based on historical award holder exercise patterns and
considered the market performance of the Company's common stock and other items.
The expected term of the ESPP shares was six months, which is the length of time
between the ESPP grant and purchase dates.

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

For grants made during the three and nine-month periods ended September 30,
2006, the weighted average fair values of stock-based awards were $0.36 and
$0.45, respectively, and for ESPP shares were $0.15 and $0.16, respectively.

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, 2006.


<TABLE>
<CAPTION>
                                                                                Weighted
                                                              Weighted           Average      ($000s)
                                                               Average          Remaining    Aggregate
                                                              Exercise         Contractual   Intrinsic
                                               Shares           Price         Term (Years)     Value
                                            -------------    ------------     ------------   ---------
<S>                                             <C>          <C>     <C>              <C>    <C>
Outstanding - December 31, 2005 ......          5,716,272    $       0.53
Granted ..............................            985,000            0.21
Exercised ............................                  -               -
Forfeited or expired .................                  -               -
                                            -------------
Outstanding - March 31, 2006 .........          6,701,272    $       0.48             7.98   $      74
                                            -------------
Granted ..............................             10,000            0.21
Exercised ............................                  -               -
Forfeited or expired .................            (16,217)           0.37
                                            -------------
Outstanding - June 30, 2006 ..........          6,695,055    $       0.48             7.73   $      55
                                            -------------
Granted ..............................            370,000            0.17
Exercised ............................                  -               -
Forfeited or expired .................           (208,442)           0.37
                                            -------------
Outstanding - September 30, 2006 .....          6,856,613            0.45             7.60   $      49
                                            =============
Vested or expected to vest - September
30, 2006 (1) .........................          6,737,262    $       0.45             7.57   $      49
                                            =============

Exercisable - September 30, 2006 (2) .          6,856,613    $       0.45             7.60   $      49
                                            =============

<FN>

(1) Of the options outstanding as of September 30, 2006, 4,376,915 were vested
and 2,360,347 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.
</FN>
</TABLE>

No stock option awards were exercised during either the three or nine-month
periods ended September 30, 2006. As of September 30, 2006, there was
approximately $664 thousand 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.

                                       8
<PAGE>


4. Revenue

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

<TABLE>
<CAPTION>
                                                        Increase (Decrease)
     Revenue ($000s)            2006        2005       Dollars      Percent
     ----------------------   --------    --------    ---------    ---------
     Product licenses
      <S>                     <C>         <C>         <C>             <C>
      Windows .............   $    426    $    580    $    (154)      (26.6%)
      Unix ................        295         250           45        18.0%
                              --------    --------    ---------
                                   721         830         (109)      (13.1%)
                              --------    --------    ---------
     Service fees
      Windows .............        186         174           12         6.9%
      Unix ................        217         164           53        32.3%
                              --------    --------    ---------
                                   403         338           65        19.2%
                              --------    --------    ---------
     Other ................         18           8           10       125.0%
                              --------    --------    ---------
                              $  1,142    $  1,176    $     (34)       (2.9%)
                              ========    ========    =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                       Increase (Decrease)
     Revenue ($000s)             2006       2005       Dollars     Percent
     ----------------------    --------   --------    --------    ---------
     Product licenses
      <S>                      <C>        <C>         <C>            <C>
      Windows .............    $  1,486   $  1,721    $   (235)      (13.7%)
      Unix ................       1,158        946         212        22.4%
                               --------   --------    --------
                                  2,644      2,667         (23)       (0.9%)
                               --------   --------    --------
     Service fees
      Windows .............         603        479         124        25.9%
      Unix ................         595        461         134        29.1%
                               --------   --------    --------
                                  1,198        940         258        27.4%
                               --------   --------    --------
     Other ................          57         26          31       119.2%
                               --------   --------    --------
     Total Revenue             $  3,899   $  3,633    $    266         7.3%
                               ========   ========    ========

</TABLE>

5. Patents

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

<TABLE>
<CAPTION>
                                        (000s)
                                       -------
           <S>                         <C>
           Patents                     $ 5,340
           Accumulated amortization     (1,487)
                                       -------
                                       $ 3,853
                                       =======
</TABLE>

Patent amortization, which aggregated $222 thousand and $667 thousand during the
three and nine-month periods ended September 30, 2006, respectively, is a
component of general and administrative expenses.

6. Supplemental Disclosure of Cash Flow Information

The Company disbursed no cash for the payment of income taxes during either of
the nine-month periods ended September 30, 2006 or 2005. The Company disbursed
no cash for the payment of interest expense during the nine-month period ended
September 30, 2006. The Company disbursed approximately $3 thousand for the
payment of interest expense during the nine-month period ended September 30,
2005.

As of December 31, 2005, the Company had included approximately $34 thousand of
costs, related to the private placement of stock it had undertaken during 2005,
in accrued expenses.

                                       9
<PAGE>


7. Loss Per Share

Potentially dilutive securities have been excluded from the computation of
diluted loss per common share, as their effect is antidilutive. For the three
and nine-month periods ended September 30, 2006 and 2005, 19,705,817 and
19,022,157 shares, respectively, of common stock equivalents were excluded from
the computation of diluted loss per share since their effect would be
antidilutive.

8. New Accounting Pronouncements

In September 2006, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108") which provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 becomes effective in the first
fiscal year ending after November 15, 2006. The Company is assessing the impact
of SAB 108, but does not expect it to have a material impact on its results of
operations, cash flows or financial position.

In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158") which
improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity. This statement also improves
financial reporting by requiring an employer to measure the funded status of a
plan as of the date of its year-end balance sheet, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ended after
December 15, 2006. The Company is assessing the impact of SFAS 158, but does not
expect it to have a material impact on its results of operations, cash flows or
financial position.

In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 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, SFAS 157 does not require any new fair value
measurements, however, for some entities; application of SFAS 157 will change
current practice. SFAS 157 is effective for financial statements issued for the
first fiscal year beginning after November 15, 2007 and interim periods within
those fiscal years. The Company is assessing the impact of SFAS 157, but does
not expect it to have a material impact on its results of operations, cash flows
or financial position.

In July 2006, FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainties in Income Taxes - An Interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In addition, it provides guidance on the
measurement, derecognition, classification and disclosure of tax positions, as
well as the accounting for related interest and penalties. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company is assessing the
impact of FIN 48, but does not expect it to have a material impact on its
results of operations, cash flows or financial position.



                                       10
<PAGE>


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

Forward-Looking Statements

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


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

Overview

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

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

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

Critical Accounting Policies

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

The critical accounting policies listed below should be read in conjunction with
those identified in our most recent Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005, as amended, which included: the allowance for
doubtful accounts, patents, capitalized software development costs, impairment
of intangible assets, loss contingencies and stock compensation. With the
adoption of FAS123R, on January 1, 2006, we have identified the estimates and
assumptions that accompany the fair value determination of our stock-based
compensation awards as critical, as discussed below. It is important that the
discussion of our operating results that follows be read in conjunction with the
critical accounting policies discussed below as well as those disclosed in our
Annual Report on Form 10-KSB, as filed with the SEC on April 17, 2006, and


                                       11
<PAGE>

Amendment Number 1 to our Annual Report on Form 10-KSB, as filed with the SEC on
June 12, 2006.

Revenue Recognition
We market and license products through various means, such as; channel
distributors, independent software vendors ("ISVs"), value-added resellers
("VARs"), application service providers ("ASPs") (collectively "resellers") and
direct sales to enterprise end users. Our product licenses are generally
perpetual. We also separately sell 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:

     o   Persuasive evidence of an arrangement exists, (i.e., when we sign a
         non-cancelable license agreement wherein the customer acknowledges
         an unconditional obligation to pay, or upon receipt of the
         customer's purchase order) and
     o   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
     o   Our price to the customer is fixed or determinable, as typically
         evidenced in the signed non-cancelable contract, or the customer's
         purchase order, and
     o   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, consulting services or customer
training. We limit our assessment of VSOE for each element to either the price
charged when the same element is sold separately or the price established by
management having the relevant authority to do so, for an element not yet sold
separately.

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

Certain resellers prepay for licenses they intend to resell bundled together
with maintenance that provides the reseller with license updates and customer
service. Upon receipt of the prepayment, if all other revenue recognition
criteria outlined above have been met, product licensing revenue is recognized
when the reseller is given access to the licensed program(s). The resellers are
required to provide periodic (monthly or quarterly) sell-through reports that
detail, for the respective period, various items, such as the number of licenses
purchased, the number sold to other parties and the ending balance of licenses
held as inventory available for future sale. The recognition of maintenance
revenue for these resellers is based on estimated reseller inventory turnover
levels reconciled to actual upon receipt of the sell-through report.

There are no rights of return granted to resellers or other purchasers of our
software programs.

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

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


                                       12
<PAGE>

did not recognize compensation cost related to stock options granted to our
employees and non-employee directors that had an exercise price equal to or
above the market value of the underlying common stock on the date of grant in
our condensed consolidated statement of income prior to January 1, 2006.

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

Results for prior periods have not been restated.

As a result of adopting FAS123R on January 1, 2006, our loss from operations,
loss before provision for income taxes and net loss for the three and
nine-months ended September 30, 2006 are $121 thousand and $347 thousand higher,
respectively, than if we had continued to account for stock-based compensation
under APB No. 25.

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

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

Of the variables above, the selection of an expected term, an annualized
forfeiture rate and expected stock price volatility are the most subjective. Our
estimate of the expected option term was 7.5 years and was derived based on our
analysis of historical data and future projections. We derived an annualized
forfeiture rate of 5% and a prior forfeiture rate of 10% by analyzing our
historical forfeiture data, including consideration of the impact of certain
non-recurring events, such as reductions in work force. In estimating our stock
price volatility for grants awarded during the three-month period ended
September 30, 2006, we analyzed our historic volatility since we became a public
entity (July 13, 1999) through September 30, 2006, by reference to actual stock
prices during this period and calculated an estimated volatility of
approximately 155%. We believe that each of these estimates is reasonable in
light of the data we analyzed. However, as with any estimate, the ultimate
accuracy of these estimates is only verifiable over time.

We also recognized compensation costs for shares purchased under our Employee
Stock Purchase Plan ("ESPP") during the three months ended September 30, 2006.
We applied the same variables to the calculation of the costs associated with
the ESPP shares purchased as the stock option grants noted above, except that
the expected term was 0.5 years. The time span from the date of grant of ESPP
shares to the date of purchase is six months.

The specific valuation assumptions noted above were applied to stock options
that we granted during the three-month period ended September 30, 2006 and ESPP
shares that were granted August 1, 2006. For assumptions used for grants made
during the three-month periods ended March 31 and June 30, 2006, please refer to
our Quarterly Reports on Form 10-QSB as filed with the SEC May 15 and August 14,
2006, respectively. We expect that stock-based compensation expense will
continue to have a material impact on our financial results for the remainder of
the fiscal year. For the remainder of fiscal 2006 we expect to incur stock-based
compensation expense of approximately $120 thousand.

Results of Operations for the Three and Nine Month Periods Ended September 30,
2006 and 2005.

Revenue

The changes in both Windows and Unix-based product licenses revenue for the
three and nine-month periods ended September 30, 2006 and 2005 were reflective
of how such revenue varies because a significant portion of this revenue has
been, and continues to be earned from a limited number of significant customers,
most of whom are resellers. Consequently, if any of these significant customers


                                       13
<PAGE>

change their order level or fail to order during the reporting period, our
revenue could be materially impacted. We expect this situation to continue
throughout the next several quarterly reporting periods.

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


<TABLE>
<CAPTION>
                                                        Increase (Decrease)
     Revenue ($000s)            2006        2005       Dollars      Percent
     ----------------------   --------    --------    ---------    ---------
     Product licenses
      <S>                     <C>         <C>         <C>             <C>
      Windows .............   $    426    $    580    $    (154)      (26.6%)
      Unix ................        295         250           45        18.0%
                              --------    --------    ---------
                                   721         830         (109)      (13.1%)
                              --------    --------    ---------
     Service fees
      Windows .............        186         174           12         6.9%
      Unix ................        217         164           53        32.3%
                              --------    --------    ---------
                                   403         338           65        19.2%
                              --------    --------    ---------
     Other (1).............         18           8           10       125.0%
                              --------    --------    ---------
                              $  1,142    $  1,176    $     (34)       (2.9%)
                              ========    ========    =========
</TABLE>

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

The decrease in Windows product license revenue is primarily due to our
determination, under our accounting policies, to defer revenue recognition for a
$250 thousand purchase made during the three-month period ended September 30,
2006 by a significant customer. We determined that sufficient VSOE did not exist
for the allocation of revenue to the various elements of the purchase. When such
evidence exists we will recognize revenue from this transaction. We expect that
future purchases by this customer will also be deferred for the foreseeable
future. Various increases from several smaller customers partially offset the
decrease caused by this deferral.

Nine Unix product customers, including our most significant Unix customer
(Alcatel - all worldwide locations), purchased an aggregate $226 thousand of
Unix products, which accounted for 76.6% of Unix product license revenue for the
three-month period ended September 30, 2006. These nine customers' purchases
were an aggregate $55 thousand higher than their purchases during the same
period of 2005, which aggregated $171 thousand, or 68.4% of Unix product license
revenue for the prior period.

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

The increase in both Windows and Unix-based service fees for the three-month
period ended September 30, 2006, as compared with the same period of the prior
year was primarily due to the high levels of maintenance contract purchases that
occurred during 2005. We expect service fees revenue to continue to be higher
throughout 2006 as compared with similar periods of 2005.




                                       14
<PAGE>


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


<TABLE>
<CAPTION>
                                                       Increase (Decrease)
     Revenue ($000s)             2006       2005       Dollars     Percent
     ----------------------    --------   --------    --------    ---------
     Product licenses
      <S>                      <C>        <C>         <C>            <C>
      Windows .............    $  1,486   $  1,721    $   (235)      (13.7%)
      Unix ................       1,158        946         212        22.4%
                               --------   --------    --------
                                  2,644      2,667         (23)       (0.9%)
                               --------   --------    --------
     Service fees
      Windows .............         603        479         124        25.9%
      Unix ................         595        461         134        29.1%
                               --------   --------    --------
                                  1,198        940         258        27.4%
                               --------   --------    --------
     Other ................          57         26          31       119.2%
                               --------   --------    --------
     Total Revenue             $  3,899   $  3,633    $    266         7.3%
                               ========   ========    ========
</TABLE>


During the nine-month period ended September 30, 2006, twenty Windows customers
purchased an aggregate $881 thousand of Windows product, which accounted for
59.3% of Windows product license revenue for the period. These twenty customers'
purchases were $482 thousand lower than their purchases during the same period
of 2005, which aggregated $1,363 thousand, or 79.2% of Windows product license
revenue. A significant portion of this decrease is based on the determination,
under our accounting policies, to defer revenue recognition for certain
purchases made during the nine-month period ended September 30, 2006,
aggregating $500 thousand, by a significant customer. We determined that
sufficient VSOE did not exist for the allocation of revenue to the various
elements of these purchases. When such evidence exists we will recognize revenue
from these transactions. We expect that future purchases by this customer will
also be deferred for the foreseeable future.

Fifteen Unix product customers, including our most significant Unix customer
(Alcatel - all worldwide locations), purchased an aggregate $907 thousand of
Unix products, which accounted for 78.3% of Unix product license revenue for the
nine-month period ended September 30, 2006. These fifteen customers' purchases
were an aggregate $214 thousand higher than their purchases during the same
period of 2005, which aggregated $693 thousand, or 73.3% of Unix product license
revenue.

The increase in both Windows and Unix-based service fees for the nine-month
period ended September 30, 2006, as compared with the same period of the prior
year was primarily due to higher levels of maintenance contract purchases that
occurred throughout 2005. We expect this service fees revenue to continue to
hirer throughout 2006 as compared with 2005.

Cost of Revenue

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

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

<TABLE>
<CAPTION>
      ($000s)                                           Change in
                              2006        2005      Dollars    Percent
                            --------    --------    -------    -------
      <S>                   <C>         <C>         <C>         <C>
      Product costs         $     24    $     53    $   (29)    (54.7%)
      Service costs               92          62         30      48.4
                            --------    --------    -------
                            $    116    $    115    $     1       0.9%
                            ========    ========    =======
</TABLE>

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

                                       15
<PAGE>

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

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

<TABLE>
<CAPTION>
      ($000s)                                           Change in
                              2006        2005      Dollars    Percent
                            --------    --------    -------    -------
      <S>                   <C>         <C>         <C>          <C>
      Product costs         $     89    $    157    $   (68)     (43.3%)
      Service costs              289         210         79       37.6
                            --------    --------    -------
                            $    378    $    367    $    11        3.0%
                            ========    ========    =======
</TABLE>

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

The increase in service costs for the nine-month period ended September 30,
2006, as compared with the same period in 2005, resulted primarily from
increasing the number of engineers performing customer service and from the
adoption of FAS123R, as explained elsewhere in this Form 10-QSB. In order to
better meet the needs of our customers, as we have sold more maintenance
contracts over the course of the last several quarters, we increased the number
of engineers providing customer service to our customers to eight during the
nine months ended September 30, 2006, from four for the same period of the prior
year. Additionally, in accordance with FAS123R, we expensed $13 thousand of
stock-based compensation expense related to our customer service engineers
during the nine-month period ended September 30, 2006. No such expense was
recorded during the same period of the prior year. We expect service costs to
remain higher throughout 2006, as compared with 2005.

Selling and Marketing Expenses

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

Selling and marketing expenses were 32.7% and 28.7% of revenue for the three
months ended September 30, 2006 and 2005, respectively, and 31.1% and 27.9% of
revenue for the nine months ended September 30, 2006 and 2005, respectively.
Selling and marketing expenses for the three months ended September 30, 2006
increased by $36 thousand, or 10.7%, to $373 thousand from $337 thousand for the
same period of 2005. For the nine months ended September 30, 2006, selling and
marketing expenses increased $199 thousand, or 19.6%, to $1,213 thousand from
$1,014 thousand for the same period of 2005.

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

<TABLE>
<CAPTION>
                                                               Increase (Decrease)
     ($000s)                             2006        2005      Dollars    Percent
     ------------------------------    --------    --------    -------    -------
     <S>                               <C>         <C>         <C>           <C>
     Employee costs                    $    264    $    249    $    15       6.0%
     Outside services                        63          52         11      21.2%
     Travel and entertainment                28          25          3      12.0%
     Other                                   18          11          7      63.6%
                                       --------    --------    -------
                                       $    373    $    337    $    36      10.7%
                                       ========    ========    =======
</TABLE>

The increase in employee costs for the three-month period ended September 30,
2006, as compared with the same period in 2005, resulted primarily from
stock-based compensation expense recorded in accordance with FAS123R and
increased commissions. We adopted FAS123R as of January 1, 2006, as explained
elsewhere in this Form 10-QSB, and as a result began recording stock-based
compensation expense. For the three-month period ended September 30, 2006, such


                                       16
<PAGE>

selling and marketing stock-based compensation expense amounted to $10 thousand.
No such stock-based compensation expense was recorded during 2005.

The increase in outside services for the three-month period ended September 30,
2006, as compared with the same period in 2005, was the result of increased
activity by our Asian sales representative and an increase in overall marketing
activities. We expect these trends to continue and outside service expense to
remain higher in 2006 as compared with 2005.

The increase in travel and entertainment for the three-month period ended
September 30, 2006, as compared with the same period in 2005, resulted primarily
from 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.

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

<TABLE>
<CAPTION>
                                                               Increase (Decrease)
     ($000s)                             2006        2005      Dollars    Percent
     ------------------------------    --------    --------    -------    -------
     <S>                               <C>         <C>         <C>           <C>
     Employee costs                    $    871    $    771    $   100       13.0%
     Outside services                       171         146         25       17.1%
     Travel and entertainment               101          59         42       71.2%
     Promotional expenses                    23          13         10       76.9%
     Other                                   47          25         22       88.0%
                                       --------    --------    -------
                                       $  1,213    $  1,014    $   199       19.6%
                                       ========    ========    =======
</TABLE>


The increase in employee costs for the nine-month period ended September 30,
2006, as compared with the same period in 2005, was primarily the result of
stock-based compensation expense recorded in accordance with the adoption of
FAS123R, as explained elsewhere in this Form 10-QSB, costs associated with a new
sales engineer hired during 2006, and an increase in medical benefits and
commissions. For the nine-month period ended September 30, 2006, such selling
and marketing stock-based compensation expense amounted to $26 thousand. No such
stock-based compensation expense was recorded during 2005.

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

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

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

General and Administrative Expenses

General and administrative expenses primarily consist of employee costs
(inclusive of 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,
certain costs associated with being a publicly held corporation, and bad debts
expense.

General and administrative expenses were approximately 92.9% and 64.4% of
revenues for the three-month periods ended September 30, 2006 and 2005,
respectively. For the nine-month periods ended September 30, 2006 and 2005,
general and administrative expenses were approximately 76.3% and 62.0% of
revenues, respectively. General and administrative expenses increased by $304
thousand, or 40.2%, to $1,061 thousand from $757 thousand for the three-month
period ended September 30, 2006, as compared with the same period in 2005. For


                                       17
<PAGE>

the nine-month period ended September 30, 2006, general and administrative
expenses increased by $724 thousand, or 32.1%, to $2,976 thousand from $2,252
thousand for the nine-month period ended September 30, 2005.

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

<TABLE>
<CAPTION>
                                                              Increase (Decrease)
     ($000s)                            2006        2005      Dollars    Percent
     ------------------------------   --------    --------    -------    -------
     <S>                              <C>         <C>         <C>         <C>
     Employee costs                   $    520    $    316    $   204      64.6%
     Outside services                       52          49          3       6.1%
     Travel and entertainment               52          18         34     188.9%
     Amortization/depreciation             226         226          -         -
     Legal/accounting                      107          86         21      24.4%
     Rent                                   16          16          -         -
     Public costs                           19          17          2      11.8%
     Insurance                              27           4         23     575.0%
     Other                                  42          25         17      68.0%
                                      --------    --------    -------
                                      $  1,061    $    757    $   304      40.2%
                                      ========    ========    =======
</TABLE>

The increase in employee costs in the three months ended September 30, 2006, as
compared with the same period of 2005, was primarily due to severance paid out
to our former chief operating officer upon his termination, having approximately
two more employees and salary adjustments made subsequent to September 30, 2005.
Included in employee costs is stock-based compensation expense. We adopted
FAS123R as of January 1, 2006, as explained elsewhere in this Form 10-QSB, and
as a result, began recording stock-based compensation expense. For the
three-month period ended September 30, 2006 such general and administrative
stock-based compensation expense amounted to $77 thousand. During the
three-month period ended September 30, 2005, we recorded $1 thousand of
compensation expense in accordance with FAS123, which was derived from stock
options that had been previously issued to our Chief Executive Officer. We
anticipate 2006 stock-based compensation expense to exceed 2005 levels as we
continue to comply with FAS123R. We expect 2006 employee costs to exceed 2005
levels.

The $34 thousand increase in travel and entertainment during the three months
ended September 30, 2006, as compared with the same period of the previous year,
was primarily a result of our Chief Executive Officer's travels to our various
facilities, as well as travel incurred by management while exploring potential
business development opportunities. We expect 2006 travel and entertainment
levels to exceed those of 2005.

Legal and accounting fees were higher by approximately $21 thousand during the
three months ended September 30, 2006, as compared with the same period of the
previous year, primarily as a result of fees associated with work performed on
the post effective amendment to our 2005 registration statement that was filed
with the SEC on September 26, 2006. All costs incurred for the 2005 registration
statement were charged against the costs raised in the private placement we
undertook during 2005, hence, they were not recorded to general and
administrative expense.

The $23 thousand increase in insurance during the three months ended September
30, 2006, as compared with the same period of the prior year, was primarily due
to costs associated with our directors' and officers' liability insurance
policy. We had no such policy during 2005.

Costs associated with other major components of general and administrative
expense, notably; outside services, amortization and depreciation, rent and
costs associated with being a public entity, did not change significantly during
the three month period ended September 30, 2006, as compared with the same
period of the prior year.

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

<TABLE>
<CAPTION>

                                                               Increase (Decrease)
     ($000s)                             2006        2005      Dollars    Percent
     ------------------------------    --------    --------    -------    -------
     <S>                               <C>         <C>         <C>          <C>
     Employee costs                    $  1,330    $    786    $   544      69.2%
     Outside services                       208         143         65      45.5%
     Travel and entertainment               157          49        108     220.4%
     Amortization/depreciation              679         598         81      13.5%
     Legal/accounting                       324         454       (130)    (28.6%)


                                       18
<PAGE>

     Rent                                    47          36         11      30.6%
     Public costs                            47          48         (1)     (2.1%)
     Insurance                               81          12         69     575.0%
     Other                                  103         126        (23)    (18.3%)
                                       --------    --------    -------
                                       $  2,976    $  2,252    $   724      32.1%
                                       ========    ========    =======
</TABLE>


The increase in employee costs for the nine months ended September 30, 2006, as
compared with the same period of 2005, was primarily due to having an average of
approximately three more employees, severance paid out to our former chief
operating officer upon his termination, and salary adjustments made subsequent
to September 30, 2005. Included in employee costs is stock-based compensation
expense. We adopted FAS123R as of January 1, 2006, as explained elsewhere in
this Form 10-QSB, and as a result, began recording stock-based compensation
expense. For the nine-month period ended September 30, 2006 such general and
administrative stock-based compensation expense amounted to $258 thousand.
During the nine-month period ended September 30, 2005, we recorded $2 thousand
of compensation expense in accordance with FAS123, which was derived from stock
options that had been previously issued to our Chief Executive Officer. We
anticipate 2006 stock-based compensation expense to exceed 2005 levels as we
continue to comply with FAS123R. We expect 2006 employee costs to exceed 2005
levels.

Outside services increased during the nine months ended September 30, 2006, as
compared with the same period of 2005 primarily as a result of an increase in
consulting fees charged to us by our Chief Executive Officer, prior to his being
appointed a full-time employee during September 2006. During 2006, our Chief
Executive Officer significantly increased his activities in our general business
operations in addition to pursuing business development opportunities as they
presented themselves.

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

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

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

Research and Development Expenses

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

Research and development expenses were approximately 52.1% and 28.3% of revenues
for the three-month periods ended September 30, 2006 and 2005, respectively, and
approximately 37.0% and 26.7% of revenues for the nine-month periods ended
September 30, 2006 and 2005, respectively. Research and development expenses for
the three-month period ended September 30, 2006 increased by $262 thousand, or
78.7%, to $595 thousand from $333 thousand for the three-month period ended
September 30, 2005. Research and development expenses for the nine-month period
ended September 30, 2006 increased by $471 thousand, or 48.6%, to $1,441
thousand from $970 thousand for the nine-month period ended September 30, 2005.

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

                                       19
<PAGE>

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

<TABLE>
<CAPTION>

                                                        Increase (Decrease)
    ($000s)                       2006        2005      Dollars    Percent
    ------------------------    --------    --------    -------   --------
    <S>                         <C>         <C>         <C>       <C>
    Employee costs              $    358    $    230    $   128      55.7%
    Outside services                 131          61         70     114.8%
    Rent                              28          16         12      75.0%
    Supplies                          46           4         42   1,050.0%
    Other                             32          22         10      45.5%
                                --------    --------    -------
                                $    595    $    333    $   262      78.7%
                                ========    ========    =======
</TABLE>


Employee costs for the three-month periods ended September 30, 2006 and 2005 are
net of $92 thousand and $62 thousand, respectively, which related to employee
costs reported as customer service cost of revenue. The increase in employee
costs was primarily due to the hiring of a new Vice-President of Engineering,
the hiring of a President for our Israeli subsidiary, having two additional
engineers during 2006, salary adjustments enacted subsequent to September 30,
2005 and increases in employee benefits, which were partially offset by the
customer service employee costs that were reported as cost of revenue.

Included in employee costs is stock-based compensation expense. We adopted
FAS123R as of January 1, 2006, as explained elsewhere in this Form 10-QSB, and
as a result, began recording stock-based compensation expense. For the
three-month period ended September 30, 2006 such research and development
stock-based compensation expense amounted to $30 thousand. We anticipate 2006
stock-based compensation expense to exceed 2005 levels as we continue to comply
with FAS123R. We expect 2006 employee costs to exceed 2005 levels.

The increase in outside services for the three-month period ended September 30,
2006, as compared with the same period of the prior year, was incurred primarily
by expanding our use of consulting engineers to help enhance our product
development efforts. We expect to continue making greater use of consulting
engineers throughout 2006 to assist in product development efforts. We
anticipate that expenses related to outside services in 2006 will exceed 2005
levels.

The increase in rent for the three-month period ended September 30, 2006, as
compared with the same period of the prior year, was primarily due to the
opening of our Israeli engineering facility, as well as the expansion of the
office space we rent in New Hampshire. We expect 2006 rent expense to exceed
2005 levels.

The increase in supplies for the three-month period ended September 30, 2006, as
compared with the same period of the prior year, was a result of opening our
Israeli office, expanding our New Hampshire facility, increasing the size of our
engineering team and expanding our product development efforts. We expect 2006
supplies expense to exceed 2005's levels.

Research and development expenses for the nine months ended September 30, 2006
and 2005 were as follows:

<TABLE>
<CAPTION>
                                                         Increase (Decrease)
     ($000s)                       2006        2005      Dollars    Percent
     ------------------------    --------    --------    -------   --------
     <S>                         <C>         <C>         <C>          <C>
     Employee costs              $    875    $    677    $   198      29.2%
     Outside services                 375         167        208     124.6%
     Rent                              61          48         13      27.1%
     Supplies                          59          14         45     321.4%
     Other                             71          64          7      10.9%
                                 --------    --------    -------
                                 $  1,441    $    970    $   471      48.6%
                                 ========    ========    =======
</TABLE>


Employee costs for the nine-month periods ended September 30, 2006 and 2005 are
net of $289 thousand and $210 thousand, respectively, which related to employee
costs reported as customer service cost of revenue. The increase in employee
costs was primarily due to the hiring of a new Vice-President of Engineering,
the hiring of a President for our Israeli subsidiary, having two additional
engineers during 2006, salary adjustments enacted subsequent to September 30,
2005 and increases in employee benefits, which were partially offset by the
customer service employee costs that were reported as cost of revenue.

                                       20
<PAGE>

Included in employee costs is stock-based compensation expense. We adopted
FAS123R as of January 1, 2006, as explained elsewhere in this Form 10-QSB, and
as a result, began recording stock-based compensation expense. For the
nine-month period ended September 30, 2006 such research and development
stock-based compensation expense amounted to $50 thousand. We anticipate 2006
stock-based compensation expense to exceed 2005 levels as we continue to comply
with FAS123R. We expect 2006 employee costs to exceed 2005 levels.

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

The increase in rent for the nine-month period ended September 30, 2006, as
compared with the same period of the prior year, is due to the opening of our
engineering facility in Israel as well as the expansion of the office space we
rent in New Hampshire.

The increase in supplies for the nine-month period ended September 30, 2006, as
compared with the same period of the prior year, was a result of opening our
Israeli office, expanding our New Hampshire facility, increasing the size of our
engineering team and expanding our product development efforts. We expect 2006
supplies expense to exceed 2005's levels.

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

Other Income

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

Other income for the three-month period ended September 30, 2006 increased by $3
thousand, or 42.9%, to $10 thousand from $7 thousand for the same period of
2005. For the nine-month period ended September 30, 2006, other income increased
by $7 thousand, or 28.0%, to $32 thousand from $25 thousand for the same period
of 2005.

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

Net Loss

As a result of the foregoing items, net loss for the three-month period ended
September 30, 2006 was $995 thousand, an increase of $636 thousand, or 177.2%,
from a net loss of $359 thousand for the same period of 2005. Net loss for the
nine-month period ended September 30, 2006 was $2,082 thousand, an increase of
$1,137 thousand, or 120.3%, from a net loss of $945 thousand for the same period
of 2005. As a result of our continued operating loss we intend to continue to
pursue revenue growth opportunities through all available means.

Net loss attributable to common shareholders for the nine-month period ended
September 30, 2006 was $2,081 thousand, a decrease of $2,864 thousand, or 57.9%,
from $4,945 thousand for the same period of 2005. The decrease for the
nine-month period ended September 30, 2006, as compared with the same period of
the prior year was due to the deemed dividends on preferred stock, as discussed
below.

Deemed Dividends on Preferred Stock

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

The deemed fair value of the Series A preferred stock was estimated based on the
market price and underlying number of common shares they would have converted
into had the conversion occurred immediately upon their issuance. The market
price for our common stock on February 2, 2005 was $0.46 and the Series A


                                       21
<PAGE>

preferred stock would have converted into 14,814,800 common shares, thus
deriving an estimated fair value of approximately $6,815 thousand at that date.

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

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

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

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

Liquidity and Capital Resources

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

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

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 September 30, 2006, we had consumed approximately $525 thousand and $700
thousand of the cash raised paying for expenses related to the 2005 private
placement and the NES acquisition, respectively. We estimate that we will have
no further disbursements of cash related to either the 2005 private placement or
the NES acquisition.

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

Working Capital

As of September 30, 2006, we had current assets of $3,722 thousand and current
liabilities of $1,724 thousand, which netted to working capital of $1,998
thousand. Included in current liabilities was the current portion of deferred
revenue of $1,135 thousand.

                                       22
<PAGE>

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.

New Accounting Pronouncements

In September 2006, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 becomes effective in the first fiscal year ending after November 15,
2006. We are assessing the impact of SAB 108, but do not expect it to have a
material impact on our results of operations, cash flows or financial position.

In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158") which
improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity. This statement also improves
financial reporting by requiring an employer to measure the funded status of a
plan as of the date of its year-end balance sheet, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ended after
December 15, 2006. We are assessing the impact of SFAS 158, but do not expect it
to have a material impact on our results of operations, cash flows or
financial position.

In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 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, SFAS 157 does not require any new fair value
measurements, however, for some entities; application of SFAS 157 will change
current practice. SFAS 157 is effective for financial statements issued for the
first fiscal year beginning after November 15, 2007 and interim periods within
those fiscal years. WE are assessing the impact of SFAS 157, but do not expect
it to have a material impact on our results of operations, cash flows or
financial position.

In July 2006, FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainties in Income Taxes - An Interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In addition, it provides guidance on the
measurement, derecognition, classification and disclosure of tax positions, as
well as the accounting for related interest and penalties. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We are assessing the impact
of FIN 48, but do not expect it to have a material impact on our results of
operations, cash flows or financial position.

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 September 30, 2006. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.

                                       23
<PAGE>

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 September 30, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.



                                       24
<PAGE>


PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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

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

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

   o stock options to purchase an aggregate 370,000 shares of common stock, at
     exercise prices ranging from $0.17 to $0.22, were granted to two
     non-executive employees.

   o 600,000 shares of restricted common stock, with a grant date fair
     value of $0.16 per share, were granted to a non-executive employee.
     Such shares vest in three equal annual installments commencing on
     the one year anniversary of the initial grant date, contingent upon
     the non-executive employee's continued employment with us.

   o two restricted stock units, each representing 200,000 shares of restricted
     common stock, were granted to a non-executive employee, each with a
     grant date fair value of $0.16 per share.  Each of these two grants
     contains performance-based vesting conditions. Should the
     performance-based vesting condition for the first grant be met, it
     is anticipated that 50% of the first grant's shares would vest on
     approximately the first anniversary of the non-executive employee's
     hire date.  The remaining 50% of the shares of the first grant would
     vest one year later.  Should the performance-based vesting
     conditions for the second grant be met, it is anticipated that 50%
     of its shares would vest on approximately the second anniversary of
     the non-executive employee's hire date.  The remaining 50% of its
     shares would vest one year later.

The grant of such stock options and awards to the above-listed persons was not
registered under the Securities Act of 1933, because the stock options and
awards 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 and awards
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



                                       25
<PAGE>



SIGNATURES

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


                                                     GraphOn Corporation
                                                        (Registrant)

                                                   Date: November 20, 2006
                                                   By: /s/ Robert Dilworth
                                                       -------------------
                                                         Robert Dilworth
                                                  Chief Executive Officer and
                                                    Chairman of the Board
                                                (Principal Executive Officer)

                                                   Date: November 20, 2006
                                                    By: /s/ William Swain
                                                        -----------------
                                                          William Swain
                                                    Chief Financial Officer
                                              (Principal Financial Officer and
                                                Principal Accounting Officer)