**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended April 30, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition periodfrom                            to**

**CommissionFile Number: 001-11807**

**UNIFY CORPORATION**

(Exact name of Registrantas specified in its charter)
| **Delaware**                                                     | **94-2710559**                           |
|------------------------------------------------------------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification Number) |

 

**2101 Arena Blvd, Suite 100Sacramento, California 95834**

(Address of principalexecutive offices)

**Telephone:(916) 928-6400**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act: **CommonStock, $0.001 par value**

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. YES x  NO o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of the Form 10-K or any amendment to thisForm 10-K. x

Indicate by check markwhether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES o  NO x

The aggregate market valueof the voting stock held by non-affiliates of the Registrant was $7,616,682based on the number of shares held by non-affiliates of the Registrant as of April 30,2005, and based on the reported last sale price of common stock on October 29,2004, which is the last business day of the Registrant’s most recentlycompleted second fiscal quarter. Shares of common stock held by each officerand director and by each person who owns 5% or more of the outstanding commonstock have been excluded in that such persons may be deemed to be affiliates.This determination of affiliate status is not necessarily a conclusivedetermination for other purposes. As of June 30, 2005, the Registrant had28,667,618 shares of common stock outstanding.

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

The following documents(or parts thereof) are incorporated by reference into the following parts ofthis Form 10-K: Certain information required in Part III ofthis Form 10-K is incorporated therein from our definitive ProxyStatement for our 2005 Annual Meeting of Stockholders (“Proxy Statement”), tobe filed with the Securities and Exchange Commission pursuant toRegulation 14A within 120 days after our fiscal year ended April 30,2005.

**PART I**

*A Caution aboutForward-Looking Statements:*

*The discussion in this Annual Report on Form 10-Kand the documents incorporated herein by reference contain forward-lookingstatements that have been made pursuant to the provisions of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statementsare based on current expectations, estimates and projections about the softwareindustry and certain assumptions made by the Company’s management. Words suchas “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,“projects,” and variations of such words and similar expressions are intendedto identify such forward-looking statements. These statements are notguarantees of future performance and are subject to certain risks,uncertainties and assumptions that are difficult to predict; therefore, actualresults may differ materially from those expressed or forecasted in any suchforward-looking statements. Such risks and uncertainties include, but arenot limited to, those set forth herein under “Risk Factors.” Unless required bylaw, the Company undertakes no obligation to update publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise.However, readers should carefully review the risk factors set forth in otherreports or documents the Company files from time to time with the Securitiesand Exchange Commission (the “SEC”), particularly the Company’s QuarterlyReports on Form 10-Q and any Current Reports on Form 8-K.*

**ITEM 1.**                BUSINESS

**The Company**

Unify (the “Company”, “we”, “us” or “our”) providesbusiness process automation software solutions, including applications forspecialty markets within the insurance and transportation industries. Oursolutions deliver a broad set of capabilities for automating businessprocesses, integrating existing information systems and deliveringcollaborative information. Through our industry expertise and technologies, wehelp organizations reduce risk, drive business optimization, apply governanceprinciples, and increase customer and member services.

Our products include vertical application software forthe alternative risk insurance market and transportation labor standards, andinfrastructure and database software that helps our customers build businessprocess automation solutions and information-rich and database-drivenapplications. Our products enable organizations to rapidly, efficiently andseamlessly deliver the right information to the right people at the right time.By consolidating, automating and managing data, our customers see increases inefficiencies and services, as well as reductions in costs.

In February 2005, we acquired privately-heldAcuitrek Inc., a provider of policy administration and underwriting solutionsfor the alternative risk management market. The acquisition was the result ofour strategy to penetrate specialty, underserved markets with our solutions. Asa result, Unify now offers solutions in the alternative risk market, inparticular public entity risk pools made up of cities, counties, special districts,third party administrators and insurance carriers that administerself-insurance funds for public entities.

Our customers also include corporate informationtechnology departments (“IT”), software value added resellers (“VARs”), solutionsintegrators (“SIs”) and independent software vendors (“ISVs”) from a 

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variety of industries,including insurance, financial services, healthcare, government, manufacturingand many other industries. We are headquartered in Sacramento, California witha subsidiary office in Paris, France and sales offices in the United Kingdom (“UK”)and Australia. We market and sell products directly in the United States, UK,France and Australia, and indirectly through worldwide distributors in Japan,Russia, South Africa, Italy, Brazil and Latin America with customers in morethan 45 countries.

Our mission is to deliver infrastructure andapplication software solutions that give customers transactional efficiency, arich user experience and quality information cost effectively and with a highdegree of customer satisfaction. Our strategy is to leverage our award-winningtechnology with our newly acquired vertical applications to deliver a broad setof solutions to the market that streamline and automate processes and workflow;present rich user experiences; and deliver consolidated information frommultiple sources. We believe that by integrating our technology andapplications, we have created a unique and compelling offering in ourmarketplace. By combining best-of-breed capabilities, we offer customers abetter way to manage, integrate, view and report data to help them drive theirbusiness objectives.

Unify was incorporated inDelaware on April 10, 1996. Over the past five years we have expanded ourproduct offering from the ACCELL, DataServer and Vision suite of products tothe Unify NXJ, NavRisk and ViaMode products. We are organized into two businessunits comprised of the Insurance Risk Management division and the UnifyBusiness Solutions division.

*Insurance Risk Management*

As a result of the acquisition of Acuitrek, we formedthe Insurance Risk Management (IRM) division. The integration of the companieswas completed during the fourth quarter with IRM now including all formerAcuitrek employees, combined with the addition of Unify resources to supportexpansion and growth of the division. The division is responsible for thedevelopment, implementation and sales of the NavRisk suite of products. NavRiskis a policy administration and underwriting application that automateslabor-intensive processes, streamlines access to information, and integratesand automates delivery of information for pools, policy administrators andbrokers.

The NavRisk application isconfigured uniquely for each customer based on the customer specific premiumrating requirements. The NavRisk application is generally licensed with a threeyear term, plus mandatory maintenance, with additional professional servicesfor customization as required by the customer. IRM customer contracts aretypically billed at contract signing, a midpoint project milestone and uponproject completion. As a result, the application license fee is deferred untilthe customer acceptance is received. Upon acceptance, the license fee will berecognized, which in some instances can take up to two quarters. Acuitrek wasacquired in the fourth quarter of fiscal 2005 and therefore there were nolicense revenues for fiscal 2005.

*Unify BusinessSolutions*

Unify Business Solutionsis comprised of our technology products and customer base. Our technologyproducts include Unify NXJ, ACCELL, DataServer and Vision product families. Ourcustomers are corporate end user IT departments, ISVs and our worldwidedistributors. This division is dedicated to providing exceptional technology tothis customer base and continues to meet their current and future technologyneeds. This division serves our extensive customer installed base includingsales and marketing, support, and professional services. Included in thedivision is our transportation labor standards application, ViaMode, which wasbuilt on our Unify NXJ technology.

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**Products**

*Applications*

NavRisk is an end-to-end policy administration andunderwriting solution for the alternative risk market. The NavRisk applicationautomates labor-intensive processes, improves accuracy and enhances analyticalcapability in addition to reducing operating costs. NavRisk combines deepexpertise and understanding of the market with standards-based technologies andworkflow to deliver an integration solution that automates labor-intensiveprocesses, streamlines access to information, and integrates and automatesdelivery of information for policy administrators and brokers. Key productfeatures include ad hoc reporting, loss control, flexible rating and contact managementand communications modules to help customers reduce risk, increase services andboost productivity.

ViaMode:   Transportationis a software and services solution delivered in partnership by Unify and oneof our premier domain partners. The ViaMode solution combines a softwareapplication built on Unify NXJ with professional services within thetransportation efficiency and labor standards space.

*Business ProcessAutomation Solution*

The Unify NXJ businessprocess automation platform creates and extends process-centric,collaborative-based web applications. We released Unify NXJ 10.5 in September 2004.Unify NXJ enables IT organizations to rapidly build and deploy a range ofsystems from process automation to composite applications to extending legacyapplications to the Web. Unify NXJ’s comprehensive set of application servicesincludes business process management, reporting, portal and portal integration,web services, forms processing, and enterprise application integration, as wellas assembly and orchestration components that can be deployed on all leadingJ2EE infrastructure platforms. Organizations use Unify NXJ to productively andeffectively automate business processes, consolidate multiple legacy systemsinto unified applications, and provide advanced collaborative informationsystems for employees, suppliers and partners.

*Rapid ApplicationDevelopment Product Solution*

Unify’s ACCELL®development products facilitate the productive, cost-effective development ofmission-critical, host-based applications. The ACCELL products supportnative interfaces to leading database products including Unify DataServer, IBMDB2, Informix, Microsoft SQL Server, Oracle and Sybase. The ACCELL productsuite includes ACCELL/Web, ACCELL/SQL and ACCELL/IDS.

·       ACCELL/WebTM—quicklytransforms existing ACCELL/SQL applications into fully featured graphicalWeb-browser based applications without the requirement for any source codemodifications.

·       ACCELL/SQLTM—powerful4GL-based rapid application development software for the cost-effectivedevelopment of character-based client/server applications. ACCELL/SQLutilizes native optimized connectivity for Unify, Oracle, Sybase and Informixdatabases creating one of the fastest application performance environments inthe market.

·       ACCELL/IDSTM—powerful 4GL-basedrapid application development software for applications that utilize Unify’sDataServer ELS database.

*Database ManagementProduct Line*

·       DataServer®—Ahigh performance enterprise relational database management system with minimalmaintenance and memory requirements. It can quickly accommodate the growth ofuser requirements over time, making it an attractive choice for missioncritical applications. DataServer 

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makes it easy fordevelopers to create graphical applications and migrate existing databaseapplications to enterprise network and Internet environments.

·       DataServer® ELS—A highperformance, easily embeddable relational database management system. Its smallfootprint and proven reliability make it an industry favorite for embeddedapplications that require relational databases.

*GraphicalClient/Server Product Solution*

Unify VISION® is apowerful graphical, client/server application development and deployment systemthat allows for rapid creation and easy modification of complex businessapplications based on 4GL technology. Unify VISION consists of anobject-oriented, repository-based component framework designed to enabledevelopers to rapidly create and easily modify application components. Itspowerful pre-built components enable developers to focus on the businesscomponents and processes that make up the heart of their applications. VISIONalso contains an application server to allow organizations to integrate custom-builtand packaged applications with the Internet. Unify VISION’s scalablearchitecture delivers a high level of performance, availability and reliabilityby offering server replication, load balancing, fail-over and recovery, andpublish-and-subscribe capabilities.

**Customers**

Our customer base consistsof a significant number of businesses of many sizes, public entities andindependent software vendors who sell packaged applications and resellers. Wesell to the alternative risk management insurance market, transportation labormarket and broad horizontal markets including healthcare, government,education, financial services, technology, transportation, and manufacturing. Nosingle customer accounted for 10% or more of revenues in fiscal 2005, 2004 or2003.

**Sales, Marketing and Distribution**

Unify’s products and professional services aremarketed and distributed to customers globally using a combination of a directcorporate sales force and indirect distribution channels, including ISVs, VARs,SIs and worldwide distributors. The indirect sales channels leverage Unify’s sales,support and consulting resources to provide complete solutions to ourcustomers.

Our direct sales organization consists of salesrepresentatives and pre-sales consultants. Our North America salesrepresentatives are located in our headquarters. We market our productsinternationally through offices in the UK, France and Australia. We havedistributors in Asia Pacific, Europe, Japan, Latin America, Russia and SouthAfrica. International revenues accounted for 65%, 68% and 54% of total revenuesin fiscal 2005, 2004 and 2003 respectively.

Our marketing is focused on generating demand andmarketing awareness for Unify products including efforts to support the directand indirect sales channels. Marketing activities include e-businessinitiatives, strategic demand generation, public relations, customercommunications, trade shows and our web site.

As of April 30, 2005,we had 20 employees engaged in sales and marketing activities, 14 in NorthAmerica and 6 in Europe. We expect to continue expanding our sales andmarketing group as needed through targeted recruitment of qualifiedindividuals.

**CustomerSupport and Professional Services**

Unify’s customer supportand professional services organizations play an important role in maintainingcustomer satisfaction, facilitating license sales and enabling customers tosuccessfully architect, design, develop, deploy and manage applications.

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*Customer Supportand Maintenance*

Unify provides customersupport via telephone, Web, e-mail and fax from its support centers located inSacramento, California and Paris, France. Distribution partners providetelephone support to international customers with technical assistance from theU.S.-based support personnel who also respond to e-mail inquiries.Customers are offered tailored support service levels including response time,information reporting, and other features, such as 24-hour a day,seven-day a week support. During each of the past three fiscal years, over 75%of our support and maintenance customers have renewed their annual supportcontracts.

*Consulting*

Unify offers a full rangeof consulting services ranging from application implementation servicesincluding delivering proof of concepts to completed applications using ourtechnology infrastructure. Our products allow companies to maximize return oninvestment, get to market quickly or be more efficient. Consulting servicesinclude: project implementations and application updates, business process-centricapplication development, Web-enablement, technology/knowledge transfer,application architecture audits and database tuning. The level of consultingservices is tailored to customer-defined needs and includes developmentplans, hands-on development tasks and project management.

*Education*

Unify offers education courses provided on a regularlyscheduled basis at Unify training centers located in Sacramento, California andParis, France. We also offer on-site training at customer facilities.

As of April 30, 2005,we had a total of 13 employees engaged in providing professional services, 6 insupport and 7 in consulting and training. Of those employees, 11 were locatedin the United States and 2 were located in Europe.

**Product Development**

We focus our development efforts on a combination ofnew development for our NavRisk and ViaMode applications and the Unify NXJplatform, as well as enhancing and broadening the functionality and ports ofour database and application development products. During fiscal 2005, wedeveloped and released Unify NXJ Version 10.5, ViaMode, a comprehensiveapplication platform, as well as additional versions of our database and toolsproducts. Additionally, we added the NavRisk policy administration andunderwriting solution to our offerings with the acquisition of Acuitrek.

Our product development expenses for fiscal 2005,2004, and 2003, were $2.8 million, $3.0 million and $4.1 million. Infiscal 2004, we made a strategic decision to focus more resources on sales andmarketing initiatives which reduced product development expenditures 27% infiscal 2004 compared to fiscal 2003.

Most of our current software products have beendeveloped internally; however, we have licensed certain software componentsfrom third parties and we may do so again in the future. We are committed todelivering products that meet customer and market needs today and in futureperiods.

Our product developmentactivities are conducted at the Sacramento, California headquarters facility.As of April 30, 2005, we had a total of 17 employees in productdevelopment, including 12 software development engineers.

**Competition**

The market for our software is intensely competitive,subject to rapid change and significantly affected by new product introductionsand other activities of market participants. With the Unify NXJ platform, we 

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compete in the market withproviders of application platform suites, integrated services environments andbusiness process management infrastructure software. These competitors includeBEA Systems, (“BEA”), International Business Machines (“IBM”), MicrosoftCorporation (“Microsoft”), Oracle Corporation (“Oracle”), FileNet Corporationand Pegasystems. With our NavRisk application, we compete with ComputerSciences Corporation (“CSC”) and Valley Oak.

The Company generally derives sales from new projectinitiatives, additional deployment of existing applications and productupgrades. As a result, the key competitive factor is generally the decision bya customer as to whether or not to begin a new project initiative or upgrade orkeep things status quo.

As new products and technologies are introduced,increased competition could result in fewer customer orders, reduced prices andreduced gross margins, any one of which could adversely affect our business,operating results, and financial condition. In addition, current and potentialcompetitors may make strategic acquisitions or establish cooperativerelationships among themselves or with third parties, thereby increasing theability of their products to address the needs of our prospective customers.Accordingly, it is possible that new competitors or alliances among current andnew competitors may emerge and gain significant market share. Such competitioncould adversely affect our ability to sell additional licenses and maintenanceand support renewals on favorable terms.

We believe we comparefavorably with respect to comprehensiveness of our offerings; ease of use andrich interface; product performance, quality and scalability; customer supportand service; and price.

**Intellectual Property**

We rely on a combination of copyright, trademark andtrade-secret laws, non-disclosure agreements and other methods to protectour proprietary technology. Despite efforts to protect our proprietary rights,unauthorized parties may attempt to copy aspects of our products or to obtain anduse information that we regard as proprietary. Policing unauthorized use of ourproducts is difficult, and while we are unable to determine the extent to whichpiracy of our software products exists, software piracy can be expected to be apersistent problem. In addition, the laws of some foreign countries in which wesell products do not protect our proprietary rights as fully as do the laws ofthe United States. There can be no assurance that our means of protecting ourproprietary rights in the United States or abroad will be adequate or thatcompetition will not independently develop similar technology.

Although there are no pending lawsuits against Unifyregarding infringement of any existing patents or other intellectual propertyrights and we have not received any notices that we are infringing or allegedlyinfringing the intellectual property rights of others, there can be noassurance that infringement claims will not be asserted by third parties in thefuture. If any such claims are asserted, there can be no assurance that we willbe able to defend such claim or obtain licenses on reasonable terms. Ourinvolvement in any patent dispute or any other intellectual property dispute oraction to protect trade secrets and know-how may have an adverse effect on ourbusiness, operating results, and financial condition. Adverse determinations inany litigation may subject us to significant liabilities to third parties,require us to seek licenses from third parties, and prevent us from developingand selling its products. Any of these situations could have an adverse effecton our business, operating results and financial condition.

We are dependent on third-partysuppliers for certain software which is embedded in some of our products.Although we believe that the functionality provided by software which islicensed from third parties is obtainable from multiple sources or could bedeveloped by us if any such third-party licenses were terminated or notrenewed or if these third parties fail to develop new products in a timelymanner, we could be required to develop an alternative approach to developingits products, which could require payment of additional fees to third parties,internal development costs and delays and might not be successful in providing thesame level of functionality. Such delays, increased costs, or reducedfunctionality could adversely affect our business, operating results, andfinancial condition.

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**Employees**

As of April 30, 2005, we had a total of 60employees, including 17 in product development, 20 in sales and marketing, 13in customer support, consulting, and training, and 10 in finance, informationsystems, operations and general administration. Of these employees, 51 werelocated in the United States, 8 were located in Europe and 1 was located inAustralia.

Our success depends inlarge part on our ability to attract and retain qualified employees,particularly senior management, engineering, direct sales and supportpersonnel. The competition for such employees is intense. There can be noassurance that we will be successful in attracting or retaining key employees.Any failure we have in attracting and retaining qualified senior management,engineering, direct sales, and support personnel could adversely affect ourbusiness, operating results, and financial condition. None of our employees arerepresented by a collective bargaining agreement, nor have we experienced anywork stoppage. We consider our relations with our employees to be good.

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**WHERE YOU CAN FIND MORE INFORMATION**

You are advised to read this Form 10-K inconjunction with other reports and documents that we file from time to timewith the SEC. In particular, please read our Quarterly Reports on Form 10-Qand any Current Reports on Form 8-K that we may file from time totime. You may obtain copies of these reports directly from us or from the SECand the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington,D.C. 20549. In addition, the SEC maintains information for electronic filers(including Unify) at its website at *www.sec.gov*.We make available free of charge on or through our Internet website located at *www.unify.com* our SEC filings on Form 10-K,10-Q and 8-K and any amendments to those filings as soon asreasonably practicable after electronic filing with the SEC.

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**RISK FACTORS**

*In evaluating the Company’s business, readers shouldcarefully consider the business risks discussed in this section in addition tothe other information presented in this Annual Report on Form 10-Kand in our other filings with the SEC.*

**We aredependent on acceptance of our applications and business process automationproducts as well as the growth of the market.**

We expect our applications business to account for anincreasing percentage of future revenues and accordingly, we are devoting a substantialportion of our resources in the building of the sales model and marketingprograms to gain market acceptance for it. As a result, factors adverselyaffecting the pricing of or demand for our NavRisk or ViaMode applications orfor the Unify NXJ business process automation platform, such as, but notlimited to, competition and technological change, would have an adverse effecton our business, operating results and financial condition. There can be noassurance that we will successfully market and sell these new products orenhanced versions of our existing products. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Overview;” “Business—Products”and “—Product Development.”

If our customers are not able to successfullyimplement NavRisk, ViaMode or Unify NXJ applications, the viability of ourproducts could be questioned and our reputation could be damaged, which couldhave adverse effects on our business, operating results and financialcondition. In addition, we expect that a significant percentage of futurerevenues will continue to be derived from sales to existing customers. If theseexisting customers purchase competitive products, or have difficulty deployingapplications built with Unify’s products, our relationships with thesecustomers, revenues from sales of our products and other products and theCompany’s business, operating results and financial condition could beadversely affected. See “Selected Financial Data” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”

There can be no assurancethat the market for our products will continue to grow. If these markets failto grow, or grow more slowly than we currently anticipate, our business,operating results, and financial condition could be adversely affected.

**Weare subject to intense competition.**

We have experienced and expect to continue toexperience intense competition from current and future competitors includingCSC, Valley Oak, BEA, IBM, Microsoft, FileNet Corporation, Pegasystems andOracle.

Often, these competitors have significantly greaterfinancial, technical, marketing and other resources than Unify, in addition tohaving greater name recognition and more extensive customer bases. As a result,our competitors may be able to respond more quickly to new or emergingtechnologies and changes in customer requirements or devote greater resourcesto the development, promotion and sale of their products than we can.

We expect to face additional competition as otherestablished and emerging companies enter the policy administration andunderwriting applications market and the business process market, and as newproducts and technologies are introduced. Increased competition could result inprice reductions, fewer customer orders, reduced gross margins and loss ofmarket share, any one of which could adversely affect our business, operatingresults and financial condition.

In addition, current andpotential competitors may make strategic acquisitions or establish cooperativerelationships among themselves or with third parties, thereby increasing theability of their products to address the needs of our prospective customers.Accordingly, it is possible that new 

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competitorsor alliances among current and new competitors may emerge and rapidly gainsignificant market share. Such competition could adversely affect our abilityto sell additional licenses and maintenance and support renewals on termsfavorable to us. Further, competitive pressures could require us to reduce theprice of our products and related services, which could adversely affect ourbusiness, operating results, and financial condition. There can be no assurancethat we will be able to compete successfully against current and futurecompetition, and the failure to do so would have an adverse effect upon ourbusiness, operating results and financial condition. See “Business—Competition.”

**Themarkets in which we compete are subject to rapid technological change.**

The applications software market in which we competeis characterized by rapid technological change, frequent introductions of newand enhanced products, changes in customer demands and evolving industrystandards. The introduction of products embodying new technologies and theemergence of new industry standards can render existing products obsolete andunmarketable.

Our future success will depend in part upon ourability to address the increasingly sophisticated needs of customers bydeveloping new product functionality and enhancements that keep pace withtechnological developments, emerging industry standards and customerrequirements.

There can be no assurancethat NavRisk, ViaMode and Unify NXJ will continue to be perceived by ourcustomers as technologically advantageous or that we will not experiencedifficulties that delay or prevent the sale of enhancements to existingproducts that meet with a significant degree of market acceptance. If therelease dates of any future product enhancements, or new products are delayedor if when released they fail to achieve market acceptance, our business,operating results, and financial condition would be adversely affected. See “Business—ProductDevelopment.”

**Weare dependent on indirect sales channels.**

A significant portion ofour revenues are derived from indirect sales channels, including ISVs, VARs anddistributors. ISVs, VARs and distributors accounted for approximately 51%, 62%and 54% of our software license revenues for fiscal 2005, 2004 and 2003,respectively. Our success therefore depends in part upon the performance of ourindirect sales channels, over which we have limited influence. Our ability toachieve significant revenue growth in the future depends in part on maintainingand expanding our indirect sales channels worldwide. The loss of any majorpartners, either to competitive products offered by other companies or toproducts developed internally by those partners, or the failure to attracteffective new partners could have an adverse effect on our business, operatingresults, and financial condition. See “Business—Sales, Marketing andDistribution.”

**Thereare numerous risks associated with our international operations and sales.**

Revenues derived from ourinternational customers accounted for 65%, 68% and 54% of our total revenues,with the remainder from North America, in fiscal 2005, 2004 and 2003respectively. If the revenues generated by our international operations are notadequate to offset the expense of maintaining such operations, our overallbusiness, operating results and financial condition will be adversely affected.There can be no assurance that we will continue to be able to successfullymarket, sell and deliver our products in these markets. Although we have hadinternational operations for a number of years, there are certain uniquebusiness challenges and risks inherent in doing business outside of NorthAmerica, and such challenges and risks can vary from region to region. Theseinclude unexpected changes in regulatory requirements; export restrictions,tariffs and other trade barriers; difficulties in staffing and managing foreignoperations; longer payment cycles; problems in collecting accounts receivable;political instability; fluctuations in currency exchange rates; seasonalreductions in business activity during the summer months in Europe and otherparts of the world; unfamiliar or unusual business practices; and potentiallyadverse 

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taxconsequences, any of which could adversely impact the success of ourinternational operations. There can be no assurance that one or more of thesefactors will not have an adverse effect on our future international operationsand, consequently, on our business, operating results and financial condition.In addition, the Company’s subsidiaries and distributors in Europe and Japanoperate in local currencies. If the value of the U.S. dollar increases relativeto foreign currencies, our business, operating results and financial conditioncould be adversely affected. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, “Business—Sales, Marketing andDistribution.”

**Ourstock price may be subject to volatility.**

Unify’s common stock price has been and is likely tocontinue to be subject to significant volatility. A variety of factors couldcause the price of the common stock to fluctuate, perhaps substantially,including: announcements of developments related to our business; fluctuationsin the operating results and order levels of Unify or its competitors’; generalconditions in the computer industry or the worldwide economy; announcements oftechnological innovations; new products or product enhancements from us or ourcompetitors; changes in financial estimates by securities analysts;developments in patent, copyright or other intellectual property rights; anddevelopments in our relationships with our customers, distributors andsuppliers; legal proceedings brought against the Company or its officers; andsignificant changes in our senior management team. In addition, in recent yearsthe stock market in general, and the market for shares of equity securities ofmany high technology companies in particular, have experienced extreme pricefluctuations which have often been unrelated to the operating performance ofthose companies. Such fluctuations may adversely affect the market price of ourcommon stock.

Unify’s stock trades overthe counter on the “bulletin board.” Companies whose shares trade over-the-countergenerally receive less analyst coverage and their shares are more thinly tradedthan stock that is traded on the Nasdaq National Market System or a major stockexchange. Our stock is therefore subject to greater price volatility than stocktrading on national market systems or major exchanges.

**Our quarterly operating resultsare subject to fluctuations and seasonal variability and quarterly results,including revenues, are therefore difficult to forecast.**

Unify’s quarterly operating results have variedsignificantly in the past and we expect that they could vary significantly inthe future. Such variations could result from the following factors: the sizeand timing of significant orders and their fulfillment; demand for ourproducts; the quantity, timing and significance of our product enhancements andnew product announcements or those of our competitors; our ability to attractand retain key employees; seasonality; changes in our pricing or ourcompetitors’; realignments of our organizational structure; changes in thelevel of our operating expenses; incurrence of extraordinary operatingexpenses, changes in our sales incentive plans; budgeting cycles of ourcustomers; customer order deferrals in anticipation of enhancements or newproducts offered by us or our competitors; product life cycles; product defectsand other product quality problems; currency fluctuations; and general domesticand international economic and political conditions.

Due to the foregoing factors, quarterly revenues andoperating results are difficult to forecast. Revenues are also difficult toforecast because software technology is rapidly evolving, and our sales cycle,from initial evaluation to purchase and the providing of maintenance services,can be lengthy and varies substantially from customer to customer. Because wenormally deliver products within a short time of receiving an order, wetypically do not have a backlog of orders. As a result, to achieve ourquarterly revenue objectives, we are dependent upon obtaining orders in anygiven quarter for shipment in that quarter. Furthermore, because many customersplace orders toward the end of a fiscal quarter, we generally recognize asubstantial portion of our software license revenues at the end of a quarter.Our expense levels largely reflect our expectations for future revenue and aretherefore relatively fixed in the 

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short term; if revenuelevels fall below expectations our operating results are likely to bedisproportionately adversely affected.

With the recent expansion into vertical applicationbusiness with our NavRisk and ViaMode products, our ability to recognize revenueis contingent upon receiving customer acceptance at completion of theapplication implementation. Based on uncertainty regarding the timing ofreceiving this customer acceptance, we may experience fluctuations in the amount of revenue recognized quarterly,significantly affecting our financial performance quarter to quarter.

We expect that ouroperating results will continue to be affected by the continually challengingIT economic environment as well as by seasonal trends. In particular, weanticipate relatively weak demand in the fiscal quarters ending July 31and October 31 as a result of reduced business activity in Europe duringthe summer months.

**Ourproducts are subject to lengthy sales cycles.**

Our products are used toimplement comprehensive solutions including policy administration andunderwriting, transportation labor standards evaluations and process-centric,composite applications. As a result, the licensing and implementation of ourapplications and applications built using our products generally involve a fiveto ten week implementation time, a significant commitment of managementattention and resources by prospective customers. Accordingly, our sales cycleis subject to delays associated with the long approval process that typically accompaniessignificant initiatives or capital expenditures. Our business, operatingresults, and financial condition could be adversely affected if customersreduce or delay orders. There can be no assurance that we will not continue toexperience these and additional delays in the future. Such delays maycontribute to significant fluctuations of quarterly operating results in thefuture and may adversely affect those results.

**Oursoftware products could contain defects and could be subject to potential releasedelays.**

Software productsfrequently contain errors or defects, especially when first introduced or whennew versions or enhancements are released. Although we have not experiencedadverse effects resulting from any such defects or errors to date, there can beno assurance that, despite testing by us and current and potential customers,defects and errors will not be found in current versions, new versions orenhancements after commencement of commercial shipments, resulting in loss ofrevenues, delay in market acceptance, or unexpected re-programming costs, whichcould have an adverse effect upon our business, operating results and financialcondition. Additionally, if the release dates of any future Unify product lineadditions or enhancements are delayed or if when released they fail to achievemarket acceptance, our business, operating results, financial condition andcash flows would be adversely affected. See “Business—Product Development.”

**Ourlicense agreements may not protect us from product liability claims.**

The license agreements wehave with our customers typically contain provisions designed to limit ourexposure to potential product liability claims. It is possible, however, thatthe limitation of liability provisions contained in these license agreementsmay not be effective as a result of existing or future federal, state or locallaws or ordinances or unfavorable judicial decisions. The sale and support ofcurrent and future products may involve the risk of such claims, any of whichare likely to be substantial in light of the use of these products in thedevelopment of core business applications. A successful product liability claimbrought against the Company could have an adverse effect upon our business,operating results, and financial condition.

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**Werely upon technology from certain third-party suppliers.**

Unify is dependent onthird-party suppliers for software which is embedded in some of itsproducts. Although we believe that the functionality provided by software whichis licensed from third parties is obtainable from multiple sources or could bedeveloped by the Company, if any such third-party licenses wereterminated or not renewed or if these third parties fail to develop newproducts in a timely manner, we could be required to develop an alternativeapproach to developing such products, which could require payment of additionalfees to third parties, internal development costs and delays and might not besuccessful in providing the same level of functionality. Such delays, increasedcosts or reduced functionality could adversely affect our business, operatingresults and financial condition. See “Business—Intellectual Property.”

**Wemay be subject to violations of our intellectual property rights.**

Unify relies on a combination of copyright, trademarkand trade secret laws, non-disclosure agreements and other intellectualproperty protection methods to protect its proprietary technology. Despite ourefforts to protect proprietary rights, unauthorized parties may attempt to copyaspects of our products or obtain and use information that we regard asproprietary. Policing unauthorized use of our products is difficult, and whilewe are unable to determine the extent to which piracy of our technology exists,piracy can be expected to be a persistent problem. In addition, the laws ofsome foreign countries do not protect our proprietary rights as fully as do thelaws of the United States. There can be no assurance that our means ofprotecting our proprietary rights will be adequate and, to the extent suchrights are not adequate, other companies could independently develop similarproducts using similar technology.

Although there are nopending lawsuits against us regarding infringement of any existing patents orother intellectual property rights, and we have received no notices that we areinfringing or allegedly infringing the intellectual property rights of others,there can be no assurance that such infringement claims will not be asserted bythird parties in the future. If any such claims are asserted, there can be noassurance that we will be able to defend such claim or if necessary obtainlicenses on reasonable terms. Our involvement in any patent dispute or otherintellectual property dispute or action to protect trade secrets and know-howmay have an adverse effect on our business, operating results, and financialcondition. Adverse determinations in any litigation may subject us tosignificant liabilities to third parties, require that we seek licenses fromthird parties and prevent us from developing and selling our products. Any ofthese situations could have an adverse effect on our business, operatingresults, and financial condition. See “Business—Intellectual Property.”

**Our success is dependent upon theretention of key personnel and we may be unable to retain key employees.**

Our future performancedepends on the continued service of key technical, sales and senior managementpersonnel. With the exception of Unify’s president and chief executive officerand the general manager of the Insurance Risk Management division who is theformer president and chief executive officer of Acuitrek, there are no otherUnify technical, sales, executive or senior management personnel bound by anemployment agreement. The loss of the services of one or more of our officersor other key employees could seriously harm our business, operating results andfinancial condition. Future success also depends on our continuing ability toattract and retain highly qualified technical, sales and managerial personnel.Competition for such personnel is intense, and we may fail to retain its keytechnical, sales and managerial employees, or attract, assimilate or retainother highly qualified technical, sales and managerial personnel in the future.

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**Rapidgrowth may significantly strain the resources of the Company.**

If we are able to achieverapid and successful market acceptance of our current and future products, wemay undergo a period of rapid growth. This expansion may significantly strainmanagement, financial, customer support, operational and other resources. Toaccommodate this anticipated growth, we are continuing to implement a varietyof new and upgraded operating and financial systems, procedures and controls,including the improvement of our internal management systems. There can be noassurance that such efforts can be accomplished successfully. Any failure toexpand these areas in an efficient manner could have an adverse effect on ourbusiness, operating results, and financial condition. Moreover, there can be noassurance that our systems, procedures and controls will be adequate to supportour future operations.

**Our disclosure controls andprocedures and our internal control over financial reporting may not beeffective to detect all errors or to detect and deter wrongdoing, fraud orimproper activities in all instances.**

While we believe wecurrently have adequate internal control over financial reporting, ourmanagement does not expect that our disclosure controls and procedures or ourinternal control over financial reporting will prevent all errors and fraud. Indesigning our control systems, management recognizes that any control system,no matter how well designed and operated, can provide only reasonable, notabsolute, assurance of achieving the desired control objectives. Further thedesign of a control system must reflect the necessity of considering thecost-benefit relationship of possible controls and procedures. Because ofinherent limitations in any control system, no evaluation of controls canprovide absolute assurance that all control issues and instances of wrongdoing,if any, that may affect our operations have been detected. These inherentlimitations include the realities that judgments in decision-making canbe faulty, that breakdowns can occur because of simple error or mistake andthat controls may be circumvented by individual acts by some person, bycollusion of two or more people or by management’s override of the control. Thedesign of any control system also is based in part upon certain assumptionsabout the likelihood of a potential future event, and there can be no assurancethat any design will succeed in achieving its stated goals under all potentialfuture conditions. Because of the inherent limitations in cost-effective controlsystems, misstatements due to error or wrongdoing may occur and not bedetected. Over time, it is also possible that controls may become inadequatebecause of changes in conditions that could not be, or were not, anticipated atinception or review of the control systems. Any breakdown in our controlsystems, whether or not foreseeable by management, could cause investors tolose confidence in the accuracy of our financial reporting and may have anadverse impact on our business and on the market price for Unify’s commonstock.

**ITEM 2.**                PROPERTIES

Unify’s principaladministrative offices and headquarters are in Sacramento, California where welease a 38,000 square foot facility. We also lease sales and support offices inthe United Kingdom and France. We believe that our existing facilities areadequate for our needs and that suitable additional or alternative space willbe available on commercially reasonable terms as needed.

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**ITEM 3.**                LEGALPROCEEDINGS

The Company is subject tolegal proceedings and claims that arise in the normal course of business. Ifsuch matters arise, the Company cannot assure that it would prevail in suchmatters, nor can it assure that any remedy could be reached on mutuallyagreeable terms, if at all. Due to the inherent uncertainties of litigation,were there any such matters, the Company would not be able to accuratelypredict their ultimate outcome. As of April 30, 2005, there were nocurrent proceedings or litigation involving the Company that managementbelieves would have a material adverse impact on its financial position,results of operations, or cash flows.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company’sstockholders during the fourth quarter of fiscal 2005.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Market Information for Common Stock**

Duringfiscal 2005, Unify’s common stock was traded on the Over-The-Counter BulletinBoard (OTC BB) under the symbol UNFY.BB. The following table sets forththe average high and low sales prices as reported on the over-the countermarket for shares of our common stock for the periods indicated. Such pricesrepresent prices between dealers, do not include retail mark-ups, mark-downs orcommissions and may not represent actual transactions.
| ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| **Fiscal 2005** |       |     |       |    |       |
| Fourth Quarter  |       | $        | 0.66       |    | $          | 0.45 |   |
| Third Quarter   |       | 0.66     |       | 0.38    |       |
| Second Quarter  |       | 0.65     |       | 0.37    |       |
| First Quarter   |       | 1.01     |       | 0.65    |       |
| **Fiscal 2004** |       |     |       |    |       |
| Fourth Quarter  |       | $        | 1.36       |    | $          | 0.90 |   |
| Third Quarter   |       | 1.39     |       | 0.67    |       |
| Second Quarter  |       | 0.84     |       | 0.30    |       |
| First Quarter   |       | 0.43     |       | 0.27    |       |

 

**Common Stockholdersof Record**

At June 30, 2005,there were approximately 287 stockholders of record of the Company’s common stock,as shown in the records of our transfer agent, excluding stockholders whosestock was held in nominee or street name by brokers.

**Dividends**

We have never paiddividends on our common stock and our present policy is to retain anticipatedfuture earnings for use in our business.

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**ITEM 6.**                SELECTEDFINANCIAL DATA

Thefollowing selected consolidated financial data should be read in conjunctionwith the Company’s Consolidated Financial Statements and Notes thereto in Item8 and “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in Item 7.
| ** **                                             | ** ** | **Years Ended April 30,**                           | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of  Operations Data:**        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues:                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Software licenses                                      |       | $                                                                  | 5,205      |   | $ | 6,111 |   | $ | 5,895 |   | $ | 7,303 |   | $ | 7,229 |   |
| Services                                               |       | 6,098                                                              |       | 5,814 |   | 6,278 |   | 6,297 |   | 7,074 |   |
| Total revenues                                         |       | 11,303                                                             |       | 11,925 |   | 12,173 |   | 13,600 |   | 14,303 |   |
| Cost of revenues:                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Software licenses                                      |       | 336                                                                |       | 595 |   | 263 |   | 498 |   | 662 |   |
| Services                                               |       | 1,328                                                              |       | 1,299 |   | 1,133 |   | 1,442 |   | 3,085 |   |
| Total cost of revenues                                 |       | 1,664                                                              |       | 1,894 |   | 1,396 |   | 1,940 |   | 3,747 |   |
| Gross profit                                           |       | 9,639                                                              |       | 10,031 |   | 10,777 |   | 11,660 |   | 10,556 |   |
| Operating  expenses:                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product development                                    |       | 2,814                                                              |       | 2,996 |   | 4,108 |   | 4,099 |   | 4,912 |   |
| Selling, general and administrative                    |       | 9,225                                                              |       | 7,840 |   | 6,391 |   | 4,740 |   | 14,053 |   |
| Write-down of other investments                        |       | 0                                                                  |       | 175 |   | 200 |   | 1,300 |   | 3,650 |   |
| Total operating expenses                               |       | 12,039                                                             |       | 11,011 |   | 10,699 |   | 10,139 |   | 22,615 |   |
| Income (loss) from operations                          |       | (2,400                                                             | )          | (980 | ) | 78 |   | 1,521 |   | (12,059 | ) |
| Other income  (expense), net                           |       | 44                                                                 |       | (27 | ) | 3 |   | 36 |   | (213 | ) |
| Income (loss) before income taxes                      |       | (2,356                                                             | )          | (1,007 | ) | 81 |   | 1,557 |   | (12,272 | ) |
| Provision  (benefit) for income taxes                  |       | 8                                                                  |       | 3 |   | (38 | ) | (10 | ) | 59 |   |
| Net income (loss)                                      |       | $                                                                  | (2,364     | ) | $ | (1,010 | ) | $ | 119 |   | $ | 1,567 |   | $ | (12,331 | ) |
| Net income (loss)  per share:                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | $                                                                  | (0.09      | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | 0.08 |   | $ | (0.65 | ) |
| Diluted                                                |       | $                                                                  | (0.09      | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | 0.08 |   | $ | (0.65 | ) |
| Shares used in  computing net income (loss) per share: |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | 27,777                                                             |       | 21,558 |   | 20,939 |   | 20,232 |   | 18,979 |   |
| Diluted                                                |       | 27,777                                                             |       | 21,558 |   | 21,693 |   | 20,779 |   | 18,979 |   |

 
| ** **                                 | ** ** | **April 30,  2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                 | ** ** | **(In thousands)**  | ** ** |
| **Consolidated Balance Sheet  Data:**      |       |                     |       |     |       |     |       |     |       |     |       |
| Cash, cash  equivalents and investments    |       | $                        | 3,675      |     | $          | 6,606    |       | $        | 3,030      |     | $          | 2,993 |   | $ | 3,084 |   |
| Restricted cash                            |       | —                   |       | —   |       | —   |       | —   |       | 118      |       |
| Working capital  (deficit)                 |       | 760                      |       | 3,816    |       | 658      |       | 65       |       | (3,929   | )          |
| Total assets                               |       | 9,490                    |       | 10,743   |       | 6,675    |       | 7,717    |       | 9,344    |       |
| Long-term  debt, net of current portion    |       | 31                       |       | —   |       | —   |       | 200      |       | —   |       |
| Total stockholders’  equity (deficit) |       | 2,567                    |       | 4,492    |       | 1,509    |       | 971      |       | (1,202   | )          |
|                                            |            |                          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Thefollowing discussion of the financial condition and results of operations ofthe Company contains forward-looking statements that involve risks anduncertainties and should be read in conjunction with the cautionary languageapplicable to such forward-looking statements described above in “ACaution About Forward-Looking Statements” found before Item 1 of this Form 10-K.You should not place undue reliance on these forward-looking statementswhich speak only as of the date of this Annual Report on Form 10-K. Thefollowing discussion should also be read in conjunction with the ConsolidatedFinancial Statements and Notes thereto in Item 8. The Company’s actual resultscould differ materially from those discussed herein. Factors that could causeor contribute to such differences include, but are not limited to, the RiskFactors discussed in this Annual Report and in the Company’s other filings withthe SEC.*

**Overview**

Unify (the “Company”, “we”, “us” or “our”) providesbusiness process automation software solutions, including market leadingapplications for specialty markets within the insurance and transportationindustries. Our solutions deliver a broad set of capabilities for automatingbusiness processes, integrating existing information systems and deliveringcollaborative information. Through our industry expertise and technologies, wehelp organizations reduce risk, drive business optimization, apply governance, andincrease customer and member services.

Our products include vertical application software foralternative risk insurance markets and transportation labor standards, andinfrastructure and database software that helps our customers build businessprocess, information-rich and database-driven applications. Our products enableorganizations to rapidly, efficiently and seamlessly deliver the rightinformation to the right people at the right time. By consolidating, automatingand managing data, our customers see increases in efficiencies and services, aswell as reductions in costs.

In February 2005, we acquired privately-heldAcuitrek Inc., a provider of policy administration and underwriting solutionsfor the alternative risk management market. The acquisition was the result ofour expanded strategy to penetrate specialty, underserved markets with oursolutions. As a result, Unify now offers solutions to the alternative riskmarket, in particular public entity risk pools made up of cities, counties,special districts, third party administrators and insurance carriers thatadminister self insurance funds for public entities.

Our customers also include corporate informationtechnology departments (“IT”), software value added resellers (“VARs”),solutions integrators (“SIs”) and independent software vendors (“ISVs”) from avariety of industries, including insurance, financial services, healthcare,government, manufacturing and many other industries. We are headquartered inSacramento, California with a subsidiary office in Paris, France and salesoffices in the United Kingdom (“UK”) and Australia. We market and sell productsdirectly in the United States, UK, France and Australia, and indirectly throughworldwide distributors in Japan, Russia, South Africa, Italy, Brazil and LatinAmerica with customers in more than 45 countries.

Our mission is to deliver infrastructure andapplication software solutions that give customers transactional efficiency, arich user experience and quality information cost effectively and with a highdegree of customer satisfaction. Our strategy is to leverage our award-winningtechnology with our newly acquired vertical applications to deliver a broad setof solutions to the market that streamline and automate processes and workflow;present rich user experiences; and deliver consolidated information frommultiple sources. We believe that by integrating our technology andapplications, we have created a unique and compelling offering in ourmarketplace. By combining best-of-breed capabilities, we offer customers abetter way to manage, integrate, view and report data to help them drive theirbusiness objectives.

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We are organized into twobusiness units comprised of the Insurance Risk Management division and UnifyBusiness Solutions division.

*Insurance RiskManagement*

As a result of the acquisition of Acuitrek, we formedthe Insurance Risk Management (IRM) division. The integration of the companieswas completed during the fourth quarter with IRM now including all formerAcuitrek employees, combined with the addition of Unify resources to supportexpansion and growth of the division. The division is responsible for thedevelopment, implementation and sales of the NavRisk suite of products. NavRiskis a policy administration and underwriting application that automateslabor-intensive processes, streamlines access to information, and integratesand automates delivery of information for pools, policy administrators andbrokers.

The NavRisk application is configured uniquely foreach customer based on the customer specific premium rating requirements. TheNavRisk application is generally licensed with a three year term, plusmandatory maintenance, with additional professional services for customizationas required by the customer. IRM customer contracts are typically billed atcontract signing, a midpoint project milestone and upon project completion. Asa result, the application license fee is deferred until the customer acceptanceis received. Upon acceptance, the license fee will be recognized, which in someinstances can take up to two quarters.

Acuitrek was acquired inthe fourth quarter of fiscal 2005 and therefore there were no software licenserevenues for fiscal 2005 and minimal maintenance revenues. Following the acquisition,the Company entered into two contracts which required deferral of license revenueuntil customer acceptance. The April 2005 Balance Sheet reflects deferredrevenue of $157,000 for these contracts. During the fourth quarter, thisdivision incurred approximately $0.2 million in operating expenses, primarilysalaries, which are included in Selling, General and Administrative expensesfor fiscal 2005.

*Unify BusinessSolutions*

Unify Business Solutionsis comprised of our technology products and customer base. Our technology productsinclude Unify NXJ, ACCELL, DataServer and Vision product families. Ourcustomers are corporate end users IT departments, ISVs and our worldwidedistributors. This division is dedicated to providing exceptional technology tothis customer base and to continue to meet their current and future technologyneeds. This division serves our extensive customer installed base includingsales and marketing, support, and professional services. Included in thedivision is our transportation labor standards application, ViaMode, which wasbuilt on our Unify NXJ technology.

**Critical Accounting Policies**

The following discussionand analysis of the Company’s financial condition and results of operations arebased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent liabilities. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Theareas that require significant judgment are as follows.

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*Revenue Recognition*

The Company generates revenue from software licensesales and related services, including maintenance and support, and consultingservices. The Company licenses its products to end user customers, independentsoftware vendors and value added resellers. The Company recognizes revenue forsoftware license sales in accordance with Statement of Position 97-2, “SoftwareRevenue Recognition”.  We exercisejudgment in connection with the determination of the amount of software andservices revenue to be recognized in each accounting period. The nature of eachlicensing arrangement determines how revenues and related costs are recognized.

Revenue is recognized when a noncancelable licenseagreement has been signed or other persuasive evidence of an arrangementexists, the software product or service has been shipped or electronicallydelivered, the license fees are fixed and determinable, all uncertaintiesregarding customer acceptance are resolved and collectibility is probable.

The Company’s customer contracts include multi-elementarrangements that include a delivered element (a software license) andundelivered elements (such as maintenance and support and/or consulting). Thevalue allocated to the undelivered elements is unbundled from the deliveredelement based on vendor-specific objective evidence (VSOE) of the fairvalue of the maintenance and support and/or consulting, regardless of anyseparate prices stated within the contract. The Company then allocates theremaining balance to the delivered element (the software license) regardless ofany separate prices stated within the contract using the residual method as thefair value of all undelivered elements is determinable.

We defer revenue for any undelivered elements, andrecognize revenue for delivered elements only when the fair values ofundelivered elements are known, uncertainties regarding customer acceptance areresolved, and there are no customer-negotiated refund or return rightsaffecting the revenue recognized for delivered elements. If we cannotobjectively determine the fair value of any undelivered element included inbundled software and service arrangements, we defer revenue until all elementsare delivered and services have been performed, or until fair value canobjectively be determined for any remaining undelivered elements. Changes inthe allocation of the sales price between the elements might impact the timingof revenue recognition, but would not change the total revenue recognized onthe contract. We may modify our pricing practices in the future, which couldresult in changes in our VSOE of fair value for these undelivered elements. Asa result, our future revenue recognition for multi-element arrangementscould differ significantly from our historical results.

An assessment of the ability of the Company’scustomers to pay is another consideration that affects revenue recognition. Insome cases, the Company sells to undercapitalized customers. In thosecircumstances, revenue recognition is deferred until cash is received, thecustomer has established a history of making timely payments or the customer’sfinancial condition has improved. Furthermore, once revenue has beenrecognized, the Company evaluates the related accounts receivable balance ateach period end for amounts that we believe may no longer be collectible. Thisevaluation is largely done based on a review of the financial condition viacredit agencies and historical experience with the customer. Any deteriorationin credit worthiness of a customer may impact the Company’s evaluation ofaccounts receivable in any given period.

Revenue from support andmaintenance activities, which consist of fees for ongoing support andunspecified product updates, are recognized ratably over the term of themaintenance contract, typically one year, and the associated costs are expensedas incurred. Consulting service arrangements are performed on a “best efforts”basis and are generally billed under time-and-materials arrangements. Revenuesand expenses relating to providing consulting services are recognized as theservices are performed.

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*Valuation ofLong-Lived Assets*

Our long-lived assets arecomprised of long-term investments. At April 30, 2005, we had $214,000 inlong-term investments, which are accounted for under the cost method. We assessthe valuation of long-lived assets whenever circumstances indicate that thereis a decline in carrying value below cost that is other-than temporary. Severalfactors can trigger an impairment review such as significant underperformancerelative to expected historical or projected future operating results andsignificant negative industry or economic trends. In assessing potentialimpairment for such investments, we consider these factors as well as theforecasted financial performance. When such decline in value is deemed to beother-than-temporary, we recognize an impairment loss in the current periodoperating results to the extent of the decline. We recognized $175,000 inimpairment losses related to long-term investments in fiscal 2004. Futureadverse changes in market conditions or poor operating results could result inlosses or an inability to recover the carrying value of the long-terminvestments that is not currently reflected in the investments carrying value,thereby, possibly requiring additional impairment charges in the future.

*Deferred Tax AssetValuation Allowance*

As of April 30, 2005,we have approximately $20 million of deferred tax assets relatedprincipally to net operating loss carry forwards, reserves and other accruals,deferred revenue, and foreign tax credits. A valuation allowance has beenrecorded to offset these deferred tax assets. The ability of the Company toultimately realize its deferred tax assets will be contingent upon the Companyachieving taxable income. There can be no assurance that this will occur inamounts sufficient to utilize the deferred tax assets. Should we determine thatwe would be able to realize the deferred tax assets in the future in excess ofthe recorded amount, an adjustment to the deferred tax asset would increaseincome in the period such determination was made.

**Resultsof Operations**

The following table setsforth our consolidated statement of operations expressed as a percentage oftotal revenues for the periods indicated:
| ** **                           | ** ** | **Years Ended April 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                            |       |                                     |       |   |   |   |   |
| Software licenses                    |       | 46.0                                     | %          | 51.2 | % | 48.4 | % |
| Services                             |       | 54.0                                     |       | 48.8 |   | 51.6 |   |
| Total revenues                       |       | 100.0                                    |       | 100.0 |   | 100.0 |   |
| Cost of revenues:                    |       |                                     |       |   |   |   |   |
| Software licenses                    |       | 3.0                                      |       | 5.0 |   | 2.2 |   |
| Services                             |       | 11.8                                     |       | 10.9 |   | 9.3 |   |
| Total cost of revenues               |       | 14.8                                     |       | 15.9 |   | 11.5 |   |
| Gross profit                         |       | 85.2                                     |       | 84.1 |   | 88.5 |   |
| Operating expenses:                  |       |                                     |       |   |   |   |   |
| Product development                  |       | 24.9                                     |       | 25.1 |   | 33.7 |   |
| Selling, general and administrative  |       | 81.6                                     |       | 65.7 |   | 52.6 |   |
| Write-down of other investments      |       | 0.0                                      |       | 1.5 |   | 1.6 |   |
| Total operating expenses             |       | 106.5                                    |       | 92.3 |   | 87.9 |   |
| Income (loss) from operations        |       | (21.3                                    | )          | (8.2 | ) | 0.6 |   |
| Other income (expense), net          |       | 0.4                                      |       | (0.2 | ) | 0.1 |   |
| Income (loss) before income taxes    |       | (20.9                                    | )          | (8.4 | ) | 0.7 |   |
| Provision (benefit) for income taxes |       | 0.0                                      |       | 0.1 |   | 0.3 |   |
| Net income (loss)                    |       | (20.9                                    | )%         | (8.5 | )% | 1.0 | % |

 

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*Total Revenues*

The Company generates revenue from software licensesales and related services, including maintenance and support, and consultingservices. We license our software through our direct sales force in the UnitedStates and Europe, and through indirect channels comprised of distributors,ISVs, VARs, and other partners worldwide. Revenues from our distributor, ISVand VAR indirect channels accounted for approximately 51%, 62%, and 54% of oursoftware license revenues for fiscal 2005, 2004 and 2003, respectively. Internationalrevenues include all our software license and service revenues from customerslocated outside North America. International revenues accounted for 65%, 68%,and 54% of total revenues in fiscal years 2005, 2004 and 2003, respectively.

Total revenues in fiscal 2005 were $11.3 million,a decrease of $0.6 million or 5% from fiscal 2004 revenues of$11.9 million. Total software licenses revenues were $5.2 million, adecrease of $0.9 million or 15% from fiscal 2004 while total services revenueswere $6.1 million, an increase of $0.3 million or 5% from fiscal 2004. Totalrevenues in fiscal 2004 were $11.9 million, a decrease of $0.2 million or 2%from fiscal 2003 revenues of $12.2 million. Total software license revenuesincreased by $0.2 million or 4% from fiscal 2003 while total service revenuesdecreased $0.5 million or 7% from fiscal 2003.

For fiscal 2005, the decrease in software licenserevenues of $0.9 million as compared to fiscal 2004 consists of new productrevenues from our application products of $0.1 million, offset by a $0.2million or 24% decrease in NXJ licenses, and a $0.8 million or 15% decrease inthe database and tools products. The expected revenue growth from Unify NXJ didnot materialize in fiscal 2005 as we had limited success attracting newcustomers, despite multiple NXJ product awards and customer success stories. Wedid experience customer wins from the Company’s existing installed base of ITand ISV customers and expect to see this trend continue during fiscal 2006. Thedecrease in database and tools product licenses year over year is subject tothe timing of product upgrades, end user customers purchasing additionalruntime licenses or upgrading hardware, and the health of our partner’sbusiness and the number of runtime licenses generated from sales of theirapplications. Based upon the performance of the database and tools products forthe last three years, we anticipate these revenues will continue to decline infiscal 2006, but at a reduced rate as a result of an improved database andtools focused sales strategy and centralized, stronger sales management for allterritories. We expect revenue from the application product families (NavRiskand ViaMode) to become significant over the next several years and eventuallyoffset the database and tools revenue declines.

For fiscal 2005, software license revenues from NorthAmerica increased to 33% of total software licenses, up from 29% of totalsoftware licenses in fiscal 2004. Software license revenues from North Americain absolute dollars were flat at $1.7 million. Software license revenues fromour European territory were $2.3 million, a decrease of $0.2 million or 6%. Softwarelicense revenues from our distribution territories were $1.1 million, down $0.8million or 43% from fiscal 2004 representing 80% of the total software licenserevenues decrease for fiscal 2005. The majority of the distribution territoriesdecrease can be attributed to the Russian territory, with historicalperformance that is typically very strong every other year. In fiscal 2004, theterritory had a strong performance followed by a moderate performance in fiscal2005. Because of the significance of the distribution territory and thedramatic impact on the company’s financial performance, we centralized themanagement of all the non-European distributors back to corporate headquarterswith the expectation of reversing this year over year decline. For fiscal 2004,software license revenues were $6.1 million, an increase of $0.2 millionor 4% from $5.9 million in fiscal 2003. Software license revenues fromNorth America decreased to 29% of total software licenses, down from 49% oftotal software licenses in fiscal 2003. Software license revenues from NorthAmerica were $1.8 million, a decrease of 38% from fiscal 2003. These decreasesin software license revenues in North America were from the decline in databaseand tools product licenses year over year as those revenues are subject to thetiming of product upgrades and customers purchasing additional runtime licensesand the sales team was focused on sales of Unify NXJ. Sales of Unify NXJ fromNorth America 

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did substantially increasein fiscal 2004, but the absolute dollars did not offset the decrease indatabase and tools product licenses during the year. Software license revenuesfrom outside of North America were $4.3 million, an increase of 44% fromfiscal 2003. This increase was primarily from an increase in the database andtools products revenues with the largest contribution coming from the Russianterritory.

For fiscal 2005,consulting and training revenues were $0.6 million, an increase of $0.3 millionor 100% as compared to fiscal 2004 as the Company provided additionalconsulting services implementing NXJ projects for North American customers. Consultingrevenues for fiscal 2004 were $0.3 million and $0.7 million in fiscal2003. In fiscal 2005, we renewed approximately 79% of our maintenanceagreements, consistent with the previous years. Maintenance revenues remainedconsistent at $5.5 million for fiscal 2005, 2004 and 2003. The changes in totalservices revenue were entirely attributable to the changes in consultingrevenues for fiscal 2005, 2004 and 2003.

*Cost of Revenues*

*Cost of Software Licenses.  *Costof software licenses consists primarily of product packaging and productioncosts as well as the amortization of royalties and license fees paid forlicensed technology. Cost of software licenses was $0.3 million for fiscal2005, $0.6 million for fiscal 2004 and $0.3 million for fiscal 2003. Theincrease noted in fiscal 2004 was the result of higher third party royaltiespaid and the amortization of purchased technology. Costs associated withroyalties and other direct production costs are expensed as incurred at thetime of the sale and purchased technology from third parties are amortizedratably over their expected useful lives.

*Costof Services.  *Cost of services consists primarily ofemployee, facilities and travel costs incurred in providing customer supportunder software maintenance contracts and consulting services. Total cost ofservices was $1.3 million for fiscal 2005, $1.3 million for fiscal 2004and $1.1 million for fiscal 2003. The increase in fiscal 2004 from fiscal2003 was the result of additional costs to support NXJ customers. Cost ofservices generally has a high component of fixed costs and therefore does notfluctuate directly with changes in services revenues. Our cost of services as apercent of services revenues in fiscal 2005 was 22% as compared to 22% in fiscal2004 and 18% in fiscal 2003. We continue to carefully monitor and strive toimprove the efficiency of our support, consulting and training operations. Infiscal 2006, we expect to expand our consulting and implementation teams as ourapplication product customer wins increase. As a result, our service costs willincrease and, as there is generally a period of time between when additionalconsulting personnel are hired and when they become fully productive, ourresults of operations may be adversely affected by the expansion of ourservices teams.

*Operating Expenses*

*Product Development.  *Productdevelopment expenses consist primarily of employee and facilities costsincurred in the development and testing of new products and in the porting ofnew and existing products to additional hardware platforms and operatingsystems. Product development costs were $2.8 million in fiscal 2005,$3.0 million in fiscal 2004 and $4.1 million in fiscal 2003. Thedecrease in fiscal 2004 was primarily the result of a reduction in the workforce in June 2003 as the Company reduced its product development costs aspart of a restructuring designed to afford increased investments in sales andmarketing, particularly for Unify NXJ. Product development costs as apercentage of total revenues were 25% in fiscal 2005 and 2004 and 34% in fiscal2003. The Company believes that investments in product development are criticalto maintaining technological leadership and therefore intends to continue todevote significant resources to product development in line with typicalsoftware industry averages.

*Selling, General and Administrative.  *Selling,general and administrative (“SG&A”) expenses consist primarily of salariesand incentive pay, marketing programs, travel expenses, professional services,facilities expenses and bad debt expense or recoveries. SG&A expenses were$9.2 million in fiscal 2005, $7.8 million 

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for 2004 and$6.4 million for 2003. As a percentage of total revenue, SG&A expenseswere 82% in fiscal 2005, 66% in fiscal 2004 and 53% in fiscal 2003. However,included in fiscal 2005 SG&A expenses are $1.1 million of non-operatingexpenses consisting of restructuring and severance costs for the North Americanand UK sales management teams and the conversion of the UK subsidiary to asales office. As of April 30, 2005, the Company had a remaining severance accrualbalance of $57 thousand which was paid during the first quarter of fiscal 2005.The major components of SG&A for fiscal 2005, net of the non-operatingexpenses, were sales expenses of $4.8 million, marketing expenses of $1.2million and general and administrative expenses of $2.2 million. Sales expensesincreased by $0.2 million, net of $0.7 million of restructuring and severancecharges. Marketing expenses increased by $0.6 million as a result of increasedspending in lead generation and analyst relations for the NXJ products. Generaland administrative expenses decreased by $0.5 million, net of $0.4 million ofrestructuring to a more normalized expense level. For fiscal 2004, the majorcomponents of SG&A were sales expenses of $4.5 million, marketingexpenses of $0.6 million, and general and administrative expenses of$2.7 million. Sales expenses increased $1.0 million from fiscal 2003as the Company increased its business development activities, hired a new VicePresident of sales and marketing, and increased its direct sales force andtelemarketing staff to focus on increasing sales of Unify NXJ. Marketingexpenses were flat during the same period. General and administrative expensesincreased by $0.6 million fiscal 2004 compared to fiscal 2003, primarilydue to increases in professional fees associated with legal and accounting.

*Write-down of Other Investments.  *Wecontinue to periodically review the recorded value of our investments. Infiscal 2004, we reduced the carrying value of our investment in Arango SoftwareInternational, Inc. from $350,000 to its estimated fair value of $175,000.During fiscal 2003, we recorded impairment charges of $0.2 million relatedto Arango and Evergreen Internet, Inc. We record an investment impairmentcharge if and when we believe an investment has experienced a decline in marketvalue that is other than temporary. Future adverse changes in market conditionsor poor operating results of Arango could result in losses or an inability torecover the carrying value of the investment, thereby possibly requiringadditional impairment charges in the future.

*Other Income (Expense).  *Otherincome (expense), net consists primarily of foreign exchange gains and losses,interest earned by the Company on our cash, cash equivalents and short-terminvestments offset by interest expense incurred on debt. Other income (expense)was $44,000, ($27,000) and $3,000 in fiscal 2005, 2004 and 2003, respectively.

*Provisionfor Income Taxes.  *For fiscal 2005, we recorded stateincome expense of $8,000 and with no federal or foreign tax provisions due toreported net losses. For fiscal 2004, we recorded a foreign income tax expenseof $9,000 and a federal tax benefit of $6,000 for federal income tax refundsfrom prior periods related to NOL carry backs*.*For fiscal 2003, we recorded a foreign income tax benefit as aresult of refunds applied for and a minimal state and federal tax benefit. At April 30,2005, we had net operating losses for federal tax purposes of approximately$49.1 million.

**Liquidityand Capital Resources**

At April 30, 2005,the Company had cash, cash equivalents and short-term investments of$3.7 million, compared to $6.6 million at April 30, 2004.Working capital decreased by $3.0 million to $0.8 million at April 30,2005 from $3.8 million at April 30, 2004.

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The Company completed a private financing on April 28,2004, in which it received $3,696,000, net of expenses. The proceeds from theoffering were received from the sale of 5,633,900 shares of common stock andwarrants representing the right to acquire an additional 2,253,560 shares ofthe Company’s common stock at an exercise price of $.90 per share. Due to theinitial issuance of shares in the acquisition of Acuitrek in February 2005,which caused the application of the anti-dilution provision of the warrants,the warrant exercise price has been adjusted to $0.89 per share and the totalnumber of warrant shares purchasable on exercise of the warrants has increasedto 2,272,715 shares. Any future issuance of shares with respect to the Acuitrektransaction will not trigger application of these anti-dilution provisions. Thewarrants vested immediately upon issuance. There were no warrants exercised asof April 30, 2005.

The Company has a line of credit arrangement withSilicon Valley Bank which was put in place during the first quarter of fiscal2005. As of April 30, 2005 the Company had no outstanding debt balanceunder the line of credit. The line of credit has a borrowing limit of$1.0 million; as of April 30, 2005, based upon the amount of itseligible assets at that time, the Company had available for borrowing up to$0.9 million. This line of credit expired on June 2, 2005. Inaddition, as of April 30, 2005 the Company had a term loan, also withSilicon Valley Bank, with a balance of $0.1 million. On June 5, 2005, theCompany renewed the $1.0 million revolving line of credit and theoutstanding term loans plus additional term loans up to $250,000 with SiliconValley Bank (see Note 6 and 7 in footnotes to Consolidated FinancialStatements). This line of credit is secured by qualifying foreign and domesticaccounts receivable and has a one-year term. The term loan is secured bypurchased assets and has a one-year term. The Company will incur interestexpense on the line of credit and the term loan at the prevailing prime rateplus 2.0% and 2.5%, respectively. The prime rate used to calculate interestshall not be less than 4.0%.

We currently believe that existing cash($3.7 million as of April 30, 2005), forecasted operating cash flowsfor fiscal year 2006, and the credit facility, will provide us with sufficientworking capital for us to meet our operating plan for fiscal year 2006. Theoperating plan assumes normal operations for the Company, capital expendituresof approximately $250,000 and required interest and principal payments on debt.

In fiscal 2006, we plan to aggressively market our newapplication and NXJ products as well as continue to provide excellenttechnology products to our existing customers. The fiscal 2006 plan requiresfew additional strategic investments in sales or marketing. We will addinstallation resources, as necessary, to support our application product linegrowth. We believe our fiscal 2006 plan will return the company to a neutralcash flow position with these growth initiatives in conjunction with ourdramatic changes in the Company cost structure in our UK and North Americansales operations. We believe that the $1.0 million secured line of creditobtained from Silicon Valley Bank in June 2005 will be adequate to meetour borrowing needs over the next twelve months. However, there is no assuranceour plans will be successful.

*Operating Cash Flows.  *Infiscal 2005, we had negative cash flows from operations totaling $2.4 million.This compares to fiscal 2004 and 2003 where cash flows from operations werenegative $0.1 million and positive $0.4 million, respectively. Thenegative operating cash flow for fiscal 2005 principally resulted from $2.4 millionin net loss, a $0.3 million increase in other accrued liabilities, a $0.2 milliondecrease in deferred revenue, a $0.1 million increase in accrued compensation,and a $0.1 million increase in prepaid expenses and other expenses.Offsetting these amounts was a $0.4 million decrease in accounts receivable, a$0.1 increase in accounts payable and $0.2 million in depreciation.

In fiscal 2004, we had negative cash flows fromoperations totaling $0.1 million. The negative operating cash flow for fiscal2004 principally resulted from $1.0 million in net loss, offset by both a$0.6 million increase in other accrued liabilities, and a$0.3 million increase in deferred revenue. Other factors included$0.2 million in depreciation, $0.2 million write-down of otherinvestments, $0.1 million in stock-based expense, together with a$0.2 million increase in accounts receivable, a $0.2 million increasein prepaid expenses and offset by a net $0.1 million increase in accountspayable and accrued compensation.

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In fiscal 2003, we had positive cash flows fromoperations totaling $0.4 million. The positive operating cash flow forfiscal 2003 principally resulted from $0.1 million in net income, a$1.1 million decrease in amounts owed by customers, net of a$0.6 million decrease in accrued liabilities and a $0.6 decrease indeferred revenue. Other factors include $0.2 million in depreciation,$0.2 million write-down of other investments, $0.1 in stock compensation,together with a $0.1 million decrease in prepaid expenses and offset by a$0.1 million decrease in accounts payable and a $0.1 million decreasein accrued compensation.

*Investing Cash Flows.  *Netcash and cash equivalents used by investing activities approximated $0.7 millionfor fiscal 2005. Net cash and cash equivalents used by investing activitiesapproximated $0.2 million in fiscal 2004 and $0.2 million in fiscal2003. The use of cash by investing activities for fiscal 2005 was $0.2 millionfor capital expenditures, and $0.5 million for the purchase of Acuitrek, Theuse of cash by investing activities for fiscal 2004 and 2003 was $0.2 millionof capital expenditures for both years.

*Financing Cash Flows.  *Cashprovided by financing activities in fiscal 2005 was $0.1 million, $3.8 millionin fiscal 2004 and cash used in financing activities was $0.4 million infiscal 2003. The cash provided in 2005 was the result of $0.1 million fromthe proceeds of the issuance of common stock from stock options exercises andpurchases under the employee stock purchase plan with principal payments andborrowings under debt obligations offsetting each other. The cash provided infiscal 2004 was the result of $3.8 million from the proceeds of the issuance ofcommon stock from a private financing closed in April 2004, the issuanceof common stock from stock options exercises, and purchases under the employeestock purchase plan. Cash was also provided by the collection of notesreceivable from a stockholder of $0.1 million with principal payments andborrowings under debt obligations offsetting each other. The cash used infiscal 2003 was the result of $0.3 million decrease in amounts payable tominority stockholders, a $0.2 million repayment of debt obligations and$0.1 million received for the issuance of our common stock.

Asummary of certain contractual obligations as April 30, 2005 is as follows(in thousands):
| ** **                              | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**        | ** ** | ** **                                | ** ** | **Total** | ** ** | **1 year  or less** | ** ** | ** 2-3 years ** | ** ** | **4-5 years** | ** ** | **After  5 years** | ** ** |
| **Long-Term  Debt**                     |       | $                                         | 197        |   | $ | 166 |   |   | $ | 31 |   |   |   | — |   |   |   | — |   |   |
| **Other  Long-Term Liabilities**        |       | 72                                        |       | — |   |   | — |   |   |   | — |   |   |   | $ | 72 |   |   |
| **Operating  Leases**                   |       | 2,929                                     |       | 1,079 |   |   | 1,828 |   |   |   | $ | 22 |   |   |   | — |   |   |
| **Total Contractual Cash  Obligations** |       | $                                         | 3,198      |   | $ | 1,245 |   |   | $ | 1,859 |   |   |   | $ | 22 |   |   |   | $ | 72 |   |   |
|                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Recently IssuedAccounting Standards**

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement No. 123R, *Share-BasedPayment.* This statement establishes standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices, primarily with respect to transactions in which employee services areobtained in exchange for share-based payment. Statement 123R is effective as ofthe beginning of the fiscal year that begins after June 15, 2005. TheCompany has not completed the process of evaluating the impact that will resultfrom adopting this pronouncement. The Company is therefore unable to disclosethe impact that adopting FASB Statement 123R will have on its financialposition, cash flows or results of operations when such statement is adopted.

In December 2004, the FASB issued Statement No. 153,Exchanges of Nonmonetary Assets, anamendment of APB Opinion No. 29, Accounting for Nonmonetary**Transactions.**This statement addresses the measurement ofexchanges of nonmonetary assets and redefines the scope of transactions thatshould be measured based on the fair value of the assets exchanged. Provisionsof this Statement are effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005 and are required to beadopted by the Company in the second quarter of fiscal 2006. The Companyanticipates the adoption of Statement 153 will not have a material impact toour financial position, cash flows or results of operations.

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**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

*Interest Rate Risk.  *TheCompany’s exposure to market rate risk for changes in interest rates relatesprimarily to its investment portfolio, which consists of cash equivalents andshort-term investments. Cash equivalents are highly liquid investments withoriginal maturities of three months or less and are stated at cost. Cashequivalents are generally maintained in money market accounts which have astheir objective preservation of principal and which hold investments withmaturity dates of less than 90 days. The Company does not believe itsexposure to interest rate risk is material for cash and investments, whichtotaled $3.7 million at April 30, 2005. Unify had no short-terminvestments at April 30 in fiscal 2005 or 2004. Additionally, the Companydoes not believe its exposure to interest rate risk is material for debt. On acombined basis, the current and long-term portions of debt totaled $.2 millionat April 30, 2005 and $.1 million at April 30, 2004.

Unify does not use derivative financial instruments inits short-term investment portfolio, and places its investments with highquality issuers only and, by policy, limits the amount of credit exposure toany one issuer. The Company is averse to principal loss and attempts to ensurethe safety of its invested funds by limiting default, market and reinvestmentrisk.

*Foreign Currency Exchange Rate Risk.  *Asa global concern, the Company faces exposure to adverse movements in foreigncurrency exchange rates. These exposures may change over time as businesspractices evolve and could have an adverse impact on the Company’s business,operating results and financial position. Historically, the Company’s primaryexposures have related to local currency denominated sales and expenses in Europe,Japan and Australia. For example, when the U.S. dollar strengthens against themajor European currencies, it results in lower revenues and expenses recordedfor those regions when translated into U.S. dollars.

Due to the substantialvolatility of currency exchange rates, among other factors, the Company cannotpredict the effect of exchange rate fluctuations on its future operatingresults. Although Unify takes into account changes in exchange rates over timein its pricing strategy, it does so only on an annual basis, resulting insubstantial pricing exposure as a result of foreign exchange volatility duringthe period between annual pricing reviews. The Company also has currencyexchange rate exposures on intercompany accounts receivable owed to the Companyas a result of local currency sales of software licenses by the Company’sinternational subsidiary in France. At April 30, 2005, the Company had$0.1 million in such receivables denominated in Euros. The Companyencourages prompt payment of these intercompany balances in order to minimizeits exposure to currency fluctuations, but it engages in no hedging activitiesto reduce the risk of such fluctuations. A hypothetical ten percent change inforeign currency rates would have an insignificant impact on the Company’sbusiness, operating results and financial position. The Company has notexperienced material exchange losses on intercompany balances in the past;however, due to the substantial volatility of currency exchange rates, amongother factors, it cannot predict the effect of exchange rate fluctuations onits future business, operating results and financial position.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

See Part IV, Item 15 (a) foran index to the financial statements and supplementary financial information,which are filed, as part of this report.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

At a meeting heldon December 15, 2004, our Board of Directors dismissed the firm of Ernst andYoung LLP (“Ernst and Young”) as our Independent Registered Public AccountingFirm effective December 15, 2004. In addition, the Board of Directorsapproved the engagement of Grant Thornton LLP (“Grant Thornton”) as ourIndependent Registered Public Accounting Firm for the fiscal year ending 

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April 30, 2005. TheAudit Committee of the Board of Directors approved the change in IndependentRegistered Public Accounting Firms on December 15, 2004.

The reports of Ernst and Young on our financialstatements for the past two fiscal years did not contain an adverse opinion ora disclaimer of opinion and were not qualified or modified as to uncertainty,audit scope, or accounting principles.

In connection with the audits of our financialstatements for each of the two fiscal years ended April 30, 2004 throughthe date of dismissal, there were no disagreements with Ernst and Young on anymatters of accounting principles or practices, financial statement disclosure,or auditing scope and procedures which, if not resolved to the satisfaction ofErnst and Young, would have caused Ernst and Young to make reference to thematter in their report.

During the two fiscal years ended April 30, 2004,and through December 15, 2004, we did not consult Grant Thornton regardingthe application of accounting principles to a specific completed orcontemplated transaction, or the type of audit opinion that might be renderedon our financial statements.

On December 15, 2004,pursuant to the approval of the Audit Committee of our Board of Directors, weengaged Grant Thornton LLP (“Grant Thornton”) to serve as our independentauditors. During the fiscal year ended April 30, 2004 and during thesubsequent period through December 15, 2004, we did not consult with GrantThornton on any accounting or auditing issues.

**ITEM 9A.**        CONTROLSAND PROCEDURES

(a)   Evaluationof Disclosure Controls and Procedures. Under the supervision and with theparticipation of our management, including our chief executive officer andchief financial officer, we evaluated the effectiveness of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon that evaluation,our chief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this annual report.

(b)   Changes inInternal Controls. There have been no changes in our internal controls overfinancial reporting that occurred during the fiscal year ended April 30,2005 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The information requiredby this item is included under the captions “Directors and Executive Officers”,“Election of Directors” and “Section 16(a) Beneficial OwnershipReporting Compliance” in the Company’s proxy statement for the 2005 AnnualMeeting of Stockholders (the “2005 Annual Meeting of Stockholders”) and isincorporated herein by reference.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby this item is included under the caption “Executive Compensation and OtherMatters” in the Company’s proxy statement for the 2005 Annual Meeting ofStockholders and is incorporated herein by reference.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information requiredby this item is included under the caption “Executive Compensation and OtherMatters” in the Company’s proxy statement for the 2005 Annual Meeting ofStockholders and is incorporated herein by reference.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information requiredby this item is included under the caption “Executive Compensation and OtherMatters” in the Company’s proxy statement for the 2005 Annual Meeting ofStockholders and is incorporated herein by reference.

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES

The information required by this item is includedunder the caption “Principal Accounting Fees and Services” in the Company’sproxy statement for the 2005 Annual Meeting of Stockholders and is incorporatedherein by reference.

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**PART IV**

**ITEM 15.   EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

**(a)****          The following documentsare filed as part of this Annual Report on Form 10-K:**

*1.*    *Consolidated FinancialStatements*
|                                                                                                               | ** ** | ** ** | **Page Number** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|----------------------|------------|
| Report  of Grant Thornton LLP, Independent Registered Public Accounting  Firm                                 |       | 34         |                 |
| Report  of Ernst & Young LLP, Independent Registered Public Accounting Firm                          |       | 35         |                 |
| Consolidated  Balance Sheets as of April 30, 2005 and 2004                                               |       | 36         |                 |
| Consolidated  Statements of Operations for the years ended April 30, 2005, 2004 and  2003                |       | 37         |                 |
| Consolidated  Statements of Stockholders’ Equity for the years ended April 30, 2005,  2004 and 2003 |       | 38         |                 |
| Consolidated  Statements of Cash Flows for the years ended April 30, 2005, 2004 and  2003                |       | 39         |                 |
| Notes  to Consolidated Financial Statements                                                                   |       | 40         |                 |
|                                                                                                               |            |            |                      |            |  |

 

*2.*    *Financial StatementSchedules*
| Schedule II—Valuation and  Qualifying Accounts and Reserves |   | 58 |   |
|------------------------------------------------------------------|--------|----|--------|

 

All other schedules are omitted because they are notapplicable, or the required information is shown in the Consolidated FinancialStatements or Notes thereto.

*3.    Exhibits—*SeeItem 15(b) below.

**(b)****          Exhibits**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                            | ** ** | **Description** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1         |       | Restated Certificate of Incorporation of the  Company(1)                                                                                                                                                                                                                                              |
| 3.2         |       | Bylaws of the  Registrant(1)                                                                                                                                                                                                                                                                          |
| 4.1         |       | Form of Stock  Certificate(1)                                                                                                                                                                                                                                                                    |
| 4.2         |       | Form of Warrant(5)                                                                                                                                                                                                                                                                               |
| 10.2*       |       | 1991 Stock Option Plan,  as amended(1)                                                                                                                                                                                                                                                                |
| 10.3*       |       | 1996 Employee Stock  Purchase Plan(1), (3)                                                                                                                                                                                                                                                            |
| 10.4        |       | Form of  Indemnification Agreement(1)                                                                                                                                                                                                                                                            |
| 10.6        |       | Office Building Lease  for Sacramento Facility, Dated December 17, 1999(2)                                                                                                                                                                                                                       |
| 10.8*       |       | Employment Agreement by  and between Todd Wille and the Registrant dated December 29, 2000(4)                                                                                                                                                                                                    |
| 10.9*       |       | 2001 Stock Plan(3)                                                                                                                                                                                                                                                                                    |
| 10.10       |       | Silicon Valley Bank Loan  and Security Agreement dated June 6, 2003(5), as amended by Silicon Valley  Bank Amendment to Loan Documents dated June 3, 2004 and June 5,  2005 and Amended Schedule to Loan and Security Agreement dated June 3,  2004(6) and June 5, 2005 |
| 10.11       |       | Purchase  Agreement dated April 23, 2004(6)                                                                                                                                                                                                                                                      |
| 10.12       |       | Registration  Rights Agreement dated April 26, 2004(6)                                                                                                                                                                                                                                           |

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| 10.13 |   | Fourth Amendment  Effective January 1, 2002 to Office Building Lease Dated December 17,  1999(6)                                                                                                           |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14 |   | Fifth Amendment  to Lease and Termination of Stock Pledge Agreement dated September 18,  2003(6)                                                                                                                |
| 10.15 |   | Acuitrek Inc.  Stock Purchase Agreement dated February 2, 2005(7)                                                                                                                                               |
| 10.16 |   | Acuitrek Inc.  Registration Rights Agreement dated February 2, 2005(7)                                                                                                                                          |
| 14    |   | Code of Ethics  for Senior Officers(6)                                                                                                                                                                               |
| 21.1  |   | Subsidiaries of  the Registrant                                                                                                                                                                                      |
| 23.1  |   | Consent of  Grant Thornton LLP, Independent Registered  Public Accounting Firm                                                                                                                                  |
| 23.2  |   | Consent of Ernst &  Young LLP, Independent Registered Public Accounting Firm                                                                                                                                |
| 31.1  |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Securities Exchange Act of 1934 as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 31.2  |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Securities Exchange Act of 1934 as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 32.1  |   | Certification of  Todd E. Wille, Chief Executive Officer of Unify Corporation pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                  |
| 32.2  |   | Certification of  Steven D. Bonham, Chief Financial Officer of Unify Corporation pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.               |

----

(1)          Incorporated byreference to the exhibit filed with Registrant’s Form S-1Registration Statement (No. 333-3834) declared effective by theSecurities and Exchange Commission on June 14, 1996.

(2)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on December 22,2000.

(3)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-Q on March 14,2002.

(4)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on July 30,2001.

(5)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on July 17,2003.

(6)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on July 21,2004.

(7)          Incorporated byreference to the exhibit filed with Registrant’s Form 8-K on February 2,2005.

*                    Exhibit pertainsto a management contract or compensatory plan or arrangement.

 

32

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                            | UNIFY CORPORATION |
|----------------------------|-------------------|
|                       | By:               | /s/  TODD E. WILLE |
|                       |              | Todd E. Wille |
|                       |              | *President  and Chief Executive Officer* |
| Dated: July 26,  2005 |              |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrant and in thecapacities on the dates indicated.
| /s/ TODD E. WILLE       |   | President and Chief Executive Officer        | July 26, 2005 |
|-------------------------|--------|----------------------------------------------|--------------------|
| Todd E. Wille           |   | (Principal Executive Officer)                |               |
| /s/  STEVEN D. BONHAM   |   | Vice President and Chief  Financial Officer  | July 26, 2005 |
| Steven D. Bonham        |   | (Principal Financial and Accounting Officer) |               |
| /s/  STEVEN D. WHITEMAN |   | Director and Chairman of  the Board          | July 26, 2005 |
| Steven D.  Whiteman     |   |                                         |               |
| /s/  ROBERT J. MAJTELES |   | Director                                     | July 26, 2005 |
| Robert J.  Majteles     |   |                                         |               |
| /s/  TERY R. LARREW     |   | Director                                     | July 26, 2005 |
| Tery R. Larrew          |   |                                         |               |

 

33

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**Reportof Grant Thornton LLP, Independent Registered Public Accounting Firm**

Board of Directors andShareholders of Unify Corporation

We have audited the accompanying consolidated balancesheet of Unify Corporation as of April 30, 2005 and the related consolidatedstatement of operations, stockholders’ equity, and cash flows for the yearended April 30, 2005. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Unify Corporation as of April 30, 2005 and the results of itsoperation and its cash flow for the year ended April 30, 2005 inconformity with accounting principles generally accepted in the United Statesof America.

Ouraudit was conducted for the purpose of forming an opinion on the basicfinancial statements taken as a whole. The Schedule II is presented for purposeof additional analysis and is not a required part of the basic financialstatements. This schedule has been subjected to the auditing procedures appliedin the audit of the basic financial statements and, in our opinion, is fairlystated in all material respects in relation to the basic financial statementstaken as a whole.
| /s/  GRANT THORNTON LLP                                                            |
|------------------------------------------------------------------------------------|
| Reno, Nevada                                                                       |
| May 19, 2005 (except for Note 17, as to which  the date is June 5, 2005) |

 

34

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**Reportof Ernst & Young LLP, Independent Registered Public Accounting Firm**

The Board of Directors andShareholders of Unify Corporation:

We have audited the accompanying consolidated balancesheet of Unify Corporation as of April 30, 2004, and the relatedconsolidated statements of operations, shareholders’ equity (deficit), and cashflows for years ended April 30, 2004 and 2003. Our audit also included thefinancial statement schedule listed in the Index at Item 15(a) 2 for theyears ended April 30, 2004 and 2003. These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Unify Corporation at April 30,2004, and the consolidated results of its operations and its cash flows foreach of the years ended April 30, 2004 and 2003, in conformity withaccounting principles generally accepted in the United States. Also, in our opinion,the related financial statement schedule for the years ended April 30,2004 and 2003, when considered in relation to the basic financial statementstaken as a whole, presents fairly in all material respects the information setforth therein.
|                        | /s/ ERNST &  YOUNG LLP |
|------------------------|---------------------------------|
| Sacramento, California |
| June 3, 2004      |

 

35

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**UNIFY CORPORATIONCONSOLIDATED BALANCE SHEETS(In thousands, except share data)**
| ** **                                                                                                                   | ** ** | **   April 30,     2005** | ** ** | **   April 30,     2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ASSETS                                                                                                                       |       |                                                         |       |                                                         |       |   |   |   |   |
| Current assets:                                                                                                              |       |                                                         |       |                                                         |       |   |   |   |   |
| Cash and cash equivalents                                                                                                    |       |                                                         | $          | 3,675                                                        |       |   |   | $ | 6,606 |   |   |
| Accounts receivable, net of allowances of $195 in  2005, and $175 in 2004                                                    |       |                                                         | 2,519      |                                                         |       |   | 2,650 |   |   |
| Accounts receivable-related party                                                                                            |       |                                                         | 92         |                                                         |       |   | 198 |   |   |
| Prepaid expenses and other current assets                                                                                    |       |                                                         | 656        |                                                         |       |   | 543 |   |   |
| Total current assets                                                                                                         |       |                                                         | 6,942      |                                                         |       |   | 9,997 |   |   |
| Property and  equipment, net                                                                                                 |       |                                                         | 429        |                                                         |       |   | 338 |   |   |
| Other investments                                                                                                            |       |                                                         | 214        |                                                         |       |   | 214 |   |   |
| Goodwill and  intangible assets                                                                                              |       |                                                         | 1,739      |                                                         |       |   | — |   |   |
| Other assets, net  of allowances of $178 in 2005, and $357 in 2004                                                           |       |                                                         | 166        |                                                         |       |   | 194 |   |   |
| Total assets                                                                                                                 |       |                                                         | $          | 9,490                                                        |       |   |   | $ | 10,743 |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                    |       |                                                         |       |                                                         |       |   |   |   |   |
| Current liabilities:                                                                                                         |       |                                                         |       |                                                         |       |   |   |   |   |
| Accounts payable                                                                                                             |       |                                                         | 739        |                                                         |       |   | $ | 523 |   |   |
| Current portion of long term debt                                                                                            |       |                                                         | 102        |                                                         |       |   | 146 |   |   |
| Current portion of long term debt-related party                                                                              |       |                                                         | 64         |                                                         |       |   | — |   |   |
| Other accrued liabilities                                                                                                    |       |                                                         | 1,336      |                                                         |       |   | 1,340 |   |   |
| Accrued compensation and related expenses                                                                                    |       |                                                         | 721        |                                                         |       |   | 812 |   |   |
| Deferred revenue                                                                                                             |       |                                                         | 3,220      |                                                         |       |   | 3,360 |   |   |
| Total current liabilities                                                                                                    |       |                                                         | 6,182      |                                                         |       |   | 6,181 |   |   |
| Long term debt, net of current portion                                                                                       |       |                                                         | 31         |                                                         |       |   | — |   |   |
| Royalty payable                                                                                                              |       |                                                         | 514        |                                                         |       |   | — |   |   |
| Accrued support  obligations                                                                                                 |       |                                                         | 124        |                                                         |       |   | — |   |   |
| Other long term  liabilities                                                                                                 |       |                                                         | 72         |                                                         |       |   | 70 |   |   |
| Commitments and contingencies                                                                                                |       |                                                         | —     |                                                         |       |   | — |   |   |
| Stockholders’ equity:                                                                                                   |       |                                                         |       |                                                         |       |   |   |   |   |
| Preferred stock, $0.001 par value; 5,000,000 shares  authorized; no shares issued or outstanding                             |       |                                                         | —     |                                                         |       |   | — |   |   |
| Common stock, $0.001 par value; 40,000,000 shares  authorized; 28,442,657 and 27,273,920 shares outstanding in 2005 and 2004 |       |                                                         | 28         |                                                         |       |   | 27 |   |   |
| Additional paid-in capital                                                                                                   |       |                                                         | 63,588     |                                                         |       |   | 63,205 |   |   |
| Accumulated other comprehensive income                                                                                       |       |                                                         | 73         |                                                         |       |   | 18 |   |   |
| Accumulated deficit                                                                                                          |       |                                                         | (61,122    | )                                                            |       |   | (58,758 | ) |   |
| Total stockholders’ equity                                                                                              |       |                                                         | 2,567      |                                                         |       |   | 4,492 |   |   |
| Total liabilities  and stockholders’ equity                                                                             |       |                                                         | $          | 9,490                                                        |       |   |   | $ | 10,743 |   |   |

 

See accompanying notes

36

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**UNIFY CORPORATIONCONSOLIDATED STATEMENTSOF OPERATIONS(In thousands, except per share data)**
| ** **                                             | ** ** | **Years Ended April 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                              |       |                                     |       |   |   |   |   |
| Software licenses                                      |       | $                                        | 5,205      |   | $ | 6,111 |   | $ | 5,895 |   |
| Services                                               |       | 6,098                                    |       | 5,814 |   | 6,278 |   |
| Total revenues                                         |       | 11,303                                   |       | 11,925 |   | 12,173 |   |
| Cost of revenues:                                      |       |                                     |       |   |   |   |   |
| Software licenses                                      |       | 336                                      |       | 595 |   | 263 |   |
| Services                                               |       | 1,328                                    |       | 1,299 |   | 1,133 |   |
| Total cost of revenues                                 |       | 1,664                                    |       | 1,894 |   | 1,396 |   |
| Gross profit                                           |       | 9,639                                    |       | 10,031 |   | 10,777 |   |
| Operating  expenses:                                   |       |                                     |       |   |   |   |   |
| Product development                                    |       | 2,814                                    |       | 2,996 |   | 4,108 |   |
| Selling, general and administrative                    |       | 9,225                                    |       | 7,840 |   | 6,391 |   |
| Write-down of other investments                        |       | —                                   |       | 175 |   | 200 |   |
| Total operating expenses                               |       | 12,039                                   |       | 11,011 |   | 10,699 |   |
| Income (loss) from operations                          |       | (2,400                                   | )          | (980 | ) | 78 |   |
| Other income  (expense), net                           |       | 44                                       |       | (27 | ) | 3 |   |
| Income (loss) before income taxes                      |       | (2,356                                   | )          | (1,007 | ) | 81 |   |
| Provision  (benefit) for income taxes                  |       | 8                                        |       | 3 |   | (38 | ) |
| Net income (loss)                                      |       | $                                        | (2,364     | ) | $ | (1,010 | ) | $ | 119 |   |
| Net income (loss)  per share:                          |       |                                     |       |   |   |   |   |
| Basic                                                  |       | $                                        | (0.09      | ) | $ | (0.05 | ) | $ | 0.01 |   |
| Diluted                                                |       | $                                        | (0.09      | ) | $ | (0.05 | ) | $ | 0.01 |   |
| Shares used in  computing net income (loss) per share: |       |                                     |       |   |   |   |   |
| Basic                                                  |       | 27,777                                   |       | 21,558 |   | 20,939 |   |
| Diluted                                                |       | 27,777                                   |       | 21,558 |   | 21,693 |   |

 

See accompanying notes.

37

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**UNIFY CORPORATIONCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY(In thousands, except share data)**
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Note  Receivable  from** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | **Total  Stockholders’** | ** ** | **Comprehensive  Income** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|----------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                | ** ** | **Stockholder**                       | ** ** | **Income (loss)** | ** ** | **Deficit**                   | ** ** | **Equity**                | ** ** | **(Loss)** | ** ** |
| Balances at April 30, 2002                                    |       | 20,338,663            |       |                    | $          | 20                         |       |                                  |       | $                      | 59,088     |                          |       |                      | $          | (60 | ) |   |   | $ | (210 | ) |   |   | $ | (57,867 | ) |   |   | $ | 971 |   |   |   |   |   |   |
| Comprehensive income                                               |       |                  |       |                    |       |                       |       |                                  |       |                   |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                         |       | —                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | —     |                      |       |   | — |   |   |   | 119 |   |   |   | 119 |   |   |   | $ | 119 |   |   |
| Translation adjustments                                            |       | —                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | —     |                      |       |   | 167 |   |   |   | — |   |   |   | 167 |   |   |   | 167 |   |   |
| Total comprehensive income                                         |       |                  |       |                    |       |                       |       |                                  |       |                   |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 286 |   |   |
| Exercise of stock options                                          |       | 90,849                |       |                    | —     |                       |       |                                  | 17         |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 17 |   |   |   |   |   |   |
| Issuance of common stock under employee stock  purchase plan  |       | 478,308               |       |                    | 1          |                       |       |                                  | 104        |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 105 |   |   |   |   |   |   |
| Stock-based compensation                                           |       | 258,196               |       |                    | —     |                       |       |                                  | 130        |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 130 |   |   |   |   |   |   |
| Balances at April 30, 2003                                    |       | 21,166,016            |       |                    | $          | 21                         |       |                                  |       | $                      | 59,339     |                          |       |                      | $          | (60 | ) |   |   | $ | (43 | ) |   |   | $ | (57,748 | ) |   |   | $ | 1,509 |   |   |   |   |   |   |
| Comprehensive loss                                                 |       |                  |       |                    |       |                       |       |                                  |       |                   |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                           |       | —                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | —     |                      |       |   | — |   |   |   | (1,010 | ) |   |   | (1,010 | ) |   |   | $ | (1,010 | ) |   |
| Translation adjustments                                            |       | —                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | —     |                      |       |   | 61 |   |   |   | — |   |   |   | 61 |   |   |   | 61 |   |   |
| Total comprehensive loss                                           |       |                  |       |                    |       |                       |       |                                  |       |                   |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | (949 | ) |   |
| Issuance of common stock                                           |       | 5,665,500             |       |                    | 6          |                       |       |                                  | 3,702      |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 3,708 |   |   |   |   |   |   |
| Issuance of common stock warrants                                  |       | —                |       |                    | —     |                       |       |                                  | 32         |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 32 |   |   |   |   |   |   |
| Exercise of stock options                                          |       | 114,308               |       |                    | —     |                       |       |                                  | 28         |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 28 |   |   |   |   |   |   |
| Issuance of common stock under employee stock  purchase plan  |       | 228,096               |       |                    | —     |                       |       |                                  | 64         |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 64 |   |   |   |   |   |   |
| Stock-based compensation                                           |       | 100,000               |       |                    | —     |                       |       |                                  | 40         |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 40 |   |   |   |   |   |   |
| Repayment of note receivable from stockholder                      |       | —                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | 60         |                      |       |   | — |   |   |   | — |   |   |   | 60 |   |   |   |   |   |   |
| Balances at April 30, 2004                                    |       | 27,273,920            |       |                    | $          | 27                         |       |                                  |       | $                      | 63,205     |                          |       |                      | $          | — |   |   |   | $ | 18 |   |   |   | $ | (58,758 | ) |   |   | $ | 4,492 |   |   |   |   |   |   |
| Comprehensive loss                                                 |       |                  |       |                    |       |                       |       |                                  |       |                   |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                           |       | —                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | —     |                      |       |   | — |   |   |   | (2,364 | ) |   |   | (2,364 | ) |   |   | $ | (2,364 | ) |   |
| Translation adjustments                                            |       | —                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | —     |                      |       |   | 55 |   |   |   | — |   |   |   | 55 |   |   |   | 55 |   |   |
| Total comprehensive loss                                           |       |                  |       |                    |       |                       |       |                                  |       |                   |       |                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | (2,309 | ) |   |
| Issuance of common stock                                           |       | 520,833               |       |                    | 1          |                       |       |                                  | 249        |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 250 |   |   |   |   |   |   |
| Costs related to private placement                                 |       | —                |       |                    | —     |                       |       |                                  | (93        | )                      |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | (93 | ) |   |   |   |   |   |
| Issuance of common stock warrants                                  |       | —                |       |                    | —     |                       |       |                                  | 3          |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 3 |   |   |   |   |   |   |
| Net exercise of common stock warrants                              |       | 68,016                |       |                    | —     |                       |       |                                  | —     |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Exercise of stock options                                          |       | 269,170               |       |                    |       |                       |       |                                  | 83         |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 83 |   |   |   |   |   |   |
| Issuance of common stock under employee stock  purchase plan  |       | 268,162               |       |                    | —     |                       |       |                                  | 101        |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 101 |   |   |   |   |   |   |
| Stock-based compensation                                           |       | 42,556                |       |                    |       |                       |       |                                  | 40         |                   |       |                          | —     |                      |       |   | — |   |   |   | — |   |   |   | 40 |   |   |   |   |   |   |
| Balances at  April 30, 2005                                   |       | 28,442,657            |       |                    | $          | 28                         |       |                                  |       | $                      | 63,588     |                          |       |                      | $          | — |   |   |   | $ | 73 |   |   |   | $ | (61,122 | ) |   |   | $ | 2,567 |   |   |   |   |   |   |

 

See accompanying notes.

38

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**UNIFY CORPORATIONCONSOLIDATED STATEMENTSOF CASH FLOWS(In thousands)**
| ** **                                                                               | ** ** | **Years Ended April 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                    |       |                                     |       |   |   |   |   |
| Net income (loss)                                                                        |       | $                                        | (2,364     | ) | $ | (1,010 | ) | $ | 119 |   |
| Reconciliation of net income (loss) to cash provided  by (used in) operating activities: |       |                                     |       |   |   |   |   |
| Depreciation                                                                             |       | 186                                      |       | 165 |   | 233 |   |
| Write-down of  other investments                                                         |       | —                                   |       | 178 |   | 200 |   |
| Amortization                                                                             |       | 30                                       |       | — |   | — |   |
| Fulfillment of support  obligations                                                      |       | (99                                      | )          | — |   | — |   |
| Employee stock based  expense                                                            |       | 40                                       |       | 40 |   | 130 |   |
| Non employee stock based  expense                                                        |       | 3                                        |       | 44 |   | — |   |
| Changes in operating assets and liabilities:                                             |       |                                     |       |   |   |   |   |
| Accounts receivable                                                                      |       | 427                                      |       | (240 | ) | 1,092 |   |
| Prepaid expenses and  other current assets                                               |       | (123                                     | )          | (244 | ) | 66 |   |
| Accounts payable                                                                         |       | 138                                      |       | (35 | ) | (79 | ) |
| Accrued compensation and  related expenses                                               |       | (113                                     | )          | 134 |   | (79 | ) |
| Other accrued  liabilities                                                               |       | (296                                     | )          | 588 |   | (632 | ) |
| Deferred revenue                                                                         |       | (196                                     | )          | 299 |   | (608 | ) |
| Net cash provided by  (used in) operating activities                                     |       | (2,367                                   | )          | (81 | ) | 442 |   |
| Cash flows from investing activities:                                                    |       |                                     |       |   |   |   |   |
| Acquisition, net of cash  acquired                                                       |       | (504                                     | )          | — |   | — |   |
| Purchases of property  and equipment                                                     |       | (208                                     | )          | (210 | ) | (178 | ) |
| Increase in other  investments                                                           |       | —                                   |       | — |   | (3 | ) |
| Decrease (increase) in  other assets                                                     |       | 4                                        |       | (19 | ) | 15 |   |
| Net cash used in  investing activities                                                   |       | (708                                     | )          | (229 | ) | (166 | ) |
| Cash flows from financing activities:                                                    |       |                                     |       |   |   |   |   |
| Proceeds from issuance  of common stock, net                                             |       | 92                                       |       | 3,788 |   | 122 |   |
| Borrowings under debt  obligations                                                       |       | 1,681                                    |       | 295 |   | — |   |
| Principal payments under  debt obligations                                               |       | (1,694                                   | )          | (349 | ) | (240 | ) |
| Payable to minority  interest stockholders                                               |       | —                                   |       | — |   | (309 | ) |
| Collection of notes  receivable from stockholder                                         |       | —                                   |       | 60 |   | — |   |
| Net cash provided by  (used in) financing activities                                     |       | 79                                       |       | 3,794 |   | (427 | ) |
| Effect of exchange rate  changes on cash                                                 |       | 65                                       |       | 92 |   | 188 |   |
| Net increase (decrease)  in cash and cash equivalents                                    |       | (2,931                                   | )          | 3,576 |   | 37 |   |
| Cash and cash  equivalents, beginning of year                                            |       | 6,606                                    |       | 3,030 |   | 2,993 |   |
| Cash and cash  equivalents, end of year                                                  |       | $                                        | 3,675      |   | $ | 6,606 |   | $ | 3,030 |   |
| Supplemental noncash investing and financing  activities:                                |       |                                     |       |   |   |   |   |
| Common stock issued in  acquisition                                                      |       | $                                        | 250        |   | $ | — |   | $ | — |   |
| Supplemental cash flow information:                                                      |       |                                     |       |   |   |   |   |
| Cash paid (received) during the year for:                                                |       |                                     |       |   |   |   |   |
| Interest                                                                                 |       | (42                                      | )          | 2 |   | 3 |   |
| Income taxes                                                                             |       | $                                        | 6          |   | $ | (112 | ) | $ | (52 | ) |

 

See accompanying notes

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**UNIFYCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1.   TheCompany and Summary of Significant Accounting Policies**

*The Company*

Unify provides businessprocess automation software solutions, including applications for specialtymarkets within the insurance and transportation industries. Our solutionsdeliver a broad set of capabilities for automating business processes,integrating existing information systems and delivering collaborativeinformation. Through our industry expertise and market leading technologies, wehelp organizations reduce risk, drive business optimization, apply governance,and increase customer and member services. Our customers are in a varietyof industries, including insurance, financial services, healthcare, government,manufacturing and many other industries. Unify is headquartered in Sacramento,California and has offices in the United Kingdom, France and Australia.

*Basis ofPresentation*

The accompanying consolidated financial statementsinclude the accounts of the Company, and its wholly-owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated.

The functional currency of the Company’s foreignsubsidiary is their local currency. Assets and liabilities denominated inforeign currencies are translated into U.S. dollars at period-end exchangerates. Income and expense accounts are translated at average rates of exchangein effect during the reporting period. Foreign currency transaction gains orlosses are included in other income, net. Foreign currency adjustmentsresulting from the translation process are excluded from net income (loss) andrecorded in other comprehensive income (loss).

The accompanyingconsolidated financial statements have been prepared on a going-concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. The consolidated financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or the amounts and classification ofliabilities that might be necessary should the Company be unable to continue asa going concern.

*Use of Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant estimates include the assessmentof the carrying value of the other investments and the allowance for doubtfulaccounts for accounts receivable, long-term receivables and notes receivable. Actualresults could differ from these estimates.

*Cash Equivalents*

Cash equivalents are highlyliquid investments with original maturities of three months or less whenpurchased and are stated at cost. Cash equivalents consist primarily of demanddeposits with banks and money market funds.

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*Fair Value ofFinancial Instruments*

The carrying amounts ofcash and cash equivalents, accounts receivable, notes receivable and accountspayable approximate fair value because of the short-term maturity of theseinstruments. Notes payable approximate fair value because the interest ratesare tied to the prime rate.

*Concentrations ofCredit Risk and Credit Evaluations*

Financial instrumentspotentially subjecting the Company to concentrations of credit risk consistprimarily of cash, cash equivalents, accounts receivable and investments. TheCompany places its cash, cash equivalents and investments primarily with threefinancial institutions. The Company licenses its products principally tocompanies in the United States, Europe, and Japan and no single customeraccounted for 10% or more of consolidated revenues in the years ended April 30,2005, 2004 and 2003. The Company performs periodic credit evaluations of itscustomers and generally does not require collateral. Allowances are maintainedfor potential credit losses. International revenues include all our softwarelicense and service revenues from customers located outside North America. Internationalrevenues accounted for 65%, 68% and 54% of total revenues in fiscal years 2005,2004 and 2003, respectively.

*Allowance forDoubtful Accounts*

Anallowance for doubtful accounts is established to ensure trade receivables arenot overstated due to uncollectibility. Bad debt reserves are maintained forall customers based on a variety of factors, including the length of timereceivables are past due, significant one-time events and historicalexperience. Additional reserves for individual accounts are recorded when theCompany becomes aware of a customer’s inability to meet its financialobligations, such as in the case of bankruptcy filings or deterioration in thecustomer’s operating results or financial position. If circumstances related tocustomers change, estimates of the recoverability of receivables would befurther adjusted. Following is a schedule that details activity for theallowance for doubtful accounts and the allowance for long-term accounts andnotes receivable.
| ** **                                                                             | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions  Charged to  Operating  Expenses** | ** ** | **Deductions:  Write-offs  of Accounts** | ** ** | **Additions  (Deductions):  Transfers  Between  Accounts** | ** ** | **Balance  at  End of  Period** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **(In thousands)**                        | ** ** |
| Allowance for doubtful  accounts receivable:                                           |       |                                           |       |                                                |       |                                          |       |                                                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Year ended April  30, 2003                                                             |       |                                           | $          | 318                                                 |       |                                          |       | $                                                          | 44         |                                 |       |   | $ | (162 | ) |   |   | $ | 52 |   |   |   | $ | 252 |   |   |
| Year ended April  30, 2004                                                             |       |                                           | 252        |                                                |       |                                          | (79        | )                                                          |       |                                 | 1          |   |   |   | 1 |   |   |   | 175 |   |   |
| Year ended April  30, 2005                                                             |       |                                           | 175        |                                                |       |                                          | 27         |                                                       |       |                                 | (7         | ) |   |   | — |   |   |   | 195 |   |   |
| Allowance for  long-term accounts and notes receivable—reflected in other assets: |       |                                           |       |                                                |       |                                          |       |                                                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Year ended April  30, 2003                                                             |       |                                           | $          | 1,296                                               |       |                                          |       | $                                                          | (117       | )                                    |       |   | $ | (831 | ) |   |   | $ | — |   |   |   | $ | 348 |   |   |
| Year ended April  30, 2004                                                             |       |                                           | 348        |                                                |       |                                          | 45         |                                                       |       |                                 | (36        | ) |   |   | — |   |   |   | 357 |   |   |
| Year ended April 30,  2005                                                             |       |                                           | 357        |                                                |       |                                          | —     |                                                       |       |                                 | (179       | ) |   |   | — |   |   |   | 178 |   |   |

 

*Other Investments*

The Company carries otherinvestments at the lower of cost or estimated fair value (Note 4).

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*Property andEquipment*

Property and equipment arestated at cost. Depreciation is recorded on a straight-line basis over theestimated useful lives of the related assets, generally three to five years.Leasehold improvements are amortized over the shorter of their estimated usefullives or the lease term.

*CapitalizedSoftware*

Under the criteria setforth in Statement of Financial Accounting Standard No. 86 “Accounting forthe Costs of Computer Software to be Sold, Leased or Otherwise Marketed,”capitalization of software development costs begins upon the establishment oftechnological feasibility of the product. With respect to the Company’ssoftware development process, technological feasibility is established uponcompletion of a working model. To date, the Company’s products have beenreleased shortly after reaching technological feasibility. Therefore,development costs incurred after completion of a working model and prior togeneral release have not been significant. Accordingly, no software developmentcosts have been capitalized by the Company to date.

*Long-Lived Assets*

The Company evaluates itslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets or intangibles may be inexcess of fair value or not be recoverable. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.

The Company periodicallyreevaluates the original assumptions and rationale utilized in theestablishment of the carrying value and estimated useful lives of thelong-lived assets. The criteria used for these evaluations include management’sestimate of the asset’s continuing ability to generate income from operationsand positive cash flows in future periods.

*Goodwill*

Goodwill is the excess ofcost of an acquired entity over the amounts assigned to assets acquired andliabilities assumed in a business combination. Goodwill is not amortized. Goodwillis tested for impairment on an annual basis as of May 1, and betweenannual tests if indicators of potential impairment exist, using afair-value-based approach. No impairment of goodwill has been identified duringany of the periods presented (Note 5).

*Intangible Assets*

Intangible assets areamortized using the straight-line method over their estimated period ofbenefit, typically three years. We evaluate the recoverability of intangibleassets periodically and take into account events or circumstances that warrantrevised estimates of useful lives or that indicate that impairment exists. Allof our intangible assets are subject to amortization. No impairments ofintangible assets have been identified during any of the periods (Note 5).

*Revenue Recognition*

The Company generates revenue from software licensesales and related services, including maintenance and support, and consultingservices. The Company licenses its products to end user customers, independentsoftware vendors and value added resellers. The Company recognizes revenue forsoftware license sales in accordance with Statement of Position 97-2, “SoftwareRevenue Recognition”. We exercise judgment in connection with the determinationof the amount of software and services 

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revenue to be recognizedin each accounting period. The nature of each licensing arrangement determineshow revenues and related costs are recognized.

Revenue is recognized when a noncancelable licenseagreement has been signed or other persuasive evidence of an arrangementexists, the software product or service has been shipped or electronicallydelivered, the license fees are fixed and determinable, all uncertaintiesregarding customer acceptance are resolved and collectibility is probable.

The Company’s customer contracts include multi-elementarrangements that include a delivered element (a software license) andundelivered elements (such as maintenance and support and/or consulting). Thevalue allocated to the undelivered elements is unbundled from the deliveredelement based on vendor-specific objective evidence (VSOE) of the fairvalue of the maintenance and support and/or consulting, regardless of anyseparate prices stated within the contract. VSOE of fair value is defined as (i) theprice charged when the same element is sold separately, or (ii) if theelement has not yet been sold separately, the price for the element establishedby management having the relevant authority when it is probable that the pricewill not change before the introduction of the element into the marketplace. TheCompany then allocates the remaining balance to the delivered element (asoftware license) regardless of any separate prices stated within the contractusing the residual method as the fair value of all undelivered elements isdeterminable.

We defer revenue for any undelivered elements, andrecognize revenue for delivered elements only when the fair values ofundelivered elements are known, uncertainties regarding customer acceptance areresolved, and there are no customer-negotiated refund or return rightsaffecting the revenue recognized for delivered elements. If we cannotobjectively determine the fair value of any undelivered element included inbundled software and service arrangements, we defer revenue until all elementsare delivered and services have been performed, or until fair value canobjectively be determined for any remaining undelivered elements.

An assessment of the ability of the Company’scustomers to pay is another consideration that affects revenue recognition. Insome cases, the Company sells to undercapitalized customers. In thosecircumstances, revenue recognition is deferred until cash is received, thecustomer has established a history of making timely payments or the customer’sfinancial condition has improved. Furthermore, once revenue has beenrecognized, the Company evaluates the related accounts receivable balance ateach period end for amounts that we believe may no longer be collectible. Thisevaluation is largely done based on a review of the financial condition viacredit agencies and historical experience with the customer. Any deteriorationin credit worthiness of a customer may impact the Company’s evaluation ofaccounts receivable in any given period.

Revenue from support andmaintenance activities, which consist of fees for ongoing support andunspecified product updates, are recognized ratably over the term of themaintenance contract, typically one year, and the associated costs are expensedas incurred. Consulting service arrangements are performed on a “best efforts”basis and are generally billed under time-and-materials arrangements. Revenuesand expenses relating to providing consulting services are recognized as theservices are performed.

*Warranties and Indemnification*

The Company offers a limited warranty for product andservice sales that generally provide the customer a sixty-day warranty periodagainst defects. To date, the Company has not incurred any material costs as aresult of such warranties and has not accrued any liabilities related to suchobligations in the accompanying consolidated financial statements.

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The Company’s licenseagreements generally include certain provisions for indemnifying customersagainst liabilities if its product or services infringe upon a third-party’sintellectual property rights. To date, the Company has not incurred anymaterial costs as a result of such indemnifications and has not accrued anyliabilities related to such obligations in the accompanying consolidatedfinancial statements.

*Stock-BasedCompensation*

As permitted by Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation”(SFAS 123) and Statement of Financial Accounting Standards No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure” (SFAS 148),the Company accounts for stock-based awards using the intrinsic valuemethod of accounting in accordance with Accounting Principles Board Opinion No. 25,“Accounting For Stock Issued To Employees” and related interpretations. Assuch, compensation is recorded on the measurement date, generally the date ofissuance or grant, as the excess of the current estimated fair value of theunderlying stock over the purchase or exercise price. Any deferred compensationis amortized over the respective vesting periods of the equity instruments, ifany.

SFAS 123 requires the disclosure of pro forma netincome (loss) and net income (loss) per share had the Company adopted the fairvalue method to account for its stock-based awards. Under SFAS 123,the fair value of stock-based awards to employees is calculated throughthe use of option pricing models which were developed to estimate the fairvalue of freely tradable, fully transferable options without vestingrestrictions. Such options differ significantly from the Company’s stock-basedawards. These models require subjective assumptions, including future stockprice volatility and expected time to exercise, which greatly affect thecalculated values. The Company’s calculations are made using the Black-Scholesoption pricing model, with the following weighted average assumptions: expectedoption life, 12 months following vesting; stock volatility, 222.6% infiscal 2005, 117% in fiscal 2004 and 128% in fiscal 2003; risk-free interestrates, 3.3% in fiscal 2005, 1.7% in fiscal 2004 and 2.1% in fiscal 2003; and nodividends during the expected term. The Company’s calculations are based on amultiple option valuation approach and forfeitures are recognized as theyoccur.

Thefollowing table illustrates the effect on net income (loss) and net income(loss) per share if Unify had applied the fair value recognition provisions ofSFAS 123, to stock-based employee compensation (in thousands, exceptper share amounts):
| ** **                                                                                           | ** ** | **Year Ended April 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)  as reported                                                                       |       | $                                       | (2,364     | ) | $ | (1,010 | ) | $ | 119 |   |
| Add: stock-based  employee compensation included in reported net loss                                |       | 40                                      |       | 40 |   | 130 |   |
| Less: stock-based  employee compensation expense, determined under fair value method for all  awards |       | (583                                    | )          | (288 | ) | (519 | ) |
| Pro forma net  income (loss)                                                                         |       | $                                       | (2,907     | ) | $ | (1,258 | ) | $ | (270 | ) |
| Net income(loss)  per share (basic and diluted), as reported                                         |       | $                                       | (0.09      | ) | $ | (0.05 | ) | $ | 0.01 |   |
| Net income(loss) per  share (basic and diluted), pro forma                                           |       | $                                       | (0.10      | ) | $ | (0.06 | ) | $ | (0.01 | ) |

 

*Income Taxes*

Deferred taxes arerecorded for the difference between the financial statement and tax basis ofthe Company’s assets and liabilities and net operating loss carryforwards. Avaluation allowance is recorded to reduce deferred tax assets to an amountwhose realization is more likely than not. U.S. income taxes are not providedon the undistributed earnings of foreign subsidiaries as they are considered tobe permanently invested.

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*Earnings (Loss) PerShare*

Statement of FinancialAccounting Standards No. 128, “Earnings per Share”*,* requires a dual presentation of basicand diluted income (loss) per share (“EPS”). Basic EPS excludes dilution and iscomputed by dividing net income attributable to common stockholders by theweighted average of common shares outstanding for the period. Diluted EPSreflects the potential dilution that could occur if securities or othercontracts to issue common stock (e.g. convertible preferred stock, warrants,and common stock options) were exercised or converted into common stock.Potential common shares in the diluted EPS computation are excluded for fiscalyear 2005 and 2004 as their effect would be antidilutive.

*ComprehensiveIncome (Loss)*

Comprehensive income(loss) includes net income and comprehensive income (loss). The Company’scomponents of other comprehensive income (loss) are gains and losses on foreigncurrency translation.

*Segment Reporting*

For fiscal 2004 and 2003,the Company had two reportable segments, the Americas and Europe, which areorganized, managed and analyzed geographically and operate in theinfrastructure software segment selling and marketing application developmentsoftware and related services. In fiscal 2005, a third reportable segment,Insurance Risk Management division, which sells and markets the NavRiskapplication, was added as a result of the acquisition of Acuitrek (see Note 2).

*Recently IssuedAccounting Standards*

In December, 2004 the Financial Accounting StandardsBoard (“FASB”) issued Statement No. 123R, *Share-BasedPayment.*This Statement establishes standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices, primarily with respect to transactions in which employee services areobtained in exchange for share-based payment. Statement 123R is effective as ofthe beginning of the fiscal year that begins after June 15, 2005. TheCompany has not completed the process of evaluating the impact that will resultfrom adopting this pronouncement. The Company is therefore unable to disclosethe impact that adopting FASB Statement 123R will have on its financialposition, cash flows or results of operations when such statement is adopted.

In December 2004, theFASB issued Statement No. 153, Exchangesof Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting forNonmonetary**Transactions.**This statement addresses themeasurement of exchanges of nonmonetary assets and redefines the scope oftransactions that should be measured based on the fair value of the assetsexchanged. Provisions of this Statement are effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005 andare required to be adopted by the Company in the second quarter of fiscal 2006.The Company anticipates the adoption of Statement 153 will not have a materialimpact to our financial position, cash flows or results of operations.

*Reclassifications*

Certain items in the fiscal 2004 and 2003 consolidatedfinancial statements have been reclassified to conform to the fiscal 2005presentation. These reclassifications had no effect on operating results orstockholders’ equity.

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**Note 2.   Acquisition**

On February 2, 2005,the Company acquired all of the issued and outstanding equity securities ofAcuitrek, Inc. Acuitrek Inc., is a software provider of policyadministration and underwriting solutions for the public entity self insuredand risk pools insurance market. The acquisition enables the Company to accessspecialty vertical markets with its business process automation solutions. Underthe terms of the agreement, Unify made an initial payment to the stockholdersof $455,000 (which included 520,833 shares of Common Stock), and over the nextthree years has agreed to make retention-based earn-out payments of$1.1 million and potential performance-based earn-out payments, all to bepaid with 50 percent cash and 50 percent Unify common stock (assumingprofitability of the Acuitrek division). These payments will be recorded ascompensation expense in accordance with EITF 95-8, accounting for contingentconsideration paid to the shareholders of an acquired enterprise in a purchasebusiness combination. Shares issuable in the future to the Sellers are based onthe market value of the Unify common stock at the time of issuance. Unify hasagreed to register the shares issuable under the Agreement pursuant to aRegistration Rights Agreement with the former Acuitrek shareholders. Followingis the opening balance sheet, including the purchase price allocationadjustments, for Acuitrek****as of theacquisition date, February 2, 2005 (in thousands):
| Current assets                                   |   | $     | 142    |   |
|--------------------------------------------------|--------|-------|--------|--------|
| Property and  equipment, net                     |   | 27    |   |
| Goodwill                                         |   | 1,070 |   |
| Technology based  intangible                     |   | 200   |   |
| Customer based  intangible                       |   | 164   |   |
| Total assets                                     |   | $     | 1,603  |   |
| Current liabilities                              |   | $     | 512    |   |
| Long-term  liabilities                           |   | 636   |   |
| Shareholders’  equity                       |   | 455   |   |
| Total liabilities  and shareholders’ equity |   | $     | 1,603  |   |

 

The unaudited financial information in the table belowsummarizes the combined results of operations of Unify and Acuitrek, on a pro formabasis, as though the companies had been combined as of the beginning of each ofthe periods presented. The pro forma financial information is presented forinformational purposes only and is not indicative of the results of operationsthat would have been achieved if the acquisition had taken place at thebeginning of each of the periods presented.

Theunaudited pro forma financial information in fiscal 2005 combines thehistorical results for Unify for the year ended April 30, 2005, whichincludes the Acuitrek results for the three months ended April 30, 2005, andthe historical results for Acuitrek for the nine months ended December 31,2004. The unaudited pro forma financial information in fiscal 2004 combines thehistorical results for Unify for the year ended April 30, 2004 and thehistorical results for Acuitrek for the twelve months ended March 31,2004.
| ** **                           | ** ** | **Year ended April 30,**                                                                                                      | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **           2005           ** | ** ** | **           2004           ** | ** ** |
| ** **                           | ** ** | **Unaudited**                                                                                                                                | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)**                                                                           | ** ** |
| Total revenues                       |       |                                                                                                                                         | $          | 11,973 |   |   |   | $ | 12,190 |   |   |
| Net income (loss)                    |       |                                                                                                                                         | (2,568     | ) |   |   | (1,592 | ) |   |
| Basic net income  (loss) per share   |       |                                                                                                                                         | (0.09      | ) |   |   | (0.07 | ) |   |
| Diluted net income  (loss) per share |       |                                                                                                                                         | (0.09      | ) |   |   | (0.07 | ) |   |

 

 

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**Note 3.**   Property and Equipment

Propertyand equipment at April 30, 2005 and 2004 consisted of the following (inthousands):
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Equipment                                       |       | $        | 3,111      |     | $          | 3,001 |   |
| Furniture and  leasehold improvements           |       | 896      |       | 846      |       |
|                                            |       | 4,007    |       | 3,847    |       |
| Less accumulated  depreciation and amortization |       | (3,578   | )          | (3,509   | )          |
| Property and  equipment, net                    |       | $        | 429        |     | $          | 338 |   |

 

**Note 4.**   Other Investments

Otherinvestments represent stock in closely held companies, which are accounted forunder the cost method. The Company’s ownership interest in Arango SoftwareInternational, Inc. (“Arango”) and the ownership interest in Unify JapanKK, a Japanese corporation that is a master distributor for the Company inJapan, is less than 15%. Sales to Unify Japan KK in fiscal 2005, 2004 and 2003were $0.5 million, $0.5 million and $0.4 million, respectively. At April 30,2005 and 2004 other investments consisted of the following (in thousands):
| ** **                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Arango Software  International, Inc. |       | $        | 175        |     | $          | 175 |   |
| Unify Japan KK                            |       | 39       |       | 39       |       |
|                                      |       | $        | 214        |     | $          | 214 |   |

 

The Company holds aminority interest in Arango, a privately held corporation. During the fourthquarter of fiscal 2003, the Company re-evaluated the $500,000 carrying value ofthis investment and recorded a non-cash charge of $150,000 to bring the carryingamount to $350,000. During the first quarter of fiscal 2004, the Companyre-evaluated the $350,000 carrying value of this investment and recorded anon-cash charge of $175,000 to bring the carrying amount to $175,000. TheCompany records an investment impairment charge if and when the Companybelieves an investment has experienced a decline in market value that is otherthan temporary. Future adverse changes in market conditions or poor operatingresults of Arango could result in losses or an inability to recover thecarrying value of the investment that is not currently reflected in theinvestment’s carrying value, thereby possibly requiring additional impairmentcharges in the future.

**Note5.   Goodwill and Intangible Assets**

Thecomponents of goodwill and intangible assets at April 30, 2005, are asfollows (in thousands):
| ** **       | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated   amortization ** | ** ** | **Net  carrying  amount** | ** ** | **Estimated  useful life** | ** ** |
|------------------|------------|-----------------------------|------------|-------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| Infinite Lives:  |       |                        |       |                                      |       |                      |       |                            |       |   |   |   |   |
| Goodwill         |       | $                           | 1,405      |                                      |       | $                         | —     |                            |       | $ | 1,405 |   |   | — |   |   |
| Finite Lives:    |       |                        |       |                                      |       |                      |       |                            |       |   |   |   |   |
| Technology-based |       | 200                         |       |                                      | (17        | )                         |       | $                               | 183        |   |   | 3 years |   |   |
| Customer-related |       | 164                         |       |                                      | (14        | )                         |       | 150                             |       |   | 3 years |   |   |
| Total            |       | $                           | 1,769      |                                      |       | $                         | (31        | )                               |       | $ | 1,769 |   |   |   |   |   |

 

During fiscal 2005, we recorded additions to goodwilland intangible assets of $1.8 million, all related to the acquisition ofAcuitrek, as described in Note 2—Acquisitions.

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Acquiredfinite-lived intangibles are generally amortized on a straight line basis overtheir estimated useful life. Intangible assets amortization expense was $31thousand for fiscal 2005. The estimated future amortization expense related tointangible assets as of April 30, 2005 is as follows (in thousands):
| **April 30** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|--------------|------------|------------|------------|------------|------------|
| 2006         |       |       | $          | 121        |       |   |
| 2007         |       |       | 121        |       |       |
| 2008         |       |       | 91         |       |       |
| Total        |       |       | $          | 333        |       |   |

 

Goodwill will be testedfor impairment on an annual basis as of May 1, and between annual tests ifindicators of potential impairment exist, using a fair-value-based approach inaccordance with FASB 142, Goodwill and Other Intangible Assets. Since there wasno goodwill prior to the Acuitrek acquisition on February 2, 2005, there was noimpairment review required, and therefore there is no impairment identifiedduring any of the periods presented.

**Note 6.   Credit Facility**

On June 3, 2004, the company renewed the SiliconValley Bank revolving line of credit. The line of credit has a borrowing limitof $1 million. There was no amount outstanding under the line as of April 30,2005, and based upon the amount of its eligible assets as year end, the Companyhad available for borrowing up to $852,000. The line is secured by qualifyingforeign and domestic accounts receivable and has a one-year term. The Companyincurs interest expense on funds used at the prevailing prime rate plus twopercent per annum. The prime rate used in the determination of interest shallnot be less than 4.0%. This credit facility expired in June 2005; however,it was renewed on June 5, 2005 (Note 17).

In connection with theoriginal June 6, 2003 $1.5 million revolving line of credit facility,the Company issued warrants to Silicon Valley Bank to purchase 115,385 sharesof Company stock at a per share price of $0.39. The Company determined the fairvalue of the warrants using the Black-Scholes option pricing model withthe following assumptions: volatility factor of 70%, risk free-interest rate of2.1%, expected life of 10 years and no dividend yield. The fair value forthe warrants totaling $34,600 was recorded as debt issuance costs and wasamortized into interest expense over the one year term of the original creditfacility. The warrants were exercised by Silicon Valley Bank during fiscal 2005on a net basis. 

**Note 7.   Long-Term Debt**

TheCompany’s debt consists of the following at April 30, 2005 and April 30,2004 (in thousands):
| ** **                                                                                                                                                                                                                                 | ** ** | **April 30,  2005** | ** ** | **April 30,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Unsecured note  payable to a related party, due September 15, 2005 and bears no  interest                                                                                                                                        |       |                     | $          | 64                       |       |   |   | $ | — |   |   |
| Note payable to a  financial institution, accruing interest at prime plus 2.0%, not to be less  than 4% per annum (actual interest rate at April 30, 2005 was 8.25%),  payable in monthly installments through October 2006 |       |                     | 118        |                     |       |   | 146 |   |   |
| Capital lease payable, payable in monthly  installments through August 2007                                                                                                                                                           |       |                     | 15         |                     |       |   | — |   |   |
|                                                                                                                                                                                                                                       |       |                     | 197        |                     |       |   | 146 |   |   |
| Less current  portion                                                                                                                                                                                                                      |       |                     | (102       | )                        |       |   | (146 | ) |   |
| Less current  portion-related party                                                                                                                                                                                                        |       |                     | (64        | )                        |       |   | — |   |   |
|                                                                                                                                                                                                                                       |       |                     | $          | 31                       |       |   |   | $ | — |   |   |

 

48

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**Note 8.   Other Long Term Liabilities**

As part of the Acuitrek acquisition (see Note 2), theCompany assumed a royalty payable of $600,000 as established by the 2001 fundedsoftware development and license arrangement with Acuitrek’s first customer. Aminimum royalty is payable in quarterly installments equal to two percent ofall gross revenues received from the sale or licensing of the NavRisk productthrough June 11, 2011. Any remaining royalty balance as of June 11, 2011 shallbecome fully due and payable on such date. The Company accrued the estimatedcosts of providing future support and maintenance services for the support andmaintenance contracts as of the acquisition date. The future support obligationperiods ranged from less than a year to greater than twenty (20) additionalyears. The support obligation for periods greater than one year from April 30,2005 is $124,000 and is reflected as Accrued support obligations.

In France, the Company issubject to mandatory employee severance costs associated with a statutorygovernment regulated plan covering all employees. The plan provides for onemonth of severance for the first five years of service with an employer and onefifth of one year of severance for every one year of service thereafter. Inorder to receive their severance payment the employee may not retire before age65 and must be employed at the time of retirement. The balance as of April 30,2005 and 2004 is $72,432 and $70,283, respectively and is reflected as otherlong term liabilities.

**Note 9.   Maintenance Contracts**

The Company offers maintenance contracts to itscustomers at the time they enter into a product license agreement and renewthose contracts, at the customers’ option, annually thereafter. Thesemaintenance contracts are priced as a percentage of the value of the relatedlicense agreement. The specific terms and conditions of these initialmaintenance contracts and subsequent renewals vary depending upon the productlicensed and the country in which the Company does business. Generally,maintenance contracts provide the customer with unspecified product maintenanceupdates and customer support services. Revenue from maintenance contracts isinitially deferred and then recognized ratably over the term of the agreements.

Changesin the Company’s deferred maintenance revenue during the periods are as follows(in thousands):
| ** **                                                 | ** ** | **Year Ended  April 30,** | ** ** | **Year Ended  April 30,** | ** ** | **Year Ended  April 30,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                            | ** ** | **2004**                            | ** ** | **2003**                            | ** ** |
| Deferred  maintenance revenue beginning balance            |       |                                | $          | 3,081                               |       |                                |       | $ | 2,846 |   |   |   | $ | 2,932 |   |   |
| Deferred  maintenance revenue recognized during period     |       |                                | (5,462     | )                                   |       |                                | (5,497     | ) |   |   | (5,547 | ) |   |
| Deferred  maintenance revenue of new maintenance contracts |       |                                | 5,230      |                                |       |                                | 5,732      |   |   |   | 5,461 |   |   |
| Deferred maintenance  revenue ending balance               |       |                                | $          | 2,849                               |       |                                |       | $ | 3,081 |   |   |   | $ | 2,846 |   |   |

 

**Note 10.   Stockholders’ Equity**

*Preferred Stock*

The Company may issue upto 5,000,000 shares of preferred stock in one or more series upon authorizationby its board of directors. The board of directors, without further approval ofthe stockholders, is authorized to fix the dividend rights and terms,conversion rights, voting rights, redemption rights and terms, liquidationpreferences, and any other rights, preferences, privileges and restrictionsapplicable to each series of preferred stock.

49

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*Stock Option Plan*

Under the 2001 Stock Option Plan (the “2001 OptionPlan”), the Company may grant options to purchase up to 2,975,000 shares ofcommon stock to eligible employees, directors, and consultants at prices notless than the fair market value at the date of grant for incentive stockoptions and not less than 85% of the fair market value at the date of grant fornon-statutory stock options. Options granted under the 2001 Stock Option Plangenerally vest over four years, are exercisable to the extent vested, andexpire 10 years from the date of grant. In fiscal year 2005 we granted735,000 option shares on a four-year vesting schedule to the management teamoutside of the 2001 Stock Option Plan. Under the 1991 Stock Option Plan (the “1991Option Plan”) which expired as of March 2001, the Company was able togrant options to eligible employees, directors and consultants at prices notless than the fair market value at the date of grant for incentive stockoptions and not less than 85% of the fair market value at the date of grant fornon-statutory stock options. Options granted under the 1991 Option Plangenerally vest over four years, are exercisable to the extent vested, andexpire 10 years from the date of grant.

Asummary of stock option activity is as follows:
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| Outstanding at  April 30, 2002            |       | 2,112,602                  |       |                                   | $          | 1.38 |   |   |
| Granted (weighted average fair value of $0.27) |       | 922,000                    |       |                                   | 0.46       |   |   |
| Exercised                                      |       | (90,849                    | )          |                                   | 0.19       |   |   |
| Cancelled/expired                              |       | (269,285                   | )          |                                   | 1.87       |   |   |
| Outstanding at  April 30, 2003            |       | 2,674,468                  |       |                                   | 1.05       |   |   |
| Granted (weighted average fair value of $0.46) |       | 620,500                    |       |                                   | 0.51       |   |   |
| Exercised                                      |       | (114,308                   | )          |                                   | 0.24       |   |   |
| Cancelled/expired                              |       | (208,105                   | )          |                                   | 1.81       |   |   |
| Outstanding at  April 30, 2004            |       | 2,972,555                  |       |                                   | 0.92       |   |   |
| Granted (weighted average fair value of $0.47) |       | 1,259,500                  |       |                                   | 0.47       |   |   |
| Exercised                                      |       | (269,170                   | )          |                                   | 0.31       |   |   |
| Cancelled/expired                              |       | (1,120,505                 | )          |                                   | 0.55       |   |   |
| Outstanding at  April 30, 2005            |       | 2,842,380                  |       |                                   | 0.92       |   |   |

 

Additionalinformation regarding options outstanding at April 30, 2005 is as follows:
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**        | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Number   Outstanding ** | ** ** | **Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number   Outstanding ** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.12 - 0.18                                |       |                         | 208,598    |                                |       |   | 0.67 |   |   |   | $ | 0.12 |   |   |   | 208,598 |   |   |   | $ | 0.12 |   |   |
|   0.25 -  0.25                         |       |                         | 355,520    |                                |       |   | 6.64 |   |   |   | 0.25 |   |   |   | 349,686 |   |   |   | 0.25 |   |   |
|   0.26 -  0.26                         |       |                         | 445,875    |                                |       |   | 6.55 |   |   |   | 0.26 |   |   |   | 382,436 |   |   |   | 0.26 |   |   |
|   0.27 -  0.43                         |       |                         | 353,020    |                                |       |   | 8.66 |   |   |   | 0.39 |   |   |   | 128,602 |   |   |   | 0.38 |   |   |
|   0.44 -  0.54                         |       |                         | 359,416    |                                |       |   | 9.76 |   |   |   | 0.48 |   |   |   | 22,290 |   |   |   | 0.45 |   |   |
|   0.55 -  0.55                         |       |                         | 548,270    |                                |       |   | 7.17 |   |   |   | 0.55 |   |   |   | 416,656 |   |   |   | 0.55 |   |   |
|   0.64 -  19.69                        |       |                         | 571,681    |                                |       |   | 5.04 |   |   |   | 3.11 |   |   |   | 428,905 |   |   |   | 3.90 |   |   |
|   0.12 - 19.69                         |       |                         | 2,842,380  |                                |       |   | 6.61 |   |   |   | 0.92 |   |   |   | 1,937,173 |   |   |   | 1.12 |   |   |
|                                             |            |                              |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

50

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Options to purchase1,699,499 and 1,309,187 shares at weighted average prices of $1.28 and $1.65were exercisable at April 30, 2004 and 2003. At April 30, 2005, therewere 823,919 shares reserved for future grants under the Stock Option Plan.

*Stock Purchase Plan*

Under the 1996 EmployeeStock Purchase Plan (the “Purchase Plan”), as Amended effective November 15,2001, eligible employees may purchase the Company’s common stock throughpayroll deductions of up to 15% of their base compensation. Offering periodsunder the Purchase Plan are of 24 months’ duration with purchasesoccurring every six months. Common stock is purchased for the accounts ofparticipating employees at a price per share equal to the lower of (i) 85%of the fair market value of a share of common stock at the beginning of theoffering period or (ii) 85% of the fair market value of a share of commonstock on the date of purchase. At April 30, 2005, 496,376 shares werereserved for future issuance under the Purchase Plan.

*Restricted Stock*

On May 1, 2002 theCompany established the 2002 Director Restricted Stock Plan (“DirectorRestricted Stock Plan”) as part of a compensation program designed to attractand retain independent members for our board of directors. The maximumaggregate number of shares of common stock that may be issued under theDirector Restricted Stock Plan is 500,000. In May, each independent directorshall be granted a fully vested restricted stock award for the number of shareswhich is equal to $10,000 divided by the fair market value of a share of stockat the award date. There were 42,556 and 100,000 shares awarded in fiscal 2005and 2004 under this plan, respectively, leaving a balance of 134,716 sharesreserved for future awards at April 30, 2005.

*Private Placement*

On April 26, 2004 the Company issued through aprivate placement 5,633,900 shares of common stock to a group of institutionalinvestors at a price of $0.71 per share and 5-year warrants to purchasean aggregate of 2,253,560 shares of common stock at an exercise price of $0.90per share. Net proceeds from the private placement were $3,696,000, net ofestimated accrued costs of $304,000. The Company’s actual costs for the privateplacement were $397,000 which resulted in a further reduction of additionalpaid-in-capital of $93,000 during fiscal 2005.

Due to the initialissuance of shares in the acquisition of Acuitrek in February 2005 whichcaused the application of the anti-dilution provision of the warrants, thewarrant exercise price has been adjusted to $0.89 per share and the totalnumber of warrant shares purchasable on exercise of the warrants has increasedto 2,272,715 shares. Under certain circumstances, where the closing bid priceof a share of common stock equals or exceeds $1.80, appropriately adjusted forany stock split, reverse stock split, stock dividend or other reclassificationor combination of common stock, for 20 consecutive trading days commencingafter the registration statement covering the warrants shares has been declaredeffective, the Company, upon 20 days’ prior written notice to the warrantholders within one business day immediately following the end of such20 day trading period, may call the warrants for 25% of the shares of thecommon stock initially purchasable pursuant to the warrants at a redemptionprice equal to $0.01 per share of common stock then purchasable pursuant to thewarrants. If the call conditions are met again during the 30 day periodimmediately after consummation of a previous call, the Company may once again callthe warrants for an additional increment of 25% of the shares of common stockinitially purchasable pursuant to the warrants or such less amount as shallthen remain purchasable and in the same manner and subject to the same noticerequirements as the initial call, until all of the shares have been called.

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*Note Receivablefrom Stockholder*

Note receivable fromstockholder at April 30, 2003 consisted of the principal balance due on a$60,000 full recourse note from one of the Company’s officers. The note had aninterest rate of 5% annually, and was secured by 250,000 shares of commonstock. The note was paid when due on October 1, 2003.

**Note 11.   Income Taxes**

For fiscal 2005, the Company recorded state incomeexpense of $8,000 and with no federal or foreign tax provisions due to thereported net losses. For fiscal 2004, we recorded a foreign income tax expenseof $9,000 and a federal tax benefit of $6,000 for federal income tax refundsfrom prior periods related to NOL carry backs*.*For fiscal 2003, we recorded a foreign income tax benefit as aresult of refunds applied for and a minimal state and federal tax benefit.

Income(loss) before income taxes and provision for income taxes, which consistedsolely of current tax expense, for the years ended April 30 were asfollows (in thousands):
| ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                                |       | $        | (1,670     | )        | $          | (1,334   | )          | $ | (292 | ) |
| Foreign                                 |       | (686     | )          | 327      |       | 373      |       |
| Total income (loss) before income taxes |       | $        | (2,356     | )        | $          | (1,007   | )          | $ | 81 |   |
| Foreign taxes                           |       | $        | —     |     | $          | 9        |       | $ | (37 | ) |
| Federal and state  income taxes         |       | 8        |       | (6       | )          | (1       | )          |
| Provision  (benefit) for income taxes   |       | $        | 8          |     | $          | 3        |       | $ | (38 | ) |

 

Theprovision for income taxes for the years ended April 30, 2005, 2004 and2003 differs from the amounts computed by applying the statutory U.S. federalincome tax rate to pretax income (loss) as a result of the following (inthousands):
| ** **                                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed tax  expense (benefit)                                     |       | $(801    | )          | $        | (352       | )        | $          | 28 |   |
| Increases  (reductions) in tax expense resulting from:              |       |     |       |     |       |     |       |
| Foreign taxes                                                       |       | —   |       | (105     | )          | (168     | )          |
| Increase (decrease) in valuation allowance for  deferred tax assets |       | 710      |       | 573      |       | 279      |       |
| Expiration of net operating loss carryforwards                      |       | —   |       | —   |       | —   |       |
| Other                                                               |       | 99       |       | (113     | )          | (177     | )          |
| Provision (benefit) for  income taxes                               |       | $        | 8          |     | $          | 3        |       | $ | (38 | ) |
|                                                                     |            |          |            |          |            |          |            |  |  |  |

 

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TheCompany provides deferred income taxes which reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and for income tax purposes. Significantcomponents of the Company’s deferred tax assets and liabilities at April 30were as follows (in thousands):
| ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                        |       |     |       |     |       |
| Net operating loss carryforwards            |       | $        | 16,923     |     | $          | 15,635 |   |
| Capital loss carryforward                   |       | 1,724    |       | —   |       |
| Foreign tax credits                         |       | 100      |       | 360      |       |
| Deferred revenue                            |       | 840      |       | 990      |       |
| Reserves and other accruals                 |       | 114      |       | 1,905    |       |
| Allowance for losses on accounts receivable |       | 50       |       | 150      |       |
| Other                                       |       | 105      |       | 103      |       |
| Total deferred tax assets                   |       | 19,855   |       | 19,143   |       |
| Valuation allowance                         |       | (19,855  | )          | (19,143  | )          |
| Net deferred tax assets                     |       | $        | —     |     | $          | — |   |

 

Realization of deferredtax assets is dependent upon future earnings, the timing and amount of whichare uncertain. Accordingly, the net deferred tax assets have been fully offsetby a valuation allowance. The valuation allowance increased by $710,000,$573,000 and $279,000 during fiscal 2005, 2004 and 2003, respectively. At April 30,2005, the Company had approximately $45.1 million in federal net operatingloss carryforwards that begin to expire in fiscal year 2006 through 2025,approximately $6.7 million in state net operating loss carryforwards thatexpire in fiscal years 2010 to 1015, approximately $2.5 million in foreignnet operating loss carryforwards that do not expire, approximately $4.0 millionin capital loss carryforwards that expire in 2010 and approximately $99,000 inforeign tax credit carryforwards. The Company’s ability to utilize these netoperating loss carryforwards and credits may be subject to certain limitationsin the event of a change in ownership.

**Note 12.   Other Income (Expenses)**

Otherincome (expenses), net for the years ended April 30, consisted of thefollowing (in thousands):
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                 |       | $        | 59         |     | $          | 16       |       | $ | 28 |   |
| Interest expense                |       | (26      | )          | (68      | )          | (27      | )          |
| Foreign currency  exchange loss |       | (3       | )          | 22       |       | (5       | )          |
| Other                           |       | 14       |       | 3        |       | 7        |       |
| Other income  (expenses), net   |       | $        | 44         |     | $          | (27      | )          | $ | 3 |   |

 

 

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**Note 13.   Earningsper Share**

Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted earnings per share computations for the years ended April 30(in thousands except per share amounts):
| ** **                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Income (Loss)  (Numerator):                               |       |     |       |     |       |     |       |
| Net income  (Loss), basic and diluted                         |       | $        | (2,364     | )        | $          | (1,010   | )          | $ | 119 |   |
| Shares (Denominator):                                         |       |     |       |     |       |     |       |
| Weighted average  shares of common stock outstanding, basic   |       | 27,777   |       | 21,558   |       | 20,939   |       |
| Effect of  dilutive securities (stock options)                |       | —   |       | —   |       | 754      |       |
| Weighted average  shares of common stock outstanding, diluted |       | 27,777   |       | 21,558   |       | 21,693   |       |
| Per Share Amount:                                             |       |     |       |     |       |     |       |
| Net income (loss)  per share, basic                           |       | $        | (0.09      | )        | $          | (0.05    | )          | $ | 0.01 |   |
| Effect of  dilutive securities                                |       | —   |       | —   |       | —   |       |
| Net income (loss) per  share, diluted                         |       | $        | (0.09      | )        | $          | (0.05    | )          | $ | 0.01 |   |

 

Potentially dilutivesecurities that are not included in the diluted income (loss) calculationbecause they would be antidilutive are employee stock options of 2,842,000,2,973,000 and 1,192,000 as of April 30, 2005, 2004 and 2003, respectively,and common stock warrants of 2,273,000 and 2,369,000 as of April 30, 2005and 2004.

**Note 14.   RelatedParty Transactions**

Unify has an investment ofless than 15% in Unify Japan KK who is the Company’s master distributor inJapan. Sales to Unify Japan KK in fiscal 2005, 2004 and 2003 were $0.5 million,$0.5 million and $0.4 million, respectively. Accounts receivable fromUnify Japan KK as of April 30, 2005 and 2004 were $92,485 and $198,442,respectively.

*Transaction with anOfficer*

As part of the acquisitionof Acuitrek (see Note 2), the Company assumed a note payable to a majorshareholder of Acuitrek that matures September 15, 2005.

*Transaction with aDirector*

Included as a component ofstockholders’ equity at April 30, 2003 is a note receivable from theCompany’s present chief executive officer executed in fiscal 2001 in the amountof $60,000 for the purchase of the Company’s common stock, upon the exercise ofstock options. This full recourse note was paid when due on October 1,2003. The note bore interest at 5% per annum.

**Note 15.   EmployeeRetirement Plan**

The Company maintains a401(k) profit sharing plan (the “401(k) Plan”). Eligible employeesmay contribute up to 15% of their pre-tax annual compensation to the 401(k) Plan,subject to certain statutory limitations. The Company can, at its discretion,voluntarily match the participating employees’ contributions not to exceed 6%of each employee’s annual compensation. In fiscal years 2005, 2004 and 2003,the Company contributed $47,000, $51,000 and $52,000, respectively, to the 401(k) Plan.

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**Note 16.   Commitmentsand Contingencies**

*Operating Leases*

TheCompany leases office space and equipment under non-cancelable operating leasearrangements. Future minimum rental payments under these leases as of April 30,2005 are as follows (in thousands):
| Years Ending  April 30, |   |   |   |
|------------------------------|--------|--------|--------|
| 2006                         |   | $      | 1,079  |   |
| 2007                         |   | 957    |   |
| 2008                         |   | 871    |   |
| 2009                         |   | 16     |   |
| 2010                         |   | 6      |   |
| Thereafter                   |   | — |   |
|                         |   | $      | 2,929  |   |

 

Rent expense underoperating leases was $1,117,127, $1,098,687 and $1,336,091 for the years ended April 30,2005, 2004 and 2003, respectively.

*Litigation*

The Company is subject tolegal proceedings and claims that arise in the normal course of business. Ifsuch matters arise, the Company cannot assure that it would prevail in suchmatters, nor can it assure that any remedy could be reached on mutuallyagreeable terms, if at all. Due to the inherent uncertainties of litigation,were there any such matters, the Company would not be able to accuratelypredict their ultimate outcome. As of April 30, 2005, there were nocurrent proceedings or litigation involving the Company that managementbelieves would have a material adverse impact on its financial position,results of operations, or cash flows.

**Note 17.   SubsequentEvents**

On June 5, 2005, theCompany renewed its loan agreement with Silicon Valley Bank (see Notes 6and 7). The agreement provides for a $1.0 million revolving line of creditand for term loans up to $250,000 for the purchase of qualifying equipment. Theline of credit is secured by qualifying foreign and domestic accountsreceivable and has a one-year term. The term loan is secured by purchasedassets and is repaid over twenty four months. The Company will incur interestexpense on the line of credit and the term loan at the prevailing prime rateplus 2.0% and 2.5% per annum, respectively. The prime rate used to determinethe interest shall not be less than 4.0%.

**Note 18.   SegmentInformation**

For fiscal 2005, 2004 and 2003, the Company maintainedthe two segments for the Unify Business Solution (“UBS”) division that sellsand markets application development software and related services. The segmentsare the Americas, which includes the Company’s international distributors, andEurope, including the UK, France and the European based distributors. In fiscal2005, a third reportable segment was added as a result of the acquisition ofAcuitrek (see Note 2). This segment known as the Insurance Risk Managementdivision sells and markets the NavRisk application.

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Financialinformation for the Company’s reportable segments is summarized below (inthousands):
| ** **                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total net  revenues:                   |       |     |       |     |       |     |       |
| UBS—Americas(3)                   |       | $        | 5,879      |     | $          | 6,361    |       | $ | 7,430 |   |
| UBS—Europe                        |       | 5,410    |       | 5,564    |       | 4,743    |       |
| Insurance Risk Management Division(2)  |       | 14       |       | —   |       | —   |       |
| Total net revenues                     |       | $        | 11,303     |     | $          | 11,925   |       | $ | 12,173 |   |
| Operating income (loss):               |       |     |       |     |       |     |       |
| UBS—Americas(2)                   |       | $        | (2,829     | )        | $          | (2,036   | )          | $ | (596 | ) |
| UBS—Europe(3)                     |       | 747      |       | 1,056    |       | 674      |       |
| Insurance Risk Management Division     |       | (318     | )          | —   |       | —   |       |
| Total operating income (loss)          |       | (2,400   | )          | (980     | )          | 78       |       |
| Interest income(4)                     |       | 59       |       | 16       |       | 28       |       |
| Interest expense(4)                    |       | $        | 26         |     | $          | 68       |       | $ | 27 |   |
| Identifiable assets:                   |       |     |       |     |       |     |       |
| UBS—Americas                      |       | $        | 1,786      |     | $          | 1,994    |       | $ | 1,818 |   |
| UBS—Europe                        |       | 2,518    |       | 3,271    |       | 2,609    |       |
| Insurance Risk Management Division     |       | 1,721    |       | —   |       | —   |       |
| Subtotal identifiable assets           |       | 6,025    |       | 5,265    |       | 4,427    |       |
| Corporate assets(5)                    |       | 5,205    |       | 7,221    |       | 3,857    |       |
| Elimination of  inter-company balances |       | (1,740   | )          | (1,743   | )          | (1,609   | )          |
| Total assets                           |       | $        | 9,490      |     | $          | 10,743   |       | $ | 6,675 |   |
| Depreciation  expense(6)               |       | $        | 186        |     | $          | 165      |       | $ | 233 |   |
| Capital expenditures(6)                |       | $        | 208        |     | $          | 210      |       | $ | 178 |   |

----

(1)          The Company allocatesrevenues to operating segments based on the location of the country where thelicense is installed or service is delivered. There were no transfers betweensegments during the periods presented. The accounting policies of the segmentsare the same as those described in Note 1.

(2)   Followingthe acquisition, the Company entered into two contracts which required deferralof license revenue until customer acceptance. The April 2005 Balance Sheetreflects deferred revenue of $157,000 for these contracts.

(3)          Americas operatingincome (loss) is net of corporate product development and general andadministrative expenses.

(4)          Interest income andinterest expense were primarily attributable to corporate assets located in theAmericas for the periods presented. Interest income and interest expense in theAmericas and Europe were not significant in those periods.

(5)          Corporate assets arelocated in the Americas and consist primarily of cash equivalents, investments,purchased technology and related maintenance contracts, property and equipmentand intercompany receivables from Europe.

(6)          The majority of theCompany’s capital expenditures are incurred for product development (whichoccurs exclusively in the Americas) and for corporate infrastructure.Consequently, capital expenditures and depreciation expense were primarilyattributable to the Americas in the periods presented.

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Netrevenues and long-lived assets by geographic area were as follows (inthousands):
| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total net revenues:                          |       |     |       |     |       |     |       |
| Americas                                     |       | $        | 4,101      |     | $          | 3,872    |       | $ | 5,668 |   |
| International Distributors                   |       | 1,779    |       | 2,489    |       | 1,762    |       |
| Subtotal Americas                            |       | 5,879    |       | 6,361    |       | 7,430    |       |
| United Kingdom                               |       | 1,388    |       | 1,485    |       | 1,489    |       |
| Central Europe—Germany, Benelux, Others |       | 1,775    |       | 1,532    |       | 1,262    |       |
| France                                       |       | 2,247    |       | 2,547    |       | 1,992    |       |
| Subtotal Europe                              |       | 5,410    |       | 5,564    |       | 4,743    |       |
| Insurance Risk Management Division           |       | 14       |       | —   |       | —   |       |
| Total net revenues                           |       | $        | 11,303     |     | $          | 11,925   |       | $ | 12,173 |   |
| Long-lived  assets:                          |       |     |       |     |       |     |       |
| Americas                                     |       | $        | 78         |     | $          | 64       |       | $ | 100 |   |
| Europe                                       |       | 107      |       | 100      |       | 102      |       |
| Insurance Risk Management Division           |       | 1,762    |       | —   |       | —   |       |
| Corporate Assets                             |       | 601      |       | 582      |       | 649      |       |
| Total long-lived  assets                     |       | $        | 2,548      |     | $          | 746      |       | $ | 851 |   |

 

**Note 19.   QuarterlyResults of Operations (Unaudited)**

Thefollowing interim financial information presents the fiscal 2005 and 2004results of operation on a quarterly basis:
| ** **                            | ** ** | **Quarter Ended**                                             | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                            | ** ** | **July 31,**                                                  | ** ** | **October 31,** | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
| ** **                            | ** ** | **(In thousands, except per share data)** | ** ** |
| Year ended 2005:                      |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                        |       | $                                                                  | 2,733      |   |   | $ | 2,810 |   |   |   | $ | 2,987 |   |   | $ | 2,773 |   |
| Gross margin                          |       | $                                                                  | 2,286      |   |   | $ | 2,363 |   |   |   | $ | 2,540 |   |   | $ | 2,450 |   |
| Net loss                              |       | $                                                                  | (474       | ) |   | $ | (634 | ) |   |   | $ | (651 | ) |   | $ | (605 | ) |
| Net loss per  share, basic            |       | $                                                                  | (0.02      | ) |   | $ | (0.02 | ) |   |   | $ | (0.02 | ) |   | $ | (0.02 | ) |
| Net loss per  share, diluted          |       | $                                                                  | (0.02      | ) |   | $ | (0.02 | ) |   |   | $ | (0.02 | ) |   | $ | (0.02 | ) |
| Year ended 2004:                      |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                        |       | $                                                                  | 3,301      |   |   | $ | 2,804 |   |   |   | $ | 2,644 |   |   | $ | 3,176 |   |
| Gross margin                          |       | $                                                                  | 2,895      |   |   | $ | 2,375 |   |   |   | $ | 2,116 |   |   | $ | 2,645 |   |
| Net income (loss)                     |       | $                                                                  | (144       | ) |   | $ | 61 |   |   |   | $ | (470 | ) |   | $ | (457 | ) |
| Net income (loss)  per share, basic   |       | $                                                                  | (0.01      | ) |   | $ | 0.00 |   |   |   | $ | (0.02 | ) |   | $ | (0.02 | ) |
| Net income (loss) per  share, diluted |       | $                                                                  | (0.01      | ) |   | $ | 0.00 |   |   |   | $ | (0.02 | ) |   | $ | (0.02 | ) |

 

57

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**SCHEDULE II**

**UNIFY CORPORATIONVALUATION AND QUALIFYING ACCOUNTS AND RESERVES(In thousands)**
| ** **                                                                             | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions  Charged to  Operating  Expenses** | ** ** | **Deductions:  Write-offs  of Accounts** | ** ** | **Additions  (Deductions):  Transfers  Between  Accounts** | ** ** | **Balance  at  End of  Period** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------|------------|
| Allowance for doubtful  accounts receivable:                                           |       |                                           |       |                                                |       |                                          |       |                                                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Year ended  April 30, 2003                                                        |       |                                           | $          | 318                                                 |       |                                          |       | $                                                          | 44         |                                 |       |   | $ | (162 | ) |   |   | $ | 52 |   |   |   | $ | 252 |   |   |
| Year ended  April 30, 2004                                                        |       |                                           | 252        |                                                |       |                                          | (79        | )                                                          |       |                                 | 1          |   |   |   | 1 |   |   |   | 175 |   |   |
| Year ended  April 30, 2005                                                        |       |                                           | 175        |                                                |       |                                          | 27         |                                                       |       |                                 | (7         | ) |   |   | — |   |   |   | 195 |   |   |
| Allowance for  long-term accounts and notes receivable—reflected in other assets: |       |                                           |       |                                                |       |                                          |       |                                                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Year ended  April 30, 2003                                                        |       |                                           | $          | 1,296                                               |       |                                          |       | $                                                          | (117       | )                                    |       |   | $ | (831 | ) |   |   | $ | — |   |   |   | $ | 348 |   |   |
| Year ended  April 30, 2004                                                        |       |                                           | 348        |                                                |       |                                          | 45         |                                                       |       |                                 | (36        | ) |   |   | — |   |   |   | 357 |   |   |
| Year ended  April 30, 2005                                                        |       |                                           | 357        |                                                |       |                                          | —     |                                                       |       |                                 | (179       | ) |   |   | — |   |   |   | 178 |   |   |

 

58

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| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                     | ** ** | **Description** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1              |       | Restated Certificate of Incorporation of the  Company(1)                                                                                                                                                                                                                       |
| 3.2              |       | Bylaws of the Registrant(1)                                                                                                                                                                                                                                                    |
| 4.1              |       | Form of Stock Certificate(1)                                                                                                                                                                                                                                              |
| 4.2              |       | Form of Warrant(5)                                                                                                                                                                                                                                                        |
| 10.2*            |       | 1991 Stock Option Plan, as amended(1)                                                                                                                                                                                                                                          |
| 10.3*            |       | 1996 Employee Stock Purchase Plan(1), (3)                                                                                                                                                                                                                                      |
| 10.4             |       | Form of Indemnification Agreement(1)                                                                                                                                                                                                                                      |
| 10.6             |       | Office Building Lease for Sacramento Facility, Dated  December 17, 1999(2)                                                                                                                                                                                                |
| 10.8*            |       | Employment Agreement by and between Todd Wille and  the Registrant dated December 29, 2000(4)                                                                                                                                                                        |
| 10.9*            |       | 2001 Stock Plan(3)                                                                                                                                                                                                                                                             |
| 10.10            |       | Silicon Valley Bank Loan and Security Agreement  dated June 6, 2003(5), as amended by Silicon Valley Bank Amendment to  Loan Documents dated June 3, 2004 and Amended Schedule to Loan and  Security Agreement dated June 3, 2004(6) and June 5, 2005 |
| 10.11            |       | Purchase Agreement dated April 23, 2004(6)                                                                                                                                                                                                                                |
| 10.12            |       | Registration Rights Agreement dated April 26,  2004(6)                                                                                                                                                                                                                    |
| 10.13            |       | Fourth Amendment Effective January 1, 2002 to  Office Building Lease Dated December 17, 1999(6)                                                                                                                                                                 |
| 10.14            |       | Fifth Amendment to Lease and Termination of Stock  Pledge Agreement dated September 18, 2003(6)                                                                                                                                                                      |
| 10.15            |       | Acuitrek Inc. Stock Purchase Agreement dated  February 2, 2005(7)                                                                                                                                                                                                         |
| 10.16            |       | Acuitrek Inc. Registration Rights Agreement dated  February 2, 2005(7)                                                                                                                                                                                                    |
| 14               |       | Code of Ethics for Senior Officers(6)                                                                                                                                                                                                                                          |
| 21.1             |       | Subsidiaries of the Registrant                                                                                                                                                                                                                                                 |
| 23.1             |       | Consent of Grant Thornton LLP, Independent  Registered Public Accounting Firm                                                                                                                                                                                                  |
| 23.2             |       | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm                                                                                                                                                                                          |
| 31.1             |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                      |
| 31.2             |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Securities Exchange Act of 1934 as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                      |
| 32.1             |       | Certification of Todd  Wille, Chief Executive Officer of Unify Corporation pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                          |
| 32.2             |       | Certification of Steven  D. Bonham, Chief Financial Officer of Unify Corporation pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                         |

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(1)          Incorporated byreference to the exhibit filed with Registrant’s Form S-1Registration Statement (No. 333-3834) declared effective by theSecurities and Exchange Commission on June 14, 1996.

(2)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on December 22,2000.

(3)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-Q on March 14,2002.

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(4)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on July 30,2001.

(5)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on July 17,2003.

(6)          Incorporated byreference to the exhibit filed with Registrant’s Form 10-K on July 21,2004.

(7)          Incorporated byreference to the exhibit filed with Registrant’s Form 8-K on February 2,2005.

*                    Exhibitpertains to a management contract or compensatory plan or arrangement.

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