UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





þ
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended June 30,
2009





or





o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ______________ to_________________





Commission
File Number: 000-52624





CYBRA
CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)





New
      York
              
              13-3303290(State
      or Other Jurisdiction of Incorporation or Organization)
              
              (I.R.S.
      Employer Identification No.)One
      Executive Blvd., Yonkers, NY
              
              10701(Address
      of Principal Executive Offices)
              
              (Zip
      Code)Registrant’s
      Telephone Number, Including Area Code
              
              (914)  963-6600





Not
Applicable


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)





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


þ Yes                  ̈ No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈ Yes                  ̈ No





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




Large
accelerated filer  ̈                                                                           Accelerated
filer  ̈




Non-accelerated
filer   ̈                                                                Smaller
Reporting Company  þ







Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o  No þ





As of
August 10, 2009 the registrant had 13,572,143 shares of Common Stock
outstanding.













CYBRA
Corporation





Table of
Contents





PagePart
      I.
              Financial Information
              1Item
      1.
              Financial Statements
              1Balance Sheets as of June 30, 2009 and December 31,
      2008
              1Statements of Operations for the three and six months ended
      June 30, 2009 and 2008
              2Statements of Cash Flows for the three and six months ended
      June 30, 2009 and 2008
              3Notes to Financial Statements
              4Item
      2.
              Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
              16Item
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              19Item
      4T.
              Controls and Procedures
              19Part
      II.
              Other Information
              20Item
      1.
              Legal Proceedings
              20Item
      6.
              Exhibits
              20Signatures
              21













PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS





CYBRA
CORPORATION





BALANCE
SHEETS




June
      30,
                        
                        
                        December
      31,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                        
                        $
                        75,739
                        
                        
                        $
                        70,591Accounts
      receivable, less allowance for doubtful accounts of $17,000 at both
      dates
                        
                        
                        117,743
                        
                        
                        
                        331,021Total
      Current Assets
                        
                        
                        193,482
                        
                        
                        
                        401,612PROPERTY
      AND EQUIPMENT
                        
                        
                        67,147
                        
                        
                        
                        78,831SOFTWARE
      DEVELOPMENT
                        
                        
                        440,205
                        
                        
                        
                        553,071DEFERRED
      FINANCE COSTS
                        
                        
                        -
                        
                        
                        
                        113,010SECURITY
      DEPOSITS AND OTHER ASSETS
                        
                        
                        11,634
                        
                        
                        
                        18,711TOTAL
      ASSETS
                        
                        $
                        712,468
                        
                        
                        $
                        1,165,235LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIES8% Convertible Debentures
                        
                        $
                        2,595,441
                        
                        
                        $
                        2,402,791Accrued
      liquidated damages - registration rights agreement
                        
                        
                        110,000
                        
                        
                        
                        110,000Accounts
      payable and accrued expenses
                        
                        
                        380,608
                        
                        
                        
                        437,088Accrued
      interest
                        
                        
                        585,272
                        
                        
                        
                        537,290Deferred
      revenue
                        
                        
                        336,227
                        
                        
                        
                        346,416TOTAL
      CURRENT LIABILITIES
                        
                        
                        4,007,548
                        
                        
                        
                        3,833,585STOCKHOLDERS'
      DEFICITPreferred
      Stock, Class A 1,000 shares authorized, Class B 1,000
    sharesauthorized,
      no shares outstanding at June 30, 2009 and December 31,
    2008
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, par value $0.001 per share, 100,000,000 shares
      authorized;13,572,143
      and 13,512,143 shares issued and outstanding, respectively
                        
                        
                        13,572
                        
                        
                        
                        13,512Additional
      Paid - in capital
                        
                        
                        2,797,562
                        
                        
                        
                        2,752,621Accumulated
      deficit
                        
                        
                        (6,106,214
                        )
                        
                        
                        (5,434,483
                        )Total
      Stockholders' Deficit
                        
                        
                        (3,295,080
                        )
                        
                        
                        (2,668,350
                        )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                        
                        $
                        712,468
                        
                        
                        $
                        1,165,235






The
accompanying notes are an integral part of these financial
statements.
 -1-








STATEMENTS
OF OPERATIONS




Three
      Months Ended
                          
                          
                          Six
      Months EndedJune
      30,
                          
                          
                          June
      30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008(Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)reclassified
                          
                          
                          
                          
                          
                          reclassifiedfor
      comparability
                          
                          
                          
                          
                          
                          for
      comparabilityREVENUESProducts
                          
                          $
                          117,858
                          
                          
                          $
                          215,518
                          
                          
                          $
                          383,853
                          
                          
                          $
                          342,584Services
                          
                          
                          188,323
                          
                          
                          
                          138,969
                          
                          
                          
                          341,000
                          
                          
                          
                          288,360TOTAL
      REVENUES
                          
                          
                          306,181
                          
                          
                          
                          354,487
                          
                          
                          
                          724,853
                          
                          
                          
                          630,944COST
      OF GOODS SOLDEquipment
      purchases
                          
                          
                          8,724
                          
                          
                          
                          63,925
                          
                          
                          
                          144,498
                          
                          
                          
                          97,417Royalties
      and consulting
                          
                          
                          14,165
                          
                          
                          
                          10,000
                          
                          
                          
                          30,201
                          
                          
                          
                          21,53722,889
                          
                          
                          
                          73,925
                          
                          
                          
                          174,699
                          
                          
                          
                          118,954GROSS
      PROFIT
                          
                          
                          283,292
                          
                          
                          
                          280,562
                          
                          
                          
                          550,154
                          
                          
                          
                          511,990Research
      and Development
                          
                          
                          48,801
                          
                          
                          
                          -
                          
                          
                          
                          101,134
                          
                          
                          
                          381,918Selling,
      General and Administrative
                          
                          
                          352,496
                          
                          
                          
                          610,692
                          
                          
                          
                          767,144
                          
                          
                          
                          893,596TOTAL
      OPERATING EXPENSES
                          
                          
                          401,297
                          
                          
                          
                          610,692
                          
                          
                          
                          868,278
                          
                          
                          
                          1,275,514LOSS
      FROM OPERATIONS
                          
                          
                          (118,005
                          )
                          
                          
                          (330,130
                          )
                          
                          
                          (318,124
                          )
                          
                          
                          (763,524
                          )OTHER
      INCOME (EXPENSE)Loss
      on debenture valuation adjustment
                          
                          
                          (50,907
                          )
                          
                          
                          -
                          
                          
                          
                          (50,907
                          )
                          
                          
                          -Interest
      expense, includes $113,010 and $135,045 ofamortization of deferred finance costsfor the six month periods, respectively
                          
                          
                          (73,309
                          )
                          
                          
                          (189,311
                          )
                          
                          
                          (302,735
                          )
                          
                          
                          (340,373
                          )Interest
      income
                          
                          
                          24
                          
                          
                          
                          280
                          
                          
                          
                          35
                          
                          
                          
                          3,656Miscellaneous
      Income
                          
                          
                          -
                          
                          
                          
                          135
                          
                          
                          
                          
                          
                          
                          
                          335(124,192
                          )
                          
                          
                          (188,896
                          )
                          
                          
                          (353,607
                          )
                          
                          
                          (336,382
                          )LOSS
      BEFORE INCOME TAXES
                          
                          $
                          (242,197
                          )
                          
                          $
                          (519,026
                          )
                          
                          $
                          (671,731
                          )
                          
                          $
                          (1,099,906
                          )DEFERRED
      INCOME TAXES (BENEFIT)
                          
                          
                          -
                          
                          
                          
                          (262,943
                          )
                          
                          
                          -
                          
                          
                          
                          (356,193
                          )NET
      LOSS
                          
                          $
                          (242,197
                          )
                          
                          $
                          (256,083
                          )
                          
                          $
                          (671,731
                          )
                          
                          $
                          (743,713
                          )PER
      SHARE DATABasic
      and diluted net loss per share
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.05
                          )
                          
                          $
                          (0.06
                          )Basic
      and diluted weighted-average shares outstanding
                          
                          
                          13,572,143
                          
                          
                          
                          12,655,789
                          
                          
                          
                          13,558,143
                          
                          
                          
                          12,633,495





The
accompanying notes are an integral part of these financial
statements.
 -2-




CYBRA
CORPORATION




STATEMENTS
OF CASH FLOWS




Six
      Months EndedJune
      30,2009
                          
                          
                          2008(Unaudited)
                          
                          
                          (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                          
                          $
                          (671,731
                          )
                          
                          $
                          (743,713
                          )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activitiesDepreciation
      and Amortization
                          
                          
                          125,940
                          
                          
                          
                          13,349Stock
      based compensation
                          
                          
                          45,000
                          
                          
                          
                          -Deferred
      income tax credit
                          
                          
                          -
                          
                          
                          
                          (356,192
                          )Interest
      expense - amortization of debt discount
                          
                          
                          88,002
                          
                          
                          
                          106,216Amortization
      of deferred finance cost
                          
                          
                          113,010
                          
                          
                          
                          133,045Loss
      on debenture valuation adjustment
                          
                          
                          50,907
                          
                          
                          
                          -Changes
      in operating assets and liabilitiesAccounts
      receivable
                          
                          
                          213,278
                          
                          
                          
                          122,437Loan
      Receivable
                          
                          
                          -
                          
                          
                          
                          6,000Security
      deposits and other assets
                          
                          
                          7,077
                          
                          
                          
                          (6,947
                          )Accounts
      payable and accrued expenses
                          
                          
                          (56,479
                          )
                          
                          
                          (167,708
                          )Accrued
      interest
                          
                          
                          101,723
                          
                          
                          
                          101,112Deferred
      revenue
                          
                          
                          (10,189
                          )
                          
                          
                          19,928Sales
      tax payable
                          
                          
                          -
                          
                          
                          
                          -Net
      Cash Provided by (Used in) Operating Activities
                          
                          
                          6,538
                          
                          
                          
                          (772,473
                          )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
                          
                          
                          (1,390
                          )
                          
                          
                          (4,986
                          )Net
      Cash Used in Investing Activities
                          
                          
                          (1,390
                          )
                          
                          
                          (4,986
                          )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from private placement
                          
                          
                          -
                          
                          
                          
                          110,000Net
      Cash from Financing Activities
                          
                          
                          -
                          
                          
                          
                          110,000INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                          
                          
                          5,148
                          
                          
                          
                          (667,459
                          )CASH
      AND CASH EQUIVALENTSBeginning
      of period
                          
                          
                          70,591
                          
                          
                          
                          787,156End
      of period
                          
                          $
                          75,739
                          
                          
                          $
                          119,697SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                          
                          $
                          -
                          
                          
                          $
                          -Income
      Taxes
                          
                          $
                          2,194
                          
                          
                          $
                          490






The
accompanying notes are an integral part of these financial
statements.
 -3-




CYBRA
CORPORATION





NOTESTO FINANCIAL STATEMENTS





1.  ORGANIZATION,
DESCRIPTION OF OPERATIONS, FINANCIAL STATUS OF THE COMPANY AND BASIS OF
PRESENATION





Organization and Description
of Operations





CYBRA
Corporation (“the Company”) was incorporated under the laws of the State of New
York on September 6, 1985. The Company is a software developer, publisher, and
systems integrator in the IBM midrange market. Its flagship product,
MarkMagicTM, is an
online bar code software product for IBM System i (formerly known as the AS/400)
computers. EdgeMagic®, first
released February 2008, is an integrated radio frequency identification (“RFID”)
control solution for IBM System i customers that is capable of deployment on
other platforms and is highly scalable. It is designed to manage edge readers
and analog control devices, commission, read, filter and verify RFID tags to
comply with Electronic Product Code (EPC) compliance mandates, as well as for
asset tracking applications and integration with popular ERP and Warehouse
Management application packages.





Substantially
all of the Company’s accounts receivable are due from manufacturing companies
and software vendors located throughout the United States.





Financial Status of the
Company





At June
30, 2009, the Company had cash and cash equivalents of $75,739, and a working
capital deficit of $3,814,066, which includes certain current liabilities that
are not expected to require near term cash settlement. Additionally, the Company
has incurred a net loss of $671,731 for the six months ended June 30, 2009, and
had a stockholders’ deficit of $3,295,080 at June 30, 2009. Management has taken
several steps that it believes will improve sales and reduce costs in order to
ensure that its cash flows will meet its operating cash requirements for 2009.
These steps include increasing sales of EdgeMagic®, which
management believes has revenue potential far in excess of the current product
mix, as well as the formation of a field level sales team.




The
Company, as further discussed in Notes 3 and 13, is obligated under 8%
Convertible Debentures that became due on April 10, 2009.  The Company
presently does not have the resources to pay the
Debentures.  Furthermore, the Company can provide no assurance that it
will be able to refinance the Debentures through new debt or equity financing or
extend the term of the Debentures.  If the Company is able to
refinance or extend the term of the Debentures, the terms of such a refinancing
or extension of the term may be burdensome and result in substantial dilution to
its shareholders.





Although
the terms of the Debentures permit the Company to force conversion, subject to
certain conditions, the Company was not able to satisfy those conditions and
force conversion of the Debentures by the maturity date.  The Company
is currently attempting to renegotiate the terms of the Debentures, either by
extending the maturity date of the Debentures or by exchanging the Debentures
for a new series of preferred stock. However there can be no assurance that the
Company will be able to successfully renegotiate the terms of the Debentures.
Furthermore, two Debenture holders have demanded payment of their Debentures,
and one has commenced an action in New York Supreme Court for payment. Although
the Company has continued settlement negotiations with both of the Debenture
holders, there can be no assurance that a settlement will ensue with either of
them. If the Company is unsuccessful in its settlement efforts or if other
Debenture holders demand payment of their Debentures, the Company may be
required to seek protection under the federal or state bankruptcy laws or take
other actions that could impair its ability to continue its operations. While
management of the Company is currently continuing to negotiate with Debenture
holders in good faith and remains optimistic of a positive result, the Company
remains vulnerable in the near term to the possibility that one or more
Debenture holders will not agree to a settlement, which could lead to a
bankruptcy filing.





Basis of
Presentation





The
accompanying interim financial statements have been prepared by the Company
without audit, in accordance with the instructions for Form 10-Q pursuant to the
rules and regulations of the SEC and therefore do not include all information
and notes normally provided in the annual financial statements and should be
read in conjunction with the audited financial statements and the notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, as filed with the SEC on April 2, 2009.






-4-






In the
opinion of management, the accompanying unaudited financial statements contain
all adjustments (which consist of normal and recurring adjustments) necessary
for a fair presentation of the financial statements. The results of operations
for the six months ended June 30, 2009 are not necessarily indicative of the
results to be expected for the full year.





2.  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Software
Costs





The
Company accounts for software development costs in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed (“SFAS 86”). SFAS 86
requires that costs related to the development of enhancements to MarkMagic be
capitalized as an asset when incurred subsequent to the point at which
technological feasibility of the enhancement is established. SFAS 86 specifies
that “technological feasibility” for purposes of SFAS 86 can only be established
by the completion of a “detailed program design” or if no such design is
prepared, upon the completion of a “working model” of the software. The
Company’s development process does not include a detailed program design.
Management believes that such a design could be produced in the early stages of
development but would entail significant wasted expense and delay. Consequently,
SFAS 86 requires the development costs to be recorded as an expense until the
completion of a “working model”. In the Company’s case, the completion of a
working model does not occur until shortly before the time when the software is
ready for sale.





Research and Development
Costs





Research
and development costs incurred after completion of development of a product are
expensed as incurred. Total research and development expense for the six months
ended June 30, 2009 and 2008 were $101,134 and $381,918,
respectively.





Accounting for Warrants
Classified as Equity Issued to Purchase Company Common Stock





Warrants
issued in conjunction with equity financings were accounted for under the
Emerging Issues Task Force FSP (“EITF”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock.
In December 2006, the FASB approved FSP EITF 00-19-2, Accounting for Registration Payment
Arrangements, which establishes the standard that contingent obligations
to make future payments under a registration rights arrangement shall be
recognized and measured separately in accordance with Statement 5 and FASB
Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. The
Company has evaluated the effect of FSP EITF 00-19-2 and FSP EITF Topic D-98 on
the accompanying financial statements. The adoption of FSP EITF 00-19-2 on
January 1, 2007 changed the classification of the warrant liability, which was
$551,910 at January 1, 2007, to stockholders’ equity (additional paid-in
capital).





Derivative Financial
Instruments





The
Company accounts for the Warrants that were issued in a private placement of the
8% Convertible Debentures with detachable Warrants on April 10, 2006, as
derivatives under the guidance of Statement of Financial Accounting Standards
No. 133,Accounting for
Derivative Instruments and Hedging Activities (“SFAS 133”), and Emerging
Issues Task Force Issue 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock
(“EITF 00-19”). The Company considers these standards applicable by adopting
“View A” of the Issue Summary relating to Emerging Issues Task Force Issue
05-04, The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument Subject to
Issue No. 00-19 (“EITF 05-04”) in which the Warrants and the related
registration rights agreement are viewed together as a combined instrument that
is indexed to the Company’s stock. The embedded conversion feature of the
Debentures has not been classified as a derivative financial instrument because
the Company believes that they are “conventional” as defined in Emerging Issues
Task Force Issue 05-02,The
Meaning of “Conventional Convertible Debt Instrument” in Issue No.
00-19  (“EITF 05-02”).





Depreciation and
Amortization





Depreciation
and amortization are provided by the straight-line and accelerated methods over
the estimated useful lives indicated in Note 5.






-5-





Income
Taxes





Income
taxes are accounted for under the asset and liability method in accordance with
SFAS No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
carrying amounts of existing assets and liabilities and their respective tax
bases as well as operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the periods in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance to the
extent that the recoverability of the asset is unlikely to be
recognized.





During
its prior year ended December 31, 2008, the Company adopted FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109(“FIN 48”). This interpretation provides guidance for recognizing and
measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a threshold condition that a tax position must meet for any of
the benefits of the uncertain tax position to be recognized in the financial
statements. FIN 48 also provides accounting guidance on derecognizing,
classification and disclosure of these uncertain tax positions.





Interest
costs and penalties related to income taxes are classified as interest expense
and selling, general and administrative costs, respectively, in the Company’s
financial statements. For the six months ended June 30, 2009 and 2008, the
Company did not recognize any interest or penalty expense related to income
taxes. The Company is currently subject to a three-year statute of limitations
by major tax jurisdictions. The Company files income tax returns in the U.S.
federal jurisdiction and New York State.





Advertising
Costs





Advertising
costs are charged to expense as incurred. Total advertising amounted to $8,204
and $45,102 for the six months ended June 30, 2009 and 2008,
respectively.





Use of
Estimates





The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates relate to valuation of stock grants and stock
options, the net operating loss carry-forward, the valuation allowance for
deferred taxes and various contingent liabilities. It is reasonably possible
that these above-mentioned estimates and others may be adjusted as more current
information becomes available, and any adjustment could be significant in future
reporting periods.





Cash and Cash
Equivalents





We
classify marketable securities that are highly liquid and have maturities of six
months or less at the date of purchase as cash equivalents. We manage our
exposure to counterparty credit risk through specific minimum credit standards,
diversification of counterparties and procedures to monitor our credit risk
concentrations.





Revenue
Recognition





The
Company recognizes revenues in accordance with AICPA Statement of Position (SOP)
97-2, Software Revenue
Recognition, as amended by SOP 98-9 (Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions).





Revenue
from software license agreements is recognized when persuasive evidence of an
agreement exists, delivery of the software has occurred, the fee is fixed or
determinable, and collectibility is probable. In software arrangements that
include more than one element, the Company allocates the total arrangement fee
among the elements based on the relative fair value of each of the
elements.




License
revenue allocated to software products generally is recognized upon delivery of
the products or deferred and recognized in future periods to the extent that an
arrangement includes one or more elements to be delivered at a future date and
for which fair values have not been established. Revenue allocated to
maintenance agreements is recognized ratably over the maintenance term and
revenue allocated to training and other service elements is recognized as the
services are performed. If evidence of fair value does not exist for all
elements of a license agreement and post customer support (PCS) is the only
undelivered element, then all revenue for the license arrangement is recognized
ratably over the term of the agreement as license revenue. If evidence of fair
value of all undelivered PCS elements exists but evidence does not exist for one
or more delivered elements, then revenue is recognized using the residual
method. Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue.




-6-






Cost of
license revenue primarily includes product, delivery, and royalty costs. Cost of
maintenance and service revenue consists primarily of labor costs for engineers
performing implementation services, technical support, and training personnel as
well as facilities and equipment costs.





Deferred Finance
Costs





Deferred
finance costs are being amortized over the term of the 8% Convertible Debentures
on the effective interest method.





Accounts
Receivable





We record
trade accounts receivable at net realizable value. This value includes an
appropriate allowance for estimated uncollectible accounts to reflect any loss
anticipated on the trade accounts receivable balances and charged to the
provision for doubtful accounts. We calculate this allowance based on our
history of write-offs, level of past-due accounts based on the contractual terms
of the receivables, and our relationships with and the economic status of our
customers.





Trade
receivables are presented net of an allowance for doubtful accounts of $17,000
as of June 30, 2009 and December 31, 2008.





Stock-Based
Compensation





In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123R (FAS-123R), Share-Based Payment, which is
a revision of Statement of Financial Accounting Standards No. 123 (FAS-123),
Accounting for Stock-Based
Compensation. In addition to requiring supplemental disclosures, FAS-123R
addressed the accounting for share-based payment transactions in which a company
receives goods or services in exchange for (a) equity instruments of the company
or (b) liabilities that are based on the fair value of the company’s equity
instruments or that may be settled by the issuance of such equity instruments.
FAS-123R focuses primarily on accounting for transactions in which a company
obtains employee services in share-based payment transactions. FAS-123R
eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25 (APB-25), Accounting for Stock Issued to
Employees, and generally requires that such transactions be accounted for
using a fair value based method. Accordingly, pro-forma disclosure is no longer
an alternative.





Under
FAS-123R, the Company was required to recognize compensation cost for the
portion of outstanding awards previously accounted for under the provisions of
APB-25 for which the requisite service had not been rendered as of the adoption
date for this Statement. The Statement also required companies to estimate
forfeitures of stock compensation awards as of the grant date of the
award.





The
Company adopted FAS-123R on January 1, 2006, using the modified prospective
method. Stock issued to consultants for consulting services was valued as of the
date of the agreements with the various consultants, which in all cases was
earlier than the dates when the services were committed to be performed by the
various consultants.





References
to the issuances of restricted stock refer to stock of a public company issued
in private placement transactions to individuals who are eligible to sell all or
some of their shares of restricted Common Stock pursuant to Rule 144,
promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain
limitations. In general, pursuant to Rule 144, a stockholder who is not an
affiliate and has satisfied a six-month holding period may sell all of his
restricted stock without restriction, provided that the Company has current
information publicly available. Rule 144 also permits, under certain
circumstances, the sale of restricted stock, without any limitations, by a
non-affiliate of the Company that has satisfied a one-year holding
period.




Fair Value of Financial
Instruments





The
Company is required to estimate the fair value of the stock-based financial
instruments issued in connection with the sale of the Debentures, which were
issued at the time that the Company was privately held. Estimating the values of
the stock-based financial instruments of privately held companies, which cannot
be referenced to a quoted market price, even to establish the value of the
underlying common shares, involves significant uncertainty. It also involves the
application of assumptions that may vary substantially from those that would be
applied by actual buyers and sellers of the instruments. Without a quoted stock
price to use as a basis of measurement, the Company has estimated the value of
the Common Stock, Warrants and the conversion feature of the Debentures based on
a value of approximately $0.13 per share. This value was estimated by 1)
assuming that the $2,500,000 received from investors, as an arm’s-length
transaction, represented the total fair value of the instruments issued to those
investors, 2) estimating the fair value of the Debentures issued if there were
no conversion feature or Warrants, 3) allocating the remainder to the derivative
financial instruments, and 4) using a 147% volatility factor, as discussed
below, to derive the implied Common Stock value, the value of conversion feature
(included as part of the initial value of the Debentures) and values for the two
classes of Warrants that are accounted for as separate derivative financial
instruments.







-7-




The
estimated initial fair value of the Debentures payable (separated from the
embedded conversion feature) is based on the discounted contractual cash flows
with the discount rate of 27.1%. This discount rate is based on the 22.6% mean
return on United States equity for companies with market capitalizations of
under $1,500,000 and then adding 4.5% as the long-term risk premium on software
companies as published in a respected independent source. An equity-related
discount rate was used because, in the Company’s situation, unsecured debt at
this amount would entail equity-like risks. The estimated initial value of the
embedded conversion feature was then added to this value to arrive at the total
initial value of the convertible debenture.





In
valuing the embedded conversion features and Warrants, in the absence of quoted
market prices or historical volatilities for the Company’s stock, the total fair
value of the financial instruments issued in the April 10, 2006 financing was
considered to be equal to the proceeds, representing a valuation provided by an
arm’s-length transaction. Allocating the total, however, required estimation
subject to significant uncertainty. First, proceeds were allocated to the values
of the principal and interest payable on the Debentures based on a 27.1% p.a.
discount rate as described in the last paragraph. The remainder was allocated
between the conversion feature and the Warrants based on Black-Scholes related
option pricing models. The Black-Scholes computations used a volatility factor
of approximately 147%. The volatility was the average calculated volatility, for
the one-year period ended April 10, 2006, of a sample of software companies with
market capitalizations of over $1,000,000. The implied Common Stock value that
resulted in a value for the derivatives equal to the difference between the
debenture value and the gross proceeds was approximately $0.13 per share. This
value, less an estimated 26% discount for lack of marketability for a net value
of approximately $0.096 per share, was used to estimate the fair value of the
1,826,000 shares of Common Stock sold at a discount to three individuals
involved in finding investors for the Company. Management believes that the
discount on the finders’ stock is appropriate because 1) there are no liquidated
damages provisions associated with that stock, and 2) although they were
included among the shares being registered by the Company for sale by the
holders to the public, there was no certainty that the registration will become
and remain effective.





In
December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position EITF 00-19-2 FSP 00-19-2, Accounting for Registration Payment
Arrangements. This FSPaddresses an issuer’s
accounting for registration payment arrangements by specifying that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting
for Contingencies. FSP 00-19-2 became effective for fiscal periods
beginning after December 15, 2006, and interim periods within those fiscal
periods.





Basic and Diluted Loss per
Share





In
accordance with Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standard No. 128 (“SFAS 128”), Earnings Per Share, the basic
loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding.
Diluted loss per common share is computed in a manner similar to basic loss per
common share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
At June 30, 2009 and 2008, the Company stock equivalents were anti-dilutive and
excluded in the diluted loss per share computation.





Commitments and
Contingencies





Liabilities
for loss contingencies arising from various claims, assessments, litigation,
fines and penalties and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment can be reasonably
estimated.




Adopted Accounting
Standards





In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP
157-3”), to clarify the application of the provisions of SFAS 157 in an inactive
market and how an entity would determine fair value in an inactive market. FSP
157-3 was effective upon issuance and applies to the Company’s current financial
statements. The application of the provisions of FSP 157-3 did not materially
affect the Company’s results of operations or financial condition for the period
ended June 30, 2009.




-8-







In June
2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock, effective for
financial statements issued for fiscal periods and interim periods beginning
after December 15, 2008. EITF No.07-5 provides guidance for determining whether
an equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock. The adoption of EITF No. 07-5 did not have a material effect
on the Company’s financial statements.





Pending Accounting
Standards





FSP
SFAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan
Assets





In
December 2008, the FASB issued FSP SFAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. FSP SFAS 132(R)-1 requires an
employer to provide certain disclosures about the assets held by its defined
benefit pension or other postretirement plans. The required disclosures include
the investment policies and strategies of the plans, the fair value of the major
categories of plan assets, the inputs and valuation techniques used to develop
fair value measurements and a description of significant concentrations of risk
in plan assets. FSP SFAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009. The Company does not expect the adoption of FSP SFAS 132(R)-1
to have a material impact on its Financial Statements.





FSP
SFAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly





In April
2009, the FASB issued FSP SFAS No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. Under FSP
SFAS No. 157-4, transactions or quoted prices may not accurately reflect fair
value if an entity determines that there has been a significant decrease in the
volume and level of activity for the asset or the liability in relation to the
normal market activity for the asset or liability (or similar assets or
liabilities). In addition, if there is evidence that the transaction for the
asset or liability is not orderly, the entity shall place little, if any weight
on that transaction price as an indicator of fair value. FSP SFAS No. 157-4 is
effective for periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009 subject to the early adoption of FSP
SFAS No. 115-2 and SFAS No. 124-2. The Company did not elect to early adopt FSP
SFAS No. 157-4; however, it does not expect the adoption to have a material
impact on its Financial Statements.





FSP
SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments





In April
2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP SFAS No. 115-2”). FSP SFAS No.
115-2 provides new guidance on the recognition and presentation of
other-than-temporary impairments (“OTTI”) for fixed maturity securities that are
classified as available-for-sale and held-to-maturity if management does not
intend to sell the impaired security and it is more likely than not it will not
be required to sell the impaired security before the recovery of its amortized
cost basis. The Company does not have investments in fixed maturity securities
and, accordingly, expects no impact from adoption of this
pronouncement.





FSP
SFAS No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of
Financial Instruments





In April
2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (“APB”)
No. 28-1, Interim Disclosures
about Fair Value of Financial Instruments (“FSP SFAS No. 107-1”). FSP
SFAS No. 107-1 amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require fair value of financial instrument
disclosure in interim financial statements and amends APB No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements. The provisions
of FSP SFAS No. 107-1 are effective for interim periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. The
Company did not elect to early adopt FSP SFAS No. 107-1; however, it does not
expect the adoption to have a material impact on its Financial
Statements.





Reclassifications





Certain
reclassifications have been made to the 2008 financial statements included
herein to conform to the 2009 presentation.  These reclassifications
had no material effect on the financial position, results of operations, or cash
flows of the Company.






-9-





3.  8% CONVERTIBLE
DEBENTURES AND DERIVATIVE FINANCIAL INSTRUMENTS





On April
10, 2006, the Company issued 8% Convertible Debentures (the “Debentures”) with a
principal (“face”) value of $2,500,000, along with 7,500,000 detachable Stock
Warrants (the “Warrants”) to several investors. The gross proceeds of this
transaction were $2,500,000, consisting of $2,080,000 cash, $151,000 from the
cancellation of debt incurred in 2005, $19,000 from the cancellation of debt
incurred earlier in 2006 and $250,000 applied as finders’ fees.  The
convertible debenture balances at June 30, 2009 and December 31, 2008 were
$2,490,000 and $2,402,791, respectively. The amortization of deferred finance
costs was $113,010 and $135,045 for the six months ended June 30, 2009 and 2008,
respectively. The deferred finance cost balances at June 30, 2009 and December
31, 2008 were $-0- and $113,010, respectively.





Interest
on the Debentures is due semiannually at 8% per annum beginning December 31,
2006. Interest is also due upon conversion, redemption and maturity. No interest
has been paid to date. The Debentures matured on April 10, 2009 (see Notes 1 and
13).





Through
April 10, 2008 the Company had the right, subject to certain conditions, to
redeem the Debentures for 120% of the principal value. The Company declined to
do so.





The
investors also received 7,500,000 Warrants, 2,500,000 of Class A and 5,000,000
of Class B. Each Class A Warrant gives the holder the right to buy one share of
Common Stock for $0.75. Each Class B Warrant gives the holder the right to buy
one share of Common Stock for $1.75. The Warrants are exercisable at any time
through April 10, 2011. The 7,500,000 Warrants are the only outstanding Warrants
at June 30, 2009 that were issued in connection with the sale of the
Debentures.





As part
of the transaction, $250,000 principal amount of the Debentures were issued
along with 125,000 Class A Warrants and 250,000 Class B Warrants as finders’
fees. The finders will also receive additional fees equal to 5% of any cash
collected as on the exercise of any of the Warrants. To date, no Warrants have
been exercised.





The
shares of Common Stock that underlie the conversion feature of the Debentures
and those that underlie the Warrants are subject to a registration rights
agreement. Pursuant to the registration rights agreement, the Company was
obligated to file a registration statement with the United States Securities and
Exchange Commission by June 8, 2006 registering the shares for public sale, and
to have the registration statement become effective by September 7, 2006 and to
keep the registration statement continuously effective. Failure to achieve these
registration requirements will result, in addition to other possible claims by
the holders for damages, partial liquidated damages equal to 1.5% per month
(pro-rated by day) of the aggregate purchase price originally paid by the
investors (i.e., the monthly partial liquidated damages would be $37,500 per
month). Any claims and liquidated damages that might have been due as a result
of filing the registration statement on June 16, 2006 have been waived by the
holders. The registration statement did not become effective until December 6,
2006. Liquidated damages of $110,000 for the period September 7 through December
6, 2006 and $8,833 of related interest have been accrued through June 30,
2009.





The
Warrants have been classified as derivative financial instruments as a result of
the issuance of a registration rights agreement that includes a liquidated
damages clause, which is linked to an effective registration of such securities.
Accordingly, the Company applied EITF 00-19 and accounted for the Warrants as
liabilities at estimated fair value. The Company’s value estimation methods
which, in the case of a private company, must inherently involve significant
uncertainly are described in the “fair value of financial instruments” section
of Note 1, above.





The fair
value of the financial instrument as shown on a company’s balance sheet assumes
that the shares will be registered. The liability under the alternative of the
shares never being registered and paying the full cash liquidated damages is
estimated to be approximately $892,000 greater than the fair value recorded on
the balance sheet. This estimate of value is subject to an extra level of
uncertainty concerning the amount at which a willing seller and buyer would
exchange such instruments. The estimated value represents discounting the
$450,000 p.a. ($2,500,000 at 18%) liquidated damages, in perpetuity, at a rate
of 33.875% and adding a separate value of the Warrants. The separate value of
the Warrants was in turn, based on the Black-Scholes calculation used for the
balance sheet (if registered estimate) but reducing the current share value
assumption by 45% for lack of marketability. The 45% was based on published
long-term studies.





The
derivative financial instruments have not been designated as hedges. The purpose
of their issuance was to raise additional capital in a more advantageous fashion
than could be done without the use of such instruments. In addition to expecting
the overall cost of capital to be less, the use of the derivative instruments
reduces the cost to the common shareholders when the value of their shares
declines in exchange for increasing the cost to the common shareholders when the
value of their shares increase, all of which should tend to reduce the
volatility of the value of the Company’s common shares.






-10-





4. STOCK BASED
COMPENSATION





During
the six months ended June 30, 2009, the Company issued 60,000 shares of Common
Stock for services rendered as a director and investor relations services,
valued at $0.75 per share for total compensation of $45,000. No shares were
issued in the three months ended June 30, 2009.





The
Company has adopted the CYBRA Corporation 2006 Incentive Stock Plan, a
stock-based compensation plan to reward for services rendered by officers,
directors, employees and consultants. The Company has reserved 5,000,000 shares
of Common Stock of its unissued share capital for issuance under the
plan.





The
Company recognizes share-based compensation expense for all service-based awards
with graded vesting schedules on a straight-line basis over the requisite
service period for the entire award. Initial accruals of compensation expense
are based on the estimated number of shares for which requisite service is
expected to be rendered. Estimates are revised if subsequent information
indicates that forfeitures will differ from previous estimates, and the
cumulative effect on compensation cost of a change in the estimated forfeitures
is recognized in the period of the change.





For
awards with service conditions and graded vesting that were granted prior to the
adoption of FAS-123R, the Company estimates the requisite service period and the
number of shares expected to vest and recognize compensation expense for each
tranche on a straight-line basis over the estimated requisite service period of
the award or over a period ending with an employee's eligible retirement date,
if earlier. Adjustments to compensation expense as a result of revising the
estimated requisite service period are recognized prospectively.





Total
stock options outstanding at June 30, 2009 were 100,000, all of which were
vested.





Stock
option transactions to the employees, directors, and consultants are summarized
as follows:


Stock
      Options OutstandingOutstanding
      at January 1, 2008
                
                
                100,000Granted
                
                
                -Exercised
                
                
                -Outstanding
      at December 31, 2008
                
                
                100,000Options
      exercisable at December 31, 2008
                
                
                100,000Options
      outstanding at January 1, 2009
                
                
                100,000Granted
                
                
                -Exercised
                
                
                -Outstanding
      at June 30, 2009
                
                
                100,000Options
      exercisable at June 30, 2009
                
                
                100,000





The
100,000 options outstanding at June 30, 2009 were issued in December 2007, have
a remaining outstanding life of 4 years and have an exercise price of $0.75 per
share.





Following
is a summary of the warrant activity:





Class
      A and B Warrants
                  
                  Total
      Number of Shares
                  
                  
                  Class
      A
                  
                  
                  Class
      B
                  
                  
                  Average
      Exercise Price per Share
                  
                  
                  Weighed
      Average Remaining Contractual
                    Term
      In YearsOutstanding
      at December 31, 2008
                  
                  
                  10,571,003
                  
                  
                  
                  3,523,669
                  
                  
                  
                  7,047,334
                  
                  
                  
                  1.42
                  
                  
                  
                  3.24Total
      Outstanding Warrants – December 31, 2008
                  
                  
                  10,571,003
                  
                  
                  
                  3,523,669
                  
                  
                  
                  7,047,334
                  
                  
                  
                  1.42
                  
                  
                  
                  3.24Exercisable
      at December 31, 2008
                  
                  
                  10,571,003
                  
                  
                  
                  3,523,669
                  
                  
                  
                  7,047,334
                  
                  
                  
                  1.42
                  
                  
                  
                  3.24Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at June 30, 2009
                  
                  
                  10,571,003
                  
                  
                  
                  3,523,669
                  
                  
                  
                  7,047,334
                  
                  
                  
                  1.42
                  
                  
                  
                  3.00Total
      Outstanding Warrants – June 30, 2009
                  
                  
                  10,571,003
                  
                  
                  
                  3,523,669
                  
                  
                  
                  7,047,334
                  
                  
                  
                  1.42
                  
                  
                  
                  3.00Exercisable
      at June 30, 2009
                  
                  
                  10,571,003
                  
                  
                  
                  3,523,669
                  
                  
                  
                  7,047,334
                  
                  
                  
                  1.42
                  
                  
                  
                  3.00






-11-




5. PROPERTY AND EQUIPMENT
AND SOFTWARE DEVELOPMENT





At June
30, 2009 and 2008, property and equipment consisted of the
following:




June
      30,
                      
                      
                      December
      31,
                      
                      
                      Estimated
                        Useful
      Life in2009
                      
                      
                      2008
                      
                      
                      YearsFurniture
      and office equipment
                      
                      $
                      186,869
                      
                      
                      $
                      185,479
                      
                      
                      
                      5Computer
      software
                      
                      
                      109,244
                      
                      
                      
                      109,244
                      
                      
                      
                      3Leasehold
      Improvements
                      
                      
                      21,294
                      
                      
                      
                      21,294
                      
                      
                      Life
      of Lease317,407
                      
                      
                      
                      316,017Less:
      Accumulated Depreciation
                      
                      
                      250,260
                      
                      
                      
                      237,186$
                      67,147
                      
                      
                      $
                      78,831





Depreciation
and amortization of property and equipment amounted to $13,074 and $13,349 for
the six months ended June 30, 2009 and 2008, respectively.





June
      30,
                      
                      December
      31,
                      
                      Estimated
                        Useful
      Life in2009
                      
                      2008
                      
                      YearsSoftware
      Development Costs
                      
                      $
                      677,200
                      
                      
                      $
                      677,200
                      
                      
                      
                      3Less:
      Accumulated Amortization
                      
                      
                      236,995
                      
                      
                      
                      124,129$
                      440,205
                      
                      
                      $
                      553,071





The
Company’s policy is to capitalize software development costs in accordance to
SFAS No. 86 (See Note 2). Amortization of Software Development Costs amounted to
$112,866 and $-0- for the six months ended June 30, 2009 and 2008, respectively,
and is included within Selling, General and Administrative
Expenses.





6. INCOME
TAXES





The
Company had the following deferred tax assets and liabilities at June 30, 2009
and December 31, 2008:





-12-




June
      30, 2009
                                                                
                                                                
                                                                December
      31, 2008Current
      assets and liabilities:Accounts
      receivable
                                                                
                                                                $
                                                                (48,000
                                                                )
                                                                
                                                                $
                                                                (135,000
                                                                )Accounts
      payable and accrued expenses
                                                                
                                                                
                                                                20,000
                                                                
                                                                
                                                                
                                                                57,000Deferred
      revenues
                                                                
                                                                
                                                                136,000
                                                                
                                                                
                                                                
                                                                141,000108,000
                                                                
                                                                
                                                                
                                                                63,000Valuation
      allowance
                                                                
                                                                
                                                                (108,000
                                                                )
                                                                
                                                                
                                                                (63,000
                                                                )Net
      current deferred tax asset
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -Noncurrent
      assets and liabilities:Net
      operating loss carryforwards
                                                                
                                                                $
                                                                2,268,000
                                                                
                                                                
                                                                $
                                                                2,117,000Depreciation
                                                                
                                                                
                                                                (43,000
                                                                )
                                                                
                                                                
                                                                (94,000
                                                                )2,225,000
                                                                
                                                                
                                                                
                                                                2,023,000Valuation
      allowance
                                                                
                                                                
                                                                (2,225,000
                                                                )
                                                                
                                                                
                                                                (2,023,000
                                                                )Net
      non-current deferred tax asset
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -




The
valuation allowance for the current and non-current deferred tax asset increased
by $247,000 for the six months ended June 30, 2009.





The
Company has net operating losses amounting to approximately $5,600,000 that
expire in various periods from 2024 through 2029. The ultimate realization of
the net operating losses is dependent upon future taxable income, if any, of the
Company and may be limited in any one period by alternative minimum tax rules.
Although management believes that the Company will have sufficient future
taxable income to absorb the net operating loss carryovers before the expiration
of the carryover period, the current global economic crisis imposes additional
profitability risks that are beyond our control. Accordingly, management has
determined that a full valuation allowance of the deferred tax asset is
appropriate at this time.





Internal
Revenue Code Section 382 imposes limitations on the use of net operating loss
carryovers when the stock ownership of one or more 5% shareholders (shareholders
owning 5% or more of the Company’s outstanding capital stock) has increased by
more than 50 percentage points. Management intends to carefully monitor share
ownership of 5% shareholders but cannot control the ownership changes occurring
as a result of public trading of the Company’s Common Stock. Accordingly, there
is a risk of an ownership change beyond the control of the Company that could
trigger a limitation of the use of the loss carryover.





The
Company has no uncertain income tax positions under FIN No. 48.





7. PREFERRED
STOCK





The
Company is authorized to issue 1,000 Class A Preferred shares and 1,000 Class B
Preferred shares, each of which has a par value of $1.00.  No shares
of preferred stock are currently outstanding.





8. COMMITMENTS AND
CONTINGENCIES




a. Operating
lease


The
Company occupies office space in Yonkers, New York under a lease agreement that
expires on January 31, 2010. It also rents space in West Seneca, New York, near
Buffalo. This lease agreement expires on May 31, 2010.




The
minimum rental commitment is as follows:




2009
                  
                  $
                  44,0762010
                  
                  
                  10,978$
                  55,054






-13-




Rent
expense amounted to $46,623 and $46,314 for the six months ended June 30, 2009
and 2008, respectively. This includes additional expense for
storage.





b. Line of
Credit


The
Company has a $115,000 credit line available through its bank. No money was
drawn from this line of credit in 2009 or 2008. In the event of borrowing, the
repayment period is 36 months. The line of credit is personally guaranteed by
Harold Brand, Chairman and Chief Executive and majority shareholder of the
Company. The Company’s right to draw on the credit line is subject to approval
of holders of Debentures constituting 60% of the principal amount of Debentures
outstanding.





c. Litigation


In
December, 2006, Raz-Lee Security Ltd. (“Raz-Lee”), a former distributor of the
Company's products, filed a lawsuit in Herzliya, Israel (Case No. 8443/06)
against the Company and its CEO for moneys allegedly owed in connection with the
distribution of the Company's products in Israel. The action sought $50,000 in
damages, plus interest, court costs and attorneys' fees. The Company filed a
counterclaim against Raz-Lee for failure to report sales and royalties, and for
a full accounting. The suit against the Company's CEO was dismissed, and appeal
of such dismissal was filed. In July, 2009, the Herzliya court awarded Raz-Lee
approximately (the approximations are a result of currency fluctuations) $15,750
plus approximately $7,500 of costs. The balance of Raz-Lee's claim was
dismissed. Since the amount awarded relates to past periods, the court also
awarded interest charges, bringing the total award including costs to
approximately $34,500. Raz-Lee collected the amount of approximately $6,500
which had been posted by the Company with the Herzliya court. The balance has
not been paid. The Company's counterclaim against Raz-Lee was dismissed. The
Company believes that Raz-Lee will file an appeal of the dismissal of parts of
its claim. The Company is currently consulting with counsel concerning the
filing of an appeal of the dismissal of the counterclaim or a part thereof. The
Company has a reserve of $25,000 to provide for payment of this
claim.





On July
20, 2009, Fagey Steinberg, a holder of a Debenture in the principal amount of
$100,000, filed a Motion for Summary Judgment in Lieu of Complaint (the
“Motion”) against the Company for payment of the full principal amount of such
Debenture together with accrued and unpaid interest and such other and further
relief as is just and proper.  Pursuant to an agreement between the
parties, the date for submission of the Company’s papers in opposition to the
Motion has been adjourned from August 14, 2009, to August 27, 2009, and the
return date of the Motion has been adjourned from August 21, 2009, to September
4, 2009, to give the parties time to engage in settlement
discussions.





d. Executive Employment
Contract


Effective
April 30, 2006, the Company entered into a five-year Employment Agreement with
Mr. Brand, with base salary set at $180,000 per annum. In addition to this
salary, Mr. Brand is entitled to incentive compensation an amount equal to two
percent (2%) of annual gross sales of the Company on sales in excess of one
million dollars ($1,000,000). In addition, Mr. Brand is entitled to standard
benefits: four weeks of paid vacation, accident and health insurance, sick leave
benefits, holidays and personal days, personal expenses reimbursement, life
insurance, disability insurance and the use of a corporate car.





9. PROFIT SHARING
PLAN





The
Company has a qualified 401(k) profit sharing plan covering all eligible
employees. The plan provides for contributions by the Company in such amounts as
the Board of Directors may annually determine but subject to statutory
limitations.





No
contributions to the plan by the Company have been provided for either the six
months ended June 30, 2009 or 2008.





10. RELATED PARTY
TRANSACTIONS





Profit
Horizon, Inc., a company controlled by Robert J. Roskow, Executive Vice
President and Director of the Company, provides sales consulting services.
During the six months ended June 30, 2009 and 2008, the Company incurred
approximately $15,000 and $19,000, respectively, in sales commissions to Profit
Horizon, Inc.






-14-





11. FAIR VALUE OF FINANCIAL
INSTRUMENTS





The
Company’s financial instruments consisted of the following:





June
      30, 2009
                    
                    
                    December
      31, 20088%
      Convertible Debentures
                    
                    
                    2,490,000
                    
                    
                    
                    2,402,791





12. LOSS PER
SHARE





Loss per
share for the six months ended June 30, 2009 and 2008 does not include the
effects of the 10,571,003 Warrants or the 4,980,000 shares into which the
8% Convertible Debentures are convertible because the effects would be
anti-dilutive.





13.CURRENT STATUS OF
CONVERTIBLE DEBENTURES





On April
10, 2009, the Company did not pay outstanding 8% Convertible Debentures (the
“Debentures”), in the aggregate principal amount of $2,490,000, which became due
on that date.  The three-year Debentures were issued on April 10,
2006, pursuant to a Securities Purchase Agreement, also dated April 10, 2006
(the “Securities Purchase Agreement”).





The
Company’s failure to pay the full principal amount of the Debentures on their
Maturity Date constituted an “Event of Default” under the Debentures. Upon an
Event of Default, the full principal amount of the Debenture, together with
interest and other amounts owing in respect thereof, to the maturity date will
become, at the Debenture holder’s election, immediately due and payable in cash.
The aggregate amount payable upon an Event of Default is referred to in the
Debentures as the “Mandatory Prepayment Amount.”





The
Mandatory Prepayment Amount of a Debenture is equal to the sum of: (i) the
greater of: (A) 120% of the principal amount of such Debenture, plus all accrued
and unpaid interest thereon, or (B) the principal amount of such Debenture, plus
all other accrued and unpaid interest thereon, divided by the Conversion Price
on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or
(y) the date the Mandatory Prepayment Amount is paid in full, whichever is less,
multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount is
demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is
paid in full, whichever is greater, and (ii) all other amounts, costs, expenses
and liquidated damages due in respect of such Debentures. The current Conversion
Price of the Debentures is $0.50. VWAP is the volume-weighted average price of
our common stock on the day in question.





“VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a Trading
Market, the daily volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the Trading Market on which the Common
Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on
a Business Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if
the Common Stock is not then listed or quoted on a Trading Market and if prices
for the Common Stock are then reported in the “Pink Sheets” published by the
Pink Sheets LLC (or a similar organization or agency succeeding to its functions
of reporting prices), the most recent bid price per share of the Common Stock so
reported; or (c) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Purchasers and reasonably acceptable to the Company.





In the
event the Company is not successful in entering into favorable settlement
agreements with the Debenture holders, management has determined, based on the
provisions set forth in the Debenture instrument, that, as of April 10, 2009,
the aggregate Mandatory Prepayment Amount (“MPA”) for all of the debenture
holders could be up to an estimated maximum amount of approximately $3,800,000.
Except for two debenture holders who have demanded repayment with a total
maximum MPA estimated to be up to approximately $305,000, of which $54,535
represents accrued interest over the tern of the $200,000 of related debt,
management is unable to determine at this time, any adjustments to said amount
that may need to be made if demand for repayment is made at a later date, as
such amount would be based on variables only available at such future date. Such
adjustments, if any, may be material in amount. For the two debenture holders
who have demanded repayment, the statement of operations includes a loss of
$50,907 relating to the difference between the MPA as estimated and the book
carrying amount of that debt without consideration of the MPA and that amount is
also included within the 8% Convertible Debentures of $2,595,441 as shown on the
balance sheet at June 30, 2009.





Commencing
five days after a holder demands payment of a Debenture, the interest rate on
that Debenture will accrue at the rate of 15% per annum, or such lower maximum
amount of interest permitted to be charged under applicable law. The foregoing
is a summary of the terms of the Debentures and the consequences of an Event of
Default thereunder. Accrued interest payable at June 30, 2009 includes interest
expense of $51,722 incurred and charged to operations during the period since
the maturity/default date of April 10, 2009 to the balance sheet date, of which
$6,535 relates to the $200,000 of convertible debt upon which a demand for
payment by the Company has been made. The Company is currently attempting to
renegotiate the terms of the Debentures, either by extending the maturity date
of the Debentures or by exchanging the Debentures for a new series of preferred
stock. However, there can be no assurance that the Company will be able to
successfully renegotiate the terms of the Debentures or that one or more
Debenture holders will not demand payment of their Debentures.






-15-





14.SUBSEQUENT
EVENTS





On July
27, 2009, the Company entered into an agreement that outlines the intent to form
a joint venture in the People’s Republic of China with two other companies. The
purpose of this joint venture is to develop and sell leading edge products and
services that add intelligence to shipping products to track and monitor goods
throughout the supply chain.





The
agreement provides for a capital contribution by the Company to the joint
venture of $2,500,000 payable in four installments over eighteen months. The
Company is under no obligation to make these capital contributions unless and
until the parties enter into a binding, definitive joint venture agreement. The
Company will require additional financing in the form of debt and/or equity to
participate in the joint venture and make the required contributions. Both the
agreement and the subsequent binding, definitive joint venture agreement will be
governed by the law of the People’s Republic of China.





On June
1, 2009, the Company entered into a one-year agreement with an investment banker
to raise the capital necessary to fund the joint venture. The investment banker
will receive a fee of 5% of the transaction proceeds.








ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.





FORWARD-LOOKING
STATEMENTS





This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,”
“project,” “target,” “optimistic,” “intend,” “aim,” “will” or similar
expressions are intended to identify forward-looking statements. Such statements
include, among others, those concerning our expected financial performance and
strategic and operational plans, as well as all assumptions, expectations,
predictions, intentions or beliefs about future events. These statements are
based on the beliefs of our management as well as assumptions made by and
information currently available to us and reflect our current view concerning
future events. As such, they are subject to risks and uncertainties that could
cause our results to differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among many
others: our significant operating losses; uncertainty of capital resources; the
speculative nature of our business; our ability to successfully implement new
strategies; present and possible future governmental regulations; operating
hazards; competition; the loss of key personnel; any of the factors in the “Risk
Factors” section of the Company’s Annual Report on Form 10-K; other risks
identified in this Report; and any statements of assumptions underlying any of
the foregoing. You should also carefully review other reports that we file with
the SEC. We assume no obligation and do not intend to update these
forward-looking statements, except as required by law.





The
following discussion should be read in conjunction with our financial
statements, together with the notes to those statements, included elsewhere in
this report. Our actual results may differ materially from those discussed in
these forward-looking statements because of the risks and uncertainties inherent
in future events.





We are a
software developer, publisher, and systems integrator in the IBM midrange
market. Our flagship product, MarkMagic®, is an
online bar code software product for IBM System i (formerly known as the AS/400)
computers. This software lets businesses design and print all types of
documents, such as bar code labels, radio frequency identification (“RFID”)
tags, e-forms, and other media, using live data, with little or no programming
necessary. MarkMagic’s “what-you-see-is-what-you-get” design component, JMagic,
was developed in Java specifically in order to be deployed across the Internet,
as well as on diverse computing platforms, including Windows, UNIX and
Linux.





Our
newest product, EdgeMagic®,
released in February 2008, is an RFID control solution for IBM System i
customers that is capable of deployment on other platforms and is highly
scalable. It is designed to manage edge readers and analog control devices;
commission, read, filter and verify RFID tags to comply with Electronic Product
Code (EPC) compliance mandates; and integrate with popular System i ERP and
Warehouse Management application packages.






-16-




Comparison
of the three and six months ended June 30, 2009 to the three and six months
ended June 30, 2008.





The
following table summarizes certain aspects of our results of operations for the
three and six months ended June 30, 2009 to the three and six months ended June
30, 2008.





Three
      months ended
                    June
      30,
                  
                  
                  
                  
                  
                  
                  
                  
                  Six
      months ended
                    June
      30,2009
                  
                  
                  2008
                  
                  
                  Change $
                  
                  
                  Change %
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Change $
                  
                  
                  Change %RevenuesProducts
                  
                  $
                  117,858
                  
                  
                  $
                  215,518
                  
                  
                  $
                  (97,660
                  )
                  
                  
                  -45
                  %
                  
                  $
                  383,853
                  
                  
                  $
                  342,584
                  
                  
                  $
                  41,269
                  
                  
                  
                  12
                  %Services
                  
                  
                  188,323
                  
                  
                  
                  138,969
                  
                  
                  
                  49,354
                  
                  
                  
                  36
                  %
                  
                  
                  341,000
                  
                  
                  
                  288,360
                  
                  
                  
                  52,640
                  
                  
                  
                  18
                  %Total
      Revenues
                  
                  
                  306,181
                  
                  
                  
                  354,487
                  
                  
                  
                  (48,306
                  )
                  
                  
                  -14
                  %
                  
                  
                  724,853
                  
                  
                  
                  630,944
                  
                  
                  
                  93,909
                  
                  
                  
                  15
                  %Direct
      CostsEquipment
      Purchases
                  
                  $
                  8,724
                  
                  
                  $
                  63,925
                  
                  
                  $
                  (55,201
                  )
                  
                  
                  -86
                  %
                  
                  $
                  144,498
                  
                  
                  $
                  97,417
                  
                  
                  $
                  47,081
                  
                  
                  
                  48
                  %Royalties
      & Consulting
                  
                  
                  14,165
                  
                  
                  
                  10,000
                  
                  
                  
                  4,165
                  
                  
                  
                  42
                  %
                  
                  
                  30,201
                  
                  
                  
                  21,537
                  
                  
                  
                  8,664
                  
                  
                  
                  40
                  %Total
      Direct Costs
                  
                  $
                  22,889
                  
                  
                  $
                  73,925
                  
                  
                  $
                  (51,036
                  )
                  
                  
                  -69
                  %
                  
                  $
                  174,699
                  
                  
                  $
                  118,954
                  
                  
                  $
                  55,745
                  
                  
                  
                  47
                  %%
      of total revenues
                  
                  
                  7
                  %
                  
                  
                  21
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  24
                  %
                  
                  
                  19
                  %Gross
      margin
                  
                  $
                  283,292
                  
                  
                  $
                  280,562
                  
                  
                  $
                  2,730
                  
                  
                  
                  1
                  %
                  
                  $
                  550,154
                  
                  
                  $
                  511,990
                  
                  
                  $
                  38,164
                  
                  
                  
                  7
                  %%
      of total revenues
                  
                  
                  93
                  %
                  
                  
                  79
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  76
                  %
                  
                  
                  81
                  %Research
      and development costs
                  
                  $
                  48,801
                  
                  
                  $
                  160,327
                  
                  
                  $
                  (111,526
                  )
                  
                  
                  -70
                  %
                  
                  $
                  101,134
                  
                  
                  $
                  381,918
                  
                  
                  $
                  (280,784
                  )
                  
                  
                  -74
                  %%
      of total revenues
                  
                  
                  16
                  %
                  
                  
                  45
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14
                  %
                  
                  
                  61
                  %Sales
      and marketing expenses
                  
                  $
                  30,989
                  
                  
                  $
                  74,493
                  
                  
                  $
                  (43,504
                  )
                  
                  
                  -58
                  %
                  
                  $
                  75,069
                  
                  
                  $
                  144,276
                  
                  
                  $
                  (69,207
                  )
                  
                  
                  -48
                  %%
      of total revenues
                  
                  
                  10
                  %
                  
                  
                  21
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10
                  %
                  
                  
                  23
                  %General
      and administrative expenses
                  
                  $
                  321,507
                  
                  
                  $
                  375,872
                  
                  
                  $
                  (54,365
                  )
                  
                  
                  -14
                  %
                  
                  $
                  692,075
                  
                  
                  $
                  749,320
                  
                  
                  $
                  (57,245
                  )
                  
                  
                  -8
                  %%
      of total revenues
                  
                  
                  105
                  %
                  
                  
                  106
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  95
                  %
                  
                  
                  119
                  %Interest  expense
                  
                  $
                  73,309
                  
                  
                  $
                  189,311
                  
                  
                  $
                  (116,002
                  )
                  
                  
                  -61
                  %
                  
                  $
                  302,735
                  
                  
                  $
                  340,373
                  
                  
                  $
                  (37,638
                  )
                  
                  
                  -11
                  %%
      of total revenues
                  
                  
                  24
                  %
                  
                  
                  53
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  42
                  %
                  
                  
                  54
                  %Other
      Income (Expenses)
                  
                  $
                  (50,883
                  )
                  
                  $
                  415
                  
                  
                  $
                  (51,298
                  )
                  
                  
                  -12361
                  %
                  
                  $
                  (50,872
                  )
                  
                  $
                  3,991
                  
                  
                  $
                  (54,863
                  )
                  
                  
                  -1375
                  %%
      of total revenues
                  
                  
                  -17
                  %
                  
                  
                  0
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -7
                  %
                  
                  
                  1
                  %Loss
      Before Taxes
                  
                  $
                  (242,197
                  )
                  
                  $
                  (519,026
                  )
                  
                  $
                  276,829
                  
                  
                  
                  -53
                  %
                  
                  $
                  (671,731
                  )
                  
                  $
                  (1,099,906
                  )
                  
                  $
                  428,175
                  
                  
                  
                  -39
                  %Income
      Taxes (Benefit)
                  
                  $
                  -
                  
                  
                  $
                  (262,943
                  )
                  
                  $
                  262,943
                  
                  
                  
                  -100
                  %
                  
                  $
                  -
                  
                  
                  $
                  (356,193
                  )
                  
                  $
                  356,193
                  
                  
                  
                  -100
                  %Effective
      tax rate
                  
                  
                  0
                  %
                  
                  
                  51
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  0
                  %
                  
                  
                  32
                  %Net
      loss
                  
                  $
                  (242,197
                  )
                  
                  $
                  (256,083
                  )
                  
                  $
                  13,886
                  
                  
                  
                  -5
                  %
                  
                  $
                  (671,731
                  )
                  
                  $
                  (743,713
                  )
                  
                  $
                  71,982
                  
                  
                  
                  -10
                  %%
      of total revenues
                  
                  
                  -79
                  %
                  
                  
                  -72
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -93
                  %
                  
                  
                  -118
                  %






-17-





Revenues





The
decrease in total revenues in absolute dollars for the three months ended June
30, 2009, as compared to the same three months in 2008, is primarily due to less
demand for hardware. Demand for services has increased for the period. The
increase in total revenues for the six months ended June 30, 2009 compared to
the same period in 2008 is due to an increase in sales of hardware during the
first quarter and services during the second quarter as well as an increase in
prices for hardware. We also started selling a new product called WOW, which
increased our revenues. We expect that our revenues will increase due to sales
of this new product, EdgeMagic, and new MarkMagic features we have
released.





Direct
Costs





The costs
for hardware and supplies for the three months ended June 30, 2009, were lower,
as compared to the same three months in 2008, due to a decrease in hardware
sales for this period.  The costs for hardware and supplies for the
six months ended June 30, 2009, were higher, as compared to the same six months
in 2008, due to increased hardware sales.





Gross
Margin





Gross
Margin as a percentage of sales increased slightly in the three months ended
June 30, 2009 as compared to the same three months in 2008.  Gross
Margin as a percentage of sales increased in the six months ended June 30, 2009
as compared to the same six months in 2008. This was due to increased sales. We
expect that our margins will remain at their current levels throughout the year
due to the challenging economic environment that we, and the software industry
at large, are experiencing.





Software
Development Costs





Software
development costs consist primarily of compensation of development personnel,
related overhead incurred to develop EdgeMagic and upgrades, and to enhance our
current products and fees paid to outside consultants. Substantially all of
these expenses have been incurred by us in the United States. During the
six-month periods ended June 30, 2009 and 2008, the software development costs
that were expensed were $101,134 and $381,918, respectively. Software
development costs decreased in the six-month period due to reduced spending on
consultants and a reduction in personnel as a result of the substantial
completion of our EdgeMagic product.





Sales
and Marketing Expenses





Sales and
marketing expenses consist primarily of commissions and advertising and
promotional expenses. The decrease in absolute dollars for the three and
six months ended June 30, 2009 as compared to the same three and six months in
2008 is due to cutbacks in advertising and trade show activity.





General
and Administrative Expense





General
and administrative expenses consist primarily of costs associated with our
executive, financial, human resources and information services functions.
General and administrative expenses decreased in absolute dollars for the three
and six months ended June 30, 2009 as compared to the same three and six months
in 2008 primarily due to fewer employees and the attendant reduction in related
expenses.





Interest
Expense





Interest
expense represents interest accrued on, and amortization of deferred financing
cost related to, the 8% convertible debentures.





Other
Income, Net





Interest
and other income, decreased for the three and six months ended June 30, 2009 as
compared to the same three and six months in 2008. The decrease is due primarily
to a decline in interest bearing bank balances.





Provision
for Income Taxes





The
provision for income taxes consists of provisions for federal and state income
taxes.






-18-





We
recorded income tax expense (benefit) of $-0- and ($262,943) for the three
months ended June 30, 2009 and 2008. The effective income tax rates were 0% and
51% for the three months ended June 30, 2009 and 2008. We recorded income tax
expense (benefit) of $-0- and ($356,193) for the six months ended June 30, 2009
and 2008. The effective income tax rates were 0% and 32% for the six months
ended June 30, 2009 and 2008. The effective tax rate differs from the statutory
U.S. federal income tax rate of 35%, primarily due to state income tax increase
in valuation allowance for deferred tax asset and permanent differences between
GAAP pre-tax income and taxable income.





Liquidity
and Capital Resources





As of
June 30, 2009, the Company’s principal source of liquidity was cash of $75,739.
Our operations provided $6,538 in cash during the six months ended June 30, 2009
as compared to funds used for operations of $772,473 for the six months ended
June 30, 2008. In approximate dollar amounts, the improvement of $779,000 is
largely the result of a decrease in our pre-tax loss of $428,000 coupled with
increases in non-cash expenses of $162,000, and the slowing of our net pay down
rate on accounts by payable $111,000 coupled with an increase of $91,000 in
accounts receivable collections.





To
sustain operations under our current structure, we need cash of approximately
$50,000 per month to fund research and administrative expenses. We believe that
we will be able to meet that continuing obligation at our current sales level
while continuing to pay down existing trade obligations at a moderate
rate.





Our
working capital deficiency was approximately $3,700,000 at June 30, 2009. The
deficiency on working capital included approximately $2,595,000 in amounts due
on 8% convertible debentures, at least $2,290,000 of which is expected to be
renegotiated and not require cash settlement, as well as $336,000 in deferred
revenues that require settlement in future services rather than
cash.





During
2009 we issued 60,000 shares of common stock for services.





As of the
third quarter of 2009, we are operating slightly below break-even on a cash flow
basis. This is due to reduced revenue from our OEM channels that have been
adversely impacted by general global economic weakness.  This trend is
not expected to reverse itself before the end of the year. We believe we can
sustain our cash flow at slightly below break-even and will seek additional
sources of financing for the short term.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable to smaller reporting companies.




ITEM 4T. CONTROLS AND
PROCEDURES





Evaluation of Disclosure Controls
and Procedures.





Our
Management under the supervision and with the participation of the Company’s
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are
responsible for establishing and maintaining our “disclosure controls and
procedures” (as defined in rules promulgated under the Securities Exchange Act
of 1934, as amended).  Based on their evaluation of the Company’s
disclosure controls and procedures as of June 30, 2009, the CEO and CFO have
concluded that the Company’s disclosure controls and procedures were effective
to ensure that the information required to be disclosed by the Company in this
Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and (ii) accumulated and communicated to our management,
including our principal executive and principal financial officers, to allow
timely decisions regarding required disclosure.





Changes
in Internal Control over Financial Reporting.





During
the second quarter of the Company’s 2009 fiscal year, there were no changes
in our internal control over financial reporting during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.






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Limitations on the Effectiveness of
Controls.





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected.





Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives, and the CEO and CFO have concluded that these
controls and procedures are effective at the “reasonable assurance”
level.








PART II.OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS.





In
December, 2006, Raz-Lee Security Ltd. (“Raz-Lee”), a former distributor of the
Company's products, filed a lawsuit in Herzliya, Israel (Case No. 8443/06)
against the Company and its CEO for moneys allegedly owed in connection with the
distribution of the Company's products in Israel. The action sought $50,000 in
damages, plus interest, court costs and attorneys' fees. The Company filed a
counterclaim against Raz-Lee for failure to report sales and royalties, and for
a full accounting. The suit against the Company's CEO was dismissed, and appeal
of such dismissal was filed. In July, 2009, the Herzliya court awarded Raz-Lee
approximately (the approximations are a result of currency fluctuations) $15,750
plus approximately $7,500 of costs. The balance of Raz-Lee's claim was
dismissed. Since the amount awarded relates to past periods, the court also
awarded interest charges, bringing the total award including costs to
approximately $34,500. Raz-Lee collected the amount of approximately $6,500
which had been posted by the Company with the Herzliya court. The balance has
not been paid. The Company's counterclaim against Raz-Lee was dismissed. The
Company believes that Raz-Lee will file an appeal of the dismissal of parts of
its claim. The Company is currently consulting with counsel concerning the
filing of an appeal of the dismissal of the counterclaim or a part thereof. The
Company has a reserve of $25,000 to provide for payment of this
claim.





On July
20, 2009, Fagey Steinberg, a holder of a Debenture in the principal amount of
$100,000, filed a Motion for Summary Judgment in Lieu of Complaint (the
“Motion”) against the Company for payment of the full principal amount of such
Debenture together with accrued and unpaid interest and such other and further
relief as is just and proper.  Pursuant to an agreement between the
parties, the date for submission of the Company’s papers in opposition to the
Motion has been adjourned from August 14, 2009, to August 27, 2009, and the
return date of the Motion has been adjourned from August 21, 2009, to September
4, 2009, to give the parties time to engage in settlement
discussions.





ITEM 6.EXHIBITS.





(a)
  Exhibits.




31.1
                    Certification of the Chief Executive Officer
      required by Rule 13a-14(a) or Rule 15d-14(a).31.2
                    Certification of the Chief Financial Officer
      required by Rule 13a-14(a) or Rule 15d-14(a).32.1
                    Certification of the Chief Executive Officer
      required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
      1350.32.2
                    Certification of the Chief Financial Officer
      required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
      1350.






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SIGNATURES





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





Date:
      August 18, 2009
                  CYBRA
      CorporationBy:
                  /s/
      Harold BrandHarold
      BrandChief
      Executive Officer andInterim
      Chief Financial
Officer





















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