10. Commitments and Contingencies

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

GraphOn Corporation v. Juniper Networks, Inc.

On August 28, 2007, the Company filed a proceeding against Juniper Networks, Inc. (“Juniper”) in the United States District Court in the Eastern District of Texas alleging that certain of Juniper's products infringe three of its patents - U.S. Patent Nos. 5,826,014, 6,061,798 and 7,028,336 (the “'014,” “'798” and “'336” patents) - which protect its fundamental network security and firewall technologies. The Company seeks preliminary and permanent injunctive relief along with unspecified damages and fees. Juniper filed its Answer and Counterclaims on October 26, 2007 seeking a declaratory judgment that it does not infringe any of these patents, and that all of these patents are invalid and unenforceable. On September 29, 2009, the court granted the Company's request to remove the ‘336 patent from the case. On December 30, 2009, the court, acting on its own motion, transferred the case to the United States District Court for the Northern District of California. This case is now stayed, pending outcome of the reexaminations of both the ‘014 and ‘798 patents in the Patent and Trademark Office (the “PTO”).

Patent and Trademark Office Action – Reexamination of the ‘798 Patent

On April 6, 2008 the PTO ordered the reexamination of the ‘798 patent as a result of a reexamination petition filed by Juniper. On August 14, 2009, the PTO issued a final rejection of the ‘798 patent. The Company appealed this rejection to the PTO's Board of Patents and Interferences. On October 21, 2010, the Board of Patents and Interferences affirmed the rejection of the ‘798 patent. The Company did not appeal the Board of Patents and Interferences' decision. Further, the Company believes that other issued patents and patent applications within the ‘798 patent family hold sufficient value to warrant its decision not to impair this family.

Patent and Trademark Office Action – Reexamination of the ‘014 Patent

The ‘014 patent is the sole patent remaining in the Company's lawsuit against Juniper and it is the original patent in the Company's firewall/proxy access family of patents. On July 25, 2008, the PTO ordered the reexamination of the ‘014 patent as a result of a reexamination petition filed by Juniper. On September 24, 2009, the PTO issued a final rejection of the ‘014 patent. The Company appealed this rejection to the PTO's Board of Patents and Interferences. On March 19, 2010, the Company filed an appeal brief with the PTO. On June 2, 2010, the PTO dismissed the Company's appeal and terminated the reexamination. On July 21, 2010, the Company filed a petition to revive the reexamination in which, among other matters, the Company presented new claims to the ‘014 patent that the Company believes, if confirmed, will result in a stronger patent in its lawsuit against Juniper. On February 11, 2011, the PTO granted such petition, and accepted the Company's appeal brief. An oral hearing was conducted on December 21, 2011. On January 19, 2012 the PTO gave notice that certain claims of the ‘014 patent were expected to be confirmed. The Company expects the PTO to issue notice within 90 days of that date regarding which claims of the ‘014 patent will ultimately be confirmed.

Juniper Networks, Inc. v. GraphOn Corporation et al

On March 16, 2009, Juniper initiated a proceeding against the Company and one of its resellers in the United States District Court in the Eastern District of Virginia alleging infringement of one of their patents - U.S. Patent No. 6,243,752 (the “'752 Patent”) - which protects Juniper's unique method of transmitting data between a host computer and a terminal computer. On November 24, 2009, the court dismissed the case based on a motion that had been filed by Juniper.

On May 1, 2009, the Company asserted a counterclaim against Juniper, alleging infringement of four of its patents, namely; U.S. Patent Nos. 7,249,378, 7,269,847, 7,383,573, and 7,424,737 (the “'378,” “'847,” “'573” and “'737” patents). On February 25, 2010, the court transferred the case to the United States District Court for the Northern District of California. On September 28, 2010, the court entered an order stipulated to by the Company and Juniper removing the ‘573 patent from the case. The court subsequently stayed the case pending the outcome of the following reexaminations of the asserted patents by the PTO.

Between October 4, 2011 and February 21, 2012, the Company received and filed responses to Action Closing Prosecutions regarding the ‘847, ‘378 and ‘737 patents. An Action Closing Prosecution is a non-final advisory action taken by an examiner wherein the examiner comments on the responses received by the patent owner (in this case, the Company) and the third party requestor (in this case, Juniper) during the earlier phases of the reexamination proceeding. After receiving Juniper's responses, the examiner will issue a Right of Appeal Notice to each party, which is the final administrative action in a reexamination proceeding. The Right of Appeal Notice will set forth the examiner's final comments and the administrative action taken by the examiner in the reexamination proceeding. Depending on the examiner's findings, one or both parties may appeal the Right to Appeal Notice to the Board of Patent Appeals and Interferences. As of March 23, 2012, no date had been set for the issuance of the Right to Appeal Notice for the ‘737 patent. On March 10, 2012 and March 12, 2012, the Company received a Right of Appeal Notice wherein the examiner maintained his earlier comments and issued a final rejection for the ‘847 and ‘378 patent, respectively. The Company filed a Notice of Appeal in response to the Right of Appeal Notice for each of these two patents on April 10, 2012. The Company believes that the ultimate resolution of this proceeding will not have a material impact on its results of operations, cash flows or financial position.

Myspace, Inc. v. GraphOn Corporation and craigslist, Inc. v. GraphOn Corporation

On February 10, 2010 and March 18, 2010, Myspace, Inc. and craigslist, Inc., respectively, filed complaints for declaratory judgment against the Company in the United States District Court for the District of Northern California. Such complaints ask the court to take certain actions with respect to some of the Company's patents - U.S. Patent Nos. 6,624,538, 6,850,940, 7,028,034, and 7,269,591 (the “'538,” “‘940,” “‘034,” and “‘591” patents). On May 14, 2010, the court issued an order consolidating the Myspace, Inc. and craigslist, Inc. cases into a single case. (Myspace, Inc. and craigslist, Inc. are referred to collectively herein as “Declaratory Plaintiffs.”) In their complaints, the Declaratory Plaintiffs ask the court to declare that they are not infringing these patents, or, alternatively, that each of these patents is invalid. Further, the Declaratory Plaintiffs ask the court to declare these patents unenforceable. Prior to consolidation of the individual cases, the Company responded to the complaints and added counterclaims of infringement by the Declaratory Plaintiffs of the ‘538, ‘940, ‘034, and ‘591 patents. The Company seeks unspecified damages and injunctive relief. Additionally, the Company added Fox Audience Network, Inc. (parent company to Myspace, Inc.) as a party to this suit.

On May 28, 2010, the Declaratory Plaintiffs filed a motion for summary judgment and inequitable conduct asking the court to invalidate the patents the Company asserted in this case and to hold a separate and early trial on the issue of inequitable conduct. On November 23, 2010 the court granted the Declaratory Plaintiffs' motion for summary judgment, invalidating the asserted patents.

The Company has appealed the court's order granting the Declaratory Plaintiffs' motion for summary judgment to the Court of Appeals for the Federal Circuit, and filed an appeal brief on March 7, 2011. An oral hearing was conducted on October 5, 2011. On March 2, 2012, the Court of Appeals for the Federal Circuit issued an opinion in which the trial court's order invalidating the Company's patents was affirmed. On March 30, 2012, the Company filed a petition with the Court of Appeals for rehearing en banc requesting reconsideration of its appeal. The Company believes it is not probable that it will be required to reimburse any legal fees incurred by Myspace, accordingly, the Company has not recorded an accrual for such potential costs.

On July 15, 2010 the court heard the Declaratory Plaintiffs' motion for an early hearing on the issue of inequitable conduct. Inequitable conduct is a common defense to infringement actions. The onus of proving inequitable conduct – that the patent applicant breached its duty of candor and good faith to the Patent and Trademark Office while applying for its patent – falls upon the party asking the court to decline to enforce the patent, usually the alleged infringer(s). The court had previously set March 14, 2011 for the hearing on inequitable conduct, but that date has been stayed pending the outcome of the Company's appeal on the motion for summary judgment.

If necessary, the Company intends to pursue affirmation of the validity of these patents through all channels of appeal.

Operating Leases. The Company's corporate headquarters currently occupies approximately 1,850 square feet of office space in Santa Cruz, California. Rent on the Santa Cruz facility will average approximately $4,100 per month over the remaining term of the lease, which is inclusive of a pro rata share of utilities, facilities maintenance and other costs. The Company anticipates vacating this site prior to the expiration of the current lease in July 2012. The Company has leased office space in Campbell, California and will be relocating its corporate headquarters to such location.

The Company has leased approximately 4,400 square feet of office space in Campbell, California. In March 2012, one of the Company's engineering teams commenced occupying such space and the Company's corporate headquarters will also occupy such space as discussed in the prior paragraph. The office space is rented pursuant to a 64-month operating lease, which will expire no later than June 2017. Rent on the Campbell facility will average approximately $12,300 per month over the term of the lease, net of the Company's pro rata share of utilities, facilities maintenance and other costs.

The Company currently occupies approximately 5,560 square feet of office space in Concord, New Hampshire, under a lease that will expire in September 2012. Rent on the Concord facility will approximate $8,800 per month over the remaining term of the lease.

The Company currently occupies approximately 150 square feet of office space in Irvine, California, and Charlotte, North Carolina under leases that each expire in March 2013. Under the terms of these leases, monthly rental payments are approximately $1,200 and $1,000, respectively.

The Company believes that its current facilities will be adequate to accommodate its needs for the foreseeable future.

Future minimum lease payments, which consist entirely of leases for office space, are set forth below. With the exception of the anticipated vacating of the Santa Cruz office two months prior to its current lease's expiration date in July 2012, the table assumes that the Company will occupy all currently leased facilities for the full term of each respective lease and is inclusive of the future minimum lease payments associated with our Campbell, California office:

Year Ending December 31,
2012	$	200,300
2013		145,700
2014		144,200
2015		148,600
2016		153,000
2017		78,400
	$	870,200

Rent expense aggregated approximately $196,800 and $191,200 for the years ended December 31, 2011 and 2010, respectively.

Contingencies. Under its Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and certain agreements with officers and directors, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer's or director's serving in such capacity. Generally, the term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is limited as the Company currently has a directors and officers liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of December 31, 2011.

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, including contractors and customers and (ii) its agreements with investors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights, and often survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2011.

The Company's software license agreements also generally include a performance guarantee that the Company's software products will operate substantially as described in the applicable program documentation for a period of 90 days after delivery. The Company also generally warrants that services that the Company performs will be provided in a manner consistent with reasonably applicable industry standards. To date, the Company has not incurred any material costs associated with these warranties and has no liabilities recorded for these agreements as of December 31, 2011.

During April 2011, the Company signed a one-year extension on the lease for its Santa Cruz, California corporate headquarters facility. Under such extension the monthly rent for the facility will be approximately $4,100. During June 2011, the Company received notice from the County of Santa Cruz (the “County”) that it intends to purchase the corporate office complex from the Company's landlord. Under certain statutes that enable the County to make the purchase, the Company could be required to vacate its office space within 90 days of receiving notice from the County that it will be terminating the Company's lease. Such notice could occur at any time prior to expiration of the extension. Additionally, under certain statutes, the Company would be eligible for relocation assistance. As indicated above under “Operating Leases,” the Company intends to vacate the Santa Cruz premises prior to the lease expiration date and to relocate its headquarters to the Campbell, California premises. The Company does not anticipate incurring significant costs in relocating its corporate headquarters.

The Company's Chief Financial Officer is entitled to three-months' severance of his then base salary in the event of a merger or acquisition or certain other conditions.

Director Severance Plan and Key Employee Severance Plan

At a meeting of the Company's board of directors held on October 18, 2011, the board approved the Company's Director Severance Plan and Key Employee Severance Plan, each of which had been previously approved by the board, and each of which by its terms had expired on December 31, 2010. The board approved both plans without change (except their expiration date was changed to December 31, 2013) and with immediate effect. Following is a summary description of each of these plans.

Director Severance Plan:

This plan provides for accelerated vesting of the director's stock options upon termination of the director's position as a director under certain circumstances. Those circumstances include that the termination must take place after the occurrence of any transaction or series of transactions that constitute a change in the ownership or effective control of us, or in the ownership of a substantial portion of our assets, as defined in regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended (such occurrence, a “Designated Event”) and that certain other terms and conditions set forth in the plan must have been met.

Key Employee Severance Plan:

This plan provides for payment of certain benefits upon termination of the key employee's employment under certain circumstances. The benefits consist of accelerated vesting of stock options, continuation of salary for 12 months after termination (24 months for certain senior management who are so notified in writing), bonus payments that would have been payable but for termination of employment, and payment of certain health and other insurance benefits on behalf of the employee. The circumstances in which these benefits are payable include that the termination of employment must take place after the occurrence of a Designated Event and that certain other terms and conditions set forth in the plan must have been met.

The plans provide that we have the right to amend or terminate the plans at any time, except that the plans may not be amended or terminated following the occurrence of a Designated Event. Executive officers first elected or appointed after October 18, 2011 are ineligible to participate in the Key Employee Severance Plan absent prior board consideration and, if requested by one or more directors, the affirmative vote of a majority of the directors.