10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-Q

ý  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended January 31, 2002

OR

o  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:   001-11807

UNIFY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-2710559
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
2101 Arena Blvd, Suite 100 Sacramento, California 95834
(Address of principal executive offices)
(916) 928-6400
(Registrant’s telephone number, including area code)

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.

YES   ý        NO   o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

20,258,163 shares of Common Stock, $0.001 par value, as of February 28, 2002

UNIFY CORPORATION

FORM 10-Q

INDEX

PART I.	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of January 31, 2002 and April 30, 2001	3
	Condensed Consolidated Statements of Operations for the three and nine months ended January 31, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Disclosures About Market Risk	15
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 6.	Exhibits and Reports on Form 8-K	17
SIGNATURE		18

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PART I.         FINANCIAL INFORMATION

Item 1.            Financial Statements

UNIFY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	January 31,			April 30,
	2002			2001
Assets	(unaudited)			(1)
Current assets:
Cash and cash equivalents	$	2,792		$	2,984
Restricted cash	41			118
Investments	—			100
Accounts receivable, net	3,418			2,815
Prepaid expenses and other current assets	284			600
Total current assets	6,535			6,617
Property and equipment, net	454			744
Other investments	750			1,850
Other assets	100			133
Total assets	$	7,839		$	9,344
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	696		$	1,877
Current portion of long-term debt	240			—
Other accrued liabilities	1,994			3,406
Accrued compensation and related expenses	786			1,013
Note payable to minority interest stockholders	300			528
Deferred revenue	3,728			3,722
Total current liabilities	7,744			10,546
Long-term debt	260			—
Stockholders’ deficit:
Common stock	20			18
Additional paid-in capital	59,058			58,925
Note receivable from stockholder	(60		)	(60		)
Accumulated other comprehensive loss	(525		)	(651		)
Accumulated deficit	(58,658		)	(59,434		)
Total stockholders’ deficit	(165		)	(1,202		)
Total liabilities and stockholders’ deficit	$	7,839		$	9,344

(1)  Derived from the audited consolidated financial statements for the year ended April 30, 2001.

See accompanying notes to condensed consolidated financial statements.

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UNIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2002			2001			2002			2001
Revenues:
Software licenses	$	1,972		$	1,611		$	5,062		$	4,948
Services	1,565			2,118			4,808			5,193
Total revenues	3,537			3,729			9,870			10,141
Cost of revenues:
Software licenses	92			160			406			476
Services	393			669			1,162			2,556
Total cost of revenues	485			829			1,568			3,032
Gross profit	3,052			2,900			8,302			7,109
Operating expenses:
Product development	918			860			3,027			4,072
Selling, general and administrative	1,632			2,266			4,524			8,664
Write-down of other investments	1,100			3,650			1,100			3,650
Special charges (recovery)	(1,376		)	140			(1,315		)	2,678
Total operating expenses	2,274			6,916			7,336			19,064
Income (loss) from operations	778			(4,016		)	966			(11,955		)
Other expense, net	(74		)	(18		)	(145		)	(276		)
Income (loss) before provision for income taxes	704			(4,034		)	821			(12,231		)
Provision for income taxes	8			20			45			47
Net income (loss)	$	696		$	(4,054	)	$	776		$	(12,278	)
Net income (loss) per share:
Basic	$	0.03		$	(0.21	)	$	0.04		$	(0.65	)
Diluted	$	0.03		$	(0.21	)	$	0.04		$	(0.65	)
Shares used in computing net income (loss) per share:
Basic	20,218			19,020			19,684			18,946
Diluted	20,633			19,020			20,204			18,946

See accompanying notes to condensed consolidated financial statements.

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UNIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended January 31,
	2002			2001
Cash flows from operating activities:
Net income (loss)	$	776		$	(12,278	)
Reconciliation of net income (loss) to net cash used in operating activities:
Depreciation	296			627
Loss on disposal of property	16			—
Gain on sale of investment	(21		)	—
Write-down of other investments	1,100			3,650
Changes in operating assets and liabilities:
Accounts receivable, net	(677		)	436
Prepaid expenses and other current assets	257			352
Accounts payable	(1,175		)	277
Accrued compensation and related expenses	(207		)	(209		)
Other accrued liabilities	(891		)	315
Deferred revenue	65			(142		)
Net cash used in operating activities	(461		)	(6,972		)
Cash flows from investing activities:
Purchases of available-for-sale securities	—			(100		)
Maturities/sales of available-for-sale securities	121			3,669
Decrease in restricted cash	77			—
Purchases of property and equipment	(24		)	(529		)
Increase in other assets	—			(2,180		)
Other assets	85			(176		)
Net cash provided by investing activities	259			684
Cash flows from financing activities:
Proceeds from issuance of common stock, net	135			579
Note payable to minority interest stockholders	(204		)	305
Net cash provided by (used in) financing activities	(69		)	884
Effect of exchange rate changes on cash	79			71
Net decrease in cash and cash equivalents	(192		)	(5,333		)
Cash and cash equivalents, beginning of period	2,984			7,407
Cash and cash equivalents, end of period	$	2,792		$	2,074
Supplemental noncash investing and financing activities:
Conversion of other accrued liabilities to long-term debt	$	500		$	—
Supplemental cash flow information:
Cash paid (received) net during the period for:
Interest	$	17		$	5
Income taxes	$	(98	)	$	13

See accompanying notes to condensed consolidated financial statements.

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UNIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

The condensed consolidated financial statements have been prepared by Unify Corporation (“the Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). While the interim financial information contained in this filing is unaudited, such financial statements reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2001 as filed with the SEC.

Reclassifications

Certain items in the fiscal 2001 consolidated financial statements have been reclassified to conform to the fiscal 2002 presentation. These reclassifications had no effect on net loss or stockholders’ deficit.

2.     Results of Operations and Management’s Plan

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying condensed consolidated financial statements for the nine month period ended January  31, 2002, the Company recorded net income of $776,000 and has an accumulated deficit of $58,658,000.  The Company’s cash and cash equivalents decreased for the nine month period ended January 31, 2002 by $192,000 and the Company’s working capital deficit was  $1,209,000 as of January 31, 2002.  For the year ended April 30, 2001, the Company incurred a net loss of $12,331,000, had an accumulated deficit of $59,434,000 and negative working capital of $3,929,000 as of April 30, 2001. These factors indicate that the Company may potentially be unable to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company’s continuation as a going concern is dependent upon its ability to continue to generate sufficient cash flows to meet its obligations on a timely basis, the ability to continue to work with key vendors to accept payment terms for certain payables, to obtain additional financing or refinancing as may be required, and ultimately to return to profitability and significant positive cash flows.  Management restructured the Company and significantly reduced operating expenses during fiscal 2001 and again, on a much smaller scale during the first quarter of fiscal 2002.  Management plans to grow revenues, increase the investment in marketing while aggressively controlling costs, and seek additional financing if available upon terms that are acceptable to the Company.  There is no assurance that management’s plans will be successful or if successful, that they will result in the Company continuing as a going concern.

3.     Acquisitions and Divestitures

In June 2000, the Company acquired privately-held Unify InterAmerica, the Company’s master distributor in Latin America.  The acquisition was in support of Unify’s strategy to rapidly expand into the growing Latin America e-commerce market.  After review of this strategy by the Company’s new management, the Company determined Latin America was not a strategic market

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and that this market would be best served by an independent master distributor.  In September 2000, the original stockholders agreed to repurchase Unify InterAmerica, which resulted in the Company recording a loss of approximately $400,000 as reflected in other expenses for the nine month period ended January 31, 2001.

4.     Other Investments

Other investments represents common stock in two closely held technology companies. The Company’s ownership interest in each company is less than 10% (in thousands):

	January 31,		January 31,
	2002		2001
Arrango Software International, Inc.	$	500	$	500
Evergreen Internet, Inc.	250		1,350
	$	750	$	1,850

On February 25, 2000, the Company entered into an agreement to exchange shares of its common stock or cash, or a combination of the two, with an aggregate value of $5.0 million for 1,040,993 shares of the common stock of Evergreen Internet, Inc. (“Evergreen”), a developer of software.  On March 14, 2000, the Company issued 216,931 shares of its common stock with a value of $2.8 million to Evergreen as partial payment.  On August 1, 2000, the Company paid $2.2 million in cash to Evergreen. Based upon a comprehensive review of its investments and long-lived assets during the third quarter of fiscal 2001, the Company recorded a noncash charge of $3,650,000 to write-down the carrying amount of  Evergreen.  During the third quarter of fiscal 2002, the Company re-evaluated its investments and long-lived assets and recorded an additional noncash charge of $1,100,000 to write-down the carrying amount of Evergreen to its estimated realizable value of $250,000.

5.     Long-term Debt

On December 11, 2001 the Company entered into a long-term debt agreement with New Atlanta Communications, LLC (“New Atlanta”) to pay $500,000 in liabilities that had accrued as the result of the rescission agreement between the Company and New Atlanta.  The debt bears no interest and is to be paid in 25 equal monthly installments of $20,000 through February 2004.

6.     Earnings Per Share

SFAS No. 128, Earnings Per Share, requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (e.g., convertible preferred stock, warrants, and common stock options) were exercised or converted into common stock.  Potential common shares in the diluted EPS computation are excluded for fiscal year 2001 as their effect would be antidilutive.  The following is a reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations for the periods indicated (in thousands, except per share amounts):

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	Three Months Ended					Nine Months Ended
	January 31,					January 31,
	2002		2001			2002		2001
Net Income (Loss)  (Numerator):
Net income (loss), basic and diluted	$	696	$	(4,054	)	$	776	$	(12,278	)
Shares  (Denominator):
Weighted average shares of common stock outstanding, basic	20,218		19,020			19,684		18,946
Weighted average common equivalent shares outstanding	415		—			422		—
Weighted average shares of common stock outstanding, diluted	20,633		19,020			20,106		18,946
Per Share Amount:
Net income (loss) per share, basic	$	0.03	$	(0.21	)	$	0.04	$	(0.65	)
Reduction in net income per share due to Weighted average common equivalent Shares	—		—			—		—
Net income (loss) per share, diluted	$	0.03	$	(0.21	)	$	0.04	$	(0.65	)
Antidilutive Shares:	—		941			—		941

7.     Comprehensive Income (Loss)

The Company’s total comprehensive income (loss) for the periods shown was as follows (in thousands):

	Three Months Ended					Nine Months Ended
	January 31,					January 31,
	2002		2001			2002		2001
Net income (loss)	$	696	$	(4,054	)	$	776	$	(12,278	)
Foreign currency translation gain	31		145			126		129
Unrealized holding gain arising during period	—		—			—		39
Total comprehensive income (loss)	$	727	$	(3,909	)	$	902	$	(12,110	)

8.     Special Charges

In July 2000, the Company announced that certain matters had come to the attention of the Company’s Board of Directors that indicated that the Company had engaged in improper accounting practices. Accordingly, the Board of Directors authorized its Audit Committee to conduct an investigation of the Company’s accounting and financial reporting practices and to recommend remedial action, if any.  As a result of this investigation, the Company incurred additional costs during fiscal 2001 related to the investigation itself, legal expenses and additional auditing costs of $140,000 for the three month period ended January 31, 2001, $2,678,000 for the nine month period ended January 31, 2001 and $3,356,000 for the year ended April 30, 2001. As a result of its settlement of the class action and derivative lawsuits pertaining to the matters being investigated, the Company recorded net recoveries of special charges of $1,376,000 and $1,315,000 during the three and nine month periods ended January 31, 2002, related to previously accrued legal, accounting investigation and estimated settlement costs.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the software industry and certain assumptions made by the Company’s management. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth herein under “Volatility of Stock Price and General Risk Factors Affecting Quarterly Results” and in the Company’s Annual Report on Form 10-K under “Business — Risk Factors.” Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the SEC, particularly the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2001 as filed with the SEC.

Overview

Unify provides business application platform solutions to companies worldwide seeking to develop, deploy and maintain Web, graphical, client/server and character-based applications. The Company’s products include a relational database management system and application development systems for Web, host-based and client/server application development. Additionally, Unify provides support, training and consulting to help customers design, develop and deliver critical application development projects.

Unify’s customers consist primarily of independent software vendors (“ISVs”), value added resellers (“VARs”), corporate information technology (“IT”) departments, solutions integrators (“SIs”) and distributors.  The Company sells its products to these markets through direct sales organizations in the United States, United Kingdom, France and Japan, and indirectly to end-users through its worldwide network of distributors and VARs. The Company recognizes software license revenue when a noncancelable license agreement has been executed, delivery has occurred, fees are fixed and determinable, and collection of the resulting receivables is deemed probable by management.  Services revenue includes support revenue, which is recognized ratably over the support period (generally a one-year term), and revenue from consulting and training services, which is recognized as services are performed.  Fees for support (which consists primarily of technical support and software updates) are billed in advance and included in deferred revenue until recognized.

Audit Committee Investigation

In July 2000, the Company announced that certain matters had come to the attention of the Company’s Board of Directors that indicated that the Company had engaged in improper

9

accounting practices during fiscal 2000. Accordingly, the Board of Directors authorized its Audit Committee to conduct an investigation of the Company’s accounting and financial reporting practices and to recommend remedial action, if any.  In July 2000, in connection with the ongoing investigation, the Company placed its former chief executive officer and its former chief financial officer on administrative leave, and in November 2000, the Company terminated its former chief executive officer and its former chief financial officer resigned.  As a result of this financial reporting investigation, the Company incurred significant costs during fiscal 2001 related to the investigation itself, legal expenses and additional auditing costs.  In addition, the majority of the U.S. based sales team resigned or were terminated during the first quarter of fiscal 2001, which had a significant negative impact on the Company’s revenues for fiscal 2001.

Securities Lawsuits

On February 26, 2002, the Company announced that it has entered into memoranda of understanding to settle the shareholder and derivative litigation pending against the Company and certain of its current and former officers and directors in the United States District Court for the Northern District of California and the Superior Court of the State of California, County of San Francisco.  Under the terms of the proposed settlements, all claims against the Company and all other defendants will be dismissed without admission of liability or wrongdoing by any party. The settlements are subject to execution of final settlement documents, notice to shareholder class members and review and approval by the federal and state courts. The estimated impact on the Company of the settlement was accrued at the end of fiscal 2001, and therefore, the settlement will have no negative impact on the Company’s earnings or financial position.

Results of Operations

Revenues

Total revenue for the three months ended January 31, 2002 decreased $0.2 million (5%) to $3.5 million from $3.7 million for the three months ended January 31, 2001. Total revenue for the nine months ended January 31, 2002 decreased $0.2 million (2%) to $9.9 million from $10.1 million for the nine months ended January 31, 2001.

Software license revenues increased $0.3 million (19%) for the three months ended January 31, 2002 and $0.1 million (2%) for the nine months ended January 31, 2002, as compared to the same periods in the prior year.  The increase during the three month period was primarily the result of sales progress in North America. The nine month period was relatively flat as a result of adverse economic conditions during the first and second quarters of fiscal 2002.

Total services revenue for the third quarter ended January 31, 2002, was $1.6 million, a 24% decrease compared to the third quarter services revenues of $2.1 million of the prior year.  Total services revenue for the nine months ended January 31, 2002 decreased $0.4 million to $4.8 million from $5.2 million for the nine months ended January 31, 2001.  The three and nine month decrease in services revenues was primarily due to nonrecurring royalty payments received from New Atlanta Communications in fiscal 2001and a decrease in consulting and training revenues due to reduced IT spending.  Consulting and training revenues for the three month and nine month periods ended January 31, 2002 were $0.1 million and $0.4 million respectively, as compared to $0.4 million and $0.6 million for the three month and nine month periods ended January 31, 2001.

International revenues include all software license and service revenues from customers located outside the United States. International revenues from the Company’s direct sales organizations in Europe and Japan and from value added resellers, distributors, and other partners in all international locations accounted for 62% of total revenues for the three month and nine month

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periods ended January 31, 2002 respectively, as compared to 69% and 57% for the three month and nine month periods ended January 31, 2001.

Cost of Revenues

The Company’s cost of revenues consists primarily of cost of software licenses and cost of services.  Cost of software licenses consists primarily of product documentation, packaging and production costs in the U.S. and Japan, and royalties paid for licensed technology.  Cost of services consists primarily of employee, facilities and travel costs incurred in providing customer support under support contracts, and consulting and training services.  Total cost of revenues as a percentage of total revenues decreased to 14% for the three month period ended January 31, 2002 from 22% for the comparative three month period of the prior year and decreased to 16% for the nine month period ended January 31, 2002 from 30% for the same nine month period of the prior year.

Cost of software licenses as a percentage of software license revenues were 5% and 8% for the three month and nine month periods ended January 31, 2002, compared to the 10% levels achieved for the three month and nine month periods ended January 31, 2001.

Total cost of services decreased 43% to $0.4 million in the third quarter of fiscal 2002 from $0.7 million for the third quarter of fiscal 2001.  For the nine month period ended January 31, 2002, cost of services decreased 54% to $1.2 million from $2.6 million in the same nine month period of the prior year.  The decrease in fiscal 2002 reflects the cost reduction measures that were initiated at the end of the second quarter of fiscal 2001 and the reduction in the use of contract labor.  Notwithstanding the foregoing, the cost of services generally has a high component of fixed costs and therefore does not fluctuate as readily with changes in revenues.

Product Development

Product development expenses consist primarily of employee and facilities costs incurred in the development and testing of new products and in the porting of new and existing products to additional hardware platforms and operating systems.  For the three month period ended January 31, 2002, product development expenses remained flat at $0.9 when compared to the same three month period of the prior year.  For the nine month period ended January 31, 2002, product development expenses decreased 27% to $3.0 million from $4.1 million for the same nine month period of the prior year.  The decrease was primarily the result of a reduction in the workforce in late October 2000.  Product development costs as a percentage of total revenues during the three month and nine month periods ended January 31, 2002 were 26% and 31%, respectively, as compared to 23% and 40% for the three month and nine month periods ended January 31, 2001.  The Company believes that investments in product development are critical to maintaining technological leadership and therefore intends to continue to devote significant resources to product development.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the quarter ended January 31, 2002 decreased to $1.6 million, or 46% of total revenues, as compared to $2.3 million, or 61% of total revenues for the same quarter of the prior year. SG&A expenses for the nine months ended January 31, 2002 decreased to $4.5 million, or 46% of total revenues, as compared to $8.7 million, or 85% of total revenues, for the same period of the prior year.  The major components of SG&A for the nine months ended January 31, 2002 were sales expenses of $2.9 million, marketing expenses of $0.4 million, general and administrative of $1.7 million, and bad debt recovery of $0.3 million.

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For the three month period ended January 31, 2002, sales expenses, salaries and commissions decreased $0.1 million when compared to the same quarter of the prior year, as a result of the continued improvements in the Company’s worldwide sales model.  During the first quarter of fiscal 2002, the Company transitioned key customers and regions in Europe to a direct sales model.  Further adjustments were made to the sales model during the first part of fiscal 2002 resulting in additional cost savings.  Marketing expenses also decreased by $0.2 million during the same three month period.  General and administrative expenses decreased by $0.2 million for the third quarter of fiscal 2002, compared to the comparable period for the prior year, primarily as a result of the cost reduction measures implemented at the end of the second quarter of fiscal 2001 and the first quarter of fiscal 2002, and as a result of the normal quarter-to-quarter fluctuations that occurs throughout the Company’s operating year.  As a result of management’s continuing evaluation, the performance and quality of its outstanding receivables has improved. Bad debt expense was less than $0.1 million for both the three months ended January 31, 2002 and the comparable period of the prior year.

For the nine months ended January 31, 2002, sales expenses, salaries and commissions decreased by $1.5 million compared to the nine months ended January 31, 2001 as the result of result of the cost reduction measures taken in the second quarter of fiscal 2001 and the restructuring of the Company’s worldwide sales model.  Marketing expense also decreased by $0.9 million period to period.  General and administrative expenses decreased by $0.8 million during the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001 primarily as a result of reduced spending, cost reduction measures implemented in the second quarter of fiscal 2001 and the first quarter of fiscal 2002 and normal quarter-to-quarter fluctuations that occur throughout the Company’s operating year.  As a result of management’s continuing evaluation of its outstanding receivables and management of its delinquent portfolio, the Company had a net recovery of bad debt expense of $0.3 million during the nine month period ended January 31, 2002, compared to $0.7 million during the nine month period ended January 31, 2001.  The Company expects that total SG&A expenses may fluctuate from quarter to quarter primarily because of variability in marketing program spending and sales commission expense.

Write-down of Other Investments

During the third quarter of fiscal 2001, the Company completed a comprehensive review of its other investments and recorded a non-cash charge of $3,650,000 to write-down the carrying amount of its investment in Evergreen Internet, Inc, to its estimated realizable value.  During the third quarter of fiscal 2002, the Company re-evaluated its position in Evergreen Internet and in light of the continued weakness in the e-commerce market, and discussions with valuation experts, the Company recorded an additional non-cash charge of $1,100,000 to further write down the carrying amount of the investment to an estimated realizable value of $250,000.

Special Charges

In July 2000, Company announced that certain matters had come to the attention of the Company’s Board of Directors that indicated that the Company had engaged in improper accounting practices during fiscal 2000. Accordingly, the Board of Directors authorized its Audit Committee to conduct an investigation of the Company’s accounting and financial reporting practices and to recommend remedial action, if any.  As a result of this investigation, the Company incurred additional costs related to the investigation itself, legal expenses and additional auditing costs for the three and nine month period ended January 31, 2001 of $140,000 and $2,678,000 respectively.  As a result of its settlement of the class action and derivative lawsuits pertaining to the matters being investigated, the Company recorded net recoveries of special charges of $1,376,000 and $1,315,000 during the three and nine month periods ended January 31, 2002, related to previously accrued legal, accounting investigation and estimated settlement costs.

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Provision for Income Taxes

The Company recorded tax provisions for the three and nine month periods ended January 31, 2002 and 2001 related primarily to foreign income taxes and withholding taxes on software license royalties paid to the Company by certain foreign licensees. For the same periods, the Company recorded no significant federal or state income tax provisions as the Company had substantial net operating loss carryforwards.

Liquidity and Capital Resources

At January 31, 2002, the Company had cash, cash equivalents, restricted cash and investments of $2.8 million, compared to $3.2 million at April 30, 2001.  The Company’s working capital deficit was reduced to $1.2 million at January 31, 2002 from $3.9 million at April 30, 2001.

As shown in the accompanying condensed consolidated financial statements for the nine month period ended January 31, 2002, the Company recorded net income of $776,000 and had an accumulated deficit of $58,658,000. The Company’s cash equivalents decreased for the nine month period ended January 31, 2002 by $192,000 and the Company’s working capital was a negative $1,209,000.  For the year ended April 30, 2001, the Company incurred a net loss of $12,331,000, and had an accumulated deficit of $59,434,000 and working capital deficit of $3,929,000 as of April 31, 2001.

During fiscal 2001, the Company experienced a decline in revenues and incurred significant special charges as a result of the Audit Committee’s investigation.  The Company is focused on growing revenues and anticipates that it will continue to have some success in that regard during fiscal 2002.  However, the Company may continue to incur significant expenses in defense of the shareholder litigation if the final settlement is not approved by the Court as proposed, or at all.  As a result of these factors,  the Company may potentially be unable to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company’s continuation as a going concern is dependent upon its ability to continue to generate sufficient cash flows to meet its obligations on a timely basis, the ability to continue to work with key vendors to accept payment terms for certain payables, to obtain additional financing or refinancing as may be required, and ultimately to return to profitability and significant positive cash flows.

Management restructured the Company and significantly reduced operating expenses during fiscal 2001.  Management plans to grow revenues, increase the investment in marketing, while aggressively controlling costs, and seek additional financing if available upon terms that are acceptable to the Company.  There is no assurance that management’s plans will be successful or if successful, that they will result in the Company continuing as a going concern.The Company’s ability to obtain equity financing on acceptable terms may be adversely affected by the delisting of the Company’s Common Stock from the Nasdaq National Market during fiscal 2001. If adequate funds are not available to satisfy the Company’s short-term or long-term capital requirements, the Company may be required to significantly reduce its operations.  Additionally, the sale of additional equity or other securities will result in dilution of the Company’s stockholders.

The Company’s operations resulted in a decrease in cash of $0.2 million during the nine months ended January 31, 2002, as compared to a decrease of $5.3 million for the same period in the prior year.  Net cash used in operating activities of $0.5 million for the first nine months of fiscal 2002 was primarily due to decreases in accounts payable of $1.2 million, a decrease in other

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accrued liabilities of $0.9 million, a decrease in accrued compensation and related expenses of $0.2 and an increase in accounts receivable, net, of $0.7 million, offset by depreciation expenses of $0.3 million, the write down of other investments of $1.1 million, a decrease in prepaid expenses and other current assets of $0.3 million and net income of $0.8 million.  Investing activities during the period provided cash of $0.3 million, consisting of the maturities/sales of available-for-sale securities of $0.1 million and decreases in restricted cash of and other assets of $0.2 million.  Cash used in financing activities during the period was $0.1 million, which represented proceeds from the issuance of common stock under the Company’s stock option and stock purchase plans of $0.1 million offset by the reduction in the note payable to minority interest stockholders of $0.2 million.

Noncash investing and financing activities of $500,000 was the result of the Company converting an obligation, in other liabilities, to a non-interest-bearing note which is reflected in the balance sheet as short-term and long-term debt of $240,000 and $260,000 respectively.  During fiscal 2001, the Company announced the rescission of the New Atlanta Communications acquisition and recorded a current obligation to pay New Atlanta $500,000 for net revenues received that occurred between the time New Atlanta was acquired by Unify and the time the acquisition was rescinded.

Volatility of Stock Price and General Risk Factors Affecting Quarterly Results

The Company’s common stock price has been and is likely to continue to be subject to significant volatility.  A variety of factors could cause the price of the Company’s common stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company’s business; fluctuations in the Company’s or its competitors’ operating results and order levels; general conditions in the software and computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; and developments in the Company’s relationships with its customers, distributors and suppliers; legal proceedings brought against the Company or its officers; and significant changes in the Company’s senior management team.  In addition, in recent years the stock market in general, and the market for shares of equity securities of many high technology companies in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of those companies. Such fluctuations may adversely affect the market price of the Company’s common stock.

The Company’s quarterly operating results have varied significantly in the past, and the Company expects that its operating results are likely to vary significantly from time to time in the future. Such variations result from, among other factors, the following: the size and timing of significant orders and their fulfillment; demand for the Company’s products; the number, timing and significance of product enhancements and new product announcements by the Company and its competitors; ability of the Company to attract and retain key employees; seasonality; changes in pricing policies by the Company or its competitors; realignments of the Company’s organizational structure; changes in the level of the Company’s operating expenses; changes in the Company’s sales incentive plans; budgeting cycles of the Company’s customers; customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors; product life cycles; product defects and other product quality problems currency fluctuations; and general domestic and international economic and political conditions.

Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast. Revenues are also difficult to forecast because the market for Java development and business application development software is rapidly evolving and has been subject to significant volatility during the past two years, and the Company’s sales cycle, from initial evaluation to purchase and the provision of maintenance services, is lengthy and varies substantially from customer to customer. Because the Company normally ships products within a short time after it receives an

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order, it typically does not have any material backlog. As a result, to achieve its quarterly revenue objectives, the Company is dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders toward the end of a fiscal quarter, the Company generally recognizes a substantial portion of its revenues at the end of a quarter. As the Company’s expense levels are based in significant part on the Company’s expectations as to future revenues and are therefore relatively fixed in the short term, if revenue levels fall below expectations operating results are likely to be disproportionately adversely affected.  The Company also expects that its operating results will be affected by seasonal trends, and also anticipates that it may experience relatively weaker demand in fiscal quarters ending July 31 and October 31 as a result of reduced business activity in Europe during the summer months.

Doubts about the ability of the Company to continue as a going concern as discussed in Note 2 to the condensed consolidated financial statements and above in this Item 2 may have an adverse effect on the Company’s future sales and its ability to attract and retain qualified personnel. The Company’s products are typically used to develop applications that are critical to a customer’s business.  Customers may be unwilling to build their business applications around the Company’s products because of concerns about the Company’s ability to continue supporting its products.

Item 3. Disclosures about Market Risk

Interest Rate Risk.  The Company is exposed to market risk relating to changes in interest rates that may affect returns on its investment portfolio, which consists of cash equivalents and investments. Cash equivalents are highly liquid investments with original maturities of three months or less and are stated at cost.  Cash equivalents are generally maintained in money market accounts whose objective is preservation of principal and which hold investments with maturity dates of less than 90 days. The Company does not believe its exposure to interest rate risk is material for these balances, which totaled $2.8 million at January 31, 2002. The securities in the Company’s investment portfolio are generally classified as available-for-sale and, consequently, are recorded on the consolidated balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity.  The Company does not use derivative financial instruments in its short-term investment portfolio, places its investments with high quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company attempts to ensure the safety of its invested funds by limiting default.  The Company had no investments at January 31, 2002.  If market interest rates were to change immediately and uniformly by 10% from levels at January 31, 2002, the fair value of the Company’s cash equivalents and investments would not change by a significant amount.

Foreign Currency Exchange Rate Risk.  Because a large portion of the Company’s revenues arise from international sales, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company’s business, operating results and financial position. Historically, the Company’s primary exposures have related to revenues and expenses denominated in local currency in Europe, Japan and Australia. Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on its future operating results.  The Company also has currency exchange rate exposures on intercompany accounts receivable resulting from local currency sales of software licenses by the Company’s international subsidiaries in the United Kingdom, France and Japan. At January 31, 2002, the Company had $0.1 million, $0.2 million and $0.3 million in such receivables denominated in British pounds, euro and Japanese yen, respectively. The Company encourages prompt payment of these intercompany balances in order to minimize its exposure to currency fluctuations, but it engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical 10% percent change in foreign currency rates would not have a significant impact on the Company’s business, operating results or financial position. The Company has not experienced material exchange losses on these balances in the past; however,

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due to the substantial volatility of currency exchange rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.

PART II.                OTHER INFORMATION

Item 1.  Legal Proceedings

Beginning on July 31, 2000 and through October 2000, a series of class action complaints were filed in the U.S. District Court for the Northern District of California, against Unify and certain of its directors and former officers.  The plaintiffs in each of these actions claim to be suing on behalf of a class of persons who purchased the Company’s common stock during periods specified in the complaint.  These actions have been consolidated and the court has selected lead plaintiffs’ counsel.

From August through October 2000, five shareholder derivative actions were filed; four in the Superior Court of the State of California and one in the U.S. District Court for the Northern District of California.  The plaintiffs in these actions each claims to be suing on behalf of the Company.  These actions name as defendants certain of the Company’s present and former officers and directors.  The complaints allege substantially the same conduct, and concern the same time period, as the shareholder class actions filed in the U.S. District Court for the Northern District of California.  The complaints allege that, as a result of this conduct, certain of the present and former officers and directors breached their fiduciary duties to the Company and engaged in improper insider trading.  The complaints seek an unspecified amount in damages and injunctive relief.

In February and April 2001, two alleged institutional investors filed actions in U.S. District Court for the Northern District of California against the Company and its former chief executive officer and former chief financial officer alleging violations of federal securities laws.  The complaint alleges the same conduct, and concerns generally the same time period, as that alleged in the shareholder class actions discussed above.

On February 26, 2002, the Company announced that it had reached an agreement in principle to settle the above class action, individual and derivative cases.  The settlement is subject to the execution of a definitive settlement agreement by the parties, notice to class members and approval by the state and federal courts.  The estimated costs to settle such lawsuits were accrued as of April 30, 2001.  However, there can be no assurance that the settlement will be successfully finalized or that it will be approved by the federal and state courts.  There can also be no assurance that the settlement will not be challenged or overturned, which could result in additional litigation costs and liability.

In May 2001, a lawsuit was brought against the Company and certain of its present and former officers and directors by an insurance carrier which issued Unify a directors and officers liability and reimbursement excess policy.  The action, which is presently pending in the United States District Court for the Northern District of California, seeks reformation and recission of that insurance policy. The Company intends to vigorously defend the action.  Additionally, the Company has become aware that the SEC and the Department of Justice are conducting investigations into the facts and circumstances surrounding the Company’s restatement of its quarterly financial statements and other matters. The Company is fully cooperating with these investigations.

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Item 6.  Exhibits and Reports on Form 8-K.

                (a)           Exhibits.

Exhibit
No.		Description
10.3	1996 Employee Stock Purchase Plan, as amended to date
10.9	2001 Stock Option Plan

                (b)           Reports on Form 8-K

                No reports on Form 8-K were filed during the quarter ended January 31, 2002.

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UNIFY CORPORATION

SIGNATURE

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

Date:  March 14, 2002	Unify Corporation
	(Registrant)
	By:
	/s/  DAVID H. ADAMS
	David H. Adams
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EX-10.3

Exhibit 10.3

UNIFY CORPORATION

1996 EMPLOYEE STOCK PURCHASE PLAN

(As Amended Effective November 15, 2001)

1.             PURPOSE.

The purpose of this Plan is to provide an opportunity for Employees of Unify Corporation (the “Corporation”) and its Designated Subsidiaries, to purchase Common Stock of the Corporation and thereby to have an additional incentive to contribute to the prosperity of the Corporation.  It is the intention of the Corporation that the Plan qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and the Plan shall be construed in accordance with this intention.

2.             DEFINITIONS.

(a)           “Board” shall mean the Board of Directors of the Corporation.

(b)           “Code” shall mean the Internal Revenue Code of 1986, as amended.

(c)           “Committee” shall mean the committee appointed by the Board in accordance with Section 12 of the Plan.

(d)           “Common Stock” shall mean the Common Stock of the Corporation, or any stock into which such Common Stock may be converted.

(e)           “Compensation” shall mean an Employee’s wages or salary and other amounts payable to an Employee on account of personal services rendered by the Employee to the Corporation or a Designated Subsidiary and which are reportable as wages or other compensation on the Employee’s Form W-2, plus pre-tax contributions of the Employee under a cash or deferred arrangement (401(k) plan) or cafeteria plan maintained by the Corporation or a Designated Subsidiary, but excluding, however, (1) non-cash fringe benefits, (2) special payments as determined by the Committee (e.g., moving expenses, unused vacation, severance pay), (3) income from the exercise of stock options or other stock purchases and (4) any other items of Compensation as determined by the Committee.

(f)            “Corporation” shall mean Unify Corporation, a Delaware corporation.

(g)           “Designated Subsidiary” shall mean a Subsidiary which has been designated by the Board as eligible to participate in the Plan.

(h)           “Employee” shall mean an individual employed (within the meaning of Code section 3401(c) and the regulations thereunder) by the Corporation or a Designated Subsidiary.

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(i)            “Entry Date” shall mean the first day of each Option Period.  The first Entry Date shall be the date the Corporation’s initial public offering registered with the Securities and Exchange Commission is declared effective, unless otherwise determined by the Committee.

(j)            “Exercise Date” shall mean the last business day of each Exercise Period.

(k)           “Exercise Period” shall mean a six-month or other period as determined by the Committee.  The first Exercise Period during an Option Period shall commence on the first day of such Option Period.  Subsequent Exercise Periods, if any, shall run consecutively after the termination of the preceding Exercise Period.  The last Exercise Period in an Option Period shall terminate on the last day of such Option Period.

(l)            “Fair Market Value” shall mean the value of one (1) share of Common Stock on the relevant date, determined as follows:

(1)           If the shares are traded on an exchange or on the NASDAQ National Market System, the reported “closing price” on the next preceding trading day (provided that in the case of the first Entry Date, the Fair Market Value shall be the initial price to the public in the Corporation’s initial public offering);

(2)           If the shares are traded over–the–counter on the NASDAQ System (other than on the NASDAQ National Market System), the mean between the bid and the ask prices on said System at the close of business on the next preceding trading day (provided that in the case of the first Entry Date, the Fair Market Value shall be the initial price to the public in the Corporation’s initial public offering); and

(3)           If neither (1) nor (2) applies, the fair market value as determined by the Committee in good faith.  Such determination shall be conclusive and binding on all persons.

(m)          “Option Period” shall mean a period of up to twenty-seven (27) months as determined by the Committee.

(n)           “Participant” shall mean a participant in the Plan as described in Section 4 of the Plan.

(o)           “Plan” shall mean this employee stock purchase plan.

(p)           “Subsidiary” shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, as described in Code section 424(f).

3.             ELIGIBILITY.

Any Employee regularly employed on a full–time basis by the Corporation or by any Designated Subsidiary on an Entry Date shall be eligible to participate in the Plan with respect to the Option Period commencing on such Entry Date, provided that the Committee may establish administrative rules requiring that employment commence some minimum period

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(e.g., one pay period) prior to an Entry Date to be eligible to participate with respect to that Entry Date.  An Employee shall be considered employed on a full–time basis unless his or her customary employment is less than 20 hours per week or five months per year.  No Employee may participate in the Plan if immediately after an option is granted the Employee owns or is considered to own (within the meaning of section 424(d) of the Code), shares of stock, including stock which the Employee may purchase by conversion of convertible securities or under outstanding options granted by the Corporation, possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or of any of its Subsidiaries.  All Employees who participate in the Plan shall have the same rights and privileges under the Plan except for differences which may be mandated by local law and which are consistent with Code section 423(b)(5).  The Committee may impose restrictions on eligibility and participation of Employees who are officers and directors to facilitate compliance with federal or state securities laws.

4.             PARTICIPATION.

4.1           An Employee who is eligible to participate in the Plan in accordance with Section 3 may become a Participant by filing, on a date prescribed by the Committee prior to an applicable Entry Date, a completed payroll deduction authorization and Plan enrollment form provided by the Corporation.  An eligible Employee may authorize payroll deductions at the rate of any whole percentage of the Employee’s Compensation, not to exceed fifteen percent (15%) of the Employee’s Compensation, or such lesser percentage as specified by the Committee as applied to an Entry Date or Option Period.  All payroll deductions may be held by the Corporation and commingled with its other corporate funds.  No interest shall be paid or credited to the Participant with respect to such payroll deductions except where required by local law as determined by the Committee.  A separate bookkeeping account for each Participant shall be maintained by the Corporation under the Plan and the amount of each Participant’s payroll deductions shall be credited to such account.  A Participant may not make any additional payments into such account.

4.2           Under procedures established by the Committee, a Participant may (i) reduce the rate of his or her payroll deductions at any time during an Option Period or (ii) increase his or her rate of payroll deductions effective on an Entry Date; provided, however, that effective for each Option Period commencing on or after August 7, 1997, a Participant may increase his or her rate of payroll deductions at any time during an Option Period.  Notwithstanding the foregoing, the Committee may, from time to time, consistent with the Plan and the requirements of Section 423 of the Code, establish, change or terminate such rules, guidelines, policies, procedures, limitations or adjustments as deemed advisable by the Committee for the proper administration of the Plan, including, without limitation, (i) a minimum payroll deduction amount for participation in the Plan, (ii) a limitation on the frequency or number of changes permitted in the rate of payroll deductions during an Option Period or Exercise Period,  (iii) a minimum period of advance notice before a Participant’s payroll deduction change election may become effective, and (iv) a payroll deduction greater than or less than the amount designated by the Participant in order to adjust for the Corporation’s delay or mistake in processing the Participant’s payroll deduction authorization and Plan enrollment form or in otherwise effecting a Participant’s election under the Plan or as advisable to comply with the requirements of Section 423 of the Code.  A Participant’s election to increase or decrease his or

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her rate of payroll deductions shall be made by completing and filing a new payroll deduction authorization and Plan enrollment form with the Corporation.  If a new payroll deduction authorization and Plan enrollment form is not filed with the Corporation, the rate of payroll deductions shall continue at the originally elected rate throughout the Option Period unless the Committee determines to change the permissible rate.

4.3           Under procedures established by the Committee, a Participant may suspend or discontinue participation in the Plan at any time during an Option Period by completing and filing with the Corporation’s designated office a written notice of such action on a form provided by the Corporation for such purpose.  If a Participant suspends participation during an Exercise Period, his or her accumulated payroll deductions will remain in the Plan for purchase of shares as specified in Section 6 on the following Exercise Date, but the Participant will not again participate until he or she completes a new payroll deduction authorization and Plan enrollment form.  The Committee may establish rules limiting the frequency with which Participants may suspend and resume payroll deductions under the Plan and may impose a waiting period on Participants wishing to resume suspended payroll deductions.  If a Participant discontinues participation in the Plan, the amount credited to the Participant’s individual account shall be paid to the Participant without interest (except where required by local law).  In the event any Participant terminates employment with the Corporation or any Subsidiary for any reason (including death) prior to the expiration of an Option Period, the Participant’s participation in the Plan shall terminate and all amounts credited to the Participant’s account shall be paid to the Participant or the Participant’s estate without interest (except where required by local law).  Whether a termination of employment has occurred shall be determined by the Committee.  The Committee may also establish rules regarding when leaves of absence or change of employment status (e.g., from full-time to part-time) will be considered to be a termination of employment, and the Committee may establish termination of employment procedures for this Plan which are independent of similar rules established under other benefit plans of the Corporation and its Subsidiaries.

In the event of a Participant’s death, any accumulated payroll deductions will be paid, without interest, to the estate of the Participant.

5.             OFFERING.

5.1           The maximum number of shares of Common Stock which may be issued pursuant to the Plan shall be 2,700,000 shares.  The Committee may designate any amount of available shares for offering for any Option Period determined pursuant to Section 5.2.

5.2           Each Option Period, Entry Date and Exercise Period shall be determined by the Committee.  The Committee shall have the power to change the duration of future Option Periods or future Exercise Periods, and to determine whether or not to have overlapping Option Periods, with respect to any prospective offering, without stockholder or Board approval.

5.3           With respect to each Option Period, each eligible Employee who has elected to participate as provided in Section 4.1 shall be granted an option to purchase that number of shares of Common Stock which may be purchased with the payroll deductions accumulated on behalf of such Employee (assuming payroll deductions at a rate of 15% of Compensation)

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during each Exercise Period within such Option Period at the purchase price specified in Section 5.4 below; provided, however, (1) in no event shall the Employee be entitled to accrue rights to purchase shares under the Plan (and all other employee stock purchase plans, as defined in Code section 423, of the Corporation and its subsidiaries) at a rate which exceeds $25,000 of the Fair Market Value of such stock (determined at the time the option is granted) for any calendar year in which such option is outstanding at any time, and (2) the maximum shares subject to any option shall in no event exceed 20,000.

5.4           The option price under each option shall be the lower of: (i) eighty–five percent (85%) of the Fair Market Value of the Common Stock on the Entry Date on which an option is granted, or (ii) eighty–five percent (85%) of the Fair Market Value on the Exercise Date on which the Common Stock is purchased.

5.5           If the total number of shares of Common Stock for which options granted under the Plan are exercisable exceeds the maximum number of shares offered on any Entry Date, the number of shares which may be purchased under options granted on the Entry Date shall be reduced on a pro rata basis in as nearly a uniform manner as shall be practicable and equitable.  In this event, payroll deductions shall also be reduced or refunded accordingly.  If an Employee’s payroll deductions during any Exercise Period exceeds the purchase price for the maximum number of shares permitted to be purchased under Section 5.3, the excess shall be refunded to the Participant without interest (except where otherwise required by local law).

5.6           In the event that the Fair Market Value of the Corporation’s Common Stock is lower on the first day of an Exercise Period within an Option Period (subsequent “Reassessment Date”) than it was on Entry Date for such Option Period, all Employees participating in the Plan on the Reassessment Date shall be deemed to have relinquished the unexercised portion of the option granted on the Entry Date and to have enrolled in and received a new option commencing on such Reassessment Date, unless the Committee has determined not to permit overlapping Option Periods or to restrict such transfers to lower price Option Periods.

6.             PURCHASE OF STOCK.

Upon the expiration of each Exercise Period, a Participant’s option shall be exercised automatically for the purchase of that number of full shares of Common Stock which the accumulated payroll deductions credited  to the Participant’s account at that time shall purchase at the applicable price specified in Section 5.4.

7.             PAYMENT AND DELIVERY.

Upon the exercise of an option, the Corporation shall deliver to the Participant the Common Stock purchased and the balance of any amount of payroll deductions credited to the Participant’s account not used for the purchase.  The Committee may permit or require that shares be deposited directly with a broker designated by the Participant (or a broker selected by the Committee), and the Committee may utilize electronic or automated methods of share transfer.  To the extent the unused cash balance represents a fractional share, the unused cash balance credited to the Participant’s account shall be carried over to the next Exercise Period, if

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the Participant is also a Participant in the Plan at that time or refunded to the Participant, as determined by the Committee.  The Corporation shall retain the amount of payroll deductions used to purchase Common Stock as full payment for the Common Stock and the Common Stock shall then be fully paid and non–assessable.  No Participant shall have any voting, dividend, or other stockholder rights with respect to shares subject to any option granted under the Plan until the option has been exercised and shares issued.

8.             RECAPITALIZATION.

If after the grant of an option, but prior to the purchase of Common Stock under the option, there is any increase or decrease in the number of outstanding shares of Common Stock because of a stock split, stock dividend, combination or recapitalization of shares subject to options, the number of shares to be purchased pursuant to an option, the share limit of Section 5.3 and the maximum number of shares specified in Section 5.1 shall be proportionately increased or decreased, the terms relating to the purchase price with respect to the option shall be appropriately adjusted by the Committee, and the Committee shall take any further actions which, in the exercise of its discretion, may be necessary or appropriate under the circumstances.

The Committee, if it so determines in the exercise of its sole discretion, also may adjust the number of shares specified in Section 5.1, as well as the price per share of Common Stock covered by each outstanding option and the maximum number of shares subject to any individual option, in the event the Corporation effects one or more reorganizations, recapitalizations, spin-offs, split-ups, rights offerings or reductions of shares of its outstanding Common Stock.

                The Committee’s determinations under this Section 8 shall be conclusive and binding on all parties.

9.             MERGER, LIQUIDATION, OTHER CORPORATION TRANSACTIONS.

In the event of the proposed liquidation or dissolution of the Corporation, the Option Period will terminate immediately prior to the consummation of such proposed transaction, unless otherwise provided by the Committee in its sole discretion, and all outstanding options shall automatically terminate and the amounts of all payroll deductions will be refunded without interest to the Participants.

In the event of a proposed sale of all or substantially all of the assets of the Corporation, or the merger or consolidation of the Corporation with or into another corporation, then in the sole discretion of the Committee, (1) each option shall be assumed or an equivalent option shall be substituted by the successor corporation or parent or subsidiary of such successor corporation, (2) a date established by the Committee on or before the date of consummation of such merger, consolidation or sale shall be treated as an Exercise Date, and all outstanding options shall be deemed exercisable on such date or (3) all outstanding options shall terminate and the accumulated payroll deductions shall be returned to the Participants.

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10.          TRANSFERABILITY.

Options granted to Participants may not be voluntarily or involuntarily assigned, transferred, pledged, or otherwise disposed of in any way, and any attempted assignment, transfer, pledge, or other disposition shall be null and void and without effect.  If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than as permitted by the Code, such act shall be treated as an election by the participant to discontinue participation in the Plan pursuant to Section 4.2.

11.          AMENDMENT OR TERMINATION OF THE PLAN.

11.1         The Plan shall continue until March 25, 2006, unless previously terminated in accordance with Section 11.2.

11.2         The Board may, in its sole discretion, insofar as permitted by law, terminate or suspend the Plan, or revise or amend it in any respect whatsoever, except that, without approval of the stockholders, no such revision or amendment shall:

(a) materially increase the number of shares subject to the Plan other than an adjustment under Section 8 of the Plan;

(b) materially modify the requirements as to eligibility for participation in the Plan;

(c) materially increase the benefits accruing to Participants;

(d) reduce the purchase price specified in Section 5.4, except as specified in Section 8;

(e) extend the term of the Plan beyond the date specified in Section 11.1; or

(f) amend this Section 11.2 to defeat its purpose.

12.          ADMINISTRATION.

The Plan shall be administered by a Committee which shall consist of at least two members appointed by the Board.  The Committee shall have full power and authority to promulgate any rules and regulations which it deems necessary for the proper administration of the Plan, to interpret the provisions and supervise the administration of the Plan, and to take all action in connection with administration of the Plan as it deems necessary or advisable.  Decisions of the Committee shall be made by a majority of its members and shall be final and binding upon all participants.  Any decision reduced to writing and signed by a majority of the members of the Committee shall be fully effective as if it had been made at a meeting of the Committee duly held.  The Corporation shall pay all expenses incurred in the administration of

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the Plan.  No Committee member shall be liable for any action or determination made in good faith with respect to the Plan or any option granted thereunder.

13.          PROVISION OF INFORMATION.

Each Participant who has exercised all or part of his or her option shall receive, as soon as practicable after the Exercise Date, a report of such Participant’s Plan account setting forth the total payroll deductions accumulated prior to such exercise, the number of shares purchased, the option price for such shares, the date of purchase and the cash balance, if any, remaining immediately after such purchase that is to be refunded or retained in the Participant’s Plan account pursuant to Section 5.5.  The report required by this Section may be delivered in such form and by such means, including by electronic transmission, as the Corporation may determine.  In addition, each Participant shall be provided information concerning the Corporation equivalent to that information provided generally to the Corporation’s common stockholders.  At least annually, copies of the Corporation’s balance sheet and income statement for the just completed fiscal year shall be made available to each Participant.  The Corporation shall not be required to provide such information to key employees whose duties in connection with the Corporation assure them access to equivalent information.

14.          COMMITTEE RULES FOR FOREIGN JURISDICTIONS.

The Committee may adopt rules or procedures relating to te operation and administration of the Plan in non-United States jurisdictions to accommodate the specific requirements of local laws and procedures.  Without limiting the generality of the foregoing, the Committee is specifically authorized to adopt rules and procedures regarding handling of payroll deductions, conversion of local currency, withholding procedures and handling of stock certificates which vary with local requirements.

15.          SECURITIES LAWS REQUIREMENTS.

The Corporation shall not be under any obligation to issue Common Stock upon the exercise of any option unless and until the Corporation has determined that: (i) it and the Participant have taken all actions required to register the Common Stock under the Securities Act of 1933, or to perfect an exemption from the registration requirements thereof; (ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed has been satisfied; and (iii) all other applicable provisions of state and federal law have been satisfied.

16.          GOVERNMENTAL REGULATIONS.

This Plan and the Corporation’s obligation to sell and deliver shares of its stock under the Plan shall be subject to the approval of any governmental authority required in connection with the Plan or the authorization, issuance, sale, or delivery of stock hereunder.

17.          NO ENLARGEMENT OF EMPLOYEE RIGHTS.

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Nothing contained in this Plan shall be deemed to give any Employee the right to be retained in the employ of the Corporation or any Designated Subsidiary or to interfere with the right of the Corporation or Designated Subsidiary to discharge any Employee at any time.

18.          GOVERNING LAW.

This Plan shall be governed by California law, but shall be interpreted to be consistent with the requirements of any employee stock purchase plan under Code section 423.

19.          EFFECTIVE DATE.

This Plan shall be effective March 26, 1996, subject to approval of the stockholders of the Corporation within 12 months of its adoption by the Board of Directors.

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PLAN HISTORY

May 26, 1996	Board adopts Plan, with an initial reserve of 400,000 shares.
May    , 1996	Stockholders approve Plan, with an initial reserve of 400,000 shares.
August 7, 1997	Board approved an increase to the Plan of 450,000 shares from 400,000 shares to 850,000 shares.
October 3, 1997	Stockholders approve an increase to the Plan of 450,000 shares from 400,000 shares to 850,000 shares.
November 22, 1999	Board approves a 2 for 1 stock split, thereby increasing the share reserve of the Plan to 1,700,000.
May 18, 2001	Board approves an increase to the Plan of 1,000,000 from 1,700,000 shares to 2,700,000 shares.
September 29, 2001	Stockholders approve an increase to the Plan of 1,000,000 from 1,700,000 shares to 2,700,000 shares.
November 15, 2001	Board approved the amended plan.

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EX-10.9

EXHIBIT 10.9

UNIFY CORPORATION

2001 STOCK OPTION PLAN

1.             Establishment, Purpose and Term of Plan.

1.1           Establishment.  The Unify Corporation 2001 Stock Option Plan (the “Plan”) is hereby established effective as of May 18, 2001.

1.2           Purpose.  The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group.

1.3           Term of Plan.  The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed.  However, all Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company.

2.             Definitions and Construction.

2.1           Definitions.  Whenever used herein, the following terms shall have their respective meanings set forth below:

(a)           “Board” means the Board of Directors of the Company.  If one or more Committees have been appointed by the Board to administer the Plan, “Board” also means such Committee(s).

(b)           “Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(c)           “Committee” means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board.  Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law.

(d)           “Company” means Unify Corporation, a Delaware corporation, or any successor corporation thereto.

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(e)           “Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on a Form S-8 Registration Statement under the Securities Act.

(f)            “Director” means a member of the Board or of the board of directors of any other Participating Company.

(g)           “Disability” means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee’s position with the Participating Company Group because of the sickness or injury of the Optionee.

(h)           “Employee” means any person treated as an employee (including an Officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director’s fee shall be sufficient to constitute employment for purposes of the Plan.  The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual’s employment or termination of employment, as the case may be.  For purposes of an individual’s rights, if any, under the Plan as of the time of the Company’s determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination.

(i)            “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(j)            “Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Board, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

(i)            If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable.  If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to

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the relevant date, or such other appropriate day as shall be determined by the Board, in its discretion.

(ii)           If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Board in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse.

(k)           “Incentive Stock Option” means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.

(l)            “Insider” means an Officer, a Director of the Company or other person whose transactions in Stock are subject to Section 16 of the Exchange Act.

(m)          “Nonstatutory Stock Option” means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option.

(n)           “Officer” means any person designated by the Board as an officer of the Company.

(o)           “Option” means a right to purchase Stock pursuant to the terms and conditions of the Plan.  An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.

(p)           “Option Agreement” means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof.  An Option Agreement may consist of a form of “Notice of Grant of Stock Option” and a form of “Stock Option Agreement” incorporated therein by reference, or such other form or forms as the Board may approve from time to time.

(q)           “Optionee” means a person who has been granted one or more Options.

(r)            “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(s)           “Participating Company” means the Company or any Parent Corporation or Subsidiary Corporation.

(t)            “Participating Company Group” means, at any point in time, all corporations collectively which are then Participating Companies.

(u)           “Rule 16b-3” means Rule 16b–3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.

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(v)           “Section 162(m)” means Section 162(m) of the Code.

(w)          “Securities Act” means the Securities Act of 1933, as amended.

(x)            “Service” means an Optionee’s employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant.  An Optionee’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee’s Service.  Furthermore, an Optionee’s Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee’s Service shall be deemed to have terminated unless the Optionee’s right to return to Service with the Participating Company Group is guaranteed by statute or contract.  Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee’s Option Agreement.  The Optionee’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company.  Subject to the foregoing, the Company, in its discretion, shall determine whether the Optionee’s Service has terminated and the effective date of such termination.

(y)           “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2.

(z)            “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

(aa)         “Ten Percent Owner Optionee” means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code.

2.2           Construction.  Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan.  Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular.  Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

3.             Administration.

3.1           Administration by the Board.  The Plan shall be administered by the Board.  All questions of interpretation of the Plan or of any Option shall be determined by the

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Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option.

3.2           Authority of Officers.  Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, determination or election.

3.3           Powers of the Board.  In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its discretion:

(a)           to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option;

(b)           to designate Options as Incentive Stock Options or Nonstatutory Stock Options;

(c)           to determine the Fair Market Value of shares of Stock or other property;

(d)           to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee’s termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan;

(e)           to approve one or more forms of Option Agreement;

(f)            to amend, modify, extend, cancel or renew any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof;

(g)           to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee’s termination of Service with the Participating Company Group;

(h)           to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including,

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without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and

(i)            to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law.

3.4           Committee Complying with Section 162(m).  If a Participating Company is a “publicly held corporation” within the meaning of Section 162(m), the Board may establish a Committee of “outside directors” within the meaning of Section 162(m) to approve the grant of any Option which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m).

3.5           Administration with Respect to Insiders.  With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b–3.

3.6           Indemnification.  In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

4.             Shares Subject to Plan.

4.1           Maximum Number of Shares Issuable.  Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be one million nine hundred fifty thousand (1,950,000) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof.  If an outstanding Option for any reason expires or is terminated or canceled or if shares of Stock are acquired upon the exercise of an Option subject to a Company repurchase option and are repurchased by the Company at the Optionee’s exercise price, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available

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for issuance under the Plan.  However, except as adjusted pursuant to Section 4.2, in no event shall more than one million nine hundred fifty thousand (1,950,000) shares of Stock be available for issuance pursuant to the exercise of Incentive Stock Options (the “ISO Share Issuance Limit”).  Notwithstanding the foregoing, at any such time as the offer and sale of securities pursuant to the Plan is subject to compliance with Section 260.140.45 of Title 10 of the California Code of Regulations (“Section 260.140.45”), the total number of shares of Stock issuable upon the exercise of all outstanding Options (together with options outstanding under any other stock option plan of the Company) and the total number of shares provided for under any stock bonus or similar plan of the Company shall not exceed thirty percent (30%) (or such other higher percentage limitation as may be approved by the stockholders of the Company pursuant to Section 260.140.45) of the then outstanding shares of the Company as calculated in accordance with the conditions and exclusions of Section 260.140.45.

4.2           Adjustments for Changes in Capital Structure.  In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options, in the ISO Share Issuance Limit set forth in Section 4.1, in the Section 162(m) Grant Limit set forth in Section 5.4 and in the exercise price per share of any outstanding Options.  If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the “New Shares”), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares.  In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its discretion.  Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option.  The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive.

5.             Eligibility and Option Limitations.

5.1           Persons Eligible for Options.  Options may be granted only to Employees, Consultants, and Directors.  For purposes of the foregoing sentence, “Employees,”“Consultants” and “Directors” shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of an employment or other service relationship with the Participating Company Group.  Eligible persons may be granted more than one (1) Option.  However, eligibility in accordance with this Section shall not entitle any person to be granted an Option, or, having been granted an Option, to be granted an additional Option.

5.2           Option Grant Restrictions.  Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option.  An Incentive Stock Option granted to a prospective Employee upon the condition that

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such person become an Employee shall be deemed granted effective on the date such person commences Service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1.

5.3           Fair Market Value Limitation.  To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portions of such options which exceed such amount shall be treated as Nonstatutory Stock Options.  For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted.  If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code.  If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising.  In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first.  Separate certificates representing each such portion shall be issued upon the exercise of the Option.

5.4           Section 162(m) Grant Limit.  Subject to adjustment as provided in Section 4.2, no Employee shall be granted one or more Options within any fiscal year of the Company which in the aggregate are for the purchase of more than one million (1,000,000) shares (the “Section 162(m) Grant Limit”).  An Option which is canceled in the same fiscal year in which it was granted shall continue to be counted against the Section 162(m) Grant Limit for such period.

6.             TERMS AND CONDITIONS OF OPTIONS.

Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish.  No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement.  Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

6.1           Exercise Price.  The exercise price for each Option shall be established in the discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty–five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option.

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Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code.

6.2           Exercisability and Term of Options.  Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company, and (d) with the exception of an Option granted to an Officer, a Director or a Consultant, no Option shall become exercisable at a rate less than twenty percent (20%) per year over a period of five (5) years from the effective date of grant of such Option, subject to the Optionee’s continued Service.  Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.

6.3           Payment of Exercise Price.

(a)           Forms of Consideration Authorized.  Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Optionee having a Fair Market Value not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a “Cashless Exercise”), (iv) provided that the Optionee is an Employee (unless otherwise not prohibited by law, including, without limitation, any regulation promulgated by the Board of Governors of the Federal Reserve System) and in the Company’s sole discretion at the time the Option is exercised, by delivery of the Optionee’s promissory note in a form approved by the Company for the aggregate exercise price, provided that, if the Company is incorporated in the State of Delaware, the Optionee shall pay in cash that portion of the aggregate exercise price not less than the par value of the shares being acquired, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof.  The Board may at any time or from time to time, by approval of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.

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(b)           Limitations on Forms of Consideration.

(i)            Tender of Stock.  Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.  Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months (and not used for another Option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.

(ii)           Cashless Exercise.  The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise.

(iii)          Payment by Promissory Note.  No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law.  Any permitted promissory note shall be on such terms as the Board shall determine.  The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company.  Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company’s securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations.

6.4           Tax Withholding.  The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof.  Alternatively or in addition, in its discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof.  The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates.  The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group’s tax withholding obligations have been satisfied by the Optionee.

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6.5           Effect of Termination of Service.

(a)           Option Exercisability.  Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Board in the grant of an Option and set forth in the Option Agreement, an Option shall be exercisable after an Optionee’s termination of Service only during the applicable time period determined in accordance with this Section 6.6 and thereafter shall terminate:

(i)            Disability.  If the Optionee’s Service terminates because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee (or the Optionee’s guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee’s Service terminated, but in any event no later than the date of expiration of the Option’s term as set forth in the Option Agreement evidencing such Option (the “Option Expiration Date”).

(ii)           Death.  If the Optionee’s Service terminates because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee’s legal representative or other person who acquired the right to exercise the Option by reason of the Optionee’s death at any time prior to the expiration of twelve (12) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration Date.  The Optionee’s Service shall be deemed to have terminated on account of death if the Optionee dies within ninety (90) days (or such longer period of time as determined by the Board, in its discretion) after the Optionee’s termination of Service.

(iii)          Other Termination of Service.  If the Optionee’s Service terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee’s Service terminated, may be exercised by the Optionee at any time prior to the expiration of ninety (90) days (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration Date.

(b)           Extension if Exercise Prevented by Law.  Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.5(a) is prevented by the provisions of Section 10 below, the Option shall remain exercisable until three (3) months (or such longer period of time as determined by the Board, in its discretion) after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date.

(c)           Extension if Optionee Subject to Section 16(b).  Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.5(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b)

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of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee’s termination of Service, or (iii) the Option Expiration Date.

6.6           Transferability of Options.  During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee’s guardian or legal representative.  No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution.  Notwithstanding the foregoing, to the extent permitted by the Board, in its discretion, and set forth in the Option Agreement evidencing such Option, a Nonstatutory Stock Option shall be assignable or transferable subject to the applicable limitations, if any, described in Section 260.140.41 of Title 10 of the California Code of Regulations and the General Instructions to Form S-8 Registration Statement under the Securities Act.

7.             STANDARD FORMS OF OPTION AGREEMENT.

7.1           Option Agreement.  Unless otherwise provided by the Board at the time the Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the form of Option Agreement approved by the Board concurrently with its adoption of the Plan and as amended from time to time.

7.2           Authority to Vary Terms.  The Board shall have the authority from time to time to vary the terms of any standard form of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan.

8.             CHANGE IN CONTROL.

8.1           Definitions.

(a)           An “Ownership Change Event” shall be deemed to have occurred if any of the following occurs with respect to the Company:  (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company.

(b)           A “Change in Control” shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, a “Transaction”) wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the

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outstanding voting securities of the Company or, in the case of a Transaction described in Section 8.1(a)(iii), the corporation or other business entity to which the assets of the Company were transferred (the “Transferee”), as the case may be.  For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities.  The Board shall have the right to determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive.

8.2           Effect of Change in Control on Options.  In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “Acquiring Corporation”), may, without the consent of the Optionee, either assume the Company’s rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation’s stock.  Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control.  Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement.  Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its discretion.

9.             Provision of Information.

At least annually, copies of the Company’s balance sheet and income statement for the just completed fiscal year shall be made available to each Optionee and purchaser of shares of Stock upon the exercise of an Option.  The Company shall not be required to provide such information to key employees whose duties in connection with the Company assure them access to equivalent information.

10.           Compliance with Securities Law.

The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities.  Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities

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laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed.  In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act.  The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.  As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

11.           Termination or Amendment of Plan.

The Board may terminate or amend the Plan at any time.  However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company’s stockholders under any applicable law, regulation or rule.  No termination or amendment of the Plan shall affect any then outstanding Option unless expressly provided by the Board.  In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule.

12.           Stockholder Approval.

The Plan or any increase in the maximum aggregate number of shares of Stock issuable thereunder as provided in Section 4.1 (the “Authorized Shares”) shall be approved by the stockholders of the Company within twelve (12) months of the date of adoption thereof by the Board.  Options granted prior to stockholder approval of the Plan or in excess of the Authorized Shares previously approved by the stockholders shall become exercisable no earlier than the date of stockholder approval of the Plan or such increase in the Authorized Shares, as the case may be.

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