10-Q

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

Form 10-Q
x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended July 31, 2006
	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)

Telephone: (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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

          Large accelerated filer    o Accelerated filer    o Non-accelerated filer    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act),

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 29,523,608 shares of Common Stock, $0.001 par value, as of July 31, 2006.

UNIFY CORPORATION
FORM 10-Q

INDEX

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of July 31, 2006 and April 30, 2006	3
	Unaudited Condensed Consolidated Statements of Operations for the three months ended July 31, 2006 and 2005	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2006 and 2005	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION	23
Item 1.	Legal Proceedings	23
Item 6.	Exhibits	24
SIGNATURE		25
CERTIFICATIONS

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

UNIFY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

	July 31, 2006			April 30, 2006
	(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,300		$	1,881
Accounts receivable, net		1,424			3,473
Prepaid expenses and other current assets		451			499
Contracts in progress		136			200
Total current assets		4,311			6,053
Property and equipment, net		257			267
Other investments		214			214
Goodwill and intangible assets, net		1,587			1,617
Other assets, net		216			200
Total assets	$	6,585		$	8,351
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	257		$	379
Current portion of long-term debt		16			33
Other accrued liabilities		831			791
Accrued compensation and related expenses		542			878
Deferred revenue		2,683			3,296
Total current liabilities		4,329			5,377
Other long-term liabilities		738			739
Commitments and contingencies		—			—
Stockholders’ equity:
Common stock		30			29
Additional paid-in capital		63,969			63,937
Accumulated other comprehensive income		23			19
Accumulated deficit		(62,504	)		(61,750	)
Total stockholders’ equity		1,518			2,235
Total liabilities and stockholders’ equity	$	6,585		$	8,351

See accompanying notes to condensed consolidated financial statements.

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UNIFY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

	Three Months Ended July 31,
	2006			2005
Revenues:
Software licenses	$	615		$	1,169
Services		1,481			1,557
Total revenues		2,096			2,726
Cost of Revenues:
Software licenses		37			139
Services		503			327
Total cost of revenues		540			466
Gross profit		1,556			2,260
Operating Expenses:
Product development		682			701
Selling, general and administrative		1,650			1,666
Total operating expenses		2,332			2,367
Loss from operations		(776	)		(107	)
Other income, net		22			(6	)
Loss before income taxes		(754	)		(113	)
Provision for income taxes		—			—
Net loss	$	(754	)	$	(113	)
Net loss per share:
Basic	$	(0.03	)	$	0.00
Dilutive	$	(0.03	)	$	0.00
Shares used in computing net loss per share:
Basic		29,524			28,620
Dilutive		29,524			28,620

See accompanying notes to condensed consolidated financial statements.

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UNIFY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Three Months Ended July 31,
	2006			2005
Cash flows from operating activities:
Net loss	$	(754	)	$	(113	)
Reconciliation of net loss to net cash provided by operating activities:
Depreciation		41			56
Loss on disposal of equipment		—			5
Amortization		30			30
Fulfillment of support obligations		(1	)		(156	)
Employee stock based expense		—			50
Stock based expense		32			32
Changes in operating assets and liabilities:
Accounts receivable		2,068			1,078
Prepaid expenses and other current assets		36			119
Contracts in progress		64			—
Accounts payable		(123	)		(76	)
Accrued compensation and related expenses		(345	)		(147	)
Other accrued liabilities		37			(214	)
Deferred revenue		(627	)		(653	)
Net cash provided by operating activities		458			11
Cash flows from investing activities:
Purchases of property and equipment		(31	)		(7	)
Net cash used in investing activities		(31	)		(7	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		—			56
Principal payments under debt obligations		(19	)		(87	)
Net cash used in financing activities		(19	)		(31	)
Effect of exchange rate changes on cash		11			(67	)
Net increase (decrease) in cash and cash equivalents		419			(94	)
Cash and cash equivalents, beginning of period		1,881			3,675
Cash and cash equivalents, end of period	$	2,300		$	3,581
Supplemental cash flow information:
Cash received during the period for:
Interest, net	$	19		$	18

See accompanying notes to condensed consolidated financial statements.

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UNIFY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The condensed consolidated financial statements have been prepared by Unify Corporation (the “Company”, “we”, “us”, “our”) 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, in the opinion of management, 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, 2006 as filed with the SEC.

Revenue Recognition

The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. The Company licenses its products to end-user customers, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection, special acceptance or warranty provisions. With the exception of its NavRisk product, the Company recognizes revenue for software license sales in accordance with Statement of Position 97-2, Software Revenue Recognition. For the NavRisk product, the Company recognizes revenue for software licenses sales in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts. The Company exercises judgment in connection with the determination of the amount of software and services revenue to be recognized in each accounting period. The nature of each licensing arrangement determines how revenues and related costs are recognized.

With the exception of the NavRisk software application, the Company’s products are generally sold with a perpetual license. The Company sells the NavRisk software under both perpetual and term licenses. Term licenses allow the customer to use the NavRisk software for a fixed period of time, generally 3 to 5 years, and at the conclusion of the term the customer must cease using the software or purchase a new license term. The customer does not receive any additional software during the license term. Under both perpetual and term licenses the customer can, at their discretion, elect to purchase related maintenance and support on an annual basis.

For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectibility is probable and persuasive evidence of an arrangement exists.

For arrangements of $10,000 or more a signed noncancelable license agreement is required for revenue recognition. For arrangements that are less than $10,000 the Company considers a customer purchase order, a customer purchase requisition, or a sales quotation signed by an officer of the customer to be persuasive evidence that an arrangement exits such that revenue can be recognized.

For software license arrangements that do require significant modification or customization of the underlying software, revenue is recognized based on contract accounting under the provisions of Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts and Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. This guidance is followed since contracts with customers purchasing the NavRisk application require significant configuration to the software and the configuration activities are essential to the functionality of the software. The Company is using the completed-contract method for revenue recognition as it has limited experience determining the accuracy of progress-to-completion estimates for installation hours and project milestones. Under the completed-contract method, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance

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are resolved, collectibility is probable and persuasive evidence of an arrangement exists. Project costs incurred for contracts in progress are deferred and reflected on the Balance Sheet as Contracts in Progress. When a contract is completed, revenue is recognized and deferred costs are expensed. The Company anticipates it will switch to the percentage-of-completion method to recognize NavRisk revenue when it is capable of accurately establishing progress-to-completion estimates for the NavRisk contracts.

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

We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.

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

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123(R), Share-Based Payment. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily with respect to transactions in which employee services are obtained in exchange for share-based payment. Statement 123(R) was adopted by the Company effective May 1, 2006 and the impact of Statement 123(R) is reflected in Note 2.

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In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections – A Replacement of APB No. 20 and FAS No. 3.  SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 became effective for the Company in the first quarter of fiscal year 2007 and did not have a material impact on our financial position, cash flows or results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments – An Amendment of FAS Statements No. 133 and 150. SFAS No. 155 (a) permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies that certain instruments are not subject to the requirements of SFAS 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that may contain an embedded derivative requiring bifurcation, (d) clarifies what may be an embedded derivative for certain concentrations of credit risk and (e) amends SFAS 140 to eliminate certain prohibitions related to derivatives on a qualifying special-purpose entity. SFAS No. 155 is required to be adopted in fiscal years beginning after September 15, 2006. We do not expect the adoption of this accounting pronouncement to have a material impact on our financial position, cash flows or results of operations.

In June 2006, the FASB issued Interpretation (“FIN”) No. 48 Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation was adopted by the Company in the first quarter of fiscal year 2007 and did not have a material impact on our financial position, cash flows or results of operations.

2. Stock Compensation Information

Effective May 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, using the modified prospective application. Under this method, compensation expense includes the estimated fair value of equity awards vested during the reported period. Expense for equity awards vested is determined based on grant date fair value previously calculated for pro forma disclosures under SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123.”  For the quarter ended July 31, 2006, equity-based compensation expense was comprised of the following (in thousands):

	Three Months Ended July 31,
	2006
Cost of Sales	$	3
Product Development		11
Selling, General and Administrative		18
Total Equity-Based Compensation	$	32

The impact of equity-based compensation expense on net earnings and earnings per share for the three months ended July 31, 2006, can be found in the pro forma table in this footnote. The Company currently estimates that equity-based compensation expense will reduce basic and diluted earnings per share in fiscal 2007 by less than $0.01. The following table shows remaining unrecognized compensation expense on a pre-tax basis related to all types of nonvested equity awards outstanding as of July 31, 2006. This table does not include an estimate for future grants that may be issued (amounts in thousands).

8

FYE
April 30,	Amount
Remainder of 2007	$	61
2008		76
2009		55
2010		7
Total	$	199

The cost above is expected to be recognized over a weighted-average period of 1.3 years.

As permitted by SFAS No. 148, prior to the adoption of SFAS No. 123(R) the Company accounted for equity award expense under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation was recognized in the Company’s financial statements for the quarter ended July 31, 2005. In connection with the modified prospective method, disclosures made for periods prior to the adoption of SFAS No. 123(R) do not reflect restated amounts.

The following table presents equity-based compensation expense included in our financial statements for the three months ended July 31, 2006 and 2005, respectively, and also illustrates the pro forma effects on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to equity-based compensation for the quarter ended July 31, 2005:

	Three Months Ended July 31,
	2006			2005
Net loss as reported	$	(754	)	$	(113	)
Add: stock-based employee compensation included in reported net loss		32			50
Less: stock-based employee compensation expense, determined under fair value method for all awards		(32	)		(89	)
Proforma net loss	$	(754	)	$	(152	)
Net loss per share (basic and diluted), as reported	$	(0.03	)	$	0.00
Net loss per share (basic and diluted), pro forma	$	(0.03	)	$	(0.01	)

The Company continues to use the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility. The Company’s calculations were made with the following weighted average assumptions for the three months ended July 31, 2006 and 2005, respectively: expected option life, 12 months following vesting; stock volatility of 181% and 230%; risk-free interest rates of 4.8% and 3.8% and no dividends during the expected term. The Company’s calculations are based on the single option approach and forfeitures are recognized as they occur.

Under the 2001 Stock Option Plan (the “2001 Option Plan”), the Company may grant options to purchase up to 2,975,000 shares of common stock to eligible employees, directors, and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 2001 Stock Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant. Under the 1991 Stock Option Plan (the “1991 Option Plan”) which expired as of March 2001, the Company was able to grant options to eligible employees, directors and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 1991 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant.

A summary of the Company’s stock option activity for the period ended July 31, 2006 is as follows:

9

	Shares			Weighted average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value (1)
Outstanding at April 30, 2006		2,644,914		$	0.82		6.60	$	171,848
Granted		25,000		$	0.32
Exercised		—		$	—
Canceled or expired		(57,663	)	$	0.73
Outstanding at July 31, 2006		2,612,251		$	0.81		6.37	$	109,995
Exercisble at July 31, 2006		1,918,999		$	0.95		5.51	$	100,277

(1) Aggregate intrinsic value is defined as the difference between the current market value and the exercise price and is estimated using the closing price of the Company’s common stock on the last trading day of the periods ended as of the dates indicated.

Total intrinsic value of awards exercised during the quarters ended July 31, 2006 and  July 31, 2005 was $0 and $43,797 respectively. The total fair value of awards vested during the quarters ended July 31, 2006 and July 31, 2005 was $32,007 and $29,865, respectively.

A summary of the Company’s nonvested stock option activity for the period ended July 31, 2006 is as follows:

	Shares			Weighted average fair value
Nonvested at April 30, 2006		777,792		$	0.43
Granted		25,000		$	0.30
Vested		(80,997	)	$	0.42
Canceled or expired		(45,382	)	$	0.60
Nonvested at July 31, 2006		676,413		$	0.39

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3. Goodwill and Intangible Assets

The following tables present details of the Company’s goodwill and intangible assets as of July 31, 2006 and April 30, 2006 (in thousands):

July 31, 2006	Gross carrying amount		Accumulated amortization			Net carrying amount		Estimated useful life
Infinite Lives:
Goodwill	$	1,405	$	—		$	1,405		—
Finite Lives:
Technology-based		200		(100	)		100		3 years
Customer-related		164		(82	)		82		3 years
Total	$	1,769	$	(182	)	$	1,587
April 30, 2006	Gross carrying amount		Accumulated amortization			Net carrying amount		Estimated useful life
Infinite Lives:
Goodwill	$	1,405	$	—		$	1,405		—
Finite Lives:
Technology-based		200		(83	)		117		3 years
Customer-related		164		(69	)		95		3 years
Total	$	1,769	$	(152	)	$	1,617

Acquired finite-lived intangibles are generally amortized on a straight line basis over their estimated useful life. Intangible assets amortization expense for the three months ended July 31, 2006 and 2005 was $30,000 and $30,000 respectively. The estimated future amortization expense related to intangible assets as of July 31, 2006 is as follows (in thousands):

FYE
April 30,	Amount
Remainder of 2007		91
2008		91
Total	$	182

Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach in accordance with FASB 142, Goodwill and Other Intangible Assets.

4. Credit Facility

On August 2, 2006, the company extended the Silicon Valley Bank revolving line of credit. This credit facility was to expire August 3, 2006; however, it was extended until November 3, 2006. (See Note 11).

The line of credit has a borrowing limit of $1 million. There were no amounts outstanding under the line of credit as of July 31, 2006.  Based upon the amount of its eligible assets as of quarter end, the Company had available for borrowing $933,700 under the line. The line is secured by qualifying foreign and domestic accounts receivable. The Company incurs interest expense on funds used at the prevailing prime rate plus two percent per annum. The prime rate used in the determination of interest shall not be less than 4.0%.

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5. Long-Term Debt

The Company’s debt consists of the following at July 31, 2006 and April 30, 2006 (in thousands):

	July 31,  2006			April 30, 2006
Notes payable to a financial institution, accruing interest at prime plus 2.0%, not to be less than 4% per annum (actual interest rate at July 31, 2006 was 10.25%), payable in monthly installments through September 2006	$	9		$	26
Capital lease payable, payable in monthly installments through August 2007		8			10
		17			36
Less current portion		(16	)		(33	)
	$	1		$	3

6. Other Long-Term Liabilities

In February 2005, the Company acquired all of the issued and outstanding equity securities of Acuitrek, Inc. As part of the Acuitrek acquisition the Company assumed a royalty payable of $600,000 as established by the 2001 funded software development and license arrangement with Acuitrek’s first customer. A minimum royalty is payable in quarterly installments equal to two percent of all gross revenues received from the sale or licensing of the NavRisk product through June 11, 2011. Any remaining royalty balance as of June 11, 2011 shall become fully due and payable on such date. The Company accrued the estimated costs of providing future support and maintenance services for the support and maintenance contracts as of the acquisition date. The future support obligation periods ranged from less than a year to greater than twenty (20) additional years. The support obligation for periods greater than one year from July 31, 2006 is $119,000 and is reflected as accrued support obligations.

The Company’s other long-term liabilities consists of the following at July 31, 2006 and April 30, 2006 (in thousands):

		July 31, 2006		April 30, 2006
Long-term debt, net of current portion	$	1	$	3
Royalty payable		539		539
Accrued support obligations		119		120
Other long-term liabilities		79		77
	$	738	$	739

In France, the Company is subject to mandatory employee severance costs associated with a statutory government regulated plan covering all employees. The plan provides for one month of severance for the first five years of service with an employer and one fifth of one year of severance for every one year of service thereafter. In order to receive their severance payment the employee may not retire before age 65 and must be employed at the time of retirement.

7. Maintenance Contracts

The Company offers maintenance contracts to its customers at the time they enter into a product license agreement and renew those contracts, at the customers’ option, annually thereafter. These maintenance contracts are priced as a percentage of the value of the related license agreement. The specific terms and conditions of these initial maintenance contracts and subsequent renewals vary depending upon the product licensed and the country in which the Company does business. Generally, maintenance contracts provide the customer with unspecified product maintenance updates and customer support services. Revenue from maintenance contracts is initially deferred and then recognized ratably over the term of the agreements.

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Changes in the Company’s deferred maintenance revenue during the periods are as follows (in thousands):  

	Three Months Ended July 31,
	2006			2005
Deferred maintenance revenue beginning balance	$	2,895		$	2,849
Deferred maintenance revenue recognized during period		(1,271	)		(1,322	)
Deferred maintenance revenue of new maintenance contracts		747			608
Deferred maintenance revenue ending balance	$	2,371		$	2,135

8. Comprehensive Loss

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

	Three Months Ended July 31,
	2006			2005
Net loss	$	(754	)	$	(113	)
Foreign currency translation gain (loss)		4			(62	)
Total comprehensive loss	$	(750	)	$	(175	)

9. Earnings (Loss) Per Share

SFAS No. 128, Earnings per Share, requires a dual presentation of basic and diluted income 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 the three-month period ended July 31, 2006 and July 31, 2005 as their effect would be antidilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted income per share computations for the periods indicated (in thousands, except per share data):

	Three Months Ended  July 31,
	2006			2005
Net loss (Numerator):
Net loss, basic and diluted	$	(754	)	$	(113	)
Shares (Denominator):
Weighted average shares of common stock outstanding, basic		29,524			28,620
Effect of dilutive securities (stock options)		—			—
Weighted average shares of common stock outstanding, diluted		29,524			28,620
Per Share Amount:
Net loss per share, basic	$	(0.03	)	$	0.00
Effect of dilutive securities		—			—
Net loss per share, diluted	$	(0.03	)	$	0.00

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10. Segment Information

The Company maintains two segments for the Unify Business Solutions (“UBS”) division that sells and markets application development software, database software and related services in the following geographic areas, the Americas, which includes the Company’s international distributors, and Europe, including the UK, France and other direct European customers. The Company also maintains a reportable segment for its Insurance Risk Management Division (“IRM”). The IRM Division sells and markets the NavRisk application.

Financial information for the Company’s reportable segments is summarized below (in thousands):

	Three Months Ended July 31,
	2006			2005
Total net revenues:
UBS-Americas	$	787		$	1,595
UBS-Europe		963			963
Insurance Risk Management Division		346			168
Total net revenues	$	2,096		$	2,726
Operating income (loss):
UBS-Americas	$	(560	)	$	(24	)
UBS-Europe		263			197
Insurance Risk Management Division		(479	)		(280	)
Total operating loss	$	(776	)	$	(107	)
Interest income	$	21		$	21
Interest expense	$	2		$	3

Net revenues by geographic area were as follows (in thousands):

	Three Months Ended July 31,
	2006		2005
Total net revenues:
Americas	$	575	$	597
International Distributors		212		998
Central Europe-Germany, Benelux, Others		288		224
United Kingdom		200		358
France		475		381
Insurance Risk Management Division		346		168
Total net revenues	$	2,096	$	2,726

11. Subsequent Event

The Company maintains a revolving line of credit with Silicon Valley Bank. The original line of credit agreement had a one-year term that was to expire on June 4, 2006. On May 24, 2006 the original term was extended to an expiration date of August 3, 2006. On August 2, 2006, the Company further extended the Silicon Valley Bank revolving line of credit to November 3, 2006 (see Note 4). The agreement provides for a $1.0 million revolving line of credit and for term loans up to $250,000 for the purchase of qualifying equipment. The line of credit is secured by qualifying foreign and domestic accounts receivable. The term loan is secured by purchased assets and is repaid over twenty four months. The Company will incur interest expense on the line of credit and the term loan at the prevailing prime rate plus 2.0% and 2.5% per annum, respectively. The prime rate used to determine the interest shall not be less than 4.0%.

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UNIFY CORPORATION

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, 2006, as filed with the SEC.

Overview

Unify (the “Company”, “we”, “us” or “our”) provides business automation software solutions, including market leading applications for specialty markets within the insurance and transportation industries. Our solutions deliver a broad set of capabilities for automating business processes, integrating existing information systems and delivering collaborative information. Through our industry expertise and technologies, we help organizations reduce risk, drive business optimization, apply governance, and increase customer and member services.

Our products include vertical application software solutions for the alternative risk insurance and transportation management markets and also infrastructure and database software that helps our customers automate and streamline business processes. By consolidating, automating and managing data, our customers see increases in efficiencies and services, as well as reductions in costs.

We have entered into an Agreement and Plan of Merger with HALO Technologies Holdings, Inc. Under the terms of the merger agreement Halo would acquire all of the outstanding stock of Unify as part of an all stock transaction valued at approximately $21.0 million based on Halo’s market valuation at the time the merger agreement was signed and $15.8 million based on Halo’s market valuation as of July 24, 2006.

The Company is comprised of two divisions, the Unify Business Solutions (“UBS”) division and the Insurance Risk Management (“IRM”) division. We are headquartered in Sacramento, California with a subsidiary office in France and a sales office in the United Kingdom (“UK”). UBS is comprised of our technology products including Unify NXJ, Unify NXJ Composer, ACCELL, Dataserver and the VISION product families. UBS customers include corporate information technology departments (“IT”), software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) from a variety of industries, including insurance, financial services, healthcare, government, manufacturing and many other industries. We market and sell products directly in the United States, UK and France, and indirectly through worldwide distributors in Australia, Brazil and Latin America with customers in more than 45 countries. Through our Insurance Risk Management (“IRM”) division we provide a policy administration and underwriting solution, NavRisk, for the alternative risk market. The alternative risk market includes public entity risk pools, third party administrators and insurance carriers that administer self-insurance funds for public entities, captives and other self-insured groups.

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Our mission is to deliver applications and infrastructure technology solutions that give customers transactional efficiency, a rich user experience and quality information cost effectively and with a high degree of customer satisfaction. Our strategy is to leverage our award-winning process automation technology with our vertical applications to deliver a broad set of solutions that streamline and automate processes and workflow; present rich user experiences; and deliver consolidated information from multiple sources. We believe that by integrating our technology and applications, we have created a unique and compelling offering in our marketplace. By combining best-of-breed capabilities, we offer customers a better way to manage, integrate, view and report data to help them drive their business objectives.

Critical Accounting Policies

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

Revenue Recognition

The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. The Company licenses its products to end-user customers, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection, special acceptance or warranty provisions. With the exception of its NavRisk product, the Company recognizes revenue for software license sales in accordance with Statement of Position 97-2, Software Revenue Recognition. For the NavRisk product, the Company recognizes revenue for software licenses sales in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts. The Company exercises judgment in connection with the determination of the amount of software and services revenue to be recognized in each accounting period. The nature of each licensing arrangement determines how revenues and related costs are recognized.

With the exception of the NavRisk software application, the Company’s products are generally sold with a perpetual license. The Company sells the NavRisk software under both perpetual and term licenses. Term licenses allow the customer to use the NavRisk software for a fixed period of time, generally 3 to 5 years, and at the conclusion of the term the customer must cease using the software or purchase a new license term. The customer does not receive any additional software during the license term. Under both perpetual and term licenses the customer can, at their discretion, elect to purchase related maintenance and support on an annual basis.

For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectibility is probable and persuasive evidence of an arrangement exists.

For arrangements of $10,000 or more a signed noncancelable license agreement is required for revenue recognition. For arrangements that are less than $10,000 the Company considers a customer purchase order, a customer purchase requisition, or a sales quotation signed by an officer of the customer to be persuasive evidence that an arrangement exits such that revenue can be recognized.

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For software license arrangements that do require significant modification or customization of the underlying software, revenue is recognized based on contract accounting under the provisions of Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts and Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.  This guidance is followed since contracts with customers purchasing the NavRisk application require significant configuration to the software and the configuration activities are essential to the functionality of the software.  The Company is using the completed-contract method for revenue recognition as it has limited experience determining the accuracy of progress-to-completion estimates for installation hours and project milestones.  Under the completed-contract method, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectibility is probable and persuasive evidence of an arrangement exists.  Project costs incurred for contracts in progress are deferred and reflected on the Balance Sheet as Contracts in Progress.  As of July 31, 2006 Contracts in Progress was $136,000. When a contract is completed, revenue is recognized and deferred costs are expensed. The Company anticipates it will switch to the percentage-of-completion method to recognize NavRisk revenue when it is capable of accurately establishing progress-to-completion estimates for the NavRisk contracts.

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

We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.

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

Valuation of Long-Lived Assets

Our long-lived assets are comprised of long-term investments. At July 31, 2006, we had $214,000 in long-term investments, which are accounted for under the cost method. We assess the valuation of long-lived assets whenever circumstances indicate that there is a decline in carrying value below cost that is other-than-temporary. Several factors can trigger an impairment review such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance. When such decline in value is

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deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline. Future adverse changes in market conditions or poor operating results could result in losses or an inability to recover the carrying value of the long-term investments that is not currently reflected in the investments carrying value, thereby, possibly requiring additional impairment charges in the future.

Deferred Tax Asset Valuation Allowance

As of July 31, 2006, we have approximately $5 million of deferred tax assets related principally to net operating loss carryforwards, reserves and other accruals, deferred revenue, and foreign tax credits. A valuation allowance has been recorded to offset these deferred tax assets. The ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There can be no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Should we determine that we would be able to realize the deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:

	Three Months Ended July 31,
	2006			2005
Revenues:
Software licenses		29.3	%		42.9	%
Services		70.7	%		57.1	%
Total revenues		100.0	%		100.0	%
Cost of revenues:
Software licenses		1.8	%		5.1	%
Services		24.0	%		12.0	%
Total cost of revenues		25.8	%		17.1	%
Gross profit		74.2	%		82.9	%
Operating expenses:
Product development		32.5	%		25.7	%
Selling, general and administrative		78.7	%		61.1	%
Total operating expenses		111.2	%		86.8	%
Loss from operations		(37.0	)%		(3.9	)%
Other income, net		1.0	%		(0.2	)%
Loss before income taxes		(36.0	)%		(4.1	)%
Provision for income taxes		0.0	%		0.0	%
Net loss		(36.0	)%		(4.1	)%

Revenues

The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. We license our software through our direct sales force in the United States and Europe, and through indirect channels comprised of distributors, ISVs, VARs, and other partners worldwide. Total revenues for the first quarter in fiscal 2007 were $2.1 million, a decrease of $0.6 million, or 23% from fiscal 2006 revenues of $2.7 million.

Total software licenses revenues in fiscal 2007 were $0.6 million, a decrease of $0.6 million from fiscal 2006. In the first quarter of fiscal 2007 the Company experienced a general softening in the market in all geographic areas, except for France and Central Europe. This resulted in a decrease in software license revenue compared to the first quarter of fiscal 2006. Contributing to the decrease in software

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license revenue was the fact that for the first quarter of fiscal 2007 the Company had only one individual sale greater than $100,000 compared to the first quarter of fiscal 2006 when the Company had three such sales. Total services revenues were $1.5 million, down $0.1 million from the first quarter of fiscal 2006. For the first quarter of fiscal 2007, NXJ license revenues were $0.1 compared to $0.2 in the first quarter of fiscal 2006. For the last several years we have experienced an ongoing erosion in our worldwide database and tools as we are no longer attracting the volume of new customers we have historically, and existing customers are moving to other company’s products for new projects more often. NavRisk license revenues were $0.2 million in the first quarter of fiscal 2007 compared to $0.1 million in the first quarter of fiscal 2006. NavRisk is the primary product of our IRM division.

Consulting revenue for the first quarter of both fiscal years was $0.2 million. In both years UBS consulting revenue was $0.1 million and NavRisk consulting revenue was also $0.1 million. Maintenance revenue in the first quarter of both fiscal 2007 and fiscal 2006 was $1.3 million.

Cost of Revenues

Cost of software licenses consists primarily of product packaging and production costs as well as the amortization of royalties and license fees paid for licensed technology. Cost of software licenses was $37,000 for the first quarter of fiscal 2007 and $139,000 for the first quarter of fiscal 2006. Cost of software licenses was higher in fiscal 2006 than fiscal 2007 and included costs associated with our account operations unit. During fiscal 2006 we were able to significantly reduce the size of the account operations unit and in fiscal 2007 this unit was combined with our accounting department. Related costs are now included in selling, general and administrative expenses which resulted in a decrease in cost of software licenses expenses. Costs associated with royalties and other direct production costs are expensed as incurred at the time of the sale and purchased technology from third parties are amortized ratably over their expected useful lives.

Cost of services consists primarily of employee, facilities and travel costs incurred in providing customer support under software maintenance contracts and consulting and implementation services. Total cost of services was $0.5 million for the first three months of fiscal 2007 and $0.3 million for the same period of fiscal 2006. Cost of services is comprised primarily of two components, costs for consulting and training and costs for product support. Costs for consulting and training services for the first quarter of fiscal 2007 were $0.3 million compared to $0.1 million in the same period of fiscal 2006. The IRM division’s products are custom software applications which require significant consulting and implementation services. As the IRM division was formed as a result of the purchase of Acuitrek, Inc. in February 2005 the division was still ramping up in the first quarter of fiscal 2006. In the first quarter of fiscal of 2007 the division was fully evolved and providing consulting services to more customers than in the first quarter of fiscal 2006 and accordingly had increased costs. Product support costs were $0.2 million in the first quarter of both fiscal 2007 and fiscal 2006.

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. Product development costs were $0.7 million in the first quarter of fiscal 2007 and $0.7 million for the same period in the prior year. Product development costs as a percentage of total revenues were 33% for the three months ended July 31, 2007 compared to 26% in the same period of fiscal 2006.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and benefits, marketing programs, travel expenses, professional services, facilities expenses and bad debt expense or recoveries. SG&A expenses were $1.7 million for both the first quarter in fiscal 2007 and fiscal 2006. The major components of SG&A in the first quarter of fiscal 2007 were sales expenses of $0.7 million, marketing expenses of $0.1 million and general and administrative expenses of $0.8 million. For the first quarter of fiscal 2006, the major components of SG&A were sales expenses of $0.9 million, marketing expenses of $0.2 million, and general and administrative expenses of $0.6 million.

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Provision for Income Taxes

No federal or state tax provisions were recorded in the three month period ended July 31, 2006, as the Company has significant net operating loss carryforwards.

Liquidity and Capital Resources

At July 31, 2006, the Company had cash and cash equivalents of $2.3 million, compared to $1.9 million at April 30, 2006. Working capital at the end of the first quarter of fiscal 2007 was $0.0 million compared to $0.7 million at the end of fiscal 2006.

On August 2, 2006 the Company extended its line of credit arrangement with Silicon Valley Bank. This line of credit was to expire on August 3, 2006, but the line was extended until November 3, 2006 (see Notes 4 and 11 in footnotes to Consolidated Financial Statements). As of July 31, 2006 the Company had no outstanding debt under the line of credit. The line of credit has a borrowing limit of $1.0 million. As of July 31, 2006, based upon the amount of its eligible assets at that time, the Company had available for borrowing $933,700 on the line of credit. In addition, as of July 31, 2006, the Company had a term loan, also with Silicon Valley Bank, with a balance of $8,500. The line of credit is secured by qualifying foreign and domestic accounts receivable. The term loan is secured by purchased assets. The Company will incur interest expense on borrowings of the line of credit and the term loan at the prevailing prime rate plus 2.0% and 2.5%, respectively. The prime rate used to calculate interest shall not be less than 4.0%.

Overall, cash increased by $0.4 million during the first quarter of fiscal 2007. Cash flows provided by operating activities were $0.5 million in first quarter of fiscal 2007 compared to $11,000 for the first quarter of fiscal 2006. In the first quarter of fiscal 2007 the primary reasons that operating cash was provided were a decrease of $2.1 million in accounts receivable and a decrease in contracts in progress of $0.1 million.  Primary reasons operating cash was used were the result of a decrease in deferred revenue of $0.6 million, a decrease in accrued compensation of $0.3 million, a decrease in accounts payable of $0.1 million and a net loss of $0.8 million. Cash used in investing activities for the first quarter of fiscal 2007 and fiscal 2006 resulted from the purchase of equipment. Cash used in financing activities for the first quarter of fiscal 2007 and fiscal 2006 was $19,000 and $31,000, respectively as a result of principal payments on debt obligations. The Company’s cash flow also reflects an increase in cash of $11,000 in the first quarter of fiscal 2007 as a result of the effect of currency exchange rates related to international operations.    

A summary of certain contractual obligations as of July 31, 2006, is as follows (in thousands):

	Payments Due by Period
Contractual Obligations	Total		1 year  or less		2-3  years		4-5  years		After  5 years
Short-term borrowings	$	—	$	—	$	—	$	—	$	—
Long-Term Debt		9		9		—		—		—
Capital Lease Obligations		8		7		1		—		—
Other Long-Term Liabilities		79		—		—		—		79
Operating Leases		1,838		1,041		785		12		—
Total Contractual Cash Obligations	$	1,934	$	1,057	$	786	$	12	$	79

Volatility of Stock Price and General Risk Factors Affecting Quarterly Results

Unify’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 common stock to fluctuate, perhaps substantially, including: announcements of developments related to our business; fluctuations in the operating results and order levels of Unify or its competitors’; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements from us or our competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; developments in our relationships with our customers, distributors and suppliers; legal proceedings brought against the Company or its officers; and significant changes in our senior management

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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, have 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 our common stock. Unify’s stock trades over-the-counter on the “bulletin board.” Companies whose shares trade over-the-counter generally receive less analyst coverage and their shares are more thinly traded than stock that is traded on the NASDAQ National Market System or a major stock exchange. Our stock is therefore subject to greater price volatility than stock trading on national market systems or major exchanges.

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; ability to sell new 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; the Company’s ability to integrate and manage acquisitions; 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 may be difficult to forecast. Revenues may also be difficult to forecast because the market for software continues to evolve and the Company’s sales cycle, from initial evaluation to purchase and the provision of maintenance services, can be lengthy and vary substantially from customer to customer. Because the Company normally ships products within a short time after it receives an 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 license 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’s operating results are generally negatively affected by seasonal trends as it experiences weaker demand in the first and second quarters of the fiscal year as a result of reduced business activity in the summer months, particularly in Europe.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. The Company’s exposure to market rate risk for changes in interest rates relates primarily to its investment portfolio, which consists of cash equivalents. 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 which have as their objective preservation of principal. The Company does not believe its exposure to interest rate risk is material for cash and cash equivalents, which totaled $2.3 million at July 31, 2006. Unify had no short-term investments at July 31 in fiscal 2007 or 2006. Additionally, the Company does not believe its exposure to interest rate risk is material for debt. On a combined basis, the current and long-term portions of debt totaled $17,000 in the first quarter of fiscal 2007 and $94,000 in the first quarter of fiscal 2006.

Unify does not use derivative financial instruments in its short-term investment portfolio, and places its investments with high quality issuers only and, by policy, limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and attempts to ensure the safety of its invested funds by limiting default, market and reinvestment risk.

Foreign Currency Exchange Rate Risk. As a global concern, 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 an adverse impact on the Company’s business, operating results and financial position. Historically, the Company’s primary exposures have related to local currency denominated sales and expenses in Europe, Japan and Australia. For example, when the U.S. dollar strengthens against the major European currencies, it results in lower revenues and expenses recorded for those regions when translated into U.S. dollars.

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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. Although Unify takes into account changes in exchange rates over time in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The Company also has currency exchange rate exposures on intercompany accounts receivable owed to the Company as a result of local currency sales of software licenses by the Company’s international subsidiary in France. At July 31, 2006, the Company had $0.2 million in such receivables denominated in Euros. The Company encourages prompt payment of 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 ten percent change in foreign currency rates would have an insignificant impact on the Company’s business, operating results and financial position. The Company has not experienced material exchange losses on intercompany balances in the past; however, 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.

Item 4. Controls and Procedures

          (a)  Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

          (b)   Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended July 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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UNIFY CORPORATION

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

Litigation

The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of July 31, 2006, there were no current proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.

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Item 6.   Exhibits

	Exhibits
31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 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: September 13, 2006	Unify Corporation
	(Registrant)
	By:	/s/ STEVEN D. BONHAM
		Steven D. Bonham
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER

I, Todd E. Wille, certify that:

             1.     I have reviewed this quarterly report on Form 10-Q of Unify Corporation;

             2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

             3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

             4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

       (a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

       (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

       (c)  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

             5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

       (a)  all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

       (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ TODD E. WILLE

Todd E. Wille

President and Chief Executive Officer

(Principal Executive Officer)

Dated:  September 13, 2006

EX-31.2

Exhibit 31.2

CERTIFICATION OF
CHIEF FINANCIAL OFFICER

I, Steven D. Bonham, certify that:

             1.     I have reviewed this quarterly report on Form 10-Q of Unify Corporation;

             2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

             3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

             4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

       (a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

       (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

       (c)  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

             5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

       (a)  all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

       (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ STEVEN D. BONHAM

Steven D. Bonham

Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: September 13, 2006

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Unify Corporation (the “Registrant”) on Form 10-Q for the quarter ended July 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd E. Wille, Chief Executive Officer of the Registrant, do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

          (1) the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

          (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated:  September 13, 2006	/s/ TODD E. WILLE
	Todd E. Wille
	Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Unify Corporation and will be retained by Unify Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Unify Corporation (the “Registrant”) on Form 10-Q for the quarter ended July 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven D. Bonham, Chief Financial Officer of the Registrant, do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

          (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

          (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated:  September 13, 2006	/s/ STEVEN D. BONHAM
	Steven D. Bonham
	Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Unify Corporation and will be retained by Unify Corporation and furnished to the Securities and Exchange Commission or its staff upon request.