Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including:

o our history of operating losses, and expectation that those losses will continue;
o that a significant portion of our operating revenue has been and continues to be earned from a very limited number of significant customers;
o that our stock price has been volatile and you could lose your investment; and
o other factors, including those set forth under Item 6. "Management's Discussion and Analysis or Plan of Operation - Risk Factors" in our 2007 10-KSB Report and in other documents we have filed with the Securities and Exchange Commission.

These factors could have a material adverse effect upon our business, results of operations and financial condition.

Overview

We are developers of business connectivity software, including Unix, Linux and Windows server-based software, with an immediate focus on web-enabling applications for use and/or resale by independent software vendors ("ISVs"), corporate enterprises, governmental and educational institutions, and others.

Server-based computing, which is sometimes referred to as thin-client computing, is a computing model where traditional desktop software applications are relocated to run entirely on a server, or host computer. This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing. Our software architecture provides application developers with the ability to relocate applications traditionally run on the desktop to a server, or host computer, where they can be run over a variety of connections from remote locations to a variety of display devices. With our server-based software, applications can be web-enabled, without any modification to the original application software required, allowing the applications to be run from browsers or portals. Our server-based technology can web-enable a variety of Unix, Linux or Windows applications.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimates, and different estimates, which also would have been reasonable, could have been used, which would have resulted in different financial results. Our critical accounting policies are identified in our 2007 10-KSB Report, and included:
revenue recognition, the allowance for doubtful accounts, patents, long-lived assets, capitalized software development costs, impairment of intangible assets, loss contingencies and stock-based compensation expense. The following operating results should be read in conjunction with our critical accounting policies.

Stock-Based Compensation

On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," ("FAS123R") and related interpretations using the modified prospective transition method. Under that method, compensation cost recognized in the three and nine-month periods ended September 30, 2008 and 2007 includes (a) compensation cost for all stock-based awards granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS123") and (b) compensation cost for all stock-based awards granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS123R.

The valuation provisions of FAS123R apply to new awards and to awards that were outstanding on the adoption date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the adoption date is

recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS123.

The valuation of employee stock options is an inherently subjective process since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. In calculating the estimated fair value of our stock options, we used a binomial pricing model which requires the consideration of the following variables for purposes of estimating fair value:

o the expected volatility of our common stock,
o the annualized forfeiture/termination rate,
o the prior forfeiture/termination rate,
o the expected term of the option,
o the exercise factor for optionees,
o the risk free interest rate for the expected option term, and
o expected dividends on our common stock (we do not anticipate paying dividends for the foreseeable future).

Of the variables above, the selection of an expected term, an annualized forfeiture rate and expected stock price volatility are the most subjective. Our estimate of the expected term was derived based on our analysis of historical data and future projections. We estimated forfeiture rate by analyzing our historical forfeiture data, including consideration of the impact of certain non-recurring events, such as reductions in work force. We estimated stock price volatility by referencing our actual stock prices over the period commensurate with the expected life of the options and ending on the balance sheet date, for each period currently being reported. We believe that each of these estimates is reasonable in light of the data we analyzed. However, as with any estimate, the ultimate accuracy of these estimates is only verifiable over time.

We estimated the fair value of each stock-based award granted during the three and nine-month periods ended September 30, 2008 and 2007, as of the grant date, using a binomial model with the assumptions set forth in the following table:

                                  Three Months Ended
                                    September 30,              Nine Months Ended September 30,
                             -----------------------------   -------------------------------------
                                 2008             2007              2008                2007
                             ------------    -------------   -----------------   -----------------
Estimated volatility              160.00%          154.22%    158.00 - 160.00%    153.66 - 154.44%
Annualized forfeiture rate          4.00%            5.37%               4.00%        5.06 - 5.37%
Prior forfeiture rate               4.00%            5.25%               5.30%               5.50%
Expected option term (years)         7.5              7.5                 7.5                 7.5
Estimated exercise factor          10.00%           10.00%              10.00%              10.00%
Approximate risk-free
interest rate                       3.44%            4.60%        3.15 - 3.46%        4.58 - 4.60%
Expected dividend yield                0%               0%                  0%                  0%

We applied the same variables to the valuation of shares purchased under our ESPP, except that the expected term was 0.5 years, as the time span from the date of grant of ESPP shares to the date of purchase is six months, and the risk-free interest rate was 3.79% for ESPP shares purchased during the three months ended September 30, 2008.

The following table illustrates the stock-based compensation expense recorded during the three and nine-month periods ended September 30, 2008 and 2007 by income statement classification: