The following discussion should be read in conjunction with the consolidated financial statements and related notes provided in Item 8, "Financial Statements and Supplementary Data," in this Annual Report on Form 10-K.

Critical Accounting Policies. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. The Summary of Significant Accounting Policies appears in Part II, Item 8 - Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, which summary describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, the amount of stock-based compensation expense, the allowance for doubtful accounts, the estimated lives and valuation of intangible assets, depreciation of fixed assets, accruals for liabilities and taxes. Actual results could differ materially from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.

Revenue Recognition
We market and license products through various means, such as; channel distributors, independent software vendors ("ISVs"), value-added resellers ("VARs") (collectively "resellers") and direct sales to enterprise end users. Our product licenses are generally perpetual. We also separately sell intellectual property licenses, maintenance contracts, which are comprised of license updates and customer service access, private-label branding kits, software developer kits ("SDKs") and product training services.

Generally, software license revenues are recognized when:

o Persuasive evidence of an arrangement exists, (i.e., when we sign a non-cancelable license agreement wherein the customer acknowledges an unconditional obligation to pay, or upon receipt of the customer's purchase order) and
o Delivery has occurred or services have been rendered and there are no uncertainties surrounding product acceptance, (i.e., when title and risk of loss have been transferred to the customer, which generally occurs when the media containing the licensed program(s) is provided to a common carrier or, in the case of electronic delivery, when the customer is given access to the licensed programs) and
o The price to the customer is fixed or determinable, as typically evidenced in a signed non-cancelable contract, or a customer's purchase order, and
o Collectibility is probable. If collectibility is not considered probable, revenue is recognized when the fee is collected.

Revenue recognized on software arrangements involving multiple elements is allocated to each element of the arrangement based on vendor-specific objective evidence ("VSOE") of the fair values of the elements; such elements include licenses for software products, maintenance, or customer training. We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately.

If sufficient VSOE of fair value does not exist, so as to permit the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. If evidence of VSOE of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

Certain resellers purchase product licenses that they hold in inventory until they are resold to the ultimate end user (an "inventory stocking order"). We provide maintenance services to these resellers for such licenses at no charge. Generally, we defer the recognition of revenue for inventory stocking orders until the underlying licenses are sold to the end user. We allocate revenue to the service fee (maintenance) component based on VSOE prorated to the time period between the inventory order date and date of sale to the end user. For certain resellers, assuming all other revenue recognition criteria have been

met, we recognize and allocate revenue for inventory stocking orders based upon the estimated time frame the licenses will be held by the reseller. Such estimates are based upon our historical experience with the reseller.

There are no rights of return granted to resellers or other purchasers of our software programs.

We recognize revenue from maintenance contracts ratably over the related contract period, which generally ranges from one to five years.

Long-Lived Assets
Long-lived assets, which consist primarily of patents, are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, as it relates to our patents, annually. Typically, for long-lived assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals, current market value, comparable sales value, and undiscounted future cash flows, among other variables, as appropriate. Assets to be held and used affected by an impairment loss are depreciated or amortized at their new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. During the fourth quarter of 2008, we recorded an impairment charge of $868,200 against certain of our patent families as we determined that due to our limited cash availability we will not be initiating any new infringement litigation or attempting to seek licensing revenue with respect to any of the NES patents that were not involved in any of our on-going litigation as of December 31, 2008; thus, we reduced them to a net realizable value of $0 as of December 31, 2008. No such impairment charge was recorded during 2007.

Patents
Our patents are being amortized over their estimated remaining economic lives, currently estimated to be approximately two years, as of December 31, 2008. Costs associated with filing, documenting or writing method patents are expensed as incurred. Contingent legal fees paid in connection with a patent lawsuit, or settlements thereof, are charged to cost of goods sold. All other non-contingent legal fees and costs incurred in connection with a patent lawsuit, or settlements thereof, are charged to general and administrative expense. During the fourth quarter of 2008, we recorded an impairment charge of $868,200 against certain of our patents. No such impairment charge was recorded during 2007.

Stock-Based Compensation
We apply the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," ("FAS No. 123R") and related interpretations using the modified prospective transition method. Under that method, compensation cost recognized 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 FAS No. 123 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 FAS No. 123R.

We estimated the fair value of each stock-based award granted during the years ended December 31, 2008 and 2007 on the date of grant using a binomial model, with the assumptions set forth in the following table:

                                                    2008              2007
                                              ---------------   ---------------
        Estimated volatility                  158.0% - 173.0%   154.2% - 154.4%
        Annualized forfeiture rate                       4.0%     5.1% -   5.4%
        Expected option term (years)                     7.5               7.5
        Estimated exercise factor                       10.0%             10.0%
        Approximate risk-free interest rate     2.6% -   3.5%              4.6%
        Expected dividend yield                            -                 -

In estimating our stock price volatility for grants awarded during the years ended December 31, 2008 and 2007, we analyzed our historic volatility over the 7.5 year period ended December 31, 2008 and December 2007, respectively, by reference to actual stock prices during this period. We derived an annualized forfeiture rate by analyzing our historical forfeiture data, including consideration of the impact of certain non-recurring events, such as reductions in our work force. Our estimates of the expected option term and the estimated exercise factor were derived from our analysis of historical data and future projections. The approximate risk-free interest rate was based on the implied yield available on U. S. Treasury issues with remaining terms equivalent to our

expected option term. 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 also recognized compensation costs for shares purchased under our Employee Stock Purchase Plan ("ESPP") during the years ended December 31, 2008 and 2007. We applied the same variables to the calculation of the costs associated with the ESPP shares purchased in each respective year as the stock option grants noted above, except that the expected term was 0.5 years in each year and the approximate risk-free interest rate was 1.9% - 3.8% for ESPP shares purchased during 2008. The time span from the date of grant of ESPP shares to the date of purchase is six months.

We have not historically paid dividends on our common stock and do not anticipate doing so for the foreseeable future.

Results of Operations

Set forth below is statement of operations data for the years ended December 31, 2008 and 2007 along with the dollar and percentage changes from 2007 to 2008 in the respective line items. Percentage changes that are not meaningful are marked NM.

                                     Year Ended December 31,           Change in
                                    -------------------------   -----------------------
                                       2008           2007        Dollars    Percentage
Revenue:                            -----------   -----------   -----------  ----------
Product licenses                    $ 4,468,900   $ 3,325,100   $ 1,143,800       34.4%
Intellectual property licenses                -     6,250,000    (6,250,000)        NM
Service fees                          2,168,700     1,794,400       374,300       20.9
Other                                    71,100       116,100       (45,000)     (38.8)
                                    -----------   -----------   -----------
   Total Revenue                      6,708,700    11,485,600    (4,776,900)     (41.6)
Cost of revenue                         575,100     2,623,000    (2,047,900)     (78.1)
                                    -----------   -----------   -----------
Gross profit                          6,133,600     8,862,600    (2,729,000)     (30.8)
                                    -----------   -----------   -----------
Operating expenses:
Selling and marketing                 1,816,100     1,819,900        (3,800)      (0.2)
General and administrative            3,796,100     4,703,000      (906,900)     (19.3)
Research and development              2,373,500     2,162,700       210,800        9.7
Impairment of patents                   868,200             -       868,200         NM
                                    -----------   -----------   -----------
   Total operating expenses           8,853,900     8,685,600       168,300        1.9
                                    -----------   -----------   -----------
(Loss) Income from operations        (2,720,300)      177,000    (2,897,300)  (1,636.9)
                                    -----------   -----------   -----------
Other income (expense):
Interest and other income                89,100        62,700        26,400       42.1
Interest and other expense               (7,300)       (4,100)       (3,200)     (78.0)
                                    -----------   -----------   -----------
   Total other income                    81,800        58,600        23,200       39.6
                                    -----------   -----------   -----------

(Loss) income before income taxes    (2,638,500)      235,600    (2,874,100)  (1,219.9)
Provision for income taxes              (11,700)       42,100       (53,800)    (127.8)
                                    -----------   -----------   -----------
Net (loss) income attributable to
 common shareholders                $(2,626,800)  $   193,500   $(2,820,300)  (1,457.5)

Revenue. Our software revenue has historically been primarily derived from product licensing fees and service fees from maintenance contracts. Other sources of software revenue include sales of software development kits and training. Software development kits are tools that allow end users to develop, interface and brand their own applications for use in conjunction with either our Windows or Unix/Linux products. Currently, we do not generate a significant amount of revenue from the sale of software development kits nor do we anticipate generating a significant amount from them during 2009.

The table that follows summarizes product licensing fees for the years ended December 31, 2008 and 2007 and calculates the change in dollars and percentage from 2007 to 2008 in the respective line item.

                             Year Ended December 31,           Increase/(Decrease)
                            -------------------------------------------------------
   Product licensing fees        2008         2007            Dollars    Percentage
   --------------------------------------------------------------------------------
   Windows                  $ 3,117,400    $ 1,959,500     $ 1,157,900      59.1%
   Unix/Linux                 1,351,500      1,365,600         (14,100)     (1.0)
                            ------------------------------------------
   Total                    $ 4,468,900    $ 3,325,100     $ 1,143,800      34.4%
                            ==========================================

During the fourth quarter of the year ended December 31, 2008, we recognized $946,000 of Windows product licensing fees revenue that had previously been deferred, all of which had been derived from various prior transactions we had entered into with our former distributor in Japan. At the time that we had entered into these transactions, not all criteria necessary for recognizing revenue had been met so all such revenue had been deferred. During the fourth quarter of 2008 all such criteria was met, thus the revenue was recognized.

After giving affect to the impact of the preceding paragraph, the remaining changes in both Windows and Unix-based product licensing fees revenue for the year ended December 31, 2008, as compared with the prior year, was primarily reflective of how such revenue varies because a significant portion of this revenue has historically been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Consequently, if any of these significant customers change their order level, or fail to order, our product licensing fees revenue can be materially adversely impacted.

Another factor that lead to increased Windows product licensing fees was the release of an updated version of our Windows product, GO-Global for Windows, version 3.2, during June 2007, which enhanced the functionality and performance of earlier versions. Version 3.2 has been well-received by our customers with 2008 being the first full year that it was available for sale.

During December 2007, we entered into a $6,250,000 settlement and licensing agreement with AutoTrader.com, under which they, their parent company Cox Enterprises, Inc. and all of their affiliates received an irrevocable, perpetual, world-wide, non-exclusive license to all of our patents and patent applications, including the `538 and `940 patents. We did not enter into any such settlement and licensing agreement during 2008. Although we have initiated various actions with respect to our patents, there can be no assurances that we will be successful.

Segment Revenue. Segment revenue was as follows:

                                                            Increase (Decrease)
                                                         -----------------------
   Year Ended December 31,       2008          2007         Dollars   Percentage
   ----------------------------------------------------------------------------
   Software                 $ 6,708,700   $  5,235,600    $ 1,473,100     28.1%
   Intellectual Property              -      6,250,000     (6,250,000)  (100.0)
                            -----------------------------------------
   Consolidated Total       $ 6,708,700   $ 11,485,600     (4,776,900)   (41.6)%
                            =========================================

With respect to our software segment revenue, the increases in software revenues for the comparative periods presented was due primarily to the factors previously discussed above. During December 2007 we recognized $6,250,000 of revenue related to the settlement and licensing agreement of our intellectual property that we entered into with Autotrader.com. We did not license our intellectual property during 2008, hence our intellectual property segment recorded no revenue during 2008. For additional information on our segment revenues, please refer to Note 13 of our consolidated financial statements included elsewhere in this Annual Report.

Cost of Revenue. Cost of revenue is comprised primarily of service costs, which represent the costs of customer service (and is inclusive of non-cash stock-based compensation expense calculated in accordance with FAS123R), product costs and, when applicable, contingent legal fees resulting from settlements and/or licensing agreements incurred as a result of our patent litigation efforts. Shipping and packaging materials are immaterial as virtually all of our license deliveries are made via electronic means over the Internet. Under accounting principles generally accepted in the United States, research and development costs for new product development, after technological feasibility is established, are recorded as "capitalized software" on our balance sheet. Such capitalized costs are subsequently amortized as cost of revenue over the shorter of three years or the remaining estimated life of the products.

Cost of revenue decreased by $2,047,900, or 78.1%, to $575,100 for the year ended December 31, 2008 from $2,623,000 for the prior year. Cost of revenue for the year ended December 31, 2008 represented approximately 8.6% of total revenue, as compared with 22.8% for the prior year. During the year ended December 31, 2007, cost of revenue included contingent legal fees that resulted

from the settlement and licensing agreement we entered into with Autotrader.com, which aggregated approximately $2,119,100. No such fees were incurred during the year ended December 31, 2008. Net of these contingent legal fees, cost of revenue increased by $71,200, or 14.1%, to $575,100 for the year ended December 31, 2008 from $503,900 for the prior year. This increase was mainly due to increased engineering time spent performing customer service in effort to better meet the support needs of our customers.

Service costs for the years ended December 31, 2008 and 2007 were inclusive of $24,500 and $13,300 of non-cash stock-based compensation expense, respectively.

We expect that cost of revenue for 2009, assuming that we incur no contingent legal fees during 2009, will approximate 2008 levels.

Selling and Marketing Expenses. Selling and marketing expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense calculated in accordance with FAS123R), outside services and travel and entertainment expenses.

Selling and marketing expenses for the year ended December 31, 2008 approximated those for the prior year. Selling and marketing expenses represented approximately 27.1% and 15.8% of total revenue, respectively, for the years ended December 31, 2008 and 2007. Included in selling and marketing expenses for the years ended December 31, 2008 and 2007 were approximately $30,600 and $32,100, respectively, of non-cash stock-based compensation expense.

Although 2008 selling and marketing expenses approximated those for 2007, employee costs were lower in 2008 , as compared with 2007, mainly as a result of a decrease in bonuses and commissions as certain performance-based targets were not achieved. Partially offsetting the decrease in employee costs was an increase in outside services. During 2008 we incurred costs associated with market research for a potential new product whereas no such market research costs were incurred during 2007.

We expect aggregate 2009 selling and marketing expenses to approximate 2008 levels.

General and Administrative Expenses. General and administrative expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense calculated in accordance with FAS123R), amortization and depreciation, legal, professional and other outside services (including those related to realizing benefits from our patents), rent, travel and entertainment and insurance. Certain costs associated with being a publicly-held corporation are also included in general and administrative expenses, as well as bad debts expense.

General and administrative expenses for the year ended December 31, 2008 decreased by $906,900, or 19.3%, to $3,796,100 from $4,703,000 for 2007. General and administrative expenses for the years ended December 31, 2008 and 2007 represented approximately 56.6% and 40.9% of total revenue, respectively. Included in general and administrative expenses for the years ended December 31, 2008 and 2007 were approximately $182,900 and $366,300, respectively, of non-cash stock-based compensation expense.

The main factors that contributed to the decrease in general and administrative expenses for 2008, as compared to 2007, were an aggregate $636,500 decrease in outside services related to the non-contingent fees associated with our patent litigation, and an aggregate $169,600 decrease in bad debts expense, due to an adjustment we made to our bad debts reserve during 2008 that resulted from an evaluation of our current customers' outstanding balances, and decreased employee costs, primarily as a result of the decrease in non-cash stock-based compensation expense outlined in the preceding paragraph. Typically, the non-contingent legal fees incurred in conjunction with our lawsuits become much higher as the respective lawsuit approaches trial. None of our currently active lawsuits approached their trial dates during 2008, whereas one such suit approached its trial date in 2007. We deemed the entire outstanding receivable balances from two customers, which had been fully reserved during or prior to 2007, to be uncollectible during 2008 and removed them from our books. Upon removal of such balances and analysis of all remaining receivables, we determined that a lower bad debts reserve was appropriate for 2008. The decrease in non-cash stock-based compensation expense in 2008, as compared to 2007, was primarily due to the significant drop in our stock price in 2008, as compared with 2007, which significantly reduced the non-cash stock-based compensation expense of options awarded during 2008, and the compensation expense associated with certain large stock option grants granted in 2005 became fully recognized early in 2008.

Other costs associated with major components of general and administrative expenses, notably, depreciation and amortization, insurance, rent and costs associated with being a public entity did not change significantly during the year ended December 31, 2008, as compared with the prior year.
The ending balance of our allowance for doubtful accounts as of December 31, 2008 and 2007 was $32,000 and $229,000, respectively. Bad debts expense was approximately $12,600 and $182,200 for the years ended December 31, 2008 and 2007, respectively.

We anticipate that cumulative general and administrative expense in 2009 will approximate those incurred during 2008.

Research and Development Expenses. Research and development expenses consist primarily of employee costs (inclusive of non-cash stock-based compensation expense calculated in accordance with FAS123R), payments to contract programmers, all costs of GraphOn Research Labs Limited, and rent.

Under accounting principles generally accepted in the United States, all costs of product development incurred once technological feasibility has been established, but prior to the general release of the product, are typically capitalized and amortized to expense over the estimated life of the underlying product, rather than being charged to expense in the period incurred. There was no significant capitalization of product development costs during either 2008 or 2007.

Research and development expenses increased by $210,800, or 9.7%, to $2,373,500 for the year ended December 31, 2008 from $2,162,700 in the prior year. Research and development expenses for the years ended December 31, 2008 and 2007 represented approximately 35.4% and 18.8% of total revenue, respectively.

Research and development costs for the years ended December 31, 2008 and 2007 are inclusive of $104,400 and $101,500, respectively, of non-cash stock-based compensation.

During 2008, we incurred $220,400 of increased costs associated with the use of outside engineering consultants than we did during 2007. We increased our level of using outside consultants in order to accelerate development work on the next release of our GO-Global products, which is scheduled for later in 2009, to supplement our engineering staff's efforts in new product development and to allow certain members of our engineering staff to devote more time to customer service.

Other costs associated with major components of research and development expenses, notably, employees costs, depreciation and rent did not change significantly during the year ended December 31, 2008, as compared with the prior year.

Our research and development efforts currently are focused on further enhancing the functionality, performance and reliability of existing products. We historically have made significant investments in our protocol and in the performance and development of our server-based software, and we expect to continue to make significant product investments during 2009, including investments in new product offerings. We expect 2009 research and development expense to approximate 2008 levels.

Impairment of Patents. During the fourth quarter of 2008 we recorded an $868,200 impairment charge against certain of our patent families as we determined that due to our limited cash availability we will not be initiating any new infringement litigation or attempting to seek licensing revenue with respect to any of the NES patents that were not involved in any of our on-going litigation as of December 31, 2008; thus, we reduced them to a net realizable value of $0 as of December 31, 2008. No such impairment charge was recorded during 2007.

Interest and Other Income. During 2008 the primary component of interest and other income was interest income derived on excess cash. Our excess cash was held in interest bearing money market accounts with institutions whose minimum net assets were greater than or equal to one billion U.S. dollars. During 2007, . . .