Solutions division.

Insurance Risk Management

          As a result of the acquisition of Acuitrek, in February 2005, we formed the Insurance Risk Management (IRM) division. The integration of the companies was completed in May 2005 with IRM now including former Acuitrek employees, combined with the addition of Unify resources to support expansion and growth of the division. The division is responsible for the development, implementation and sales of the NavRisk suite of products. NavRisk is a policy administration and underwriting application that provides a consolidated, streamlined view of all information and processes involved in the management administration of policies and underwriting. Using NavRisk, underwriters can manage the tracking and valuation of exposures, rating, quoting and invoicing of premiums and issuance of final policies and certificates. NavRisk eliminates intense manual entry of policy information, automatically sends policy information to brokers and agents and provides in-depth reporting and analysis.

Unify Business Solutions

          Unify Business Solutions is comprised of our technology products including Unify NXJ, Unify NXJ Composer, ACCELL, DataServer and VISION product families. Our customers are corporate end user IT departments, ISVs, VARs and our worldwide distributors. This division is dedicated to providing exceptional technology and service to the customer base and continues to meet their current and future technology needs. This division serves our extensive customer installed base and includes sales and marketing, support, and professional services. Included in the division is our driver performance management application, ViaMode, which was built on our Unify NXJ technology and is sold through partnerships.

Products

Business Applications

          NavRisk is an end-to-end policy administration and underwriting solution used by the underwriters, administrators and risk managers of risk pools, risk retention groups, captives and other self-insured entities. NavRisk is used to enable proactive risk management and administration of alternative risk groups by automating the complete policy cycle including renewal processing, rating, policy certificates, quoting, premium invoicing, reporting, loss control and communications with customers or members. NavRisk automates and enables data consolidation, tracking and valuing of exposures, all aspects of quoting and invoicing of premiums, issuance of final policy certificates and endorsements, all communications, including creating an audit trail so information is retrievable and accessible. NavRisk integrates with claims and accounting systems for comprehensive real-time reporting and analysis on all lines of business.

          ViaMode is a transportation software and services solution delivered in partnership by Unify and one of our premier domain partners. The ViaMode solution combines a software application built on Unify NXJ with professional services for driver performance management within the transportation industry.

Java 2 Enterprise Edition (“J2EE”) Application Development Platform

          The Unify NXJ application development platform is used by IT developers to build business process-centric and collaborative web applications. Unify NXJ, Version 11, released in October 2005, enables IT organizations to rapidly build and deploy a range of custom applications built on industry standard Java reporting and graphically-rich, easy to navigate online forms. Organizations use Unify NXJ to productively and effectively automate business processes, consolidate older legacy systems into a single system or application, and deliver collaborative information to employees, suppliers and partners.

          The Unify NXJ Composer product is specifically designed for IBM Lotus Notes® customers migrating to the J2EE platform. Unify NXJ Composer has built in migration utilities that enable an existing Lotus Notes application to be redeployed onto the J2EE platform with little manual involvement.

Rapid Application Development Tools

          Unify’s ACCELL® is a highly productive 4GL application development suite and database software for developing and deploying data-rich, database-driven applications. 4GL is a fourth generation programming language designed to allow users to develop applications, particularly for the purpose of querying databases and producing reports. The ACCELL products support interfaces to leading database products including Unify DataServer, IBM DB2, Informix, Microsoft SQL Server, Oracle and Sybase. The ACCELL product suite includes ACCELL/Web, ACCELL/SQL and ACCELL/IDS.

• ACCELL/Web™ — enables our customers with existing ACCELL/SQL applications to convert them into fully featured graphical Web-based applications without rewriting the application or modifying the source code. • ACCELL/SQL™ — is our powerful 4GL-based rapid application development software for developing client/server applications. ACCELL/SQL connects to Unify, Oracle, Sybase and Informix databases creating a fast application performance environment. • ACCELL/IDS™ — powerful 4GL-based rapid application development software for applications that connect to Unify’s DataServer ELS database.

Database Management Product Line

• DataServer® — A high performance enterprise relational database management system with minimal maintenance and memory requirements. It can quickly accommodate the growth of user requirements over time, making it an attractive choice for mission critical applications. DataServer makes it easy for developers to create graphical applications and migrate existing database applications to enterprise network and Internet environments. • DataServer® ELS — A high performance, easily embeddable database. Its small footprint and proven reliability make it an industry favorite for embedded applications that require relational databases.

Graphical Client/Server Product Solution

          Unify VISION® is a powerful graphical, client/server application development system that allows for rapid creation and easy modification of complex business applications based on 4GL technology. Unify VISION consists of an object-oriented, repository-based component framework designed to enable developers to rapidly create and easily modify application components. VISION also contains an application server to allow organizations to integrate custom-built and packaged applications with the Internet.

Customers

          Unify’s customer base consists of a significant number of businesses of many sizes, public entities and independent software vendors who sell packaged applications and resellers. We sell to the alternative risk management insurance market, transportation labor market and broad horizontal markets including healthcare, government, education, financial services, technology, transportation, and manufacturing. In fiscal 2006, one customer accounted for approximately 12% of total revenue. In fiscal 2005 and 2004 no single customer accounted for 10% or more of revenues.

Sales, Marketing and Distribution

          Unify’s products and professional services are marketed and distributed to customers globally using a combination of a direct corporate sales force and indirect distribution channels, including ISVs, VARs, SIs and worldwide distributors. The indirect sales channels leverage Unify’s sales, support and consulting resources to provide complete solutions to our customers.

          Unify’s direct sales organization consists of sales representatives and pre-sales consultants. Our North America sales representatives are located in our headquarters. Unify markets its products internationally through offices in the UK and France. Unify has distributors in Asia Pacific, Europe, Japan, Latin America, Russia and South Africa. International revenues accounted for 63%, 65% and 68% of total revenues in fiscal 2006, 2005 and 2004, respectively.

          Unify’s marketing is focused on generating demand and marketing awareness for Unify products including efforts to support the direct and indirect sales channels. Marketing activities include e-business initiatives, strategic demand generation, public relations, customer communications, trade shows and our Web site.

          As of April 30, 2006, Unify had 15 employees engaged in sales and marketing activities, 9 in North America and 6 in Europe.

Customer Support and Professional Services

          Unify’s customer support and professional services organizations play an important role in maintaining customer satisfaction, facilitating license sales and enabling customers to successfully architect, design, develop, deploy and manage applications.

Customer Support and Maintenance

          Unify provides customer support via telephone, Web, e-mail and fax from its support centers located in Sacramento, California and Paris, France. Distribution partners provide telephone support to international customers with technical assistance from the U.S.-based support personnel who also respond to e-mail inquiries. Customers are offered tailored support service levels including response time, information reporting, and other features, such as 24-hour a day, seven-day a week support. During each of the past three fiscal years, over 75% of our support and maintenance customers have renewed their annual support contracts.

Consulting

          Unify offers a full range of consulting services ranging from application implementation services including delivering proof of concepts to completed applications using our technology infrastructure. Our products allow companies to maximize return on investment, get to market quickly or be more efficient. Consulting services include: project implementations and application updates, business process-centric application development, Web-enablement, technology/knowledge transfer, application architecture audits and database tuning. The level of consulting services is tailored to customer-defined needs and includes development plans, hands-on development tasks and project management.

Education

          Unify offers education courses provided on a regularly scheduled basis at Unify training centers located in Sacramento, California and Paris, France. We also offer on-site training at customer facilities.

          As of April 30, 2006, we had a total of 14 employees engaged in providing professional services, 6 in support and 8 in consulting and training. Of those employees, 12 were located in the United States and 2 were located in Europe.

Product Development

          We focused our development efforts on a combination of new development for our NavRisk and ViaMode applications and the Unify NXJ platform, as well as enhancing and broadening the functionality and ports of our database and application development products. During fiscal 2006, we developed and released Unify NXJ Version 11, Unify NXJ Composer for Lotus Notes application migration and ViaMode, a comprehensive application platform, as well as additional versions of our database and tools products. Additionally, we enhanced the NavRisk policy administration and underwriting solution and added a new web portal product to our NavRisk suite of products. Unify’s product development expenses for fiscal 2006, 2005, and 2004, were $2.7 million, $2.8 million and $3.0 million, respectively.

          Most of Unify’s current software products have been developed internally; however, we have licensed certain software components from third parties and we may do so again in the future. We are committed to delivering products that meet customer and market needs today and in future periods.

          Unify’s product development activities are conducted at the Sacramento, California headquarters facility. As of April 30, 2006, we had a total of 20 employees in product development, including 17 software development engineers.

Intellectual Property

          Unify relies on a combination of copyright, trademark and trade-secret laws, non-disclosure agreements and other methods to protect our proprietary technology. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries in which we sell products do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competition will not independently develop similar technology.

          Although there are no pending lawsuits against Unify regarding infringement of any existing patents or other intellectual property rights and we have not received any notices that we are infringing or allegedly infringing the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted by third parties in the future. If any such claims are asserted, there can be no assurance that we will be able to defend such claim or obtain licenses on reasonable terms. Our involvement in any patent dispute or any other intellectual property dispute or action to protect trade secrets and know-how may have an adverse effect on our business, operating results, and financial condition. Adverse determinations in any litigation may subject us to significant liabilities to third parties, require us to seek licenses from third parties, and prevent us from developing and selling its products. Any of these situations could have an adverse effect on our business, operating results and financial condition.

          Unify is dependent on third-party suppliers for certain software which is embedded in some of our products. Although we believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources or could be developed by us if any such third-party licenses were terminated or not renewed or if these third parties fail to develop new products in a timely manner, we could be required to develop an alternative approach to developing products, which could require payment of additional fees to third parties, internal development costs and delays and might not be successful in providing the same level of functionality. Such delays, increased costs, or reduced functionality could adversely affect our business, operating results, and financial condition.

Competition

          The market for Unify’s Business Solutions software is intensely competitive, subject to rapid change and significantly affected by new product introductions and other activities of market participants. With the Unify NXJ platform, we compete in the market with dozens of providers of Java-based application platform suites, integrated services environments and business process management infrastructure software. These competitors include BEA

Systems, IBM, Microsoft Corporation and Oracle Corporation. All of these competitors are large, well capitalized companies with significantly greater financial, technical and marketing resources as well as greater name recognition and larger customer bases. The Unify solutions are competitive from a technical capability, rich interface and ease of use, service and pricing perspectives, but our competitors have greater brand recognition and perceived financial strength.

          With our NavRisk application, we have two significant competitors in Computer Sciences Corporation (“CSC”), which is a large and well capitalized company and Valley Oak which currently provides a claims application to our targeted NavRisk market. Other indirect competitors include solution consulting companies who offer to build custom policy administration systems for the NavRisk focused market. The NavRisk application compares favorably to the current CSC offering from a technological, functional and ease of use perspective, and because of our installation methodologies, but CSC has greater brand recognition and perceived financial strength.

          The Company generally derives sales from new project initiatives, additional deployment of existing applications and product upgrades. As a result, the key competitive factor is generally the decision by a customer as to whether or not to begin a new project initiative or upgrade or keep things status quo. Organizations choose Unify software for a variety of factors including the ability to build and implement applications quickly, the knowledge of Unify’s software among its IT developers, the high level of customer service and support Unify provides and our price point which gives customers a cost-effective solution to their business problem. Organizations will typically choose a competitor because of their perceived financial strength.

          As new products and technologies are introduced, increased competition could result in fewer customer orders, reduced prices and reduced gross margins, any one of which could adversely affect our business, operating results, and financial condition. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and gain significant market share. Such competition could adversely affect our ability to sell additional licenses and maintenance and support renewals on favorable terms.

Employees

          As of April 30, 2006, we had a total of 60 employees, including 20 in product development, 15 in sales and marketing, 14 in customer support, consulting, and training, and 11 in finance, information systems, operations and general administration. Of these employees, 51 were located in the United States and 9 were located in Europe.

          Unify’s success depends in large part on its ability to attract and retain qualified employees, particularly senior management, engineering, direct sales and support personnel. The competition for such employees is intense. There can be no assurance that we will be successful in attracting or retaining key employees. Any failure we have in attracting and retaining qualified senior management, engineering, direct sales, and support personnel could adversely affect our business, operating results, and financial condition. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

WHERE YOU CAN FIND MORE INFORMATION

          You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from time to time. You may obtain copies of these reports directly from us or from the SEC and the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. In addition, the SEC maintains information for electronic filers (including Unify) at its website at www.sec.gov. We make available free of charge on or through our Internet website located at www.unify.com our SEC filings on Forms 10-K, 10-Q and 8-K and any amendments to those filings as soon as reasonably practicable after electronic filing with the SEC.

          In addition, if the merger closes our business will become part of Halo. For information on Halo, please read Halo’s Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB and any Current Reports on Form 8-K that they may file from time to time. You may obtain copies of these reports directly from us or from the SEC and the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. In addition, the SEC maintains information for electronic filers (including Halo) at its website at www.sec.gov.

RISK FACTORS

            In evaluating the Company’s business, readers should carefully consider the business risks discussed in this section in addition to the other information presented in this Annual Report on Form 10-K and in our other filings with the SEC.

Risks related to the proposed merger

Failure to complete the merger could negatively impact our stock price, future business, or operations. If the merger is not completed, we may be subject to a number of material risks, including the following: • we may be required under certain circumstances to pay Halo a termination fee of $600,000; • the price of our common stock may decline to the extent that the relevant current market price reflects a market assumption that the merger will be completed; and • costs related to the merger, such as legal, accounting, certain financial advisory and financial printing fees, must be paid, even if the merger is not completed.

            Further, if the merger is terminated and our board of directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner on terms as attractive as those provided for in the merger agreement. In addition, while the merger agreement is in effect and subject to very narrowly defined exceptions, Unify is prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, disposition, consolidation, dissolution, sale of assets or other business combination, other than with Halo.

Failure to satisfy or waive certain conditions could prevent the merger from occurring.

            The closing of the merger is contingent upon various conditions being satisfied or waived. If all the conditions are not satisfied or waived, the merger will not occur. If the merger does not occur, we will lose the intended benefits of the merger. The following conditions, in addition to other customary closing conditions, must be satisfied or waived, if permissible, before Halo and/or Unify are obligated to complete the merger:

• the merger agreement must be adopted by the holders of a majority of the outstanding shares of Unify common stock as of the record date; • there must not be any order, injunction or decree preventing the completion of the merger; • a combined Halo/Unify proxy statement/prospectus must be declared effective by the SEC and no stop order suspending such effectiveness shall be in effect; • there shall have been no material adverse change in the business, operations, condition (financial or otherwise), assets or liabilities of either Unify or Halo; • Halo must have received at least $3,000,000 in new money equity investments (in addition to any investment in Halo made by Special Situations Funds); • certain holders of convertible promissory notes of Halo must have converted such promissory notes into shares of Halo common stock or restructured the payment terms such that no amounts will be due until December 1, 2007, subject to certain exceptions; • the holders of all outstanding shares of Halo’s preferred stock (other than Halo’s Series D Preferred Stock) must convert their shares of Halo preferred stock to shares of Halo common stock; • at the effective time of the merger Unify must have cash on hand of at least $2,100,000;

• should any holders of Unify common stock exercise dissenters rights with respect to the merger, the number of shares of common stock held by such holders shall not be more than ten percent of Unify’s common stock; and • Todd Wille and Halo must have entered into an employment agreement.

            Any termination of the merger agreement, regardless of whether termination expenses are required to be paid, could lead to a possible decline in the market price of our common stock to the extent current market prices reflect a market assumption that the merger will be completed.

The price of our common stock may be affected by factors affecting the price of Halo’s common stock.

            Holders of Unify common stock will be entitled to receive Halo common stock in the merger and will become holders of Halo common stock if the merger closes. Halo’s business differs in certain ways from Unify’s business, and the factors affecting Halo’s results of operations, as well as the price of Halo common stock, may be different than the factors affecting Unify’s results of operations and the price of Unify common stock. The price of Halo common stock may fluctuate significantly, including as a result of factors over which Halo has no control. Fluctuations in Halo’s common stock could lead to possible fluctuations in the market price of our common stock to the extent current market prices reflect a market assumption that the merger will be completed.

The contractual provision that requires us to pay a termination fee could adversely affect our financial condition and may discourage other companies from trying to acquire Unify.

            Under the merger agreement, Unify has agreed to pay a termination fee of $600,000 plus expenses to Halo in particular circumstances, including circumstances in which a third party seeks to acquire or acquires Unify. This termination fee could discourage other companies from trying to acquire Unify even though those other companies might be willing to offer greater consideration to Unify stockholders than Halo has offered in the merger agreement. In addition, payment of the termination fee could have a material adverse effect on Unify’s financial condition.

General uncertainty related to the merger could harm our revenues, ability to retain key personnel, stock price and operating results .

            Our customers may, in response to the pendency of the proposed merger, delay or defer purchasing decisions. If our customers delay or defer purchasing decisions, our revenues could materially decline. Similarly, our employees may experience uncertainty about their future role after the merger is completed. This may harm our ability to attract and retain key management, sales, marketing and technical personnel. Also, speculation regarding the likelihood of the completion of the merger could increase the volatility of Halo’s and our stock prices. The disruption of the businesses of Unify caused by these issues could cause quarterly and annual operating results to be lower than expected.

Contractual provisions in the merger agreement contain significant restrictions on our operations that would require the consent of Halo to deviate from.

            Under the merger agreement, Unify has agreed to certain restrictions on the conduct of its business, including not making capital expenditures in excess of $50,000, not issuing any additional securities (except in the ordinary course of business), not acquiring any other business or company, not amending any employee plan, not commencing any litigation, not incurring any additional indebtedness, and others, in each case without the consent of Halo (which will not be unreasonably withheld). The effect of these provisions is that Unify may not be able to take actions it otherwise might believe are in the best interests of Unify stockholders unless it can convince Halo to consent, and there can be no assurances that such consent would be obtained on acceptable terms or at all.

We are dependent on acceptance of our applications and business automation products as well as the growth of the market.

            We expect our applications business to account for an increasing percentage of future revenues and accordingly, we are devoting a substantial portion of our resources in the building of the sales model and marketing programs to gain market acceptance for it. As a result, factors adversely affecting the pricing of or demand for our NavRisk or ViaMode applications or for the Unify NXJ business automation platform, such as, but not limited to, competition and

technological change, would have an adverse effect on our business, operating results and financial condition. There can be no assurance that we will successfully market and sell these new products or enhanced versions of our existing products. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview;” “Business—Products” and “—Product Development.”

          If our customers are not able to successfully implement NavRisk, ViaMode or Unify NXJ applications, the viability of our products could be questioned and our reputation could be damaged, which could have adverse effects on our business, operating results and financial condition. In addition, we expect that a significant percentage of future revenues will continue to be derived from sales to existing customers. If these existing customers purchase competitive products, or have difficulty deploying applications built with Unify’s products, our relationships with these customers, revenues from sales of our products and other products and the Company’s business, operating results and financial condition could be adversely affected. See “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

          There can be no assurance that the market for our products will continue to grow. If these markets fail to grow, or grow more slowly than we currently anticipate, our business, operating results, and financial condition could be adversely affected.

We are subject to intense competition.

          We have experienced and expect to continue to experience intense competition from current and future competitors including Computer Science Corporation, Valley Oak, BEA Systems, IBM, Microsoft Corporation, and Oracle Corporation.

          Often, these competitors have significantly greater financial, technical, marketing and other resources than Unify, in addition to having greater name recognition and more extensive customer bases. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can.

          We expect to face additional competition as other established and emerging companies enter the policy administration and underwriting applications market and the business process market, and as new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any one of which could adversely affect our business, operating results and financial condition.

          In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could adversely affect our ability to sell additional licenses and maintenance and support renewals on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could adversely affect our business, operating results, and financial condition. There can be no assurance that we will be able to compete successfully against current and future competition, and the failure to do so would have an adverse effect upon our business, operating results and financial condition. See “Business—Competition.”

The markets in which we compete are subject to rapid technological change.

          The applications software market in which we compete is characterized by rapid technological change, frequent introductions of new and enhanced products, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable.

          Our future success will depend in part upon our ability to address the increasingly sophisticated needs of customers by developing new product functionality and enhancements that keep pace with technological developments, emerging industry standards and customer requirements.

          There can be no assurance that NavRisk, ViaMode and Unify NXJ will continue to be perceived by our customers as technologically advantageous or that we will not experience difficulties that delay or prevent the sale of enhancements to existing products that meet with a significant degree of market acceptance. If the release dates of any future product enhancements, or new products are delayed or if when released they fail to achieve market acceptance, our business, operating results, and financial condition would be adversely affected. See “Business—Product Development.”

We are dependent on indirect sales channels.

          A significant portion of our revenues are derived from indirect sales channels, including ISVs, VARs and distributors. ISVs, VARs and distributors accounted for approximately 46%, 51% and 62% of our software license revenues for fiscal 2006, 2005 and 2004, respectively. Our success therefore depends in part upon the performance of our indirect sales channels, over which we have limited influence. Our ability to achieve significant revenue growth in the future depends in part on maintaining and expanding our indirect sales channels worldwide. The loss of any major partners, either to competitive products offered by other companies or to products developed internally by those partners, or the failure to attract effective new partners could have an adverse effect on our business, operating results, and financial condition. See “Business—Sales, Marketing and Distribution.”

There are numerous risks associated with our international operations and sales.

          Revenues derived from our international customers accounted for 63%, 65% and 68% of our total revenues, with the remainder from North America, in fiscal 2006, 2005 and 2004, respectively. If the revenues generated by our international operations are not adequate to offset the expense of maintaining such operations, our overall business, operating results and financial condition will be adversely affected. There can be no assurance that we will continue to be able to successfully market, sell and deliver our products in these markets. Although we have had international operations for a number of years, there are certain unique business challenges and risks inherent in doing business outside of North America, and such challenges and risks can vary from region to region. These include unexpected changes in regulatory requirements; export restrictions, tariffs and other trade barriers; difficulties in staffing and managing foreign operations; longer payment cycles; problems in collecting accounts receivable; political instability; fluctuations in currency exchange rates; seasonal reductions in business activity during the summer months in Europe and other parts of the world; unfamiliar or unusual business practices; and potentially adverse tax consequences, any of which could adversely impact the success of our international operations. There can be no assurance that one or more of these factors will not have an adverse effect on our future international operations and, consequently, on our business, operating results and financial condition. In addition, the Company’s subsidiaries and distributors in Europe and Japan operate in local currencies. If the value of the U.S. dollar increases relative to foreign currencies, our business, operating results and financial condition could be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business—Sales, Marketing and Distribution.”

Our stock price may be subject to volatility.

          Unify’s common stock price has been and is likely to continue to be subject to significant volatility. In addition to factors associated with our proposed merger discussed above, 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; and 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 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.

Our quarterly operating results may be subject to fluctuations and seasonal variability.

          Unify’s quarterly operating results have varied significantly in the past and we expect that they could vary significantly in the future. Such variations could result from the following factors: the size and timing of significant orders and their fulfillment; demand for our products; the quantity, timing and significance of our product enhancements and new product announcements or those of our competitors; our ability to attract and retain key employees; seasonality; changes in our pricing or our competitors’; realignments of our organizational structure; changes in the level of our operating expenses; incurrence of extraordinary operating expenses, changes in our sales incentive plans; budgeting cycles of our customers; customer order deferrals in anticipation of enhancements or new products offered by us or our 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 vary on a quarterly basis. Revenues and quarterly results may vary because software technology is rapidly evolving, and our sales cycle, from initial evaluation to purchase and the providing of maintenance services, can be lengthy and varies substantially from customer to customer. Because we normally deliver products within a short time of receiving an order, we typically do not have a backlog of orders. As a result, to achieve our quarterly revenue objectives, we are 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, we generally recognize a substantial portion of our software license revenues at the end of a quarter. Our expense levels largely reflect our expectations for future revenue and are therefore somewhat fixed in the short term.

          With the recent expansion into vertical application business with our NavRisk and ViaMode products, our ability to recognize revenue is contingent upon receiving customer acceptance at completion of the application implementation. Based on uncertainty regarding the timing of receiving this customer acceptance, we may experience fluctuations in the amount of revenue recognized quarterly, significantly affecting our financial performance quarter to quarter.

          We expect that our operating results will continue to be affected by the continually challenging IT economic environment as well as by seasonal trends. In particular, we anticipate relatively weak demand in the fiscal quarters ending July 31 and October 31 as a result of reduced business activity in Europe during the summer months.

Our products are subject to lengthy sales cycles.

          Our products are used to implement comprehensive solutions including policy administration and underwriting, transportation labor standards evaluations and process-centric, composite applications. As a result, the licensing and implementation of our applications and applications built using our products generally involve a five to ten week implementation time, a significant commitment of management attention and resources by prospective customers. Accordingly, our sales cycle is subject to delays associated with the long approval process that typically accompanies significant initiatives or capital expenditures. Our business, operating results, and financial condition could be adversely affected if customers reduce or delay orders. There can be no assurance that we will not continue to experience these and additional delays in the future. Such delays may contribute to significant fluctuations of quarterly operating results in the future and may adversely affect those results.

Our software products could contain defects and could be subject to potential release delays.

          Software products frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Although we have not experienced adverse effects resulting from any such defects or errors to date, there can be no assurance that, despite testing by us and current and potential customers, defects and errors will not be found in current versions, new versions or enhancements after commencement of commercial shipments, resulting in loss of revenues, delay in market acceptance, or unexpected re-programming costs, which could have an adverse effect upon our business, operating results and financial condition. Additionally, if the release dates of any future Unify product line additions or enhancements are delayed or if when released they fail to achieve market acceptance, our business, operating results, financial condition and cash flows would be adversely affected. See “Business—Product Development.”

Our license agreements may not protect us from product liability claims.

          The license agreements we have with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in these license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. The sale and support of current and future products may involve the risk of such claims, any of which are likely to be substantial in light of the use of these products in the development of core business applications. A successful product liability claim brought against the Company could have an adverse effect upon our business, operating results, and financial condition.

We rely upon technology from certain third-party suppliers.

          Unify is dependent on third-party suppliers for software which is embedded in some of its products. We believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources or could be developed by the Company. However, if any such third-party licenses were terminated, or not renewed, or if these third parties fail to develop new products in a timely manner, we could be required to develop an alternative approach to developing such products, which could require payment of additional fees to third parties, internal development costs and delays and might not be successful in providing the same level of functionality. Such delays, increased costs or reduced functionality could adversely affect our business, operating results and financial condition. See “Business—Intellectual Property.”

We may be subject to violations of our intellectual property rights.

          Unify relies on a combination of copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect its proprietary technology. Despite our efforts to protect proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our technology exists, piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights will be adequate and, to the extent such rights are not adequate, other companies could independently develop similar products using similar technology.

          Although there are no pending lawsuits against us regarding infringement of any existing patents or other intellectual property rights, and we have received no notices that we are infringing or allegedly infringing the intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted by third parties in the future. If any such claims are asserted, there can be no assurance that we will be able to defend such claim or if necessary obtain licenses on reasonable terms. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how may have an adverse effect on our business, operating results, and financial condition. Adverse determinations in any litigation may subject us to significant liabilities to third parties, require that we seek licenses from third parties and prevent us from developing and selling our products. Any of these situations could have an adverse effect on our business, operating results, and financial condition. See “Business—Intellectual Property.”

Our success is dependent upon the retention of key personnel and we may be unable to retain key employees.

          Our future performance depends on the continued service of key technical, sales and senior management personnel. With the exception of Unify’s president and chief executive officer and the general manager of the Insurance Risk Management division who is the former president and chief executive officer of Acuitrek, there are no other Unify technical, sales, executive or senior management personnel bound by an employment agreement. The loss of the services of one or more of our officers or other key employees could seriously harm our business, operating results and financial condition. Future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and we may fail to retain our key technical, sales and managerial employees, or attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.

Rapid growth may significantly strain the resources of the Company.

          If we are able to achieve rapid and successful market acceptance of our current and future products, we may undergo a period of rapid growth. This expansion may significantly strain management, financial, customer support, operational and other resources. To accommodate this anticipated growth, we are continuing to implement a variety of new and upgraded operating and financial systems, procedures and controls, including the improvement of our internal management systems. There can be no assurance that such efforts can be accomplished successfully. Any failure to expand these areas in an efficient manner could have an adverse effect on our business, operating results, and financial condition. Moreover, there can be no assurance that our systems, procedures and controls will be adequate to support our future operations.

Our disclosure controls and procedures and our internal control over financial reporting may not be effective to detect all errors or to detect and deter wrongdoing, fraud or improper activities in all instances.

          While we believe we currently have adequate internal control over financial reporting, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and fraud. In designing our control systems, management recognizes that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further the design of a control system must reflect the necessity of considering the cost-benefit relationship of possible controls and procedures. Because of inherent limitations in any control system, no evaluation of controls can provide absolute assurance that all control issues and instances of wrongdoing, if any, that may affect our operations, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple error or mistake and that controls may be circumvented by individual acts by some person, by collusion of two or more people or by management’s override of the control. The design of any control system also is based in part upon certain assumptions about the likelihood of a potential future event, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in cost-effective control systems, misstatements due to error or wrongdoing may occur and not be detected. Over time, it is also possible that controls may become inadequate because of changes in conditions that could not be, or were not, anticipated at inception or review of the control systems. Any breakdown in our control systems, whether or not foreseeable by management, could cause investors to lose confidence in the accuracy of our financial reporting and may have an adverse impact on our business and on the market price for Unify’s common stock.