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 and eDiscovery industries 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. In addition, statements that refer to the anticipated impacts of acquisitions, statements made on goodwill, intangible assets, and impairment, statements about the ability to utilize deferred tax assets, and statements about other characterizations of future events or circumstances are 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 in the Company's Annual Report on Form 10-K under "Business - Risk Factors" and in the Company's other filings with the SEC. 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, 2012, as filed with the SEC.

Overview

Daegis Inc. (the "Company", "we", "us" or "our") is a global provider of eDiscovery, application development, data management, migration, and archiving software solutions. The Company sells its solutions through two segments. The segments are the eDiscovery segment and the database, archive, and migration segment.

Our customers include corporate legal departments, law firms, information technology ("IT") departments, software value-added resellers ("VARs"), solutions integrators ("SIs") and independent software vendors ("ISVs") from a variety of industries. We are headquartered in Roseville, California, with offices in San Francisco, New York, Chicago, New Jersey, Canada, Australia, France, Germany, and the United Kingdom ("UK"). We market and sell our solutions directly in the United States, Europe, Canada, Japan, Singapore and Australia and indirectly through global distributors and resellers on a worldwide basis.

Our eDiscovery solutions include technology and services that address the full spectrum of eDiscovery needs for corporate counsel and law firms. Our eDiscovery platform delivers a comprehensive solution that helps clients lower costs in all phases of the eDiscovery lifecycle from information management through search and analysis to review and production. Our services include managed document review, project management, search analytics, consulting, and hosting of data.

Our database, archive, and migration business includes application development, data management and application modernization. Our tools and database software help companies to maximize value and reduce cost in the development, deployment, management and retention of business applications and data. Our application development and data management software products include Team Developer, SQLBase, Unify NXJ, DataServer, VISION and ACCELL. Our application modernization solutions include Composer Notes, Composer Sabertooth, Composer CipherSoft and Composer Mainframe. Our enterprise archiving software enables our customers to preserve, manage, and dispose of their electronically stored information ("ESI") for regulatory compliance and information governance.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) as set forth in the Financial Accounting Standards Board's Accounting Standards Codification (Codification) and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. GAAP, as set forth within the Codification, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

º Revenue Recognition
º Goodwill and Intangible Assets
º Deferred Tax Asset Valuation Allowance
º Account Receivable and Allowances for Doubtful Accounts
º Accounting for Stock-based Compensation
º Fair Value of Common Stock Warrant Liability

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with the Finance and Audit Committee of the Board of Directors.

During the second quarter of fiscal 2013, there were no significant changes to our critical accounting policies and estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended April 30, 2012 provides a more complete discussion of our critical accounting policies and estimates.

Results of Operations

The following table sets forth our consolidated statement of operations
expressed as a percentage of total revenues for the periods indicated:

                                                                 Three Months Ended                 Six Months Ended
                                                                     October 31,                       October 31,
                                                                2012             2011             2012             2011
Revenues:
    eDiscovery                                                   39.1   %         49.9   %         40.6   %         51.2   %
    Database, archive, and migration                             60.9             50.1             59.4             48.8
        Total revenues                                          100.0            100.0            100.0            100.0
Operating expenses:
    Direct costs of eDiscovery revenue                           21.5             20.2             21.9             20.5
    Direct costs of database, archive, and migration revenue     12.3             12.2             12.8             12.0
    Product development                                          17.4             16.8             18.5             17.0
    Selling, general and administrative                          40.1             40.0             45.9             41.5
    Sale of intangible trade name                                   -                -             (5.0 )              -
        Total operating expenses                                 91.3             89.2             94.1             91.0
           Income from operations                                 8.7             10.8              5.9              9.0
Other income (expense):
    Loss on extinguishment of debt                                  -                -                -             (9.6 )
    Gain (loss) from change in fair value of common stock
    warrant liability                                            (1.8 )            1.4              1.4              2.7
    Interest expense                                             (3.9 )           (4.2 )           (4.2 )           (6.1 )
    Other, net                                                   (0.1 )           (0.2 )           (0.6 )            0.1
        Total other income (expenses)                            (5.8 )           (3.0 )           (3.4 )          (12.9 )
    Income (loss) before income taxes                             2.9              7.8              2.5             (3.9 )
Provision for income taxes                                        0.5              0.6              0.5              0.5
    Net income (loss)                                             2.4              7.2              2.0             (4.4 )

Total Revenues

The Company generates revenue from eDiscovery software and service sales. All of our eDiscovery software and services sales are sold by our direct sales force in the United States. The Company also generates database, archive, and migration revenue from software license sales and related services, including maintenance, support and consulting services. We sell our database, archive, and migration solutions 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 in the second quarter of fiscal 2013 were $10.3 million, a decrease of $0.8 million from the second quarter of fiscal 2012. This represents a decrease of 7% from the second quarter of fiscal 2011 revenues of $11.1 million. Total revenues for the six months ended October 31, 2012 were $20.0 million, a decrease of $2.6 million. This represents a decrease of 12% over revenues from the six months ended October 31, 2011 of $22.6 million. Total eDiscovery revenues in the second quarter of fiscal 2013 were $4.0 million, a decrease of $1.5 million from the second quarter of fiscal 2012. This represents a decrease of 27% over the second quarter of fiscal 2012 revenues of $5.5 million. Total eDiscovery revenues for the six months ended October 31, 2012 were $8.1 million, a decrease of $3.5 million from the six months ended October 31, 2011. This represents a decrease of 30% in revenue from the six months ended October 31, 2011 revenues of $11.6 million. The decrease in eDiscovery revenue for the three and six months ended October 31, 2012 is primarily related to customers having fewer large legal matters in process during the period compared to the three and six months ended October 31, 2011. Total database, archive, and migration revenues in the second quarter of fiscal 2013 were $6.3 million, an increase of $0.8 million from the second quarter of fiscal 2012. This represents an increase of 14% from the second quarter of fiscal 2012 revenues of $5.5 million. Total database, archive, and migration revenues for the six months ended October 31, 2012 were $11.9 million, an increase of $0.9 million from the six months ended October 31, 2011. This represents an increase of 8% in revenue from the six months ended October 31, 2011 revenues of $11.0 million. The increase in database, archive, and migration revenue for the three and six and months ending October 31, 2012 is primarily due to increased activity in the current year on large government migration projects, the receipt of a large maintenance renewal, and an increase in archive license sales.

For the second quarter of fiscal 2013 and 2012, total revenues from the United States were 65% and 74% of total revenues, respectively. Total revenue from the United States in absolute dollars was $6.7 million for the second quarter of fiscal 2013 and $8.2 million for the second quarter of fiscal 2012. Total revenue from all other countries was $3.6 million in the second quarter of fiscal 2013 and $2.9 million for the second quarter of fiscal 2012. On a percentage basis, revenue from other countries was 35% for the second quarter of fiscal 2013 and 26% for the second quarter of fiscal 2012.

For the six months ended October 31, 2012 and 2011, total revenues from the United States were 68% and 74% of total revenues, respectively. Total revenue from the United States in absolute dollars was $13.6 million and $16.6 million for the six months ended October 31, 2012 and 2011, respectively. For the six months ended October 31, 2012 and 2011, total revenues from all other countries were 32% and 26% of total revenues, respectively. Total revenue from all other countries in absolute dollars was $6.4 million and $6.0 million for the six months ended October 31, 2012 and 2011, respectively.

Operating Expenses

Direct Costs of eDiscovery Revenue. Direct costs of eDiscovery revenue consist primarily of expenses related to employees, facilities, and third party assistance that were directly related to the generation of eDiscovery revenue. A majority of these costs are fixed in nature and generally don't fluctuate with changes in revenue. Direct costs of eDiscovery revenue were $2.2 million for the second quarter of both fiscal 2013 and fiscal 2012. For the six months ended October 31, 2012 and 2011, the direct costs of eDiscovery revenue were $4.4 million and $4.6 million, respectively.

Direct Costs of Database, Archive, and Migration Revenue. Direct costs of database, archive, and migration revenue consist primarily of expenses related to employees, facilities, third party assistance, royalty payments, and the amortization of purchased technology from third parties that were directly related to the generation of database, archive, and migration revenue. Direct costs of database, archive, and migration revenue were $1.3 million and $1.4 million for the second quarter of fiscal 2013 and fiscal 2012, respectively. For the six months ended October 31, 2012 and 2011, direct costs of database, archive, and migration revenue were $2.6 million and $2.7 million, respectively.

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 in the second quarter of fiscal 2013 were $1.8 million compared to $1.9 million in the same period of fiscal 2012. For the six months ended October 31, 2012 and 2011, product development expenses were $3.7 million and $3.8 million, respectively.

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, amortization of intangible assets, and bad debt expense. SG&A expenses were $4.1 million in the second quarter of fiscal 2013 and $4.4 million for the second quarter of fiscal 2012. For the second quarter of fiscal 2013, the major components of SG&A were sales expenses of $1.7 million, marketing expenses of $0.4 million and general and administrative expenses of $2.0 million. The major components of SG&A for the second quarter of fiscal 2012 were sales expenses of $1.9 million, marketing expenses of $0.5 million and general and administrative expenses of $2.0 million. As a percentage of total revenue, SG&A expenses were 40% in the second quarter of fiscal 2013 and 40% in the second quarter of fiscal 2012. In the six months ended October 31, 2012 and 2011, our SG&A expenses were $9.2 million and $9.4 million, respectively. The major components of SG&A for the six month period ended October 31, 2012 were sales expenses of $3.9 million, marketing expenses of $0.8 million and general and administrative expenses of $4.5 million. The major components of SG&A for the six month period ended October 31, 2011 were sales expenses of $3.8 million, marketing expenses of $1.2 million and general and administrative expenses of $4.4 million. As a percentage of total revenue, SG&A expenses were 46% in the first six months of fiscal 2013 and 42% in the first six months of fiscal 2012.

Sale of Intangible Trade Name. The sale of intangible trade name is due to the sale of a trade name for $1.0 million that occurred in the first quarter of fiscal 2013.

Loss on Extinguishment of Debt. The loss on extinguishment of debt is the result of the refinancing of the Hercules Term Loan and Credit Facility on June 30, 2011. The Company expensed $1.8 million of unamortized loan costs and warrant discounts on notes payable that were associated with the borrowings under the Hercules Term Loan and Credit Facility. Additionally, the Company was assessed prepayment fees of $0.4 million.

Gain (Loss) from Change in Fair Value of Common Stock Warrant Liability. The change in fair value of common stock warrant liability for the three and six months ended October 31, 2012 resulted in a loss of $0.2 million and a gain of $0.3 million, respectively. The change in fair value of common stock warrant liability for the three and six months ended October 31, 2011 resulted in a gain of $0.2 million and $0.6 million, respectively. The gains are due primarily to a decrease in the Company's common stock share price during the period. The loss is due primarily to an increase in the Company's common stock share price during the period.

Interest Expense. Interest expense is primarily the result of interest on outstanding debt. Interest expense for the second quarter of fiscal 2013 and 2012 was $0.4 million and $0.5 million, respectively. For the six months ended October 31, 2012 and 2011, interest expense was $0.8 million and $1.4 million, respectively. The decrease in the interest expense for the six months ended October 31, 2012 is due primarily to the lower interest rates on debt that resulted from our refinancing that occurred in the first quarter of fiscal 2012.

Other, Net. Other, net consists primarily of foreign exchange rate gains and losses and other income. Foreign exchange rate losses for the second quarter of fiscal 2013 and 2012 were $17,000 and $26,000, respectively. Foreign exchange rate losses for the six months ended October 31, 2012 were $112,000. Foreign exchange rate gains for the six months ended October 31, 2011 were $21,000. Other income for the second quarter of fiscal 2013 and 2012 was $1,000 and $2,000, respectively. Other income for the six months ended October 31, 2012 and October 31, 2011 was $4,000 and $5,000, respectively.

Provision for Income Taxes. For the second quarter of fiscal 2013, the Company recorded $46,000 in federal, state, and foreign income tax expense. For the second quarter of fiscal 2012, the Company recorded $68,000 in federal, state, and foreign income tax expense. For the six months ended October 31, 2012 the Company recorded $98,000 in federal, state, and foreign income tax expense. For the six months ended October 31, 2011 the Company recorded $119,000 in federal, state, and foreign income tax expense.

Liquidity and Capital Resources

At October 31, 2012, the Company had cash and cash equivalents of $4.0 million, compared to $4.8 million at April 30, 2012. The Company had net accounts receivable of $9.0 million as of October 31, 2012, and $11.0 million as of April 30, 2012.

In June 2011, the Company entered into a new Revolving Credit and Term Loan Agreement with Wells Fargo (the "Wells Fargo Credit Agreement"). In order to secure its obligations under the Wells Fargo Credit Agreement, the Company has granted the lender a first priority security interest in substantially all of its assets. The Wells Fargo Credit Agreement consists of two term notes and a revolving credit note agreement. Term Note A is for $12.0 million payable over four years with principal payments of $239,000 quarterly plus an additional annual payment based on the Company's free cash flow for the year with any remaining amount due at maturity, June 30, 2015. As a result of prior free cash flow payments, the quarterly principal payment was decreased from $300,000 to $239,000. The Company incurs interest at the prevailing LIBOR rate plus 5.0% per annum with a minimum rate of 6.50% (6.50% at October 31, 2012). Term Note B is a four year note for $4.0 million payable in full at maturity, June 30, 2015. The Company incurs interest at the prevailing LIBOR rate plus 10% per annum with a minimum rate of 12.0% (12.0% at October 31, 2012). As of October 31, 2012 there is $12.6 million outstanding on the term notes of which $1.0 million is current. Under the terms of the revolver, the Company can borrow up to $8.0 million. The Company incurs interest expense on funds borrowed at the prevailing LIBOR rate plus 5.0% per annum with a minimum rate of 6.50% (6.50% at October 31, 2012). The revolver has a maturity date of June 30, 2015. The total amount that can be borrowed under the Term Note A and the revolver is based on a multiplier factor of the trailing twelve months of maintenance revenue. As of October 31, 2012, the Company was eligible to borrow the entire amount of $8.0 million. As of October 31, 2012 there is $5.5 million borrowed on the revolving line of credit, none of which is current.

The Wells Fargo Credit Agreement requires ongoing compliance with certain affirmative and negative covenants. The affirmative covenants include, but are not limited to: (i) maintenance of existence and conduct of business; (ii) compliance with laws; (iii) use of proceeds; and (iv) books and records and inspection. The negative covenants set forth in the Wells Fargo Credit Agreement include, but are not limited to, restrictions on the ability of the Company (and the Company's subsidiaries): (i) with certain limited exceptions, to create, incur, assume or allow to exist indebtedness; (ii) with certain limited exceptions, to create, incur, assume or allow to exist liens on properties;
(iii) with certain limited exceptions, to make certain payments, transfers of property, or investments; or (iv) with certain limited exceptions, to make acquisitions.

The Company is obligated to maintain certain minimum consolidated adjusted EBITDA levels, certain minimum liquidity levels, certain total leverage ratios, and certain fixed charge coverage ratios, all as calculated in accordance with the terms and definitions determining such amounts as contained in the Wells Fargo Credit Agreement. The Wells Fargo Credit Agreement also contains various information and financial reporting requirements. The Company is in compliance with all such covenants and requirements at October 31, 2012.

The Wells Fargo Credit Agreement also contains customary events of default, including without limitation events of default based on payment obligations, repudiation of guaranty obligations, material inaccuracies of representations and warranties, covenant defaults, insolvency proceedings, monetary judgments in excess of certain amounts, change in control, certain ERISA events, and defaults under certain other obligations.

In June 2011, the Company issued through a private placement 1,666,667 shares of preferred stock to a group of related party institutional investors at a price of $2.40 per share for a total of $4.0 million. The preferred stock will automatically convert on a 1-for-1 basis into shares of common stock of the Company upon the earlier of the second anniversary of the financing, June 30, 2013, or the date on which the Company's common stock has an average closing price above $4.00 per share during the preceding 30 trading days. The preferred stock includes an annual dividend of 10% payable in cash or stock at the Company's option. The preferred stock has no other provisions or preferences. During the six months ended October 31, 2012, the Company paid $66,000 in preferred stock dividends. As of October 31, 2012, the Company had accrued $136,000 of dividends payable on preferred stock.

Except for the Wells Fargo Credit Agreement, as of October 31, 2012 the Company had no other notes payable outstanding.

As of October 31, 2012, the Company has $0.5 million in capital leases payable, $0.2 million of which is current.

Operating Cash Flows. For the first six months of fiscal year 2013 cash provided by operations was $1.3 million. Cash flows provided by operations for the first six months of fiscal 2013 principally resulted from net income of $0.4 million, a decrease in accounts receivable of $2.0 million, a decrease in prepaid expenses and other current assets of $0.5 million, a decrease in other assets of $0.1 million, amortization of intangible assets of $0.8 million, depreciation of $0.6 million, and stock based compensation expense of $0.3 million. Offsetting these amounts was a decrease in account payables of $0.1 million, a decrease in accrued compensation and related expenses of $0.4 million, a decrease in deferred revenue of $1.7 million, a sale of an intangible trade name of $1.0 million, and a gain from change in fair value of common stock warrant liability of $0.3 million.

For the first six months of fiscal year 2012 cash provided by operations was $3.1 million. Cash flows provided by operations for the first six months of fiscal 2012 principally resulted from a decrease in accounts receivable of $4.4 million, a decrease in other assets of $0.1 million, amortization of intangible assets of $1.1 million, depreciation of $0.5 million, loss on extinguishment of debt of $2.2 million, interest added to long term debt principal of $0.1 million, and stock based compensation expense of $0.5 million. Offsetting these amounts was a net loss of $1.0 million, an increase in prepaid expenses and other current assets of $0.2 million, a decrease in accounts payable of $0.7 million, a decrease in accrued compensation and related expenses of $0.9 million, a decrease in other accrued liabilities of $0.8 million, a decrease in deferred revenue of $1.4 million, a decrease in other long term liabilities of $0.2 million, and a gain from change in fair value of common stock warrant liability of $0.6 million.

Investing Cash Flows. Net cash provided by investing activities was $0.8 million for the first six months of fiscal 2013 and was the result of proceeds from the sale of an intangible trade name of $1.0 million. This was partially offset by cash used for the purchase of property and equipment of $0.2 million. Cash flows used in investing activities was $0.6 million for the first six months of fiscal 2012 and was the result of cash used for the purchase of property and equipment.

Financing Cash Flows. Net cash used in financing activities for the first six months of fiscal 2013 was $2.8 million. Cash used in financing activities was the result of $2.5 million of principal payments on debt obligations, $0.2 million of principal payments on capital leases, and $0.1 million of payments of preferred stock dividends. Net cash used in financing activities for the first six months of fiscal 2012 was $1.5 million. Cash from financing activities was . . .