Sajan 10Q 2010 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010 or

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________ to ___________________

Commission File Number: 000-51560

Sajan, Inc.

(Exact name of registrant as specified in its charter)

Delaware	41-1881957
(State of incorporation)	(I.R.S. Employer Identification No.)

625 Whitetail Blvd., River Falls, Wisconsin	54022
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (715) 426-9505

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No

As of August 13, 2010, the registrant had 16,009,331 shares of common stock, $0.01 par value per share, outstanding.

Sajan, Inc.

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3. Quantitative and Qualitative Disclosures About Market Risk		29

Item 4T. Controls and Procedures		30

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		31

Item 1A. Risk Factors		31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 3. Defaults Upon Senior Securities		31

Item 4. Removed and Reserved		31

Item 6. Exhibits		32

SIGNATURES		33

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Sajan, Inc., Subsidiaries and Affiliate (River Valley Business Center, LLC) (1)

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2010 (Unaudited)			December 31, 2009
Assets

Current assets:
Cash and cash equivalents	$	2,595,071		$	120,493
Restricted cash		1,000,000			-
Accounts receivable, net of allowance of $15,000 and $10,000		2,768,352			2,871,005
Deferred tax asset, net of allowance		680,336			660,170
Unbilled services		631,269			256,697
Prepaid expenses and other current assets		129,090			38,534
Total current assets		7,804,118			3,946,899

Property and equipment, net		751,603			3,349,556

Other assets:
Intangible assets, net		258,883			336,983
Capitalized software development costs, net		679,919			877,117
Other assets, net		12,752			24,294
Total other assets		951,554			1,238,394

Total assets	$	9,507,275		$	8,534,849

Liabilities and Stockholders’ Equity

Current liabilities:
Checks issued in excess of bank balance	$	-		$	113,048
Current portion of capital lease obligations		3,392			10,514
Current portion of long-term debt		-			105,159
Note payable – related party		1,000,000			292,973
Note payable – indemnification escrow		1,000,000			-
Line of credit		-			1,000,000
Accounts payable		1,493,242			901,213
Accrued interest – related party		27,836			23,415
Accrued compensation and benefits		685,222			505,084
Other accrued liabilities		823,513			747,671
Deferred revenue		244,134			336,458
Total current liabilities		5,277,339			4,035,535

Long-term liabilities:
Long-term debt, net of current portion		-			2,412,194
Lease obligations and other long-term liabilities		55,211			-
Tax liability – uncertain tax position		19,687			19,687
Deferred tax liability – long-term		563,845			605,497
Total long-term liabilities		638,743			3,037,378
Total liabilities		5,916,082			7,072,913

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized and no shares issued and outstanding		-			-
Common stock, $.01 par value, 35,000,000 shares authorized, 16,009,331 issued and outstanding at June 30, 2010 and 18,000,000 shares authorized and 5,686,250 issued and outstanding at December 31, 2009		160,093			56,863
Additional paid-in capital		6,211,009			1,919,161
Accumulated deficit		(2,747,727	)		(709,393	)
Accumulated other comprehensive loss:
Foreign currency adjustment		(21,838	)		(22,896	)
Stockholders’ equity		3,601,537			1,243,735

Non-controlling interest in subsidiary		(10,344)			(3,075	)
Non-controlling interest in equity affiliate
(River Valley Business Center, LLC)		-			221,276
Total equity		3,591,193			1,461,936
Total liabilities and stockholders’ equity	$	9,507,275		$	8,534,849

See notes to condensed consolidated financial statements.

(1)

MathStar and Sajan consolidated as of February 24, 2010.

River Valley Business Center, LLC deconsolidated as of February 23, 2010.

Sajan India Software Private Limited consolidated as of June 1, 2009.

Sajan, Inc., Subsidiaries and Affiliate (River Valley Business Center, LLC) (1)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three months ended						Six months ended
	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Revenues:
Translation and consulting income	$	3,818,209		$	2,469,790		$	6,623,583		$	5,238,924
Technology income		327,295			215,099			629,001			438,659
Product income		52,301			7,256			69,967			15,816
Other income		4,515			16,786			19,971			33,572
Total revenues		4,202,320			2,708,931			7,342,522			5,726,971

Cost of revenues
Cost of revenues (exclusive of depreciation and amortization included below)		2,289,126			1,503,764			4,050,629			3,186,157

Gross margin		1,913,194			1,205,167			3,291,893			2,540,814

Operating expenses:
Sales and marketing		921,544			883,287			1,732,488			1,701,071
Research and development		392,606			162,034			961,192			336,427
General and administrative		927,895			341,218			2,177,584			754,234
Depreciation and amortization		220,696			239,646			465,739			423,833
Total operating expenses		2,462,741			1,626,185			5,337,003			3,215,565

Loss from operations		(549,547	)		(421,018	)		(2,045,110	)		(674,751	)

Other income (expense):
Interest expense		(22,428	)		(51,497	)		(68,416	)		(103,075	)
Interest and other income		25,518			19,954			27,556			20,140
Other expense		(1,291	)		(5,202	)		(17,379	)		(10,018	)
Total other income (expense)		1,799			(36,745	)		(58,239	)		(92,953	)

Net loss before income taxes and non-controlling interests in subsidiary and affiliate		(547,748	)		(457,763	)		(2,103,349	)		(767,704	)

Income tax benefit		-			(100,707	)		(62,311	)		(168,894	)

Net loss before non-controlling interest		(547,748	)		(357,056	)		(2,041,038	)		(598,810	)
Less Non-controlling interest in subsidiary		4,623			2,131			7,269			2,131
Less Non-controlling interest in affiliate (River Valley Business Center)		-			(7,760	)		(4,565	)		30,474
Net loss attributable to Sajan, Inc. and subsidiaries	$	(543,125	)	$	(362,685	)	$	(2,038,334	)	$	(566,205	)
Loss per common share – Basic and diluted	$	(0.03	)	$	(0.06	)	$	(0.15	)	$	(0.10	)
Weighted average shares outstanding – Basic and diluted		16,009,331			5,686,250			13,972,298			5,686,250

See notes to condensed consolidated financial statements.

(1)

MathStar and Sajan consolidated as of February 24, 2010.

River Valley Business Center, LLC deconsolidated as of February 23, 2010.

Sajan India Software Private Limited consolidated as of June 1, 2009.

Sajan, Inc., Subsidiaries and Affiliate (River Valley Business Center, LLC) (1)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

	Six months ended
	June 30, 2010			June 30, 2009
Cash flows from operating activities:
Net loss	$	(2,041,038	)	$	(598,808	)
Adjustments to reconcile net loss to net cash from operating activities:
Amortization of capitalized software costs		262,483			238,088
Amortization of license costs and debt issuance costs		80,295			50,696
Depreciation		122,961			135,049
Stock-based compensation expense		456,610			102,215
Deferred taxes		(61,818	)		(168,894	)
Change in allowance for doubtful accounts		5,000			0
Decrease (increase) in current assets:
Accounts receivable		(19,065	)		703,712
Change in unbilled services		(374,572	)		(16,580	)
Prepaid expenses and other current assets		(80,752	)		(189,015	)
Increase (decrease) in current liabilities:
Accounts payable		621,265			84,205
Accrued interest – related party		27,867			985
Accrued compensation and benefits		180,137			81,269
Other accrued liabilities		(510,207	)		317,478
Deferred revenue		(92,324	)		(30,750	)
Net cash flows provided by (used in) operating activities		(1,423,158	)		709,650

Cash flows from investing activities:
Purchases of property and equipment		(81,672	)		(161,866	)
Purchases of intangible assets		(2,052	)		(354,586	)
Capitalized software development costs		(64,155	)		(231,082	)
Cash acquired in merger transaction		5,472,000			-
Payment of dissenter liability		(366,943	)		-
Deconsolidation of affiliate		(98,730	)		-
Net cash flows provided by (used in) investing activities		4,858,448			(747,534	)

Cash flows from financing activities:
Checks issued in excess of cash		(113,048	)		-
Net proceeds on line of credit		-			150,000
Payments on note payable – related party		(285,645	)		(17,710	)
Payments on merger costs		(540,254	)		-
Payments on capital lease obligation		(7,122	)		(26,439	)
Payments on mortgage long-term liability		(14,571	)		(42,721	)
Net cash flows provided by (used in) financing activities		(960,640	)		63,130

Net increase in cash and cash equivalents		2,474,650			25,246

Effect of exchange rate changes in cash		(72	)		-

Cash and cash equivalents – beginning of period		120,493			381,501

Cash and cash equivalents – end of period	$	2,595,071		$	406,747

Cash paid for interest, net of amortization of loan fees	$	69,409		$	101,614
Non-cash investing and financing transactions:
Note payable – related party acquired in merger	$	1,000,000		$	-
Short-term note payable – indemnification escrow and restricted cash acquired in merger	$	1,000,000		$	-
Reduction in line of credit via merger transaction	$	1,000,000		$	-
Dissenter accrual acquired in merger transaction	$	364,000		$	-

See notes to condensed consolidated financial statements.

(1)

MathStar and Sajan consolidated as of February 24, 2010.

River Valley Business Center, LLC deconsolidated as of February 23, 2010.

Sajan India Software Private Limited consolidated as of June 1, 2009.

1.	Nature of Business and Summary of Significant Accounting Policies –

Nature of Business / Basis of Presentation

Sajan, Inc. (the “Company” or “Sajan”) provides language translation and technology solutions to companies located throughout the world, particularly in the technology, consumer products, medical and life sciences, financial services, manufacturing, government, and retail industries that are selling products into global markets. The Company is located in River Falls, Wisconsin. In 2009, we established Sajan Software Ltd (“Sajan Software”), which is based in Dublin, Ireland. The Ireland facility serves as both a Global Language Service Center and is home to Sajan Software Ltd, the producer of Sajan’s technology tools. Sajan India Software Private Limited (“Sajan – India”), based in Delhi, India, houses one of our development centers at which we conduct substantially all of our software development activities. Sajan-India is a majority-owned subsidiary of Sajan Software.

Sajan, Inc. originally organized as a Wisconsin corporation in March 1998, reorganized as a Minnesota corporation in October 2001, and reorganized as a Delaware corporation in February 2010 as part of the Merger (as such term is defined in Note 2 to the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q).

Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2009, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any other period. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company, and notes thereto, contained in our Current Report on Form 8-K filed with the SEC on February 24, 2010. The financial information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to fairly present the results of the interim periods presented in order to make the consolidated financial statements not misleading.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Sajan, Inc. and its wholly-owned subsidiary, Sajan Software, and majority-owned subsidiary (94% ownership), Sajan - India, from the effective date of their acquisition or formation during 2009. The non-controlling interest in subsidiary on the consolidated balance sheets and consolidated statements of operations represents the 6% of Sajan India held by third parties. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

River Valley Business Center, LLC (River Valley), is a limited liability company that owns real estate leased to Sajan. River Valley is owned by Shannon Zimmerman and Angela Zimmerman, each of whom is an executive officer and director of the Company, and beneficial owners of the Company’s outstanding voting common stock. Prior to the Merger, the consolidated financial statements included both Sajan, its subsidiaries and River Valley (affiliate) based on a requirement for variable interest entities to be consolidated by their primary beneficiary when certain circumstances exist. The primary beneficiary is the entity that holds the majority of the beneficial interests in the variable interest entity (VIE). A VIE is a legal entity used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. At December 31, 2009 and up until the date of the Merger, Sajan was the primary beneficiary of River Valley, requiring consolidation with the Company. All significant intercompany accounts and transactions were eliminated in the consolidation.

The Merger is a reconsideration event for the lease between Sajan and River Valley. Based on the change in ownership, the Company is no longer considered the primary beneficiary of the lease with River Valley. The pro forma unaudited consolidated financial statements are presented with the deconsolidation of the affiliate. (See Note 2)

Accounts Receivable

The Company extends unsecured credit to customers in the normal course of business. The Company provides an allowance for doubtful accounts when appropriate, the amount of which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions, on an individual customer basis. Normal accounts receivable are due 30 days after issuance of the invoice. Receivables are written off only after all collection attempts have failed, and are based on individual credit evaluation and specific circumstances of the customer. Accounts receivable have been reduced by an allowance for uncollectible accounts of approximately $15,000 at June 30, 2010 and $10,000 at December 31, 2009. Management believes all accounts receivables in excess of the allowance are fully collectible. The Company does not accrue interest on accounts receivable.

Loss Per Common Share

Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include unexercised stock options and warrants. Basic per share amounts are computed, generally, by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive, thereby reducing the loss or increasing the income per common share. In calculating diluted weighted average shares and per share amounts, we included stock options and warrants (see Note 9) with exercise prices below average market prices, for the respective fiscal years in which they were dilutive, using the treasury stock method. The Company calculated the number of additional shares by assuming the outstanding stock options and warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price during the year. For both the three months and six months ended June 30, 2010 and 2009, we excluded options to purchase 1,110,062 and 729,375 shares and warrants to purchase 628,008 and 102,875 shares from the diluted weighted average share outstanding calculation as the effect of these options is anti-dilutive. The effect of all options and warrants outstanding during the three and six months ended June 30, 2010 and 2009 was anti-dilutive.

A reconciliation of the denominator in the basic and diluted income or loss per share is as follows:

	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009
Numerator:
Net loss attributable to Sajan, Inc. and Subsidiaries	$	(543,125	)	$	(362,685	)
Denominator:
Weighted average common shares outstanding - basic		16,009,331			5,686,250
Weighted average common shares outstanding – diluted		16,009,331			5,686,250
Loss per common share – basic	$	(0.03	)	$	(0.06	)
Loss per common share – diluted	$	(0.03	)	$	(0.06	)

	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009
Numerator:
Net loss attributable to Sajan, Inc. and Subsidiaries	$	(2,038,334	)	$	(566,205	)
Denominator:
Weighted average common shares outstanding - basic		13,972,298			5,686,250
Weighted average common shares outstanding – diluted		13,972,298			5,686,250
Loss per common share – basic	$	(0.15	)	$	(0.10	)
Loss per common share – diluted	$	(0.15	)	$	(0.10	)

Capitalized Software Development Costs

Sajan capitalizes software costs incurred during the application development stage for software that is internally developed solely to meet the entity’s internal needs and when no substantive plans exist or are being developed to market the software externally. Costs capitalized include external direct costs of materials and services and internal payroll and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life.

When the projects are ready for their intended use, the Company amortizes such costs over their estimated useful lives of three years. Capitalized software amortization expense for the three and six months ended June 30, 2010 was $127,822 and $262,483, respectively, and for the three and six months ended June 30, 2009 was $131,952 and $238,088, respectively. Estimated amortization expense for capitalized software costs are expected to be approximately $231,840 for the remainder of 2010 and, $328,900, and $117,700 for the years ending December 31, 2011, and 2012, respectively.

Capitalized software development costs consist of the following as of June 30, 2010 and December 31, 2009, respectively:

	June 30, 2010			December 31, 2009
Capitalized software development costs	$	2,548,641			2,483,356
Less accumulated amortization		(1,868,722	)		(1,606,239	)
Total capitalized software development costs, net	$	679,919			877,117

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock-based compensation at fair value. The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. For the three and six months ended June 30, 2010, total stock-based compensation expense was approximately $87,000 ($0.01 per share) and $457,000 ($0.03 per share), respectively. For the three and six months ended June 30, 2009, total stock-based compensation expense was approximately $64,000 ($0.01 per share) and $102,000 ($0.01 per share), respectively. As of June 30, 2010, there was approximately $700,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s 2004 Long-Term Incentive Plan. That cost is expected to be recognized over a weighted-average period of three years. This is an estimate based on options currently outstanding, and therefore this projected expense could be more in the future.

The Company’s determination of fair value of share-based compensation awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of variables. These variables include, but are not limited to; the Company’s expected stock price volatility, and actual and projected stock option exercise behaviors and forfeitures. An option’s expected term is the estimated period between the grant date and the exercise date of the option. As the expected term increases, the fair value of the option and the compensation cost will also increase. The expected-term assumption is generally calculated using historical stock option exercise data; however the Company does not have historical exercise data to develop such an assumption. As a result, the Company determined the expected term assumption using the simplified expected-term calculation as provided in SEC Staff Accounting Bulletin 107.

In 2009, the Company calculated expected volatility for stock options and awards using an industry index and comparable companies, as the Company was a privately owned company and did not have sufficient information to utilize a historical volatility. The Company considered specific companies with comparable operations along with the Dow Jones software and computer services small cap technology index to be representative of the Company’s size and industry and has used the historical closing total return values of that index for the three years prior to the date of grant to estimate volatility. Subsequent to the Merger and going forward, the Company calculates expected volatility for stock options and awards using its own stock price. Management expects and estimates substantially all director and employee stock options will vest, and therefore the forfeiture rate used is zero. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of grant.

In determining the compensation cost of the options granted, the fair value of each option grant in the quarter ended June 30, 2010 and 2009, respectively, has been estimated on the date of grant using the Black-Scholes option pricing model, and the weighted average assumptions used in these calculations are summarized as follows:

	Three Months Ended June 30,
	2010			2009
Risk-free interest rate		1.3	%		2.52	%
Expected life of options granted	5 Yrs			7 Yrs
Expected volatility range		63.34	%		24.07	%
Expected dividend yield		0	%		0	%

Using the Black-Scholes option pricing model, management has determined that the options issued have a weighted-average grant date fair value for the three months ended June 30, 2010 and 2009 of $0.75 and $1.06 per share, respectively.

In determining the compensation cost of the options granted, the fair value of each option grant in the six months ended June 30, 2010 and 2009, respectively, has been estimated on the date of grant using the Black-Scholes option pricing model, and the weighted average assumptions used in these calculations are summarized as follows:

	Six Months Ended June 30,
	2010			2009
Risk-free interest rate		1.5	%		2.52	%
Expected life of options granted	5.39 Yrs			7 Yrs
Expected volatility range		63.21	%		24.07	%
Expected dividend yield		-	%		-	%

Using the Black-Scholes option pricing model, management has determined that the options issued have a weighted-average grant date fair value for the six months ended June 30, 2010 and 2009 of $0.80 and $1.06 per share, respectively.

Revenue Recognition

The Company derives revenues from language translation services, software licenses, subscription hosting services, professional services, maintenance fees or a combination thereof. The Company has three primary services models, each of which is described below.

Technology Enabled Service Model

In our Technology Enabled Service Model, the Company provides all of the customer’s language translation requirements. Services within the Technology Enabled Service Model include: language translation, account management, graphic design services, technical, consulting and professional services. Language translation services are generally billed on a “per word” basis and other services are billed on a per hour rate basis.

In accordance with Financial Accounting Standard Board (“FASB”) and SEC accounting guidance on revenue recognition, the Company considers revenue earned and realizable at the time services are performed and amounts are earned. Sajan considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. The Company recognizes revenue for translations managed on a standard “per word” basis at the time the translation is completed. The Company recognizes revenue for professional services when the services have been completed in accordance with the statement of work.

Managed Service Model

The Managed Service Model has five elements: language translation services, software license fees, post-contract customer support, transaction fees, and professional services. We recognize revenue as earned through transaction fees delivered through the Application Service Provider (ASP) and associated fees for professional services including, implementation, training, and project management provided to customers with installed systems.

For ASP and other hosting arrangements, the Company evaluates whether the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third party to host the software. If we determine that the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third party to host the software, we recognize the license, professional services and hosting services revenues. For ASP and other hosting arrangements that do not meet the criteria for recognition, the Company accounts for the elements considering the multiple element arrangements using all applicable facts and circumstances, including whether (i) the element has stand-alone value, (ii) there is a general right of return and (iii) the revenue is contingent on delivery of other elements. The Company allocates revenue to each element of the arrangement that qualifies for treatment as a separate element based on vendor-specific objective evidence (“VSOE”), and if VSOE is not available, third party evidence, and if third party evidence is unavailable, estimated selling price. For professional services associated with ASP and hosting arrangements the Company determines do not have stand-alone value to the customer or are contingent on delivery of other elements, the Company recognizes the services revenue ratably over the term of the applicable agreement.

The Company bills service fees either on a time and materials basis or on a fixed-price schedule. In general, the Company’s consulting services are not essential to the functionality of the software. The Company’s software products are fully functional upon delivery and implementation and generally do not require any significant modification or alteration for customer use. Customers purchase the Company’s consulting services to facilitate the adoption of the Company’s technology and may dedicate personnel to participate in the services being performed, but may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services. The Company recognizes revenue from consulting services as services are performed.

Licensed Software Model

In the Licensed Software Model, clients utilize GCMS, Authoring Coach, X-Content, or a combination thereof, to self-perform their translation services. This technology-only solution provides the Company’s clients with the ability to independently operate translation services without assistance from the Company’s professionals. The Licensed Software Model has two elements: (1) license fees, and (2) post-contract customer support (maintenance).

The Company recognizes revenue from license fees, based on VSOE when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is probable at the time the software application is shipped to the client.

The Company’s customers typically purchase maintenance annually. Maintenance prices are based on a percentage of the product license fee. Customers purchasing maintenance receive product upgrades, Web-based technical support and telephone hot-line support. Unspecified product upgrades are not provided without the purchase of maintenance. The Company typically has not granted specific upgrade rights in its license agreements. Specified undelivered elements are allocated a relative fair value amount within a license agreement and the revenue allocated for these elements is deferred until delivery occurs.

Other

Sajan’s agreements with its customers may informally provide the customer with a limited time period following delivery during which the Company will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work. Revenue is recognized as services are delivered in accordance with the terms of the agreement with the customer, are not contingent, and are earned.

Revenues recognized in excess of billings are recorded as unbilled services. Billings in excess of revenues recognized are recorded as deferred revenues until revenue recognition criteria are met.

Cost of Revenues

Cost of revenues consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects. Cost of revenues excludes depreciation and amortization which is included in general and administrative expenses. Depreciation and amortization expense for the three and six months ended June 30, 2010 was $220,639 and $465,739, respectively, and for the three and six months ended June 30, 2009 was $239,646 and $423,833, respectively.

Foreign Currency Translation

The functional currency for payment of accounts receivable for certain of the Company’s foreign customers is the local currency of the country in which the customer’s operations are based. Realized foreign currency translations gains or losses arising from exchange rate fluctuations on balances denominated in foreign currencies and unrealized foreign currency transaction gains or losses relating to accounts receivable balances were not material for the three and six months ended June 30, 2010 and 2009. Foreign assets and liabilities are translated using the year end exchange rates. Results of operations are translated using average rates throughout the year. Translation gains and losses are accumulated as a separate component of equity.

Income Tax

Current income taxes are recorded based on statutory obligations for the current operating period for the various countries in which the Company has operations.

Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

River Valley is a limited liability company, and, in lieu of corporate income taxes, the members will separately account for their pro rata shares of River Valley’s income, losses, deductions and credits. Accordingly, no provision for River Valley for federal or Wisconsin income taxes was recorded for the three months ended June 30, 2010 and 2009. As of the date of the Merger, River Valley was deconsolidated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In February 2010, we adopted changes issued by the FASB to consolidation accounting and reporting. These changes establish accounting and reporting for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. These changes require, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent’s equity; that consolidated net income be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, that the amounts of consolidated net income attributable to the parent and noncontrolling interest be included on the consolidated statement of operations; and if a subsidiary is deconsolidated, that any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. Other than the change in presentation of noncontrolling interests, the adoption of these changes had no impact on the consolidated financial statements. The presentation and disclosure requirements of these changes were applied retrospectively.

In January 2010, the FASB issued amendments to guidance on fair value measurements and disclosures that will require inclusion of the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. An amendment related to the level of disaggregation in determining classes of assets and liabilities and disclosures about inputs and valuation techniques was also issued. The amendments are effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the reconciliation for level 3 activity on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The Company is currently assessing the impact of the amendments and does not expect the adoption of this amendment guidance to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (605), Multiple Deliverable Arrangements, a consensus of the FASB Emerging Issues Task Force, which addresses the accounting for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 also changes the definitions of VSOE. The effective date for ASU 2009-13 is June 30, 2010, although early adoption is permitted. The Company adopted ASU 2009-13 on January 1, 2010. There was not a material impact on the Company’s consolidated financial statements.

2.	Reverse Merger Transaction –

Pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated January 8, 2010, by and among MathStar, Inc., a Delaware corporation, and Sajan, Inc. a privately held Minnesota corporation whose business is providing language translation technology and service; Garuda Acquisition, LLC, a wholly-owned subsidiary of MathStar, now known as Sajan, LLC; and Thomas Magne, solely in his capacity as agent for the holders of common stock of Sajan, Inc. Sajan, Inc. was merged with and into Garuda Acquisition, LLC, (the “Merger”). Garuda Acquisition, LLC (“Garuda”) was the surviving entity in the Merger and subsequently changed its name to Sajan, LLC. As a result of the Merger, Sajan became a wholly-owned subsidiary of MathStar. MathStar will continue the business of Sajan and operate as a provider of language translation technology and service under the Sajan name. The Merger was closed and effective on February 23, 2010.

At closing, MathStar paid $6,100,000 in cash, of which $5,100,000 was paid to existing stockholders of Sajan. The Merger Agreement provided for the remaining $1 million to be placed in an escrow account with an escrow agent, which funds would be utilized to fulfill the indemnification obligations of the pre-Merger Sajan stockholders through February 23, 2011. This amount is presented as restricted cash and a note payable – indemnification escrow of $1 million on the consolidated balance sheets. The Company may request claims against the escrow as defined in the escrow agreement. The remaining balance of the $1 million escrow at February 23, 2011 will be distributed to the pre-Merger Sajan stockholders as defined in the escrow agreement and the Merger Agreement.

As a result of the Merger, Sajan’s 5,573,742 shares of common stock were exchanged for 6,827,734 shares of MathStar common stock, or an exchange of 1 MathStar common share for 1.225 Sajan common shares. Options to purchase Sajan common stock issued under Sajan’s 2001 Stock Option Plan and certain non-plan options and warrants were converted into options and warrants to purchase MathStar common stock and will remain outstanding as options and warrants to purchase shares of MathStar common stock. Immediately after the closing of the Merger, the former stockholders of Sajan, Inc. owned approximately 43% of the outstanding shares of MathStar common stock. At the time of Merger, 112,500 shares, valued at $364,000 per management’s determination of fair value at the time of the Merger, were recorded for dissenter shares. (See Note 11)

Pursuant to the Merger, Sajan merged with and into Garuda, with Garuda as the surviving entity. For accounting purposes, Sajan is treated as the continuing reporting entity that acquired MathStar because Sajan obtained effective control of MathStar as a result of the Merger. This determination was based on the following facts: Sajan stockholders will have a large minority interest in the combined entity, the governing board will consist of a majority of Sajan board members, and the composition of the senior management will be Sajan’s management team. Under this method of accounting, the recognition and measurement provisions of the accounting guidance for business combinations do not apply and, therefore, there is no recognition of goodwill or other intangible assets. Instead, the acquisition has been treated as the equivalent of Sajan issuing stock for the net monetary assets of MathStar, primarily cash, which are stated at their carrying value. Because of the Merger, the historical results in this and future Quarterly Reports on Form 10-Q and future Annual Reports on Form 10-K will represent those of Sajan.

At the time of the Merger, the following amounts are being allocated from MathStar’s net monetary assets and liabilities to Sajan:

Cash and cash equivalents	$	5,472,000
Restricted cash		1,000,000
Prepaid expenses and other assets		22,000
Accounts payable and accrued liabilities		(652,000	)
Notes payable – related party		(1,000,000	)
Net monetary assets	$	4,842,000

Cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable: The tangible assets and liabilities were valued at their respective carrying amounts by MathStar, except for adjustments to accrued lease obligations, necessary to state such amounts at their estimated fair values at the effective date of the Merger.

Accrued liabilities: Sajan retains the accrued lease obligations under MathStar’s non-cancellable operating leases, pursuant to which total rent payments are projected to be $358,000 and $257,000 for the years ending December 31, 2010 and 2011, respectively. In addition, Sajan retains MathStar’s non-cancellable long-term commitment with Synopsys, Inc. for the purchase of design tools. Payments under this agreement will be $151,000 during the year ending December 31, 2010.

Merger transaction costs: In connection with the Merger, MathStar incurred transaction costs of $543,000, including financial advisory, legal, accounting and due diligence costs, which were recorded as Merger transaction expenses on the consolidated statement of operations for the year ended December 31, 2009. Sajan allocated approximately $540,000 of Merger-related costs which were allocated to additional paid-in capital for the three months ended March 31, 2010.

Change in Control

Upon consummation of the Merger, MathStar experienced a change in control, with the former stockholders of Sajan, Inc. acquiring approximately 43% ownership of the outstanding shares of MathStar common stock. MathStar was incorporated under Minnesota law in April 1997, and was reincorporated under Delaware law on June 14, 2005. During the three months ended June 30, 2008, MathStar curtailed its operations as its Board of Directors evaluated strategic alternatives. Immediately before the effective date of the Merger, MathStar was a “shell company,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, having no or nominal operations, and assets consisting solely of cash and cash equivalents. The Merger had the effect of causing MathStar to cease being a shell company as of the effective date of the Merger.

Pro Forma Financial Statements

Since the Merger was effective February 23, 2010, there is not a change in the March 31, 2010 balance sheet and not a material change in the income statement for the three and six months ended June 30, 2010. The unaudited pro forma information for the year ended December 31, 2009 does not purport to represent what the Company’s results of operations would actually have been if such transactions in fact had occurred at such date or to project the Company’s results of future operations.

The accompanying unaudited pro forma consolidated combined financial statements are presented as if Sajan and MathStar had been operating as a combined entity. The unaudited pro forma combined consolidated balance sheet as of December 31, 2009 presents the financial position assuming the Merger had occurred on December 31, 2009. The unaudited pro forma combined consolidated statement of operations for the year ended December 31, 2009 presents the results of operations assuming the acquisition had occurred on January 1, 2009. All material adjustments to reflect the acquisition are set forth in the column “Pro Forma Adjustments”. The pro forma data is for informational purposes only and may not necessarily reflect future results of operations and financial position or what the results of operations or financial position would have been had Sajan and MathStar been operating as a combined entity for the specific periods. (in thousands)

SAJAN, INC., SUBSIDIARIES AND AFFILIATE

(RIVER VALLEY BUSINESS CENTER, LLC)

UNAUDITED PRO FORMA COMBINED BALANCE SHEETS

(in thousands, except per share data)

December 31, 2009

	Sajan, Inc., Subsidiaries, and Affiliate			Deconsolidation of River Valley Business Center, LLC		Sajan, Inc. and Subsidiaries			MathStar, Inc.			Cash Pay Out Adjustments				Pro Forma Adjustments				Record MathStar Net Assets Adjustments				Unaudited Pro Forma Total

Assets

Current assets:
Cash and cash equivalents	$	120		$	91	$	29		$	13,050		$	(5,100	)	A	$	61		B,C	$	5,472		F,J	$	5,562
Restricted cash		-			-		-			-			-				-				1,000		E		1,000
Accounts receivable, net of allowance of $10,000		2,871			30		2,841			-			-				-				-				2,841
Deferred tax asset		660			-		660			-			-				-				-				660
Unbilled services		257			-		257			-			-				-				-				257
Other current assets		39			110		(71	)		54			-				-				7		F		(64	)
Total current assets		3,947			231		3,716			13,104			(5,100	)			61				6,479				10,256

Property and equipment, net		3,350			2,571		779			-			-				-				-				779

Other assets:
Intangible assets, net		337			-		337			-			-				-				-				337
Capitalized software development costs, net		877			-		877			-			-				-				-				877
Other assets, net		24			24		-			16			-				-				15		F		15
Total other assets		1,238			24		1,214			16			-				-				15				1,229

Total assets	$	8,535		$	2,826	$	5,709		$	13,120		$	(5,100	)		$	61			$	6,494			$	12,264

Liabilities and Stockholders' Equity

Current liabilities:
Checks issued in excess of bank balance	$	113		$	-	$	113		$	-		$	-			$	-			$	-			$	113
Current portion of capital lease obligations		11			-		11			-			-				-				-				11
Current portion of long-term debt		105			105		-			-			-				-				-				-
Cash paid out at closing		-			-		-			-			(5,100	)	A		-				-				-
Note payable - related party		293			31		262			-			-				(262	)	C		1,000		E		1,000
Note payable - indemnification		-			-		-			-			-				-				1,000		E		1,000
Line of credit		1,000			-		1,000			-			-				-				(1,000	)	J		-
Accounts payable		901			51		850			37			-				-				28		F		878
Accrued interest - related party		23			-		23			-			-				(23	)	C		-				-
Accrued compensation and benefits		505			-		505			-			-				-				-				505
Other accrued liabilities		748			-		748			702			-				(461	)	D		775		F,K		1,062
Deferred revenue		337			6		331			-			-				-				-				331
Total current liabilities		4,036			193		3,843			739			(5,100	)			(746	)			1,803				4,900

Long-term liabilities:
Long-term debt, net of current portion		2,412			2,412		-			-			-				-				-				-
Other long-term liability		20			-		20			213			-				-				213		F		233
Deferred tax liabilities		605			-		605			-			-				-				-				605
Total long-term liabilities		3,037			2,412		625			213			-				-				213				838

Total liabilities		7,073			2,605		4,468			952			(5,100	)			(746	)			2,016				5,738

Stockholders' equity:
Common stock		57			-		57			92			-				-				103		F,K		160
Additional paid-in capital		1,919			-		1,919			155,940			-				263		H,I		4,375		F,K		6,557
Accumulated deficit		(709	)		-		(709	)		(143,864	)		-				544		B,D,H,I		-				(165	)
Accumulated other comprehensive loss:
Foreign currency adjustment		(23	)		-		(23	)		-			-				-				-				(23	)
Stockholders' equity		1,244			-		1,244			12,168			-				807				4,478				6,529

Non-controlling interest in subsidiary		(3	)		-		(3	)		-			-				-				-				(3	)
Non-controlling interest in equity of affiliate		221			221		-			-			-				-				-				-
(River Valley Business Center, LLC)
Total equity		1,462			221		1,241			12,168			-				807				4,478				6,526

Total liabilities and stockholders' equity	$	8,535		$	2,826	$	5,709		$	13,120		$	(5,100	)		$	61			$	6,494			$	12,264

Sajan, Inc., subsidiaries and affiliate (River Valley Business Center, LLC)

Common stock, $.01 par value, 18,000 shares authorized, 9,181 (pre merger) and 16,009 (pro forma) issued and outstanding at December 31, 2009

Preferred stock, $.01 par value, 10,000 shares authorized, no shares issued and outstanding at December 31, 2009

SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

SAJAN, INC., SUBSIDIARIES AND AFFILIATE

(RIVER VALLEY BUSINESS CENTER, LLC)

UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

For the year ended December 31, 2009

	Sajan, Inc., Subsidiaries, and Affiliate			Deconsolidation of River Valley Business Center, LLC			Adjustments			Sajan, Inc. and Subsidiaries			MathStar, Inc.			Pro Forma Adjustments			Unaudited Pro Forma Total
Revenues:
Translation and consulting income	$	11,640		$	-		$	-		$	11,640		$	-		$	-		$	11,640
Technology income		1,019			-			-			1,019			-			-			1,019
Rental income		67			406			339	G		-			-			-			-
Other revenue		-			-			-			-			95			-			95
Total revenues		12,726			406			339			12,659			95			-			12,754

Operating expenses:
Cost of revenues (exclusive of amortization and depreciation included in general and administrative below)		7,002			-			-			7,002			105			-			7,107
Sales and marketing		3,414			-			-			3,414			-			158	I		3,572
Research and development		596			-			-			596			36			3	I		635
General and administrative		2,875			246			339	G		2,968			2,200			(705	)H		4,463
Restructuring and impairment charges		-			-			-			-			593			-			593
Total operating expenses		13,887			246			339			13,980			2,934			(544	)		16,370

Income (loss) from operations		(1,161	)		160			-			(1,321	)		(2,839	)		544			(3,616	)

Other income (expense):
Interest expense		(209	)		(165	)		-			(44	)		-			-			(44	)
Interest and other income		4			-			-			4			88			-			92
Other expense		(38	)		-			-			(38	)		-			-			(38	)
Total other income (expense)		(243	)		(165	)		-			(78	)		88			-			10

Net loss before income taxes and non-controlling interests in subsidiary and affiliate		(1,404	)		(5	)		-			(1,399	)		(2,751	)		544			(3,606	)

Income tax benefit		(308	)		-			-			(308	)		-			-			(308	)

Net loss before non-controlling interest		(1,096	)		(5	)		-			(1,091	)		(2,751	)		544			(3,298	)
Less Non-controlling interest in subsidiary		(4	)		-			-			(4	)		-			-			(4	)
Less Non-controlling interest in affiliate (River Valley Business Center)		(5	)		(5	)		-			-			-			-			-

Net loss attributable to Sajan, Inc. and subsidiaries	$	(1,087	)	$	-		$	-		$	(1,087	)	$	(2,751	)	$	544		$	(3,294	)

Loss per common share - Basic and diluted	$	(0.19	)							$	(0.19	)	$	(0.30	)				$	(0.21	)

Weighted average shares outstanding - Basic and diluted		5,686									5,686			9,181						16,009

SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (in thousands)

The Merger is a reconsideration event for the lease between Sajan and River Valley Business Center, LLC (affiliate). Based on the change in ownership, the Company is no longer considered the primary beneficiary of the lease with River Valley Business Center, LLC (affiliate). The pro forma unaudited financial statements are presented with the deconsolidation of the affiliate.

Merger document notes cash of $5,100 paid at the time of closing to the stockholders of Sajan.

B ·

Transaction costs of $261 related fees and expenses by MathStar.

Transaction costs of $85 related fees and expense by Sajan.

Payment of note payable – related party of $262 and accrued interest – related party of $23 as required by the Merger Agreement.

D ·

Transaction costs accrued of $282 related fees and expenses by MathStar.

Transaction costs accrued of $179 related fees and expenses by Sajan.

E ·

Merger agreement provides for a note payable for one year of $1,000 to the majority stockholders of Sajan.

Merger agreement provides for $1,000 to be placed in escrow for the indemnification obligations.

Record net monetary assets of MathStar of $4,842 for the issuance of 9,181 shares of common stock and the conversion of Sajan shares at 1.225 per share.

Rent expense paid by Sajan to River Valley Business Center, LLC which will no longer be accounted for as a variable interest entity.

H ·

Transaction costs of $543 related fees and expenses by MathStar.

Transaction costs of $264 related fees and expenses by Sajan.

Stock options and warrants repriced based on terms of Merger document. Expense of $102 for the modification for vested equity instruments.

Additional expense to be recorded for the modifications in the years ending December 31:

2010	$	17
2011		16
2012		16
2013		16
	$	65

Stock options and warrants repriced based on terms of Merger document. Expense of $161 for the modification for vested equity instruments.

Additional expense to be recorded for the modifications in the years ending December 31:

2010	$	156
2011		80
2012		77
	$	313

Pay off of line of credit of $1,000.

Accrual for 113 dissenter’s common shares with a fair value of $364.

3.	Concentrations of Credit Risk –

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.

Cash Concentration – Cash and cash equivalents include all highly liquid investment assets with a maturity of ninety days or less at the time of purchase. The Company places its cash at financial institutions with balances that, at times, may exceed federally insured limits. The Company evaluates the creditworthiness of these financial institutions in determining the risk associated with these deposits. The Company has not experienced any losses on such accounts.

Accounts receivable concentration – Concentrations of credit risk with respect to trade accounts receivable are limited due to the dispersion of customers across different industries and geographic regions. As of June 30, 2010, three customers accounted for 14.71%, 11.85%, and 10.30% of the accounts receivable and as of December 31, 2009, one customer accounted for 37% of the accounts receivable.

4.	Segment Information and Major Customers –

The Company views its operations and manages its business as one reportable segment, providing language translation solutions to a variety of companies, primarily in its targeted vertical markets. Factors used to identify the Company’s single operating segment include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The Company markets its products and services through its headquarters in the United States and its wholly-owned subsidiaries operating in Ireland and India.

Net sales per geographic region, based on the billing location of end customer, are summarized below. For comparative purposes, we have omitted the rental income of approximately $0 and $16,800 for the three months ended June 30, 2010 and 2009, respectively and $10,200 and $33,600 for the six months ended June 30, 2010 and 2009, respectively, derived from the River Valley affiliate for income through the effective date of the Merger and $5,300 in other revenue generated from our MathStar subsidiary, for which operations were ceased prior to the Merger. (See Note 1)

	Three Months Ended June 30,
	2010					2009
	Sales		Percent			Sales		Percent
United States	$	3,371,659		80.23	%	$	2,072,585		76.99	%
International		830,661		19.77	%		619,546		23.01	%
Total Sales	$	4,202,320		100.00	%	$	2,692,131		100.00	%

	Six Months Ended June 30,
	2010					2009
	Sales		Percent			Sales		Percent
United States	$	5,775,095		78.76	%	$	4,733,672		83.14	%
International		1,557,227		21.24	%		959,699		16.86	%
Total Sales	$	7,332,322		100.00	%	$	5,693,371		100.00	%

The Company’s largest two customers accounted for 11.4% and 10.4% of net revenues for the three months ended June 30, 2010 and three customers accounted for 13.1%, 11.2%, and 10% of net revenues for the three months ended June 30, 2009. There were no customers greater than 10% for the six months ended June 30, 2010 and one customer accounted for 18.6% of net revenues for the six months ended June 30, 2009.

No individual foreign country accounted for 10% of consolidated revenue in any period presented.

5.	Related Party Transactions –

Notes Payable

Notes payable and accrued interest to related party was approximately $1,028,000 and $316,000 at June 30, 2010 and December 31, 2009, respectively, related to two notes payable to officers and stockholders of the Company, Shannon and Angela Zimmerman. The majority of the note payable as of December 31, 2009 was paid as of the date of the Merger. On February 23, 2010, the Company issued a Promissory Note to Shannon and Angela Zimmerman as part of the Merger consideration. The Promissory Note documents the Company’s obligation to pay $1 million of the pro rata amount of the cash Merger consideration to the Zimmermans. The Promissory Note has a term of one year and provides for an interest rate of 8% per year to be accrued until payment of the Promissory Note. Accrued interest was approximately $28,000 as of June 30, 2010. Upon the occurrence of an “event of default,” as defined in the Promissory Note, and at any time thereafter, the unpaid principal balance, plus accrued interest, plus all other amounts due under the Promissory Note will, at the option of the Zimmermans, be immediately due and payable, without notice or demand. The obligations of the Company under the Promissory Note are unsecured.

Lease

Sajan leases its office space from River Valley under two non-cancelable operating leases. The first lease was entered into during 2005 and expires in January 2026. The second lease was entered into during 2008 and expires in January 2026. In February 2010, the lease terms were amended to expire on January 31, 2017 and reduce the monthly lease payments by $1,766 per month. These lease agreements require the Company to pay a minimum monthly rental plus certain operating expenses. Related party rental income and expense for the office leases of approximately $0 and $84,700 has been eliminated from the consolidated financial statements for the three months ended June 30, 2010 and 2009, respectively, and $51,400 and $169,400 has been eliminated from the consolidated financial statements for the six months ended June 30, 2010 and 2009, respectively. Payment of rent under these leases is secured by goods, chattels, fixtures and personal property of the Company.

Debt –

Line of Credit

The Company had $0 and $650,000 outstanding at June 30, 2010 and December 31, 2009, respectively, under a $1,000,000 bank line of credit. The line of credit due in December 2009 was extended to mature in March 2010. The line of credit was paid in full and closed on February 23, 2010.

7.	Other Accrued Liabilities –

Other accrued liabilities of the following at:

	June 30, 2010		December 31, 2009
Legal and professional services	$	61,425	$	184,497
Professional translator services		423,720		418,243
Accrued lease obligations		305,279		-
Other		33,089		144,931
Total	$	823,513	$	747,671

8.	Non-controlling Interest –

Summary of activity in non-controlling interest:

	June 30, 2010			December 31, 2009
Equity of non-controlling interest in subsidiary:
Non-controlling interest in subsidiary, beginning balance	$	(3,075	)	$	-
Purchase of 94% of Sajan India Software Private, Ltd. on June 1, 2009		-			986
Net loss attributable to non-controlling interest in subsidiary		(7,269	)		(4,061	))
Non-controlling interest in subsidiary, ending balance	$	(10,344	)	$	(3,075	))

9.	Options and Warrants –

Amended and Restated 2004 Long-Term Incentive Plan

In October 2004, MathStar adopted and in June 2005 its stockholders approved the Amended and Restated 2004 Long-Term Incentive Plan (the “Plan”). Under the Plan, 1,333,334 shares of the Company's common stock were reserved for the issuance of restricted stock and incentive and nonqualified stock options to directors, officers and employees of and advisors to the Company at exercise prices as determined by the Board of Directors on the dates of grants. With the approval of stockholders at the 2006 and 2007 annual meetings, 300,000 and 1,366,666 additional shares were reserved, respectively, under the Plan. With the approval of stockholders at the 2008 annual meeting, 3,000,000 additional shares were reserved under the Plan and a one-for-five reverse stock split of its common stock was approved, which in effect, reduced the number of shares reserved under the Plan to 1,200,000.

As a result of the Merger, Sajan adopted the Plan and converted the options outstanding in their 2001 Stock Option Plan for 1.225 options of MathStar common stock. Options to purchase Sajan common stock issued under Sajan’s 2001 Stock Option Plan and certain non-plan options and warrants were converted into options and warrants to purchase MathStar common stock and will remain outstanding as options and warrants to purchase shares of MathStar common stock (see Note 2). On June 10, 2010, the stockholders of Sajan approved an amendment to increase the number of shares reserved for issuance by 1.0 million shares. The total number of shares reserved under the Plan as of June 30, 2010 is 2,200,000.

On June 30, 2010, 1,110,062 options in the Plan were outstanding with a weighted average exercise price of $2.14.

10.	Income Taxes –

Our deferred income tax assets and liabilities are recognized for the differences between the financial statement and income tax reporting basis of assets and liabilities based on currently enacted rates and laws. These differences include depreciation, net operating loss carryforwards, capital loss carryforwards, allowance for accounts receivable, stock options and warrants, prepaid expenses, unrealized loss on securities, capitalized software costs, cash to accrual conversion, and accrued liabilities. Our current deferred tax asset as of June 30, 2010 and December 31, 2009, was approximately $680,000 and $660,000, respectively. Our current deferred tax liability as of June 30, 2010 and December 31, 2009 was $564,000 and $605,000, respectively.

The cumulative net operating loss available to offset future income was $31.6 million as of June 30, 2010. The Company's federal and state net operating loss carryforwards expire in various calendar years from 2015 through 2029. (Available research and development credit carryforwards at June 30, 2010, represent federal and state amounts of $3.2 million with expiration dates in calendar years 2020 through 2028). Future utilization of available net operating loss carryforwards may be limited under Internal Revenue Code Section 382 as a result of significant changes in ownership. These limitations could result in reduction of these net operating loss carryforwards before they are utilized.

In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generations of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As such, the Company has recorded a valuation allowance to offset a portion of its deferred taxes. The valuation allowance was $16,627,000 and $0 as of June 30, 2010 and December 31, 2009, respectively.

On February 25, 2010, the Company entered into the Tax Benefit Preservation Plan and Rights Agreement (the “Plan”) with Wells Fargo Shareowner Services, a division of Wells Fargo Bank, National Association, as Rights Agent. The Company’s Board of Directors adopted the Plan in an effort to protect against a possible limitation on the ability to use its net operating losses under the Internal Revenue Code of 1986, as amended (the “Code”), and rules promulgated by the Internal Revenue Service. Under the Plan, beginning March 12, 2010, for each share of the Company’s common stock held, the holder of the common stock has the right to purchase one one-millionth of a share of a new series of preferred stock of the Company.

We file a consolidated U.S. federal tax return. As a result of the adoption of ASC 740 – Income Taxes, effective October 1, 2007, we applied the requirements of ASC 740 to all tax positions for which the statute of limitations remained open. ASC 740 was issued to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in prior standards on consistent recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosures and transition. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statement of operations.

11. Legal Proceedings –

In the ordinary course of business, the Company is subject to legal proceedings and claims. In the opinion of management, the amount of ultimate liability with respect to these actions may or may not materially affect the financial position of the Company nor can an estimate be made. The Company expenses legal costs during the period incurred.

Tiberius Litigation

As reported in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31, 2010, on October 14, 2009, the Company filed a Complaint against Tiberius Capital, LLC (“Tiberius”) in the United States District Court for the District of Minnesota captioned “MathStar, Inc., Feltl and Company, Inc., Sajan, Inc., Perkins Capital Management, Inc., Richard C. Perkins, Merrill A. McPeak, Benno G. Sand, John C. Feltl and Joseph P. Sullivan, Plaintiffs, v. Tiberius Capital II, LLC, Defendant” charging Tiberius with threatening to bring a class action lawsuit against the Company and tortious interference with prospective economic advantage. On November 9, 2009, Tiberius served and filed its Answer and asserted certain counterclaims.

On April 26, 2010, the United States District Court, District of Minnesota granted the Company’s motion to dismiss all counterclaims asserted by Tiberius. Tiberius retains certain rights to amend its counterclaims and to appeal this decision. The Company believes that the Tiberius claims are without merit and that it is not liable for any of these claims.

Litigation by Sajan, Inc. Stockholder (Natzel)

On May 13, 2010, the Company tendered a check to the plaintiffs in the amount of $366,942 in payment of the fair value of the shares of Sajan tendered by the plaintiff in connection with the exercise of dissenters’ rights related to the Company’s merger effected in February 2010. On June 8, 2010, the Company received a letter which asserted that the fair value was $495,372. The Company is required to take action with respect to this supplemental claim by August 6, 2010. The Company may dispute the amount claimed by the plaintiff or pay the plaintiff the amount they desire or a different amount. The action to dispute this amount may include filing a petition requesting the court to determine the fair value of the shares. On August 3, 2010, the parties agreed to suspend the August 6, 2010 deadline to take action indefinitely and have agreed to mediate this claim on September 9, 2010, where the issues related to the fair value of the shares will be discussed.

We believe the claims are without merit and intend to vigorously defend this lawsuit. A complete summary of the litigation is included in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31, 2010.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10 - Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (“ Securities Exchange Act ”). Forward-looking statements reflect the current view about future events. When used in this Quarterly Report on Form 10 - Q the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan” and similar expressions or the negative of these terms as they relate to Sajan , Inc. (the “Company” or “Sajan”) its subsidiaries or its management identify forward-looking statements. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of Annual Report on Form 10 -K entitled “Risk Factors” filed with the SEC on March 31, 2010) relating to the Company ’s industry, its operations and results of operations, and any businesses that may be acquired by it. These factors include:

our rate of growth in the global multi-lingual content delivery industry, especially for software-as-a-service solutions within this industry;

changes in the utilization of our software and services by our customers;

lack of acceptance of any existing or new solutions we offer;

our ability to continue increasing the number of our customers or the revenues we derive from our recurring revenue customers;

continued economic weakness and constrained globalization spending by businesses operating in international markets;

our ability to effectively develop new solutions that compete effectively with the solutions that our current and future competitors offer;

risk of increased regulation of the Internet and business conducted via the Internet;

our ability to identify attractive acquisition opportunities, successfully negotiate acquisition terms and effectively integrate any acquired companies or businesses;

our ability to effectively manage our growth;

availability of capital on acceptable terms to finance our continued growth;

risks of conducting international commerce, including foreign currency exchange rate fluctuations, changes in government policies or regulations, longer payment cycles, trade restrictions, economic or political instability in foreign countries where we may increase our business and reduced protection of our intellectual property;

our ability to add sales and marketing, research and development or other key personnel who are able to successfully sell or develop our solutions;

our ability to operate as a public company and comply with applicable disclosure and other requirements and to hire additional personnel with public company compliance experience; and

other risk factors included under “Risk Factors” in our Annual Report on Form 10 -K filed with the SEC on March 31, 2010 .

Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Although our management believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, Sajan does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the financial statements and the related notes and the pro forma financial information included in our Annual Report Form on 10-K filed with the SEC on March 31, 2010.

Recent Events

Merger Transaction

Pursuant to the Merger Agreement, by and among MathStar, a Delaware corporation, and Sajan, a privately held Minnesota corporation whose business is providing language translation technology and service; Garuda, a wholly-owned subsidiary of MathStar, now known as Sajan, LLC; and Thomas Magne, solely in his capacity as agent for the holders of common stock of Sajan, Inc., Sajan, Inc. was merged with and into Garuda. Garuda was the surviving entity in the Merger and subsequently changed its name to Sajan, LLC. As a result of the Merger, Sajan became a wholly-owned subsidiary of MathStar. MathStar will continue the business of Sajan and operate as a provider of language translation technology and service under the Sajan name. The Merger was closed and effective on February 23, 2010.

As a result of the Merger, Sajan’s 5,573,742 shares of common stock were exchanged for 6,827,734 shares of MathStar common stock, or an exchange of 1 Sajan common share for 1.225 MathStar common shares. Options to purchase Sajan common stock issued under Sajan’s 2001 Stock Option Plan and certain non-plan options and warrants were converted into options and warrants to purchase MathStar common stock and will remain outstanding as options and warrants to purchase shares of MathStar common stock. Immediately after the closing of the Merger, the former stockholders of Sajan, Inc. owned approximately 43% of the outstanding shares of MathStar common stock. At the time of Merger, 112,500 shares, valued at $364,000 per management’s determination of fair value at the time of the Merger, were recorded for dissenter shares. (See Note 11)

Tax Benefit Preservation Plan and Rights Agreement

On February 25, 2010, we entered into the Tax Benefit Preservation Plan and Rights Agreement (the “Preservation Plan”) with Wells Fargo Shareowner Services, a division of Wells Fargo Bank, National Association, as Rights Agent. Our Board of Directors adopted the Preservation Plan in an effort to protect against a possible limitation on the ability to use the Company’s net operating losses (“NOL”) under the Internal Revenue Code of 1986, as amended (the “Code”), and rules promulgated by the Internal Revenue Service.

In connection with the Preservation Plan, our Board of Directors authorized a series of 25 shares of Preferred Stock designated as Series A Preferred Stock, with a par value of $0.001 per share. The Series A Preferred Stock issuable upon the exercise of the rights under the Plan would be non-redeemable and rank junior to all other series of our preferred stock. Each whole share of Series A Preferred Stock would be entitled to dividends, upon declaration by the Board of Directors, and entitled to receive a preferential liquidation of $1 per whole share.

Under the Preservation Plan, beginning March 12, 2010, for each share of common stock held, the holder of the common stock has the right to purchase one one-millionth of a share of Series A Preferred Stock at an exercise price of $8.50. The rights expire in five years unless the Board of Directors redeems or exchanges the rights; the tax law related to limitation on the ability to use NOL is repealed; the NOL can no longer be carried forward; or the Board of Director decides to extend the term of the Preservation Plan.

The rights distributed on February 25, 2010, cannot be exercised until one of two triggering events occurs as defined in the Preservation Plan.

Upon a triggering event occurring related to the exercise of the right, we would account for the value of rights as a dividend and record a charge to retained earnings (accumulated deficit) and additional paid-in capital. Upon completion of the Merger, there were 16,009,331 common shares outstanding resulting in 1.6 shares of Series A Preferred Stock purchase rights.

Name and Trading Symbol Change

On February 26, 2010, the corporate name was changed from MathStar, Inc. to Sajan, Inc. On April 22, 2010, our trading symbol changed from “MATH.PK” to “SAJA.PK”. The Company continues to trade on the Pink Sheets markets.

General Overview

Sajan provides on-demand language translation solutions to customers selling products into global markets. These customers use our solutions to translate product manuals, instructions, warnings, and other product information into numerous languages. We combine our internally developed proprietary technology and high quality translation services to provide language translation solutions that are fast, reliable, and user-friendly. By utilizing an integrated technology and a service-based approach to language translation, we offer comprehensive solutions that allow customers to rely upon a single provider to meet all of their language translation needs. Our hosted technology system delivers a secure online solution that can be offered on a modular basis, which makes it attractive in both small business settings and in large enterprise environments.

We offer our customers the ability to utilize our solutions under three different models:

Technology Enabled Service Model: we provide all of the customer’s language translation requirements;

Managed Service Model: customers use our technology and operations staff to manage translators; and

Licensed Software Model: a technology-only solution that is independently operated by our customers.

Our solutions are used to manage the end-to-end process of content globalization, which is the project, process and delivery management of content translated and localized into multiple languages across the enterprise. Content is localized across the enterprise for a wide variety of high value-added purposes and uses, most notably, product sales and marketing, packaging, user manuals, technical support and training, as well as internal requirements.

In 2009, we established Sajan Software Ltd (“Sajan Software”), which is based in Dublin, Ireland. The Ireland facility serves as both a Global Language Service Center and is home to Sajan Software Ltd, the producer of Sajan’s technology tools. Sajan India Software Private Limited (“Sajan – India”), based in Delhi, India, houses one of our development center at which we conduct substantially all of our software development activities. Sajan-India is a majority-owned subsidiary of Sajan Software.

Discussion of Critical Accounting Policies and Estimates

Discussion of the financial condition and results of our operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and judgments, including those discussed below. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to the consolidated financial statements.

Management believes the following critical accounting policies involve significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue Recognition

Technology Enabled Service Model

In our Technology Enabled Service Model, the Company provides all of the customer’s language translation requirements. Services within the Technology Enabled Service Model include: translation services, account management, graphic design services, technical, consulting and professional services as requested by our clients on a per hour rate basis.

Managed Service Model

Licensed Software Model

Other

Revenues recognized in excess of billings are recorded as unbilled services. Billings in excess of revenues recognized are recorded as deferred revenues until revenue recognition criteria are met.

Income Taxes

Income taxes are provided for tax effects of transactions reported in the consolidated financial statements and consist of income taxes currently due plus deferred income taxes related to timing differences between the basis of certain assets and liabilities for financial statements and income tax reporting. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance for the net deferred tax assets is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

On June 30, 2010, we have an accumulated NOL carryforward of approximately $31.6 million, which includes approximately $29.1 million as a result of the Merger. The NOL carryforward may be used to offset future income tax liabilities, subject to limitations as provided in Section 382 of the Code, as amended, and will continue to be available provided there is no change of control, as defined in Section 382 of the Code. Based upon the provisions of Section 382 of the Code, an amount of up to 4.14% of the available NOL is available on an annual basis. The Company is allowed to issue shares in each year subsequent to the effective date of the Merger in an amount not to exceed 10% of the share count at the beginning of such year without violating the Section 382 of the Code change of control limitations, even if such issuance were to constitute a change of control as defined in Section 382 of the Code.

Software Development Costs

We capitalize software costs incurred during the software application development stage when the software is internally developed solely to meet the entity’s internal needs and no substantive plans exist or are being developed to market the software externally. Costs capitalized include external direct costs of materials and services and internal payroll and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. When a project is ready for its intended use, we amortize such costs over the estimated useful life of three years.

Stock-based Compensation

We measure and recognize compensation expense for all stock-based compensation at fair value. Our determination of fair value of share-based compensation awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of variables. These variables include, but are not limited to, expected stock price volatility and actual and projected stock option exercise behaviors and forfeitures. An option’s expected term is the estimated period between the grant date and the exercise date of the option. As the expected term increases, the fair value of the option and the compensation cost will also increase. The expected-term assumption is generally calculated using historical stock option exercise data. We do not have historical exercise data to develop such an assumption. In cases where companies do not have historical data and where the options meet certain criteria, SEC Staff Accounting Bulletin 107 (“SAB 107”) provides the use of a simplified expected-term calculation. Accordingly, Sajan calculated the expected terms using the SAB 107 simplified method.

Prior to the Merger, we calculated expected volatility for stock options and awards using an industry index and comparable companies, as we were recently a privately owned company and did not have sufficient information to utilize a historical volatility. We consider specific companies with comparable operations along with the Dow Jones software and computer services small cap technology index to be representative of our size and industry and have used the historical closing total return values of that index for the three years prior to the date of grant to estimate volatility. Management expects and estimates that substantially all employee stock options will vest, and therefore the forfeiture rate used was zero.

The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of grant.

Source of Revenues

We generate revenues by providing language translation services to customers for which we are paid based upon the number of words translated and by the languages involved. The price charged per word per language varies depending upon the language, the availability of translator resources and the extent to which our proprietary TMate search algorithm has been applied to reuse prior translation work. We break out for financial reporting purposes revenues for which we incurred direct cost of revenues with linguists versus revenues where the translation is machine-based from Translation Memory. In late 2010, we expect that we will begin generating revenue on a product only basis, for which we will also receive revenue on a per word basis similar to our services business model based upon the number of words processed through our GCMS software platform by our product customers.

Cost of Revenue

Cost of revenue is highly variable based upon the volume of translation services revenue. We work with freelance linguists who complete the actual language translation, and they are paid on a per word basis. The fixed component of cost of revenue is comprised of the global operations staff located principally in our River Falls, Wisconsin location and also in our Dublin, Ireland location, who are responsible for project and process management, quality control, operational integration, vendor management and production operations. Over the long term, we expect cost of revenue will grow in absolute dollars, as we expect to continue to grow our revenue, but decrease as a percentage of revenue due to economies of scale, more efficient sourcing and operational efficiencies from ongoing utilization of our GCMS platform.

Sales and Marketing Expenses

Sales and marketing expense consists primarily of advertising and promotional costs, wages and benefits for sales and marketing personnel, sales commissions and partner referral fees. Advertising costs consist of pay-per-click payments to search engines and print advertisements in trade journals. Advertising costs are expensed as incurred. Promotional costs consist primarily of public relations, memberships and event costs. As we move into full commercial launch of our product solution throughout 2010, we expect advertising and marketing expense to increase proportionally faster than product sales during the year, but to decrease slightly as a percentage of total sales.

Research and Development Expenses

Research and development expenses consist primarily of wages and benefits for product strategy and development personnel. We have focused our research and development efforts more recently on the industrialization of the GCMS platform and its component modules for general release and independent use by the various participants involved in the content globalization process and for the ability to host GCMS utilizing cloud computing methodologies. Functional development has continued in parallel on improving ease of use, functionality, scalability and efficiency of Translation Memory processing.

We capitalize development costs and amortize such costs over 36 months, with such amortization reflected in general and administrative costs, as noted below. The research and development organization is located principally at Sajan-India and at Sajan Software. We expect that on an annual basis, research and development expenses will increase in absolute dollars as we continue to enhance and expand our product offerings, but decrease as a percentage of revenues as we expect to continue to grow our revenues at a faster rate.

General and Administrative Expenses

General and administrative expenses consist primarily of wages and benefits for administrative, human resources, internal information technology support, finance and accounting personnel, professional fees, certain taxes and other corporate expenses. We expect that general and administrative expenses will increase as we continue to add personnel in connection with the anticipated growth of our business and incur costs related to operating as a public company. We expect that our general and administrative expenses will increase in absolute dollars and on a percentage basis throughout 2010 reflecting the cost of being public and subsequently increase in absolute dollars but, decrease on a percentage basis as sales increase.

Depreciation and Amortization

Depreciation and amortization consist of the expense related to property and equipment, capitalized software development costs and software license costs that are being depreciated over the estimated useful lives of the assets using the straight-line method.

Foreign Currency Translation

The functional currency for payment of accounts receivable for certain of the Company’s foreign customers is the local currency of the country in which the customer’s operations are based. Realized foreign currency translations gains or losses arising from exchange rate fluctuations on balances denominated in foreign currencies and unrealized foreign currency transaction gains or losses relating to accounts receivable balances were not material for the three or six months ended June 30, 2010 and 2009. Foreign assets and liabilities are translated using the year end exchange rates. Results of operations are translated using average rates throughout the year. Translation gains and losses are accumulated as a separate component of equity.

Results of Operations - Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

For the three-month period ended June 30, 2010, net loss attributable to stockholders was $.54 million compared to net loss of $.36 million for the three months ended June 30, 2009. Operating results for the quarter reflect increased revenues and cost of revenues from additional translation services which resulted in an increase in gross margin of $.7 million. This was offset by an increase in operating expenses related to nonrecurring legal, accounting and tax costs related to the Merger; increased sales and marketing costs related to higher commissions and costs related to our Ireland office as well as additional investment in research and development.

The major components of revenues, cost of revenue, operating expenses, other income (expense), and income tax benefit are discussed below.

	Three Months Ended
Item	6/30/2010			6/30/2009			% Change (Year Over Year)
Revenues	$	4,202,320		$	2,708,931			55.1	%
Cost of Revenues		2,289,126			1,503,764			52.2	%
Operating Expenses:
Sales and Marketing		921,544			883,287			4.3	%
Research and Development		392,606			162,034			142.3	%
General and Administrative		927,895			341,218			171.9	%
Depreciation and amortization		220,696			239,646			(7.9	)%
Other Income (Expense):
Interest expense		(22,428	)		(51,497	)		(56.5	)%
Interest and other income		25,518			19,954			27.9	%
Other expense		(1,291	)		(5,202	)		(75.2	)%
Income tax benefit		-			100,707			(100.0	)%
Net loss before non-controlling interest		(547,748	)		(357,056	)		53.4	%
Less non-controlling interest in subsidiary		4,623			2,131			116.9	%
Less non-controlling interest in affiliate		-			(7,760	)		(100.0	)%
Net loss attributable to Sajan, Inc. and subsidiaries	$	(543,125	)	$	(362,685	)		49.8	%

Revenues

Revenues totaled $4.2 million for the three months ended June 30, 2010 compared to $2.7 million for the three months ended June 30, 2009. This $1.5 million or 55.1% increase resulted from an increase in the number of customers, the growth of business with existing customers, and the introduction of new products and services.

The following table summarizes our revenues for the three months ended June 30, 2010 and 2009, respectively:

	Three Months Ended June 30,				Three Months Ended June 30,
	2010		2009		2010			2009
					(percentage of revenues)
Translation and consulting income	$	3,818,209	$	2,469,790		90.86	%		91.17	%
Technology income		327,295		215,099		7.79	%		7.94	%
Product income		52,301		7,256		1.24	%		0.27	%
Other income		4,515		16,786		0.11	%		0.62	%
Total	$	4,202,320	$	2,708,931		100.00	%		100.00	%

Cost of Revenues

Cost of revenues increased $.79 million, or 52.2% for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. As a percentage of revenue, cost of revenues was 54.5% for the three months ended June 30, 2010 compared to 55.5% for the same interim period in 2009. The increase in dollar terms resulted from additional costs to process the additional words translated, as well as additional costs associated with an increase in the operations staff in River Falls in support of anticipated growth. The cost of revenues as a percentage of revenue improved slightly over the prior year as increased economies of scale associated with a larger revenue base offset costs associated with the initiation of a contract for a major customer that was purposefully bid with sub-standard margins to break into the account and position us for future opportunities. Cost of revenue excludes depreciation and amortization of $.22 million and $.24 million for the three months ended June 30, 2010 and June 30, 2009, respectively, which are included in operating expenses.

Operating Expenses

Total operating costs for the three months ended June 30, 2010 were $2.46 million compared to $1.63 million for the three months ended June 30, 2009. For the three months ended June 30, 2010, the major components of these costs were sales and marketing, research and development and general and administrative expenses. A discussion of the various components of our operating costs for the three months ended June 30, 2010 and 2009 appears below:

Sales and Marketing. Sales and marketing expense of approximately $.922 million for the three months ended June 30, 2010 increased 4% from sales and marketing expense of approximately $.883 million for the three months ended June 30, 2009. The increase in our expenses between the interim periods is the result of an increase in commission expense in the quarter due to a higher level of revenue, offset by a reduction in salaries and wages and lower stock based compensation expense. As a percentage of revenue, sales and marketing expense was approximately 22% for the three months ended June 30, 2010, a decrease from approximately 32.6% for the same interim period in 2009, reflecting the economies of scale that result from an increase in revenues and management’s intentional restraint on discretionary marketing spending.

Research and Development. Research and development expense of approximately $.39 million grew $.23 million or 142.3% for the three months ended June 30, 2010 over research and development expense of $.16 million for the three months ended June 30, 2009. The increase for the three months ended June 30, 2010 is comprised of additional investments in our Sajan – India subsidiary, increased salaries and benefits expense from addition of staff in Europe, and approximately $.18 million of additional development expenses related to our enterprise technology product, Global Communication Management System (“GCMS”). As a percentage of revenue, research and development expense increased to 9.34% for the three months ended June 30, 2010 compared to 5.98% for the three months ended June 30, 2009.

General and Administrative. General and administrative expense was $.93 million and $.34 million for the three months ended June 30, 2010 and 2009, respectively, an increase of approximately $.59 million, or 171.9%. As a percentage of revenue, general and administrative expense was 22.1% for the three months ended June 30, 2010 as compared with 12.6% for the three months ended June 30, 2009. This increase principally reflects legal and accounting fees associated with the preparation and filing of periodic reports with the SEC under the Securities Exchange Act and costs associated with the salary and benefits of certain executives that were reclassified from sales and marketing in prior years. As we seek to comply with the various legal, accounting and governance rules and regulations applicable to public reporting companies, we anticipate our general and administrative expenses will remain at these levels during the remainder of fiscal 2010.

Depreciation and Amortization. Depreciation and amortization expense was $.22 million and $.24 million for the three months ended June 30, 2010 and 2009, respectively, a decrease of $19,000. As a percentage of revenue, depreciation and amortization expense was 5.3% for the three months ended June 30, 2010 as compared to 8.8% for the three months ended June 30, 2009.

Other Income (Expense). Interest expenses for three months ended June 30, 2010 of approximately $22,000 decrease from $52,000 for the three months ended June 30, 2009 as a result of the elimination of the mortgage interest expense that related to the buildings owned by River Valley Business Center, LLC and leased by Sajan. The interest expense was discontinued as a result of the deconsolidation on February 23, 2010. Interest and other income for the three months ended June 30, 2010 was approximately $25,000 compared to $20,000 for the three months ended June 30, 2009. The increase in interest income is a result of increased cash and cash equivalents.

Income Tax Benefit

Income tax benefit for the three months ended June 30, 2010 was zero compared to income tax benefit of $.10 million for the three months ended June 30, 2009.

Results of Operations - Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

For the six-months ended June 30, 2010, net loss attributable to stockholders was $2.04 million compared to net loss of $.56 million for the six months ended June 30, 2009. Operating results for the quarter reflect increased revenues and cost of revenues from additional translation services which resulted in an increase in gross margin of $.75 million. This was offset by an increase in operating expenses related to nonrecurring legal, accounting, tax and investment banking fees related to the Merger, increased stock compensation expenses, increased insurance expenses, increased sales and marketing costs related to our Ireland office as well as additional investment in research and development.

The major components of revenues, cost of revenue, operating expenses, other income (expense), and income tax benefit are discussed below.

	Six Months Ended
Item	6/30/2010			6/30/2009			% Change (Year Over Year)
Revenues	$	7,342,522		$	5,726,971			28.2	%
Cost of Revenues		4,050,629			3,186,157			27.1	%
Operating Expenses:
Sales and Marketing		1,732,488			1,701,071			1.9	%
Research and Development		961,192			336,427			185.7	%
General and Administrative		2,177,584			754,234			188.7	%
Depreciation and amortization		465,739			423,833			9.9	%
Other Income (Expense):
Interest expense		(68,416	)		(103,075	)		(33.6	)%
Interest and other income		27,556			20,140			36.8	%
Other expense		(17,379	)		(10,018	)		73.5	%
Income tax benefit		(62,311	)		(168,894	)		(63.1	)%
Net loss before non-controlling interest		(2,041,038	)		(598,810	)		240.9	%
Less non-controlling interest in subsidiary		7,269			2,131			241.1	%
Less non-controlling interest in affiliate		(4,565	)		30,474			(115.0	)%
Net loss attributable to Sajan, Inc. and subsidiaries	$	(2,038,334	)	$	(566,205	)		260.0	%

Revenues

Revenues totaled $7.4 million for the six months ended June 30, 2010 compared to $5.7 million for the six months ended June 30, 2009. This $1.6 million or 28.5% increase resulted from an increase in the number of customers, the growth of business with existing customers, and the introduction of new products and services.

The following table summarizes our revenues for the six months ended June 30, 2010 and 2009, respectively:

	Six Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010			2009
					(percentage of revenues)
Translation and consulting income	$	6,623,583	$	5,238,924		90.21	%		91.48	%
Technology income		629,001		438,659		8.57	%		7.65	%
Product income		69,967		15,816		0.95	%		0.28	%
Other income		19,971		33,572		0.27	%		0.59	%
Total	$	7,342,522	$	5,726,971		100.00	%		100.00	%

Cost of Revenues

Cost of revenues increased $.86 million, or 27% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. As a percentage of revenue, cost of revenues was 55.2% for the six months ended June 30, 2010 compared to 55.6% for the same interim period in 2009. Cost of revenue excludes depreciation and amortization of $.46 million and $.42 million for the six months ended June 30, 2010 and June 30, 2009, respectively, which are included in operating expenses.

Operating Expenses

Total operating costs for the six months ended June 30, 2010 were $5.34 million compared to $3.22 million for the six months ended June 30, 2009. For the six months ended June 30, 2010, the major components of these costs were sales and marketing, research and development and general and administrative expenses. A discussion of the various components of our operating costs for the six months ended June 30, 2010 and 2009 appears below:

Sales and Marketing. Sales and marketing expense of approximately $1.73 million for the six months ended June 30, 2010 increased $.031 million, or 2%, over sales and marketing expense of approximately $1.70 million for the six months ended June 30, 2009. The slight increase in our expenses between the interim periods primarily relates to an increase in sales commissions related to the higher revenue levels in 2010, offset in part by a decrease in salaries and wages for the six month period. As a percentage of revenue, sales and marketing expense was approximately 23.6% for the six months ended June 30, 2010 as compare to approximately 29.7% for the same interim period in 2009, reflecting the economies of scale that result from an increase in revenues and management’s intentional restraint on discretionary marketing spending.

Research and Development. Research and development expense of approximately $.96 million grew $.62 million or 186% for the six months ended June 30, 2010 over research and development expense of $.34 million for the six months ended June 30, 2009. The increase for the six months ended June 30, 2010 is comprised of additional investments in our Sajan – India subsidiary, increased salaries and benefits expense from addition of staff in Europe, approximately $.18 million of additional development expenses related to our enterprise technology product, Global Communication Management System (“GCMS”) and an increase in stock compensation expense for the six months ended June 30, 2010. As a percentage of revenue, research and development expense increased to 13.1% for the six months ended June 30, 2010 compared to 5.9% for the six months ended June 30, 2009.

General and Administrative. General and administrative expense was $2.18 million and $.75 million, an increase of approximately $1.42 million, or 188.7%, for the six months ended June 30, 2010 and 2009, respectively. As a percentage of revenue, general and administrative expense was 29.7% for the six months ended June 30, 2010, compared to 13.2% for the six months ended June 30, 2009. This increase principally reflects non-recurring legal and accounting fees associated with the preparation and filing of periodic reports with the SEC under the Securities Exchange Act, professional services related to an analysis of our net operating loss carryforward, and three years of financial audits required as part of the Merger, an increase in stock compensation expense and incremental insurance costs. As we seek to comply with the various legal, accounting and governance rules and regulations applicable to public reporting companies, we anticipate our general and administrative expenses will remain at approximately these levels for the remainder of fiscal 2010.

Depreciation and Amortization. Depreciation and amortization expense was $.46 million and $.42 million for the six months ended June 30, 2010 and 2009, respectively, an increase of $42,000. This increase is primarily the result of higher amortization of capitalized software costs in 2010. As a percentage of revenue, depreciation and amortization expense was 6.3% for the three months ended June 30, 2010 as compared to 7.4% for the three months ended June 30, 2009.

Other Income (Expense). Interest expenses for six months ended June 30, 2010 and 2009 of approximately $68,000 and $103,000 were related to the mortgage on the buildings owned by River Valley Business Center, LLC and leased by Sajan. The decrease is the result of the deconsolidation of this entity on February 23, 2010. Interest and other income for the six months ended June 30, 2010 was approximately $28,000 compared to $20,000 for the six months ended June 30, 2009. The increase in interest income is a result of increased cash and cash equivalents. Other expenses for the six months ended June 30, 2010 were approximately $17,000 compared to $10,000 for the six months ended June 30, 2009. The increase in other expenses was related to fluctuations in foreign currency.

Income Tax Benefit

Income tax benefit for the six months ended June 30, 2010 was $.06 million compared to income tax benefit of $.17 million for the six months ended June 30, 2009.

Liquidity and Capital Resources

Summary cash flow data is as follows:

	Six Months Ended June 30,
	2010			2009
Cash flows provided (used) by :
Operating activities	$	(1,423,158	)	$	709,650
Investing activities		4,858,448			(747,534	)
Financing activities		(960,640	)		63,130
Net increase in cash		2,474,650			25,246
Effect of exchange rate changes in cash		(72	)		-
Cash, beginning of period		120,493			381,501
Cash, end of period	$	2,595,071		$	406,747

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities for the six months ended June 30, 2010 was $1.42 million and was used to fund our operations and expand our operations internationally. Net cash provided by operating activities for the six months ended June 30, 2009 was a result of a significantly lower net loss, a decrease in accounts receivable and an increase in accrued liabilities, offset by a reduction in deferred revenues.

Net Cash (Used in) Provided by Investing Activities

Net cash of $4.9 million provided by investing activities for the six months ended June 30, 2010 primarily related to cash acquired in the Merger transaction. Net cash of $.75 million used in investing activities for the six months ended June 30, 2009 related to purchases of property and equipment, acquisition of specialized software and capitalization of software development costs.

Net Cash Used in Financing Activities

Net cash of $.96 million used in financing activities for the six months ended June 30, 2010 primarily related to payments for merger-related costs and short-term debt. Net cash of $63,000 provided by financing activities for the six months ended June 30, 2009 related to amounts advanced on short -term debt facilities.

Sources of Capital

For the six months ended June 30, 2010, our principal source of liquidity was funds generated from operations and cash received as part of the Merger.

Uses of Capital

Sajan’s primary uses of capital resources for the six months ended June 30, 2010 have been to fund operating activities, expand business operations internationally, and make nonrecurring payments for professional fees related to the Merger. The capital obtained by way of the Merger will be used to grow and support the business in a variety of different ways, including increased investments in research and development. This will help extend our differentiation and provide greater value to our global clients. We have a product roadmap influenced heavily by voice of market and will seek to accelerate key feature releases. We also intend to use this capital for purchasing strategic companies which add ongoing benefit to the Company’s operations and clients. This may include both language translation service companies and technology companies. Finally, we will invest in more aggressive sales and marketing initiatives to assist in overall business growth.

We anticipate that we will generate positive cash flow from operations in the second half of 2010, but we may require investment capital to fund monthly cash flow requirements, investments in our organizational infrastructure for the launch of our business products and, potentially, for acquisitions.

We believe that our cash, cash equivalents and marketable securities and operating cash flows will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we may need to raise additional funds through public or private financings or borrowings to fund our operations, to develop or enhance products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders or we may be subject to covenants that restrict how we conduct our business. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of June 30, 2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

On June 30, 2010, our Chief Executive Officer and Interim Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Exchange Rule 13a-15(e)), and concluded that our disclosure controls and procedures were not effective and designed to ensure that material information relating to the Company and our consolidated subsidiaries would be made known to them by others within the Company. This conclusion was based primarily on the facts identified in our Annual Report on Form 10-K for fiscal year ended December 31, 2009, filed with the SEC on March 31, 2010.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect such controls, except as described below.

In our Annual Report on Form 10-K for the year ended December 31, 2009, we identified material weaknesses in internal control over financial reporting and a related remediation plan. We are still in the process of remediating our material weaknesses. However, to date, we believe we have made progress towards remediation, including taking steps to:

increase the oversight performed by our Board of Directors through expansion of our Board of Directors to seven members and expansion of our Audit Committee to four members.

increase our Audit Committee’s oversight role, including providing additional oversight of the Company’s internal controls, more formal review of our consolidated financial statements, reviewing management’s analysis of actual expenditures compared to its approved budget, reviewing expense reports and supporting documentation for reimbursements to our Chief Executive Officer, monitoring the interim management reports on the effectiveness of our internal controls, discussing complex or unusual accounting transactions with management and our independent registered public accounting firm, and reviewing the draft periodic reports we file with the SEC;

design and implement robust corporate governance including: (1) direct oversight of our internal controls by the Audit Committee of our Board of Directors; (2) review of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q by the Audit Committee of our Board of Directors prior to filing with the SEC; (3) adoption and communication of our Code of Business Conduct and Ethics to our employees and consultants; (4) adoption and communication of our Policy on Insider Trading to our employees and consultants; (5) revision of policies within our employee handbook to ensure that appropriate disciplinary actions may be taken in the event an employee fails to properly perform their responsible internal controls or intentionally overrides any internal control and completion of employee training on the policy revisions; (6) adoption of charters for our Audit, Compensation, Governance and Nominating Committees of our Board of Directors; (7) adoption and training for our employees on our Whistleblower Policy, which includes our anonymous reporting system; (8) adoption of our policy on reporting and investigating complaints regarding accounting, internal accounting controls or auditing matters and concerns regarding questionable accounting or auditing matters; (9) communication to our global workforce by our Chief Executive Officer and Interim Chief Financial Officer on the importance of internal control compliance and reporting of noncompliance; and (10) adoption of our operating budget and our strategic plan by our Board of Directors;

secure the administrator passwords for the financial application, the servers and other devices used to support and backup the financial application, and replicate backup files to our corporate location to complete a validation of their integrity;

utilize our internal control specialist to develop and assist us with the design, implementation and assessment of the design and operating effectiveness of our internal controls as well as design of remediation efforts as necessary for proper compliance, provide our internal audit consultant with direct access to our Audit Committee chairperson, and include our internal audit consultant in quarterly meetings of our audit committee to provide a status update on the effectiveness of our internal controls;

design and implement a formalized financial reporting process that includes properly prepared, supported and reviewed balance sheet reconciliations; properly prepared, supported and reviewed journal entries; properly segregated duties, and properly completed and approved financial close checklist and financial reporting calendar;

design a mechanism to capture costs related to our internally developed software;

begin a formal feasibility assessment of implementing an Enterprise Resource Planning (“ERP”) system to replace our current financial software application, including ensuring access rights within our new financial software application comply with designated roles and responsibilities and support the proper segregation of duties; and

begin assessing the feasibility of generating consolidated financial statements directly from the new ERP financial application and eliminate our current manual consolidation process.

Despite the progress we believe we have made, we were unable to conclude that the material weaknesses described in our Annual Report on Form 10-K for the year ended December 31, 2009 were effectively remediated as of June 30, 2010, due to the fact that (i) less than the entire remediation plan has been implemented and (ii) an insufficient period of time has passed for management to test and document the effectiveness of those controls which have been altered or newly created as part of the remediation plan (as summarized above). For further information, please see our Annual Report on Form 10-K for fiscal year ended December 31, 2009.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On April 26, 2010, the United States District Court for the District of Minnesota granted the Company’s motion to dismiss all counterclaims asserted by Tiberius Capital II, LLC (“Tiberius”) in the action captioned “MathStar, Inc., Feltl and Company, Inc., Sajan, Inc., Perkins Capital Management, Inc., Richard C. Perkins, Merrill A. McPeak, Benno G. Sand, John C. Feltl and Joseph P. Sullivan, Plaintiffs, v. Tiberius Capital II, LLC, Defendant”. Tiberius retains certain rights to amend its counterclaim and to appeal this decision. A complete summary of this litigation is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31, 2010.

On February 11, 2010, Mary Jo Natzel, a stockholder of Sajan, Inc., initiated a lawsuit against Shannon Zimmerman and Angel Zimmerman (the “Zimmermans”) and Sajan, Inc. in the Minnesota District Court, Hennepin County, Fourth Judicial District. Ms. Natzel seeks declaratory, injunctive and monetary relief in an amount in excess of $50,000 against Sajan, Inc. and the Zimmermans in connection with the alleged underpayment to Ms. Natzel of distributions made by Sajan, Inc. while it was a corporation taxed under Subchapter S of the Internal Revenue Code and representations by the Zimmermans with respect to the amount of money invested in Sajan, Inc. On May 13, 2010, the Company tendered a check to the plaintiffs in the amount of $366,942 in payment of the fair value of the shares of Sajan tendered by the plaintiff in connection with the exercise of dissenters’ rights related to the Company’s merger effected in February 2010. On June 8, 2010, the Company received a letter which asserted that the fair value was $495,372. The Company is required to take action with respect to this supplemental claim by August 6, 2010. The Company may dispute the amount claimed by the plaintiff or pay the plaintiff the amount they desire or a different amount. The action to dispute this amount may include filing a petition requesting the court to determine the fair value of the shares. On August 3, 2010, the parties agreed to suspend the August 6, 2010 deadline to take action indefinitely and have agreed to mediate this claim on September 9, 2010, where the issues related to the fair value of the shares will be discussed.

A complete summary of the litigation is included in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31, 2010.

Item 1A. Risk Factors

There have been no material changes to the Company’s Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Removed and Reserved

Removed and Reserved.

Item 6. Exhibits

Exhibit No.		Description

2.1		Agreement and Plan of Merger, dated January 8, 2010, among MathStar, Inc., Sajan, Inc., Garuda Acquisition, LLC, and Thomas Magne (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 11, 2010).

3.1		Certificate of Incorporation of MathStar, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed by MathStar, Inc. with the SEC on August 3, 2005, Registration No. 333-127164 (“Registration Statement”)).

3.2		Certificate of Amendment of the Certificate of Incorporation of MathStar, Inc. filed with the Delaware Secretary of State on May 23, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 23, 2008).

3.3		Certificate of Designation of Series A Preferred Stock filed with the Secretary of State of the State of Delaware on February 25, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated February 25, 2010 filed with the SEC).

3.4		Certificate of Ownership and Merger merging Sajan, Inc. into MathStar, Inc. filed with the SEC on March 3, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 3, 2010).

3.5		Certificate of Amendment to Amended Certificate of Incorporation of Sajan, Inc. filed with the Secretary of State of the State of Delaware on June 15, 2010 (incorporated by reference to Exhibit 3.4 to the Company’s Form 8-A12G/A filed with the SEC on June 23, 2010).

3.6		Bylaws of MathStar, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement).

4.1		Form of common stock certificate of Sajan, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-A/A filed with the SEC on June 23, 2010).

4.2		Tax Benefit Preservation Plan and Rights Agreement, dated as of February 25, 2010, between MathStar, Inc. and Wells Fargo Shareowner Services, a division of Wells Fargo Bank, National Association, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K dated February 25, 2010 filed with the SEC).

31.1		Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) ( filed herewith).

31.2		Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) ( filed herewith).

32.1		Certification of principal executive officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ( filed herewith).

32.2		Certification of principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ( filed herewith).

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 13, 2010	Sajan, Inc.
	(Registrant)

	By:	/s/ Shannon Zimmerman
		Shannon Zimmerman
		Chief Executive Officer and President

	By:	/s/ Timothy Clayton
		Timothy Clayton
		Chief Financial Officer

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Sajan Inactive 10-Q2010 Q2 Quarterly report

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