**SECURITIESAND EXCHANGE COMMISSION**

**WashingtonD.C. 20549**

 

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**FORM 10-K**

** **

| **(Mark one)**                                                                                                                                                                                                                                         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                             |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                   |   |   |
| **For the fiscal year ended November 30, 2003**                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                   |   |   |
| **OR**                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                   |   |   |
| **o**                                                                                                                                                                                                                                                  |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                   |   |   |
| **For the transition period from                     to                   ** |
|                                                                                                                                                                                                                                                   |   |   |
| **Commission File No.:   000-24413**                                                                                                                                                                                                              |

 

**TROY GROUP,INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                                         |   | **33-0807798**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or  organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **2331 South Pullman Street  Santa Ana, California**                                 |   | **92705**                             |
| (Address of principal executive offices)                                             |   | (Zip Code)                            |
|                                                                                 |   |                                  |
| Registrant’s telephone number, including  area code:  **(949) 250-3280**   |
|                                                                                 |   |                                  |
| Securities registered pursuant to  Section 12(b) of the Act: **None** |
|                                                                                 |   |                                  |
| Securities registered pursuant to  Section 12(g) of the Act:               |
|                                                                                 |   |                                  |
| **Common Stock, $.01 par value**                                                     |

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes  o No ý

 

As of January 31, 2004, 10,642,677 shares of the Registrant’sCommon Stock were outstanding.  Theaggregate market value of the Registrant’s outstanding common stock on the lastday of the most recently completed second quarter (May 31, 2003) (based uponthe last sale price of a share of common stock on that date reported by theNasdaq National Market), excluding outstanding shares beneficially owned bydirectors and executive officers, was $12,024,289

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Part III of this Annual Report on Form 10-K incorporates by referenceinformation (to the extent specific sections are referred to herein) from theregistrant’s Proxy Statement for its 2004 Annual Meeting of Stockholders to beheld on March 29, 2004.

 

 

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**TABLE OF CONTENTS**

** **
| Item 1.  | BUSINESS                                                                                        |   |
|----------|-------------------------------------------------------------------------------------------------|--------|
|     | General                                                                                         |   |
|     | Organization  and Development of Business                                                       |   |
|     | Products                                                                                        |   |
|     | Business  Strategies                                                                            |   |
|     | Research and Product  Development                                                               |   |
|     | Support  Services                                                                               |   |
|     | Sales and  Marketing                                                                            |   |
|     | Strategic  Relationships                                                                        |   |
|     | Competition                                                                                     |   |
|     | Intellectual  Property                                                                          |   |
|     | Environmental and  Regulatory Matters                                                           |   |
|     | Employees                                                                                       |   |
|     |                                                                                            |   |
| Item 1A. | CERTAIN IMPORTANT  FACTORS                                                                      |   |
|     |                                                                                            |   |
| Item 2.  | PROPERTIES                                                                                      |   |
|     |                                                                                            |   |
| Item 3.  | LEGAL PROCEEDINGS                                                                               |   |
|     |                                                                                            |   |
| Item  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |   |
|     |                                                                                            |   |
| Item  5. | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.                    |   |
|     |                                                                                            |   |
|     |                                                                                            |   |
| Item 6.  | SELECTED FINANCIAL  DATA.                                                                       |   |
|     |                                                                                            |   |
| Item  7. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.    |   |
|     | Background                                                                                      |   |
|     | Results  of Operations                                                                          |   |
|     | Fiscal Year Ended November 30, 2003  Compared to Fiscal Year Ended November 30, 2002  |   |
|     | Fiscal Year  Ended November 30, 2002 Compared to Fiscal Year Ended November 30,  2001 |   |
|     | Backlog                                                                                         |   |
|     | Liquidity and Capital  Resources                                                                |   |
|     | Critical Accounting  Policies                                                                   |   |
|     | Contractual  Obligations and Commercial Commitments                                             |   |
|     | Recently Issued Accounting Standards                                                            |   |
|     |                                                                                            |   |
| Item  7. | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                                    |   |
|     |                                                                                            |   |
| Item  8. | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA.                                                   |   |
|     |                                                                                            |   |
| Item  9. | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.          |   |

 

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| Item 9A.  | DISCLOSURE  CONTROLS AND PROCEDURES.                              |   |
|-----------|-------------------------------------------------------------------|--------|
|      |                                                              |   |
| Item  10. | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT.              |   |
|      |                                                              |   |
| Item 11.  | EXECUTIVE  COMPENSATION.                                          |   |
|      |                                                              |   |
| Item  12. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.  |   |
|      |                                                              |   |
| Item  13. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS.                  |   |
|      |                                                              |   |
| Item  14. | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                           |   |
|      |                                                              |   |
| Item 15.  | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |   |

 

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*This report contains forward-looking statements within themeaning of the Private Securities Litigation Reform act of 1995.  The statements contained in this report thatare not historical in nature, such as those that utilize terminology such as“may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or“plans,” or comparable terminology, are forward-looking statements and arebased on current expectations and assumptions. Such forward looking statements include, but are not limited to, statementsregarding**the features, benefits and performance of our currentand future products and technologies; the development and release of newproducts and technologies and enhancements to existing products andtechnologies; future revenues and costs and capital and financing requirements;the protection provided by our patents and other intellectual property; theadequacy of our facilities; the outcome of litigation; the maintenance,expansion and benefits of our strategic relationships and distribution channels;and  our competitive position.*

 

*Various risks and uncertainties could cause actual resultsto differ materially from those expressed in forward-looking statements.  These risks and uncertainties include butare not limited to the continued demand for printed financial documents; theexpected decline in sales of our wired connectivity products; the marketacceptance of products incorporating wireless printing technologies; ourability to enhance existing products and develop new products; our ability tohire and retain qualified management, technology and other personnel; theimpact of competition from existing and new technologies and companies; and theother factors set forth below under the heading “Certain Important Factors inthis report.  **Theseforward-looking statements speak only as of the date of this report.  TROY expressly disclaims any obligation orundertaking to release publicly any updates or revisions to any forward-lookingstatements contained in this report to reflect any change in our expectationsor any change in the events, conditions or circumstance on which any suchstatement is based.*

 

We own or have rights totrademarks that we use in connection with the sale of our products.  TROY®, *e*Check SecureTM, PrintraNetTM,TROYmarkTM,  StarACHTM, EtherwindTM,WindconnectTM, WindportTM, EtherSyncTM, Exact MICR TechnologyTM (ExMTTM) and ExactPositioning TechnologyTM (ExPTTM) are among the trademarks that we own.  This report also makes reference totrademarks and trade names of other companies.

 

**PART I**

 

# **Item1.**           BUSINESS

# ** **

## **General**

## ** **

TROY Group, Inc.(“TROY”) offers a full range of products to its customers in two primaryproduct lines: Secure Payment Systems and Wireless and Connectivity Solutions.Secure Payment Systems include Security Printing Solutions which enable thesecure printing and management of checks, and Financial Service Solutions whichenable secure electronic payments. Wireless and Connectivity Solutions includeshardware and software solutions that enable enterprises to share intelligentdevices, such as printers, either wirelessly or using traditional networks.

 

We serve a wide varietyof industries including financial services, insurance, telecommunications,computer hardware, automotive, personnel, government and others.  We distribute our solutions around the worldand market our products through a network of distributors and value-addedresellers and a direct sales force. More than 7,000 customers have purchased our products and services duringthe last 12 months.

 

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***Secure PaymentSystems***

 

Security Printing Solutions****includestate-of-the-art payment systems ranging from high security digital checkprinting solutions to remote payment solutions.  TROY has been a leading provider of MICR (magnetic ink characterrecognition) check printing solutions since 1971. The U.S. Treasury prints mostof its checks using TROY equipment. TROY is one of the largest manufacturers ofdesktop MICR toner in the USA, providing specialty MICR toner for TROY andnon-TROY MICR printers. In addition, TROY is a leading provider of ribbons forimpact MICR printers. Our products provide our customers with payment solutionsthat offer security, speed, flexibility and efficiency.

 

Financial Services****Solutions offer****premiere electronic payment software andservices.  We specialize in developingACH (Automated Clearing House) origination and processing software, as well asInternet check payment solutions. According to the National Automated ClearingHouse Association (NACHA), over 12,000 ACH system participants settle over sixbillion payment transactions each year. We have developed an expertise in this technology and today have severalsoftware and processing solutions that serve both our bank and commercialcustomers.  Our systems, products andservices all support the rapidly growing ACH financial settlement process,which is at the root of most commercial online transactions.

 

 AT&T Corporation, Bank of America Corporation,Farmers Group, Inc. (Farmers Insurance), Fidelity Investments, Hitachi Koki,IBM, J.P. Morgan Chase, Manpower Inc., Marsh USA, Paychex, Inc., ProgressiveInsurance, Unisys, U.S. Postal Service, and Wells Fargo & Company are amongthe Secure Payment Systems customers who have purchased products during thelast 12 months

 

***Wireless and Connectivity Solutions***

 

Wireless & Connectivity Solutions****includehardware and software solutions that enable enterprises to share intelligentdevices like printers either wirelessly or using traditional networks. We havebeen a premiere supplier of hardwired network printing solutions since 1991,and we began commercial shipments of our wireless products in 2001.

 

Ourhardwired network products are recognized worldwide for supporting a largenumber of protocols and network operating systems.  Although we have traditionally focused on printer connectivity(print servers) for local area networks (LANs), our products now enable manydifferent devices to send and receive data and/or to be controlled, monitored,and diagnosed via a LAN and the Internet. Brother Industries, Ltd., EastmanKodak Company, Oki Data Americas, Inc., Xerox Corp. and DaimlerChrysler AG areamong the Wireless and Connectivity customers who have purchased productsduring the last 12 months.

 

## **Organization and Development of Business**

 

TROY Group, Inc. is theresult of various mergers and acquisitions by a company originally founded in1982.  The founding company adopted theTROY Group name and incorporated in California in 1996 and reincorporated inDelaware in May 1998.  Today, we areorganized into two business segments: Secure Payment Systems (previouslySecurity Printing Solutions and TROY Systems) and Wireless and ConnectivitySolutions (previously TROY Wireless).

 

In October 1998, wemerged XCD Incorporated, a leading supplier of network connectivity solutions,into TROY Wireless Company, formerly TROY XCD, Inc.  This business is now a part of Wireless and Connectivity Solutions.

 

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In May 1999, we acquiredthe remaining outstanding shares of Telgate Systems, Inc. (formerly TelgateEquipment Corporation), a Canadian software development company.  This business is now a part of SecurePayment Systems.

 

In February 2000, weacquired American Development (AMDev), Inc., an ACH (Automated Clearing House)software development and processing company.   This business is now a part of Secure Payment Systems.

 

In May 2000, we acquiredCableNet Technologies, a North Carolina based company which specialized inprinter enhancement and connectivity technology, enhancing our technologyplatform to include IBM mainframe and midrange connectivity capabilities, aswell as security and forms management products.  This business is now part of Wireless and Connectivity Solutions.

 

In May 2001, we acquiredthe hardware printing solutions operations of Extended Systems Incorporated(“Extended Systems”), significantly enhancing our distribution capabilities,technology portfolio and customer base in this area of our business.  This business line is now a part of Wirelessand Connectivity Solutions.

 

On March 21, 2003,TROY announced that it had entered into an Agreement and Plan of Merger (the“Merger Agreement”) with Dirk, Inc., a Delaware corporation controlled byPatrick J. Dirk and his family members.  Under the terms of the MergerAgreement, Dirk, Inc. would merge with TROY (the “Merger”) and stockholders ofTROY (other than Dirk, Inc., the Dirk family members and officers and directorsof Dirk, Inc. and TROY) would receive $2.76 per share, in cash, for eachoutstanding share of TROY common stock owned by such stockholders.  On September 18, 2003, TROY announcedthat its stockholders had voted against approval of the Merger Agreement, andas a result the Merger Agreement was terminated.

 

Our principal executiveoffices are located at 2331 South Pullman Street, Santa Ana, California 92705,and our telephone number at that location is (949) 250-3280. Informationregarding our reportable business segments and geographical information iscontained in Note 13 to our financial statements on page F-20 of this report,and is incorporated in this item by reference.

 

## **Products**

 

***Secure Payment Systems***

 

Our Secure PaymentSystems business segment provides payment systems ranging from high securitydigital check printing systems to electronic payment and funds transfersolutions.  Our systems are used totransfer funds between bank accounts using paper checks or electronic ACHprocesses.  Our products provide ourcustomers with payment solutions that offer security, speed, flexibility andefficiency.

 

Over the past decadethere has been a dramatic shift from mainframe computer systems to networkedcomputing environments.  Due to thisfundamental shift in the way corporations store and manage financial paymentdata, IT departments are now faced with the challenge of providing users withsecure methods to make financial payments remotely and maintain control overcash.  Our Secure Payment Systems businesssegment, through our MICR desktop check printing system, was one of the firstto develop a technology to effectively distribute payments electronically tomultiple end-users both within and outside an organization.

 

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The emergence andadoption of enterprise-wide and web-based software applications is alsochanging the way organizations generate and securely distribute financialpayments.  Although many softwareapplications include basic financial reporting functionality, they generally donot adequately address an enterprise’s need to electronically transmit andoutput financial payments across networked computing environments or theWeb.  Secure Payment Systems is focusedon systems for back office processing as well as web, stand-alone or networkedpayment initiation.

 

We have beenexperts in the payment systems marketplace since 1971, and our experience hashelped make us a worldwide provider of secure financial payment systems.  Today, our services include a full array ofsecure payment solutions capable of addressing both print and electronicsituations.  Secure Payment Systems’products are now organized into two product groups:  Security Printing Solutions, and Financial Service Solutions.

 

***Security Printing Solutions.*****We began developing MICR check printingsystems in 1971 and today we are a worldwide provider of MICR check printingsystems and related supplies.  In 1984we began installing secure payment systems for the U.S. Treasury that are stillin operation today.   With the advent oflaser technology and networking, we have expanded our products to serve theneeds of virtually every business that issues a check.

 

Today with ourtechnology, laser printers have the ability to print unique output such as theMICR line on the bottom of a check. MICR lines are printed with a magnetic ink or toner that, whenmagnetized, emits a magnetic signal that identifies each unique character.  If the shape and/or the magnetic propertiesof the characters do not meet specified standards, the banking system willreject the document, which could cause costly manual handling.  Our skill has been to develop printers andsupplies that can print high-quality financial documents using blank paperstock.  Checks printed on our systemsconsistently exceed banking standards.

 

Our MICR check printingsystems include hardware, firmware, software and imaging supplies that providecustomers with functions not offered by most major OEMs (original equipmentmanufacturers).  Our technologies enablelaser printers to print MICR lines, graphics, bar codes and forms.  They also enable a printer to perform otherfunctions not offered by most printer manufacturers, such as auditing, statuschecking and security.  These featuresincrease an enterprise’s flexibility and customer service capabilities,eliminate costs associated with forms obsolescence and enhance documentsecurity.

 

We have been a strategicpartner with Hewlett-Packard (“HP”) since 1993.  This relationship provides our customers with all of the benefitsof high-quality payment solutions combined with the features, functionality,and reliability provided by HP printers. We offer various levels of high-quality MICR payment solutions based onlaser technology.  Our laser solutionsrange in print speeds from 15 to 50 pages per minute and combine laser-qualitybusiness documents with high-quality MICR coding.

 

Our most advancedprinting systems incorporate additional security features such asencryption/decryption, MICR sensors, password protection, key locks, and TROY’sexclusive special watermarking technology, TROYmarkä.  This high-quality line of MICR printers isideal for customers who require a more dedicated and fully secure financialpayment solution.

 

We have been certified bythe London-based Association for Payment Clearing Services (APACS) as complyingwith the organization’s standards for secure check printers.  APACS is a British banking organization thatsets the standards for check writing as well as all aspects of moneytransmission and payments-related activities in the United Kingdom.  The APACS standard is considered one of themost stringent in the world.

 

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We also offer our ownproprietary MICR software solutions that streamline payment processes byprinting checks with security and ease on blank check stock.  Authorized finance, accounts payable andpayroll staff can merge accounting data with our software to create and printchecks securely and easily from different bank accounts, using multiplesignatures, in a one-step process.  Ourtwo primary check printing solutions are ChequeScribe I and ChequeScribe IISecure.

 

•                  ChequeScribe I is a 32 bit Windowsapplication used by banks, credit unions and savings & loan branches foron-demand new account check, cashier check, money order or loan payment couponprinting.  With ChequeScribe I,customers have immediate access to personalized new account checks, custom loancoupons, and convenient bank payment products.

 

•                  ChequeScribe II Secure is a 32-bit checkprinting application compatible with Windows, UNIX, AS400 and mainframe-basedaccounting and payroll systems. ChequeScribe II Secure enables our customers to print checks securelyand easily from different bank accounts using multiple signatures in a one-stepprocess.  This innovative solutionstreamlines check payment creation and prints checks on blank check paper withmulti-layered security.  It is capableof integrating with a wide array of commercial accounting applications,including Great Plains, Peoplesoft, SAP, SunSystems, ACCPAC, Oracle and manymore.

 

Laser payment solutionsrequire imaging supplies on an ongoing basis. We develop and market imaging supplies that are uniquely formulated forspecific output devices.  As new outputdevices are developed, our chemical engineers combine their expertise with ouradvanced research and development equipment to design proprietary formulations.  Our imaging supplies are then produced inour sophisticated, computerized manufacturing facility.  We are recognized by our customers as ahigh-quality developer and manufacturer of proprietary imaging supplies.  TROY is one of the largest MICR tonermanufacturers in the USA and precision-manufactures high quality MICR tonercartridges for laser printers.  We alsooffer other toners, ribbons and accessories for use with other than TROYprinting devices, and additional supplies which include fluorescent andindelible ribbons, post-encoding ribbons, jumbo rolls, standard toner, paperhandling accessories and check security paper. In addition, we offer maintenance contracts to our customers on anannual, monthly and hourly basis.  Amajor part of our maintenance work is subcontracted to third party vendors.

 

***Financial Service Solutions.***We specialize in developing ACH (AutomatedClearing House) origination and processing software, as well as Internet checkpayment solutions. According to the National Automated Clearing HouseAssociation (NACHA), over 12,000 ACH system participants settle over sixbillion payment transactions each year. We have developed an expertise in this technology and today have severalsoftware and processing solutions that serve both our bank and commercialcustomers.  Our systems, products andservices all support the rapidly growing ACH financial settlement process,which is at the root of virtually every commercial online transaction.

 

Our software and servicesconsist of the following:

 

•                  StarACH is our newest Windows-based ACH software product.  StarACH is an enterprise-class,Internet-ready system capable of high-speed processing.  It provides an alternative to the legacymainframe-based ACH systems that are still being used by most banks.

 

•                  VIP and NOVA are our Windows-based ACHsoftware systems for small and medium transaction originators.  These systems support the requirements offinancial institutions

 

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for in-houseprocessing of ACH items.  These systemsprovide a simple, inexpensive solution to banks, credit unions and savings andloans upgrading from manual Fedline entry of ACH transactions.

 

•                  AutoDraft is our desktop ACH originationsystem for corporate users in networked or stand-alone situations.  This software system provides a full array ofACH transaction types, simplified database entry and management as well asNACHA file formatting.  Batchtransaction files are transmitted to the bank or to our Nashville Data Centerfor TROY ACH processing.  AutoDraft is aflexible, inexpensive solution to electronic payments, collections, payroll andother disbursements.

 

•                  *e*CheckSecureTM is our hosted online check service for web merchants and onlinebrokerage firms.  *e*Check Secure features aninteractive, real-time link with a leading check verification service for datavalidation.

 

•                  ACH transaction processing services were provided in fiscal year 2002through our various banking relationships, but were discontinued in the firstquarter of fiscal year 2003.

 

•                  AutoDraftNET is our newest Internet product that will be launched inearly 2004.  AutoDraftNET allows usersto leverage the ubiquitous Internet technology to create ACH files.  This increases the speed of centralizing andmanaging ACH transactions from an unlimited number of customers and branchlocations.

 

•                  SuperNOVA is a new software product that will be launched in 2004.  SuperNOVA is designed for small to mediumsize customers who are looking for robust functionality to streamline their ACHoperations.  Features include riskmanagement controls to set file limits and manage incoming and outgoing ACHfiles, as well as warehouse query features that reduce the stress of handlingmany ACH transactions.

 

## ***Wireless and Connectivity Solutions***

## ** **

Our Wireless andConnectivity Solutions business segment provides hardware and softwaresolutions that enable enterprises to share intelligent devices like printerseither wirelessly or using traditional networks.  Our Wireless and Connectivity Solutions business segment has beena supplier of hardwired network printing solutions since 1991.  Our wireless products allow a range ofdevices to exchange information via *Bluetooth*TM and 802.11b short-range radioconnections.  Wireless and ConnectivitySolutions Products are organized in two product groups:  connectivity products and wireless products.

 

***Connectivity Products.***Ourconnectivity products support a number of protocols and network operatingsystems.  Although we have traditionallyfocused on printer connectivity (print servers) for local area networks (LANs),our products now enable devices to send and receive data and/or to be controlled,monitored, and diagnosed via a LAN and the Internet.

 

Our connectivity productsinclude:

 

•                  *XJet*. The XJet Ethernet and Fast Ethernet print serversplug into the internal slot of Hewlett-Packard LaserJet® printers.

 

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•                  *Pony, Xconnect, PocketPro, andExtendNet*. Theseprint servers support 1, 2, or 4 printers and work on Ethernet  and/or Fast Ethernet networks.

 

•                  *Serial Server.*The Serial Server connects a wide rangeof devices, such as medical instrumentation, numerical control equipment, LEDsigns to Ethernet networks.

 

•                  *Soft Print Server*. The Soft Print Server is a softwaresolution that can be integrated into our customer’s product and provides thesame benefits as exist in our hardware solutions.

 

•                  *OEM products.*TROY develops custom hardware productsfor OEM applications.

 

***Wireless Products.***Over the pastseveral years, there has been increased adoption of various mobile computingtechnologies.  As a result, computerusers are now faced with the challenge of outputting data from mobile devicesthrough stationary PC/peripheral configurations and/or local area networks(“LANs”) that are not specifically configured to interoperate with the mobiledata sources.  In this new age of mobileinformation, there is a growing need for intelligent devices such as PC’s,cellular telephones, Personal Digital Assistants (PDA’s), printers, and digitalcameras to exchange information with each other.

 

We provide a range ofproducts that enable users of these new devices to print information overwireless networks without the need to install device-specific driversoftware.  Our wireless products arehardware and software solutions that address both 802.11b and *Bluetooth*,which are the two emerging industry standards for short-distance wirelesscommunications within a single building.

 

Our current 802.11bProducts include:

 

•                  *EtherWindTM Wireless Print Server.* Our EtherWind Print Server featuressupport for networking protocol standards, and has interoperability with mostprinters, operating systems, and other 802.11b products (e.g. PCMCIA cards andaccess points).

 

•                  *EtherSyncTM PC Wireless Card.*Our EtherSync PC Card works with mostlaptop computers to deliver wireless network access and the freedom to printfrom anywhere within our customer’s home or office.

 

•                  *EtherBridge Ethernet 802.11b Bridge*. Our EtherBridge provides 801.11bconnectivity to networked printers and other networked industrial devices.

 

•                  *OEM Modules.*Our OEM modules provide custom embeddedsolutions to our customer’s applications, from middleware/firmware to turnkeyhardware/firmware solutions.

 

*Bluetooth* is a low-cost wirelesstechnology that is especially useful for enabling small, battery-powered mobiledevices like cellular telephones to communicate with other mobile or fixeddevices at distances up to 10 meters (33.7 feet).

 

Our current *Bluetooth*products include:

 

•                  *WindConnectIITM Print Adapter.* Our WindConnectIITM Print Adapter can beattached to most printers enabling them to receive data without wires or cablesand print from PCs, laptops, PDA’s and cellular phones.

 

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•                  *OEM Modules.* We provide custom embedded solutions toour customer’s applications, from middleware/firmware to turnkeyhardware/firmware solutions.

 

## **BusinessStrategies**

 

Our goal is to increaseshareholder value through profitable growth, and we intend to pursue this goalby focusing on the following strategies.

 

*Develop New Products for our Customers*.  We achieved a leadership position in MICRcheck printing by investing in research and development, introducinghigh-quality products and focusing on satisfying the needs of both our OEMcustomers and end users.  We intend tocontinue to invest in research and development to enhance our currenttechnologies and to introduce new products based on input from our existingcustomers.

 

*Expand Distribution Channels*.  We believe that expanding both our U.S. andInternational distribution channels is an important component of our growthstrategy. As a result, we are actively recruiting distributors, dealers andVARs (Value Added Resellers) both domestically and internationally.

 

*Leverage Strategic Alliances*.  We currently partner with various software,firmware, hardware and financial service companies in offering solutions thatassist us in meeting our customers’ needs. We intend to continue to aggressively pursue new strategic alliancesthat we believe will enable us to enter new markets, expand our distributionchannels and enhance our product and service offerings.  We currently have management resourcesdedicated to developing these types of strategic alliances.

 

*Improve Manufacturing and Operating Costs.*Inaddition to reviewing all operations for cost reduction opportunities, we areimplementing a new ERP (enterprise resource planning) system. We expect thissystem to improve operational efficiencies and work flows, eliminate severalmanual systems, improve customer service and reduce cost.  We intend to continue to review theperformance of our business segments and product lines to determine if we willinvest, maintain or discontinue those operations.  We evaluate business performance based on profitability,competitive advantage in the market and growth potential.

 

There can be no assurancethat we will be successful in pursuing these business strategies, whichnecessarily involve certain risks (see “Certain Important Factors” on page 13).

 

## **Research and Product Development**

 

We are committed togrowing our business through research and development, and it is one of ourmajor business strategies.  We seekcustomer feedback in the product design process in order to meet changingrequirements, and are committed to developing functional and integratedsolutions in a rapid and efficient manner. As of January 31, 2004, we employed approximately 29 persons in ourresearch and development efforts.  Ourhighly trained staff of software, electrical, mechanical and chemical engineersis focused on principal research and development activities such as:

 

•                  developing secure printing solutions;

 

•                  creating proprietary imaging supplies;

 

•                  developing software and firmware for Wireless and Connectivityproducts;

 

•                  developing new products that provide solutions for our strategicbusiness partners; and

 

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•                  developing electronic payment solutions.

 

## **SupportServices**

 

We offer technicalsupport, maintenance and on-site services, portions of which are provided bythird parties.  We provide technicalsupport through a toll-free telephone line and through our web site atwww.troygroup.com.  We also provideon-site service through yearly maintenance contracts or on a time-and-materialsbasis.

 

In addition to ourtechnical support, maintenance and on-site services, we have maintained the *MICRTechnology Center*, a research group dedicated to providing solutionsfor MICR document processing problems. Members of the testing facility for this research group have the abilityto examine all aspects of the MICR printing process to pinpoint whereimprovements can be made and to ensure the highest-quality MICR line.

 

## **Salesand Marketing**

## ** **

Our two businesssegments, Secure Payment Systems and Wireless and Connectivity Solutions, haveindependent sales and marketing organizations. They focus on their respective product groups.  They are similar in that they market products to Fortune 1000companies through a direct sales force, and to small and mid-size businessesprimarily through a network of distributors and value-added resellers.  Our products are represented internationally,primarily through a distributor network.

 

Our Secure PaymentSystems segment markets check printing solutions to financial services,insurance, telecommunications, computer hardware, automotive, personnel,government and other customers.  Our baseof more than 5,000 active Secure Payment Systems customers include many Fortune1000 companies and the AT&TCorporation, Bank of America Corporation, Farmers Group, Inc. (FarmersInsurance), Fidelity Investments, Hitachi Koki, IBM, J.P. Morgan Chase Bank,Manpower Inc., Marsh USA, Paychex, Inc., Progressive Insurance, Unisys, U.S.Postal Service, and  Wells Fargo &Company are among the Secure Payment Systems customers that purchasedpayment products during the last 12 months.

 

We sell our Wireless andConnectivity Solutions through OEM partners, value-added resellers,distributors and directly to corporations. Our OEM customers include companies such as Oki Data Americas, Monarch,Zebra, Brother, and Eastman Kodak,  Wehave co-marketing arrangements with Sony Europe, Compaq, and Kyocera.  Through our German sales team, we selldirectly to major corporations such as Daimler Chrysler and Siemens.

 

We promote our productsthrough our web site, trade shows, advertising and direct marketing materialsas well as referrals from our strategic business partners, including TexasInstruments, Atmel, Intersil Corporation, HP, IBM, and Standard Register.

 

## **Strategic Relationships**

## ** **

In fiscal year 2003, TROY continued to establish and enhancerelationships with key industry and technology partners.

 

The digital check printermarket continues to be an important part of our business, and we are continuingto develop new products to address the needs of the market.  Since 1993, we have also maintained astrategic relationship with HP’s various printing groups.  In addition, we are a member of HP’sLaserJet Integrated Solutions Partner Support Program (ISPS), a select group ofthird-party 

 

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solutions partners.  As a member of this group, we work with HPon architecture issues for new product development.  We also entered into a technology co-development agreement withHP to develop a next generation Bluetooth printer adapter.  We anticipate that this technology will beintegrated into HP and TROY Bluetooth products in 2004.  We believe that our relationship with HPgives us a competitive advantage in marketing our products, primarily becauseof HP’s reputation as the leading provider of laser printers throughout theworld.

 

We have a joint marketingrelationship with IBM, the world leader in the development and manufacture ofadvanced information technology.  In anagreement with TROY, IBM has agreed to purchase from us all of its MICR tonerrequirements for the IBM 3900, InfoPrint 4000, and the soon-to-be-released IBM4100 family of high-speed laser printers.

 

We are an OEM supplier toStandard Register.  Standard Register isa recognized leader in delivering document management systems, products andservices to healthcare, financial and general business markets.  We private-label MICR and multi-purposeprinters for Standard Register,

 

During fiscal 2003 we continued to ship our EtherWind 802.11b printserver to Epson as part of an OEM agreement in which the EtherWind is bundled withthe Epson Stylus C82 inkjet printer.

 

## **Competition**

 

The market for ourproducts is highly competitive and subject to rapid technological change.  We compete principally on the basis of thequality, flexibility, convenience and security of our products andservices.  Overall, we believe that weare well positioned in our industry and compete favorably as a result of:

 

•                  our highly trained team of software, firmware, electrical, mechanicaland chemical engineers and programmers;

 

•                  our commitment to understanding the changing needs of our marketplace;

 

•                  our ability to develop new solutions to meet those needs;

 

•                  the breadth of our products’ features;

 

•                  our reputation for knowledge, technical expertise and professionalism;

 

•                  the strength and scope of our strategic relationships;

 

•                  our capable and reliable technical support capabilities; and

 

•                  a historical and ongoing commitment to quality.

 

**Secure Payment Systems**

 

*Security Printing Solutions.* Our primary competitors in networked computerpayment solutions are Source Technologies, Xerox, ACOM Solutions, andRosetta.  We believe that our currentrelationship with HP gives us a competitive advantage in the MICR printingmarket, primarily because of HP’s reputation as the leading provider of laserprinters worldwide.

 

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We compete in thespecialty toner and ribbon market primarily on the basis of quality andservice.  Color Image is our mostsignificant competitor with respect to our toner products.  Our significant competitors with respect toribbons are Nu-Kote International, Fuji Copian Corporation and Columbia.  We position ourselves as a full-serviceprovider, with a pricing strategy that reflects our quality, reliability,precision of formulation and available customer support.  We believe we have been able to maintain aleadership position in the MICR printer and imaging supplies business as aresult of advanced technological features (including security), high levels ofquality and value-added services.

 

*F**inancialServices Solutions.*  Wedevelop, market and support a variety of software systems.  Our key competitors are CheckFree, GoldleafTechnologies, and Politzer & Haney for ACH processing systems.  We believe our software systems have uniquefeatures that competitively differentiate them from other providers.  We continue to develop enhancements to ourcore software systems that, we believe, will continue to provide uniquecapabilities to our software users.

 

We are an authorizedreseller of Certegy check verification services, formerly Equifax CheckServices.  Certegy also has otherauthorized resellers, such as BankServ, Xign and Intellicheck, which providecompetitive service offerings.  *e*CheckSecure provides secure online checks and competes with Authorize.net, DeluxeCheck, PaybyCheck, and a host of other online check service providers.  TROY differentiates itself in real-timeverification, coupling a flexible front end with back-office reporting.

 

**Wireless and Connectivity Solutions**

 

*Wireless Solutions*.  The *Bluetooth* and 802.11b wireless markets areemerging markets.  Our primarycompetitors in the *Bluetooth* market are MPI, AnyCom and AxisCommunications.  In addition, HP, NECand Samsung have delivered *Bluetooth* capabilities on their lines of printers.  Our competitors in the 802.11b printerconnectivity market are HP, Buffalo, Linksys, D-Link, Sercomm, andKomatsu.    Our primary competitors inthe *Bluetooth*****softwareprotocol stack market are Extended Systems Inc. and Widcomm Inc.  Other competitors include IVT Corporation,Stonestreet One, Inc., and several other smaller companies.  We believe that our focus on enterpriseclass functionality and performance are key differentiators in the wirelesssolutions market.

 

*Connectivity Solutions*.  In the print server market, HP,  Axis, S.E.H., Lantronix, Silex and Lexmarkoffer competing products that are suitable for multiprotocol enterprise networkprinting applications.  There are manyother commodity print servers, including very low-cost products, but suchcommodity print servers are not usually suitable for enterprise networks due toinadequate protocol support and features, limited customer support and lowperformance.  In addition, we believeour support of both PrintraNet and IPP Internet connectivity provides anadvantage over many of our competitors. Although HP makes print servers, we do not generally consider them adirect competitor.  This is because weare a HP partner providing DEC and Banyan VINES connectivity solutions that arenot available on HP products.

 

## **Intellectual Property**

 

We have certainproprietary printing system components, manufacturing processes, information,knowledge, trademarks and tradenames. We rely on a combination of patent, trademark, trade secret and otherintellectual property laws, nondisclosure agreements with employees andinternal confidentiality measures to protect our intellectual property rightsand confidential information.  We seekpatents from time to time on products and processes.  The decision to seek additional patents is based on an analysisof various business considerations such as the cost of obtaining a patent, thelikely scope of patent protection and the benefits of patent protectionrelative to relying on trade secrets protection and other measures.  

 

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We also rely onspecialized know-how and continuing technological innovation to develop andmaintain our competitive position.

 

As of January 31,2004, we held seven United States patents. Our existing patents primarily cover components of our impact printingsystems and proprietary consumables. There can be no assurance that our issued patents will providemeaningful protection of our products and technologies.  In addition, patent applications can bedenied or significantly reduced before issuance.  Moreover, there can be no assurance that third parties will notassert intellectual property infringement claims against us or that, if suchclaims are asserted, we would prevail or be able to obtain any necessarylicenses.

 

We believe that ourproprietary manufacturing processes and techniques, materials expertise andtrade secrets may provide us with a competitive advantage as important as, ifnot more important than, patent protection. We seek to maintain the confidentiality of this proprietary informationby requiring employees who have access to proprietary information to signconfidentiality agreements and by limiting its disclosure to outsideparties.  There can be no assurance,however, that these measures will provide us with adequate protection of ourproprietary information or with adequate remedies in the event of unauthorizeduse or disclosure.  In addition, therecan be no assurance that our competitors will not independently develop orotherwise gain access to processes, techniques or trade secrets that aresimilar or superior to ours.  Finally,as with patent rights, legal action to enforce trade secret rights can belengthy and costly, with no guarantee of success.

 

## **Environmental and Regulatory Matters**

 

Our MICR printer andimaging supplies manufacturing operations are subject to numerous domestic andinternational laws and regulations, particularly relating to environmentalmatters that impose limitations on the discharge of pollutants into the air,water and soil and establish standards for the treatment, storage and disposalof solid and hazardous wastes.  We arealso required to have permits from a number of governmental agencies in order toconduct various aspects of our business. Compliance with these laws and regulations is not expected to have amaterial adverse effect on our capital expenditures, earnings or competitiveposition.  There can be no assurance,however, that future changes in environmental laws or regulations, or in thecriteria required to obtain or maintain necessary permits, will not have amaterial adverse effect on our operations.

 

## **Employees**

 

As of January 31,2004, we employed approximately 215 persons. None of our employees are represented by a labor union or covered by acollective bargaining agreement.  Wehave not experienced any work stoppages and consider relations with ouremployees to be good.

 

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## **AvailableInformation**

 

# **Our Web Site is http://www.troygroup.com.  We make available free of charge, on orthrough our Web Site, our annual, quarterly and current reports, as well as anyamendments to these reports, as soon as reasonably practicable afterelectronically filing these reports with the Securities and ExchangeCommission.  Information contained onour Web Site is not a part of this report. We have adopted a code of ethics applicable to our principal executive,financial and accounting officers.  Wemake our code of ethics available free of charge upon request.**

 

# **Item 1A. CERTAIN IMPORTANT FACTORS**

 

There are severalimportant factors that could cause our actual results to differ materially fromthose we anticipate or those reflected in any of our forward-lookingstatements.  These factors, and their impacton the success of our operations and our ability to achieve our goals, includethose set forth below.

 

**Our business depends on the continued demand for printeddocuments, including financial documents.**

 

Because we providesolutions that allow enterprises to distribute and print information, ourbusiness depends in large part on the continued demand for printeddocuments.  Demand for these solutionscould decline if businesses and organizations move toward “paperless”environments and reduce their dependence on printed documents.  Demand for printed financial documents maybe reduced as a result of competition from alternate financial documentdelivery or payment methods, such as electronic banking, electronic commerce,on-line services and other electronic media. We cannot assure you that changes in the business environment orcompetition from alternate financial document delivery or payment methods willnot significantly erode the demand for our products and cause our business tosuffer.

 

**We expect that the market for wiredconnectivity products will continue to decline, and there is no assurance thatwe will be able to increase our market share or offset this potential declinethrough increased sales of other products.**

 

We anticipate that themarket for our wired connectivity products, which constitute a significantportion of our overall sales of Wireless and Connectivity Solutions, willdecline as these products are at or approaching end of life.  In order to maintain and increase revenueswe must increase our market share.  Inaddition, it will be necessary for us to offset this potential decline in salesof wired connectivity products through increased sales of other products.  There is no assurance that we will besuccessful in growing market share or achieving increased sales in otherproducts.

 

**The success of our wireless solutionsdepends on our ability to develop and introduce on a timely basis new productsfor existing and emerging wireless communications markets and the ability ofthese products to gain market acceptance.**

 

The development of newwireless networking products is highly complex, and we may experience delays indeveloping and introducing new products on a timely basis.  Due to the intensely competitive nature ofthe wireless market, any delay in the commercial availability of new productscould materially and adversely affect our business.  In addition, if we are unable to develop or obtain access toemerging wireless networking technologies as they become available, or areunable to design, develop and introduce on a timely basis products based onthese emerging technologies, our future operating results would be materiallyand adversely affected.  To date, ourwireless solutions have not gained market acceptance or had any meaningfulcommercial impact, and there can be no assurance that our

 

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wireless solutions willever gain market acceptance or have a commercial impact.  In addition, there can be no assurance thatour wireless products will be based on the wireless standards that areultimately adopted by the marketplace.

 

**Technology in our industry evolvesrapidly, and we must continue to enhance existing products and develop newproducts or our business will suffer.**

 

Rapid technologicaladvances, obsolescence and large fluctuations in demand and changing industrystandards characterize the markets for our current products.  Our existing and development-stage productsmay easily become obsolete if our competitors introduce newer or bettertechnologies or if industry standards change. To be successful, we must continually enhance our existing products anddevelop and introduce other secure payment system products and wireless andconnectivity products.  If we fail toadequately anticipate or respond to changing technological developments andstandards or customer requirements, or if we are significantly delayed indeveloping and introducing products, our business will suffer.  In addition, our success in this rapidlychanging environment depends on our ability to appropriately refocus ourmanagement attention and other resources on the emerging technologies andstandards that will ultimately gain market acceptance.

 

**We face significant competition that may negatively impactour revenues, gross margins and market share.**

 

We face increasedcompetition in developing and selling secure payment systems as well as ourwireless and connectivity solutions. Many of our competitors in this market have substantially greaterfinancial, development, marketing and personnel resources than we have.  We cannot assure you that we will be able tocompete successfully against our current or future competitors.  Increased competition may result in pricereductions, lower gross margins and loss of market share.

 

**We maintain strategic supply, OEM and marketing arrangements,and termination of these relationships could adversely affect our revenues andearnings.**

 

We maintain and depend onstrategic relationships with a number of companies, including Certegy, HP, IBM,Novell, and Standard Register.  Theserelationships include supply, OEM, marketing and service arrangements which areimportant to our business.  Certain ofthese relationships are not covered by written agreements and could beterminated at any time.  If ourrelationship with any of these companies were to end, our revenues and earningscould fall.  We cannot assure you thatwe will be able to maintain our strategic relationships with these companies.

 

**We sell a significant portion of our productsinternationally, which exposes us to currency fluctuations and other risks.**

 

We sell a significantamount of our products to customers outside the United States.  International sales accounted for 17.5% ofour net sales in the year ended November 30, 2003.  International sales represented 17.0% of ournet sales in the fiscal year ended November 30, 2002, and 14.9% of salesin the fiscal year ended November 30, 2001.  We expect that shipments to international customers will continueto account for a material portion of our net sales.  Sales outside the United States involve the following risks,among others:

 

•                  foreign governments may impose tariffs, quotas and taxes;

 

•                  political and economic instability may reduce demand for our products;

 

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•                  restrictions on the export or import of technology may reduce oreliminate our ability to sell in certain markets; and

 

•                  potentially limited intellectual property protection may cause us torefrain from selling in certain markets.

 

Because we denominatesome of our international sales in U.S. dollars, currency fluctuations couldalso cause our products to become less affordable or less price-competitivethan those of foreign manufacturers.  Wecannot assure you that these factors will not have a material adverse effect onour international sales.  Any adverseimpact on our international sales would affect our results of operations andwould cause our business to suffer.  Inaddition, currency fluctuations could result in transaction or translationgains or losses which could have an effect on our net sales and profits.

 

**Our quarterly operating results fluctuate as a result of manyfactors.**

 

Our quarterly operatingresults fluctuate due to various factors. Some of the factors that influence our quarterly operating resultsinclude:

 

•                  the mix of products and services sold in the quarter;

 

•                  life-cycle stages of the products sold in the quarter;

 

•                  the availability and cost of components and materials;

 

•                  costs and benefits of new product and service introductions; and

 

•                  customer order and shipment timing.

 

Because of these factors,our quarterly operating results are difficult to predict and are likely to varyin the future.  If our revenues orearnings are below expectations in any quarter, our stock price is likely todrop.

 

**Patrick J. Dirk and his familymembers beneficially own approximately 67% of our common stock and thisconcentration of ownership allows them to control all matters requiringstockholder approval, could delay or prevent a change in control of TROY andlimits the trading volume for our shares.**

 

Patrick J. Dirk and his family members beneficially own approximately67% of our outstanding common stock. As a result, Mr. Dirk and his familymembers are able to control all matters requiring stockholder approval,including election of directors, and could delay or prevent a change in controlof TROY.  In addition, because of thesignificant percentage of outstanding shares beneficially owned by Mr. Dirk andhis family members and the fact that they have not historically traded theirshares to any significant extent, the trading volume for shares of our commonstock has been, and continues to be, limited. As a result, many stockholders may not be able to sell their shareswithout a significant impact on the market price of our common stock.

 

**We may not be able to adequately protect or enforce ourintellectual property rights or to protect ourselves against infringementclaims of others.**

 

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We cannot be certain thatthe steps we have taken to protect our intellectual property rights will beadequate or that third parties will not infringe or misappropriate ourproprietary rights.  Any suchinfringement or misappropriation could have a material adverse effect on ourfuture financial results.  We alsocannot be certain that we have not infringed the proprietary rights ofothers.  Any such infringement couldcause third parties to bring claims against us, resulting in significant costs,possible damages and substantial uncertainty.

 

**We depend on our executive officers for our success.**

 

We are significantlydependent upon Patrick J. Dirk, our Chairman and Chief Executive Officer, andour other executive officers.  Therecould be a material adverse effect on our business if we lose the services ofMr. Dirk or any other executive officer.

 

**Compliance with government regulations may cause us to incurunforeseen expenses.**

 

Our MICR printer andimaging supplies manufacturing operations are subject to a number of federal,state and local laws and regulations. These regulations include laws and regulations promulgated by theEnvironmental Protection Agency and similar state agencies regarding storing,shipping, disposing, discharging and manufacturing hazardous materials andhazardous and non-hazardous waste. Although we believe that our operations materially comply with allcurrent laws and regulations, we cannot assure you that these regulations willnot change.  We also cannot assure youthat unforeseen environmental incidents will not occur, or that pastcontamination or non-compliance with environmental laws will not be discoveredon our current or former properties. Any of these events could result in significant expense or requirechanges in our operations, which could materially and adversely affect ourbusiness.

 

# **Item2.  PROPERTIES**

 

We currently leaseapproximately 37,000 square feet of space for our headquarters in Santa Ana,California.  Our other facilities are locatedin Wheeling, West Virginia, where we lease approximately 77,000 square feet fora manufacturing facility; in Nashville, Tennessee, where we lease approximately5,300 square feet; in Coquitlam, British Columbia, where we lease approximately3,900 square feet; and in Herrenberg, Germany, where we lease 6,000 squarefeet.  We consider our presentfacilities to be sufficient for our current operations. The facilities in SantaAna, California, Wheeling, West Virginia, Nashville, Tennesee, and Coquitlam,British Columbia are used by the Secure Payment Systems business segment. Thefacilities in Santa Ana, California, Wheeling, West Virginia, and Herrenberg,Germany are used by the Wireless and Connectivity Solutions business segment.

 

# **Item 3.  LEGALPROCEEDINGS**

 

On November 21,2002, Tom Lloyd filed an action in the Superior Court of the State ofCalifornia in and for Orange County against TROY and its directors, allegingthat defendants breached their fiduciary duties in connection with the Mergerby attempting to provide the Dirk family with preferential treatment inconnection with their efforts to complete a sale of the TROY. The complaintsought to enjoin an acquisition of TROY by the Dirk family, as well asattorneys’ fees. Following termination of the Merger Agreement, the plaintifffiled a motion for dismissal of the action and award of attorney’s fees andexpenses of $387,250.  TROY filed amotion in support of the plaintiff’s motion for dismissal of the action and inopposition to plaintiff’s motion for fees. The court has issued a ruling granting the motion for dismissal, andcontinuing the motion for attorney’s fees to March 4, 2004. TROY hasaccrued an estimate of expenses to be incurred in connection with thislitigation in fiscal 2003 in excess of the deductible amount, which wasrecorded as an expense in the fiscal 2002 financial statements.

 

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# **Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

A Special Meetingof Stockholders was held on September 18, 2003, to consider and vote upona proposal to approve the Merger Agreement and related Merger. The MergerAgreement and related Merger were subject to:

 

(1)               approval by the holders of a majority of theoutstanding shares of TROY’s common stock, and

 

(2)               approval by the holders of a majority of the shares ofTROY’s common stock cast either “for” or “against” the Merger Agreement andrelated Merger (excluding shares beneficially owned by Dirk, Inc., the Dirkfamily members and any officers or directors of Dirk, Inc. or TROY).

 

The voting results wereas follows:

 
|                                                                                                                                                                                                                                       |   | **For**   |   | **Against** |   | **Abstain** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-------------|--------|-------------|
|                                                                                                                                                                                                                                       |   |      |   |        |   |        |
| (1) Approval by holders  of a majority of the outstanding shares                                                                                                                                                                           |   | 7,761,962 |   | 1,488,727   |   | 23,425      |
| (2) Approval by holders  of a majority of the shares cast either “for” or “against,” excluding shares  beneficially owned by Dirk, Inc., the Dirk family members and any officers or  directors of Dirk, Inc. or TROY. |   | 702,112   |   | 1,438,727   |   | N/A         |

 

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**PART II**

 

# **Item 5.  MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED**           STOCKHOLDER MATTERS.

# ** **

**Common Stock Information**

 

Our common stock wastraded on the Nasdaq National Market from July 21, 1999 untilDecember 31, 2002 under the symbol “TROY”.  From December 31, 2002 to May 14, 2003, our common stock wasquoted on the National Quotation Bureau, commonly referred to as the “PinkSheets” under the symbol “TROY.”  SinceMay 15, 2003, our common stock has traded again on the Nasdaq National Marketunder the symbol “TROY”.  The followingtable sets forth, for each of the fiscal periods indicated, the range of highand low sale prices per share as reported by the Nasdaq National Market.  These prices do not include adjustments forretail mark-ups, mark-downs or commissions. As of January 31, 2004, there were approximately 130****recordholders of our common stock.

 

 
| **Fiscal 2002** |   | **High** |   | **Low** |   |
|-----------------|--------|----------|--------|---------|--------|
| First Quarter   |   | $        | 2.16   |    | $      | 1.50 |   |
| Second Quarter  |   | $        | 2.85   |    | $      | 1.40 |   |
| Third Quarter   |   | $        | 2.84   |    | $      | 2.58 |   |
| Fourth Quarter  |   | $        | 3.06   |    | $      | 2.43 |   |

 
| **Fiscal 2002** |   | **High** |   | **Low** |   |
|-----------------|--------|----------|--------|---------|--------|
| First Quarter   |   | $        | 4.44   |    | $      | 3.35 |   |
| Second Quarter  |   | $        | 4.55   |    | $      | 3.50 |   |
| Third Quarter   |   | $        | 4.25   |    | $      | 1.88 |   |
| Fourth Quarter  |   | $        | 2.43   |    | $      | 0.93 |   |

 

**DividendPolicy**

 

We have not declared orpaid any cash dividends on our common stock since our public offering.  Any payment of future dividends will be atthe discretion of the Board of Directors and will depend on, among otherthings, TROY’s earnings, financial condition, capital requirements, extent ofindebtedness and contractual restrictions with respect to the payment ofdividends.  Currently, our ability todeclare and pay dividends is restricted by the terms of our line of creditagreement. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Liquidity and Capital Resources” and Note 6 to ourfinancial statements.

 

**Equity CompensationPlan Information**

 

The following table sets forth information as of November 30, 2003about shares of our common stock outstanding and available for issuance underour existing equity compensation plans. Options granted in the future under the plans are within the discretionof our Compensation Committee and therefore cannot be ascertained at this time.

 

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|                                                            |   | **(a)**                                                                                              |   | **(b)**                                                                            |   | **(c)**                                                                                                                                                  |      |
|-----------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| **Plan Category**                                               |   | **Number of  Securities  to be Issued Upon  Exercise of  Outstanding Options,  Warrants and Rights** |   | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** |   | **Number of  Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (excluding securities  reflected in column (a))(1)** |      |
| Equity compensation plans approved by  security holders         |   | 1,032,000                                                                                            |   | $                                                                                  | 5.63   |                                                                                                                                                     | 1,668,000 |   |
|                                                            |   |                                                                                                 |   |                                                                               |   |                                                                                                                                                     |      |
| Equity compensation plans not approved by  security holders (2) |   | 106,666                                                                                              |   | 3.50                                                                               |   | —                                                                                                                                                   |      |
| **Total**                                                       |   | 1,138,666                                                                                            |   | $                                                                                  | 5.43   |                                                                                                                                                     | 1,668,000 |   |

 

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(1)          Consists entirely of shares available for issuanceunder our 1998 Stock Option Plan.

(2)          The Company issued warrants to purchase 350,000 sharesof common stock of the Company, of which 106,666 are outstanding atNovember 30, 2003, to a consultant and an attorney in connection withservices provided relating to acquisitions, the Company’s initial publicoffering and for other services.  Nowarrants were granted in 2002 or 2003. The warrants expire five years from thedate vested.

 

# **Item 6. SELECTED FINANCIAL DATA.**

 

**SummaryStatements of Operations Data:(in thousands, except per share data)**

 
| **For the year ended  November 30:**   |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                                   |   | $        | 59,121 |     | $      | 52,310   |   | $        | 49,218 |     | $      | 54,998 |   | $ | 56,576 |   |
| Gross profit                                |   | 22,531   |   | 22,257   |   | 18,452   |   | 16,987   |   | 21,813   |   |
| Net income (loss)                           |   | 5,827    |   | 2,407    |   | (5,945   | )      | (3,175   | )      | 1,020    |   |
| Basic net income (loss) per share           |   | $        | 0.67   |     | $      | 0.22     |   | $        | (0.55  | )        | $      | (0.30 | ) | $ | 0.10 |   |
| Diluted net income (loss) per share         |   | $        | 0.64   |     | $      | 0.21     |   | $        | (0.55  | )        | $      | (0.30 | ) | $ | 0.10 |   |
| Weighted average diluted shares outstanding |   | 9,116    |   | 11,369   |   | 10,775   |   | 10,647   |   | 10,650   |   |

 

**SummaryBalance Sheet Data:(in thousands)**

 
| **At November 30:**                |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Working capital                         |   | $        | 25,011 |     | $      | 24,903   |   | $        | 21,170 |     | $      | 19,317 |   | $ | 18,939 |   |
| Total assets                            |   | 37,058   |   | 42,575   |   | 37,007   |   | 33,539   |   | 34,960   |   |
| Long-term debt (net of current portion) |   | 331      |   | 272      |   | 193      |   | 120      |   | —   |   |
| Stockholders’ equity               |   | 29,795   |   | 35,615   |   | 28,732   |   | 25,626   |   | 26,659   |   |
|                                         |        |          |        |          |        |          |        |          |        |          |        |  |  |  |  |  |

 

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**Item 7.****           MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND****       RESULTS OF OPERATIONS.**

 

The following discussionand analysis should be read in conjunction with our Consolidated FinancialStatements and related Notes included in this report.

 

## **Background**

 

TROY offers a fullrange of products to its customers in two primary product lines: Secure PaymentSystems (previously Security Printing Solutions and TROY Systems), and Wirelessand Connectivity Solutions (previously TROY Wireless). Secure Payment Systemsinclude Security Printing Solutions which enable the secure printing andmanagement of checks and Financial Service Solutions which enable secureelectronic payments. Wireless and Connectivity Solutions include hardware andsoftware solutions that enable enterprises to share intelligent devices, suchas printers, either wirelessly or using traditional networks.

 

Ourproducts have been adopted in a wide variety of industries, includingelectronic bill payment utilities, retail and brokerage firms,telecommunications, financial services, insurance, computer hardware, automotive,personnel and others. The Company markets its products in 55 countries and hasmore than 7,000 active customers, including many Fortune 1000 companies.  In fiscal years 2001, 2002, and 2003there were no customers who accounted for 10% or more of the Company’s netsales.

 

**Secure Payment Systems**

 

Security Printing Solutions****includestate-of-the-art payment systems ranging from high security digital checkprinting solutions to remote payment solutions.  TROY has been a leading provider of MICR (magnetic ink characterrecognition) check printing solutions since 1971. The U.S. Treasury prints mostof its checks using TROY equipment. TROY is the largest manufacturer of desktopMICR toner in the USA, providing specialty MICR toner for TROY and non-TROYMICR printers. In addition, TROY is a leading provider of ribbons for impactMICR printers. Our products provide our customers with payment solutions thatoffer security, speed, flexibility and efficiency.

 

Financial Services****Solutions****offer****premiereelectronic payment software and services. We specialize in developing ACH (Automated Clearing House) originationand processing software, as well as Internet check payment solutions. Accordingto the National Automated Clearing House Association (NACHA), over 12,000 ACHsystem participants settle over six billion payment transactions eachyear.  We have developed an expertise inthis technology and today have several software and processing solutions thatserve both our bank and commercial customers. Our systems, products and services all support the rapidly growing ACHfinancial settlement process, which is at the root of most commercial onlinetransactions.

 

AT&TCorporation, Bank of America Corporation, Farmers Group, Inc. (FarmersInsurance), Fidelity Investments, Hitachi Koki, IBM, J.P. Morgan Chase Bank,Manpower Inc., Marsh USA, Paychex, Inc., Progressive Insurance, Unisys, U.S.Postal Service, and  Wells Fargo &Company are among the Secure Payment Systems customers who have purchasedproducts during the last 12 months.

 

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**Wireless and Connectivity Solutions**

 

Wireless & Connectivity Solutions****include hardwareand software solutions that enable enterprises to share intelligent deviceslike printers either wirelessly or using traditional networks. We have been apremiere supplier of hardwired network printing solutions since 1991, and webegan commercial shipments of our wireless products in 2001.

 

Ourhardwired network products are recognized worldwide for supporting a largenumber of protocols and network operating systems.  Although we have traditionally focused on printer connectivity(print servers) for local area networks (LANs), our products now enable manydifferent devices to send and receive data and/or to be controlled, monitored,and diagnosed via a LAN and the Internet. Brother Industries, Ltd., EastmanKodak Company, Oki Data Americas, Inc., Xerox Corp. and DaimlerChrysler AG areamong Wireless and Connectivity Solutions customers who have purchased productsduring the last 12 months.

 

## **Resultsof Operations**

 

The following table setsforth, for the periods indicated, certain information derived from ourconsolidated statements of operations expressed as a percentage of net sales:

 
|                                          |   | **Fiscal  Year Ended November 30,** |   |
|-----------------------------------------------|--------|------------------------------------------|--------|
|                                          |   | **2001**                                 |   | **2002** |   | **2003** |   |
| Net sales                                     |   | 100.0                                    | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |   | 62.5                                     |   | 69.1 |   | 61.5 |   |
| Gross Profit                                  |   | 37.5                                     |   | 30.9 |   | 38.5 |   |
| Selling, general and administrative  expenses |   | 31.9                                     |   | 27.1 |   | 25.9 |   |
| Research and development expenses             |   | 12.2                                     |   | 12.5 |   | 9.6 |   |
| Amortization of long-lived assets             |   | 2.5                                      |   | 0.3 |   | 0.2 |   |
| Impairment of long-lived assets               |   | 11.5                                     |   | — |   | — |   |
| Operating income (loss)                       |   | (20.6                                    | )      | (9.0 | ) | 2.8 |   |
| Interest income                               |   | 1.0                                      |   | 0.2 |   | 0.1 |   |
| Interest expense                              |   | (0.2                                     | )      | — |   | — |   |
| Income (loss) before income taxes             |   | (19.8                                    | )      | (8.8 | ) | 2.9 |   |
| Provision for income taxes (credit)           |   | (7.7                                     | )      | (3.0 | ) | 1.1 |   |
| Net income (loss)                             |   | (12.1                                    | )      | (5.8 | ) | 1.8 |   |

 

## **Fiscal**Year EndedNovember 30, 2003 Compared to Fiscal Year Ended November 30, 2002

 

*Net Sales*.  Net sales in the fiscal year ended November 30, 2003 were$56.6 million, an increase of $1.6 million, or 2.9 %, from $55.0 million in thefiscal year ended November 30, 2002. This increase in net sales represents a $.5 million decrease in salesattributable to the Secure Payment Systems segment and an increase of  $2.1 million in sales attributable to theWireless and Connectivity Solutions segment. The decrease in sales in the Secure Payment Systems segment wasprimarily due to a $.7 million reduction in sales to a major distributor thatdeclared Chapter 11 bankruptcy in May 2003, which was partially offset byincreased sales to other existing distributors. The increase in sales in theWireless and Connectivity Solutions segment was due to increased sales of wiredconnectivity products.  Sales ofwireless products were approximately $1.0 million in fiscal 2003 and $.9million in fiscal 2002 and have not met our expectations.  We anticipate that sales of wiredconnectivity products, which constituted a significant portion of our overallsales of Wireless and Connectivity Solutions, will decline as these productsare at or approaching end of life.  Netsales of software licensing revenue included in the

 

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Wireless and ConnectivitySolutions segment increased from $.8 million in fiscal year endedNovember 30, 2002 to $.9 million in fiscal year ended November 30,2003.  Net sales were not significantlyaffected by price changes.

 

*Cost of Goods Sold*.  Cost of goods sold decreased by $3.2million, or 8.5 %, to $34.8 million in the fiscal year ended November 30,2003 from $38.0 million in the fiscal year ended November 30, 2002.  This decrease was due to cost reductionsfrom the consolidation of manufacturing facilities, decreased sales of Securityand Printing Solutions products ($.3 million), and the following decreasedcosts related to Wireless and Connectivity Solutions:  a decrease of $1.9 million, from $2.6 million in fiscal 2002 to$.7 million in fiscal 2003, in the amount expensed to the inventory reserve forexcess and obsolete inventories, and an additional amortization charge infiscal 2002 of $.7 million to write down capitalized software development coststo net realizable value.  The netrealizable value write down and a significant portion of the increasedinventory reserve was a result of lower forecasted sales for wireless products.In addition, in the third quarter of fiscal 2003, we increased the inventoryreserve for the Wireless and Connectivity Solutions products by $.4 million toreflect a change from a projected one-year usage to a projected six-month usageto more closely match the risk from changes in the technology of the productcomponents.    Cost of goods sold as apercentage of net sales decreased to 61.5 % in the fiscal year endedNovember 30, 2003 from 69.1% in the fiscal year ended November 30,2002.

 

*Gross Profit*.  As a result of the above factors, gross profit increased by $4.8million to $21.8 million in the fiscal year ended November 30, 2003 from$17.0 million in the fiscal year ended November 30, 2002.  Gross profit as a percentage of net salesincreased to 38.5 % in the fiscal year ended November 30, 2003 from 30.9%in the fiscal year ended November 30, 2002.  Secure Payment Systems and Wireless and Connectivity Solutionsgross profit as a percentage of net sales increased by 3.4 % and 22.6%, respectively,in the fiscal year ended November 30, 2003 from the fiscal year endedNovember 30, 2002. The increase in the Wireless and Connectivity Solutionsgross profit primarily resulted from the decrease in the amount expensed to theinventory reserve and the additional amortization charge in 2002, as describedabove.  Because the gross margin onsoftware solutions tends to be higher than on wireless and connectivityproducts, gross profit could vary due to changes in the mix of wireless andconnectivity products and software solutions sold.

 

*Selling, General and Administrative Expenses*.  Selling, general and administrative expensesof $14.7 million in the fiscal year ended November 30, 2003 decreased by$.2 million, or 1.3%, from $14.9 million in the fiscal year endedNovember 30, 2002.  A decrease in expensesdue to reductions in staff in both the Secure Payment Systems and Wireless andConnectivity Solutions segments in fiscal 2003 was partially offset by anincrease in expenses of $1.4 million related to the proposed Merger.   Selling, general and administrativeexpenses as a percentage of net sales decreased to 25.9 % in the fiscal yearended November 30, 2003 from 27.1% in the fiscal year endedNovember 30, 2002, primarily due to increased sales in 2003.  We intend to continue reducing general andadministrative expenses while investing selectively in the sales force, andadding technical resources as required.

 

*Research and Development Expenses*.  Research and development expenses decreasedby $1.5 million or 21.7 % to $5.4 million in the fiscal year endedNovember 30, 2003 from $6.9 million in the fiscal year endedNovember 30, 2002 primarily due to reduced project spending, primarily forprinters and Cheque Scribe II, *e*CheckSecure, and StarACH software, partially offset by increased spending for newtoner development, all of which relates to our Secure Payment Systemssegment.  Research and developmentexpenses as a percentage of net sales was 9.6 % in the fiscal year endedNovember 30, 2003 and 12.5% in the fiscal year ended November 30,2002.  We have the ability to redirectour research and development activities as needed based on our productstrategies and market opportunities.  Weforecast and budget research and development expenses by segment, but not byproject.  The anticipated timing for thecommercialization of any of our development efforts is not currently known.

 

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*Amortization of Intangible Assets. *Amortization of intangible assets decreased by$23,000, or 17.6 %, to $108,000 in the fiscal year ended November 30, 2003from $131,000 in the fiscal year ended November 30, 2002, primarily due tono amortization of goodwill in fiscal 2003 as a result of adopting Statement ofFinancial Standards (SFAS) No. 142 effective December 1, 2002, versusamortization of $73,000 in fiscal 2002.

 

*Operating Income (Loss)*.  As a result of the above factors, werecorded operating income of $1.6 million in the fiscal year endedNovember 30, 2003 compared to an operating loss of $(4.9) million in thefiscal year ended November 30, 2002. Operating income as a percentage of net sales was 2.8 % in the fiscalyear ended November 30, 2003 compared to an operating loss as a percentageof net sales of (9.0)% in the fiscal year ended November 30, 2002.

 

*Interest Income.*  Interest income decreased by $12,000, or 11.9 %, to $89,000 inthe fiscal year ended November 30, 2003 from $101,000 in the fiscal yearended November 30, 2002, primarily due to lower rates on our investment ofcurrent cash and available for sale securities.

 

*Interest Expense*.  Interest expense decreased by $24,000 to$10,000 in the fiscal year ended November 30, 2003 from $34,000 in thefiscal year ended November 30, 2002, primarily due to reduced principal onour long-term debt, which was paid off in November, 2003.

 

*Income Taxes*.  We reported  income taxexpense of $.6  million in the fiscalyear ended November 30, 2003 compared to an income tax credit of $1.7million in the fiscal year ended November 30, 2002.  The credit in 2002 was due to our operatingloss and increases in research and development and other tax credits.  The recoverability of our deferred tax assetis dependant on our ability to generate future taxable income.  The Company will need approximately $16.0million in pre-tax income to utilize $1.3 million in tax credit carryforward.

 

## **FiscalYear Ended**November 30,2002 Compared to Fiscal Year Ended November 30, 2001

 

*Net Sales*.  Net sales in the fiscal year ended November 30, 2002 were$55.0 million, an increase of $5.8 million, or 11.7 %, from $49.2 million inthe fiscal year ended November 30, 2001. This increase in net sales represents a $3.7 million increase in salesin the Secure Payment Systems segment and an increase of  $2.1 million in sales in the Wireless andConnectivity Solutions segment.  Theincrease in sales in the Secure Payment Systems segment resulted from increasedorders from existing customers for printers and toner supplies. The increase insales in the Wireless and Connectivity Solutions segment was due to $3.8 millionin sales of wired connectivity products related to our acquisition of theprinting solutions operations of Extended Systems which was partially offset byreduced sales of other wired connectivity products.  Sales of wireless products were approximately $.9 million andhave not met our expectations.   Netsales of software licensing revenue included in the Wireless and ConnectivitySolutions segment increased from $.5 million in fiscal year endedNovember 30, 2001 to $.8 million in fiscal year ended November 30,2002.  Net sales were not significantlyaffected by price changes.

 

*Cost of Goods Sold*.  Cost of goods sold increased by $7.2million, or 23.5 %, to $38.0 million in the fiscal year ended November 30,2002 from $30.8 million in the fiscal year ended November 30, 2001.  This increase was due to increased sales inthe Secure Payment Systems segment, and the following increased costs relatedto the Wireless and Connectivity Solutions segment:  $2.9 million additional costs as a result of our acquisition ofthe printing solutions operations of Extended Systems, an increase in theinventory reserve of $1.4 million for excess and obsolete inventories, and anadditional amortization charge of   $.7million to write down capitalized software development costs to net realizablevalue.  The net realizable value writedown and a significant portion of the increased inventory reserve was a resultof lower forecasted sales for wireless products.  Cost of goods sold as a percentage of net sales increased to

 

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69.1% in the fiscal yearended November 30, 2002 from 62.5% in the fiscal year endedNovember 30, 2001.

 

*Gross Profit*.  As a result of the above factors, gross profit decreased by $1.5million to $17.0 million in the fiscal year ended November 30, 2002 from$18.5 million in the fiscal year ended November 30, 2001.  Gross profit as a percentage of net salesdecreased to 30.9 % in the fiscal year ended November 30, 2002 from 37.5%in the fiscal year ended November 30, 2001.  The gross profit in the Secure Payment Systems and Wireless andConnectivity Solutions segments as a percentage of net sales decreased by 2.1 %and 6.2%, respectively, in the fiscal year ended November 30, 2002 fromthe fiscal year ended November 30, 2001.

 

*Selling, General and Administrative Expenses*.  Selling, general and administrative expensesdecreased by $.8 million or 4.9 % to $14.9 million in the fiscal year endedNovember 30, 2002 from $15.7 million in the fiscal year endedNovember 30, 2001.  This decreaseprimarily was due to reductions in staff in both the Secure Payment Systems andWireless and Connectivity Solutions segments. Selling, general and administrative expenses as a percentage of netsales decreased to 27.1 % in the fiscal year ended November 30, 2002 from31.9% in the fiscal year ended November 30, 2001, due to reductions inexpenses.

 

*Research and Development Expenses*.  Research and development expenses increasedby $845,000 or 14.0 % to $6.9 million in the fiscal year endedNovember 30, 2002 from $6.0 million in the fiscal year endedNovember 30, 2001 due to investments in toner development and financialsoftware, both with respect to the Secure Payment Systems segment.  Research and development expenses as apercentage of net sales was 12.5 % in the fiscal year ended November 30,2002 and 12.2% in the fiscal year ended November 30, 2001.  We have the ability to redirect our researchand development activities as needed based on our product strategies and marketopportunities.  We forecast and budgetresearch and development expenses by segment, but not by project.  The anticipated timing for thecommercialization of any of our development efforts is not currently known.

 

*Amortization of Intangible Assets. *Amortization of intangible assets decreased by$1.1 million, or 89.4 %, to $131,000 in the fiscal year ended November 30,2002 from $1.2 million in the fiscal year ended November 30, 2001.  This decrease was the result of thewrite-off in fiscal year 2001 of impaired intangible assets associated with ouracquisitions.

 

*Impairment of Long-Lived Assets*.  During the fourth quarter of fiscal year2001, we initiated an analysis of long-lived assets in accordance with Statement of Financial AccountingStandards No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of” (“SFAS 121”), to determine if there wasimpairment of  long-lived assets.  This analysis was initiated due to changesin our business environment, which were highlighted during our annual businessplanning process, and certain changes in our management. This analysis was doneon a business unit by unit basis as it was determined that these units wereindependent of each other and were the lowest level for which cash flows couldbe identified.  The business unitsidentified were similar to the businesses acquired by us since 1998.  The analysis demonstrated that the acquiredprint server products and technologies were at or approaching their end-of lifeand that the ACH processing services were not generating the cash flowsanticipated when this business unit was acquired.  We completed this analysis with the assistance of an independentvaluation firm.  The analysis indicatedthat these business units would not generate sufficient positive cash flowsover the projected period of five years, which approximated the remaining lifeof the long-lived assets, and that there was no current value or residual valuebeyond the value of the net current assets and certain property andequipment.  Substantially all of theintangible assets of certain of these business units were written off atNovember 30, 2001 because they were projected to generate insufficientpositive cash flows.  Certain propertyand equipment of these business units were not written off because

 

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they continue to be usedin operations and were determined to have value.  As a result of this analysis, we recorded a charge in 2001 of$5,634,000 for the impairment of long-lived assets on a business unit by unitbasis as follows:

 
| **Business  Unit**   |   | **Amount** |      | **Segment**                |                       |
|----------------------|--------|------------|-----------|----------------------------|----------------------------|
|                 |   |       |      |                       |                       |
| XCD                  |   | $          | 1,085,000 |                       | Wireless and  Connectivity |   |
| American Development |   | 1,945,000  |      | Secure Payment Systems     |                       |
| CableNet             |   | 2,074,000  |      | Wireless and Connectivity  |                       |
| ESI                  |   | 530,000    |      | Wireless and  Connectivity |                       |
| Total                |   | $          | 5,634,000 |                       |                       |   |

 

The amortization expenserecorded for these assets in 2001 prior to the recorded impairment charge was$1,261,000.

 

At November 30,2001, we had $2,470,000 in intangible assets that was determined to be notimpaired. Included in this amount are capitalized software development costsrelated to new Wireless and Connectivity products and StarACHTM, our newest ACHsoftware product.  Amortization expenseon these intangible assets in 2002 was $520,000.

 

*Operating Loss*.  As a result of the above factors, we recorded an operating lossof $4.9 million in the fiscal year ended November 30, 2002 compared to anoperating loss of $10.1 million in the fiscal year ended November 30,2001.  The operating loss as apercentage of net sales was 9.0% in the fiscal year ended November 30,2002 compared to an operating loss as a percentage of net sales of 20.6% in thefiscal year ended November 30, 2001.

 

*Interest Income.*  Interest income decreased by $414,000, or 80.4 %, to $101,000 inthe fiscal year ended November 30, 2002 from $515,000 in the fiscal yearended November 30, 2001.  Thisincome was due to our investment of current cash and available for salesecurities and our cash flows provided by operations.  This decrease is the result of lower rates on our investments inavailable for sale securities due to our acquisitions, our stock repurchaseprogram and working capital requirements.

 

*Interest Expense*.  Interest expense decreased by $104,000 to$34,000 in the fiscal year ended November 30, 2002 from $138,000 in thefiscal year ended November 30, 2001. This decrease was due to reduced borrowings under our line of credit.

 

*Income Taxes*.  We reported an income tax credit of $1.7 million in the fiscalyear ended November 30, 2002 compared to income tax credit of $3.8 millionin the fiscal year ended November 30, 2001.  The credit was due to our operating loss and increases inresearch and development and other tax credits.  The recoverability of our deferred tax asset is dependant on ourability to generate future taxable income.

 

## **Backlog**

 

Wesell our products on a purchase order basis rather than through long-termcontracts.  Because we typically shipproduct within 30 days of order and customers may cancel orreschedule deliveries, we do not consider backlog to be a reliableindicator of future financial results.

 

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## **Liquidity and Capital Resources**

 

Cash flows provided byoperating activities were $4.7 million in the fiscal year endedNovember 30, 2003 compared to $1.4 million provided by operatingactivities in the fiscal year ended November 30, 2002.  This increase was due primarily toreductions in inventories and accounts receivable, an income tax refund, andnet income in fiscal 2003 versus a net loss in fiscal 2002.

 

Cash flows used ininvesting activities were $9.3 million in the fiscal year endedNovember 30, 2003 compared to cash flows provided by investing activitiesof $4.0 million in the fiscal year ended November 30, 2002. The change incash flows was due primarily to the purchase of $8.2 million ofavailable-for-sale securities and $1.9 million of equipment in fiscal 2003 andthe maturities of $6.7 million of available-for-sale securities in fiscal 2002.

 

Cash flows used infinancing activities were $213,000 in the fiscal year ended November 30,2003 compared to cash flows used in financing activities of $1,000 in thefiscal year ended November 30, 2002. The increase in cash used in financing activities primarily resultedfrom the pay off of the long-term debt.

 

We have a $5,000,000line-of-credit agreement with Comerica Bank. As of November 30, 2003, there were no borrowings outstandingagainst the line of credit.  Borrowingsunder the line of credit bear interest at the lesser of the bank’s referencerate (4.0 % at November 28, 2003) less 0.25% or the bank’s LIBOR rate(1.17 % at November 28, 2003) plus 2% and are limited to 80% of eligibleaccounts receivable and 50% of eligible inventories if total liabilities totangible effective net worth is greater than two to one.  In connection with the line-of-creditagreement, we have a $650,000 standby letter-of-credit sublimit agreement ofwhich approximately $80,000 was outstanding at November 30, 2003.  This line of credit is secured bysubstantially all of our assets.  Ourborrowing arrangement requires us to comply with certain financial covenantsand other restrictions, including our ability to pay dividends. As ofNovember 30, 2003, we had approximately $4,920,000 in availability underthe line of credit.  The line-of-creditborrowings are due on demand.  Theagreement may be terminated by either party.

 

We believe that existingcash balances, our available-for-sale securities, cash generated by operatingactivities, and funds available under our credit facility will be sufficient tofinance our operating activities for at least the next 12 months, which willinclude capital expenditures of approximately $.5 million.  To the extent that the funds generated fromthese sources are insufficient to finance our operating activities, we wouldneed to raise additional funds through public or private financing.  We cannot assure you that additionalfinancing, if required, would be available on terms favorable to us, or at all.

 

In March 2001, Troyestablished a stock repurchase program under which TROY’s common stock, with anaggregate market value up to $4.0 million, may be acquired in the openmarket.  As of November 30, 2003, Troyhas purchased 331,493 shares of common stock in the open market, at an averageprice of $3.63 per share, under the stock repurchase program.  Approximately $2.8 million remains availablefor future common stock repurchases.

 

**Critical Accounting Policies and Estimates**

 

# ***Application ofCritical Accounting Policies***

# ** **

Our significantaccounting policies are described in Note 1 to the consolidated financialstatements included in Item 8 of this Form 10-K.  Critical accounting policies are defined as those that are themost important to the accurate portrayal of our financial condition and resultsof operations. Critical

 

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accounting policies require management’s subjective judgment and mayproduce materially different results under different assumptions andconditions. Our operations are affected by numerous factors including continueddemand for printed documents, development and market acceptance of wirelessproducts, changes in technologies and new laws and government regulations andpolicies.  We cannot predict whatimpact, if any, the occurrence of these or other events might have on ouroperations.  Significant estimates andassumptions made by management are used for, but not limited to, the allowancefor doubtful accounts, the reserve for slow moving or obsolete inventories, thecarrying value and fair value of long-lived and intangible assets and therealizability of deferred tax assets. We have discussed the development andselection of these critical accounting policies with the Audit Committee of ourBoard of Directors, and the Audit Committee has reviewed and approved ourrelated disclosure in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations. The following are our critical accountingpolicies:

 

*Inventories*

 

We value inventories atthe lower of cost or market on a first-in, first-out basis.  We use a standard cost system for purposesof determining cost.  The standards areadjusted periodically to ensure they approximate actual costs.  We include materials, labor andmanufacturing overhead in the cost of inventories.  We write down the carrying value of our inventory to market valuebased upon assumptions about future demand and market conditions.  We compare current inventory levels on aproduct basis to our current sales forecasts in order to assess our inventorybalance.  Our sales forecasts are basedon economic conditions and trends (both current and projected), anticipatedcustomer demand, expected future products and other assumptions.  Our estimates may differ from actual resultsdue to the quality, quantity and mix of products in inventory, customerpreferences and economic conditions and as a result, additional write-downs maybe required.

 

## ***Capitalizationof software development costs***

## ** **

Costsincurred in the research, design and development of software for sale to othersas a separate product or embedded in a product and sold as part of the productas a whole are charged to expense until technological feasibility is established.  Thereafter, software development costs arecapitalized until the products are offered for sale, and amortized to productcost of sales on a straight-line basis over the lesser of five years or theestimated economic lives of the respective products, beginning when theproducts are offered for sale. At each balance sheet date, we comparethe unamortized capitalized costs to the net realizable value of that product.The net realizable value is the estimated future gross revenues from thatproduct reduced by the estimated future costs of completing and disposing ofthat product, including the costs of performing maintenance and customersupport required to satisfy our responsibility set forth at the time of sale.For developed software components of a product or process marketed as anintegral part of that product or process and not sold separately, we evaluatenet realizable value of that component with the total system.  We determine net realizable value consideringmany of the same factors we use in establishing reserves for estimated obsoleteor excess inventory.

 

*Long-lived and intangible assets*

 

Depreciationand amortization of our long-lived assets is provided using the straight-linemethod over their estimated useful lives. Changes in circumstances such as thepassage of new laws or changes in regulations, technological advances, changesto our business model or changes in the capital strategy could result in theactual useful lives differing from initial estimates. In those cases where wedetermine that the useful life of a long-lived asset should be revised, we willdepreciate the net book value in excess of the estimated residual value overits revised remaining useful life. Factors such as changes in the

 

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planneduse of equipment, customer attrition, contractual amendments or mandatedregulatory requirements could result in shortened useful lives.

 

We periodically reviewthe value of our long-lived tangible and our amortizing intangible assets todetermine if impairment has occurred by comparing the carrying value of thelong-lived assets with the lowest level of identifiable future net undiscountedcash flows expected to result from the use of the assets, including cash flowsfrom disposition.  As discussed in Note14 to the consolidated financial statements, we recorded an impairment loss oncertain long-lived assets during fiscal year 2001 based on an evaluation ofprojected operating income, cash flows and business prospects. In addition, we determinedother long-lived assets were not impaired. In making these determinations, theassumptions used by management about future cash flows are critical.  If these expected cash flows are notrealized, future additional impairment losses may be recorded.

 

*Goodwill and OtherIntangible Assets*

 

The Company adopted Statement of FinancialAccounting Standards (SFAS) No. 142 *Goodwilland Other Intangible Assets* effective December 1, 2002 andperformed its initial transitional impairment test as of that date. Theprovisions of SFAS No. 142 require that the Company allocate its goodwillto its various reporting units, determine the carrying value of thosebusinesses, and estimate the fair value of the reporting units so that atwo-step goodwill impairment test can be performed. The Company’s reportingunits represent components of  itsoperating segments, which are the same as the reportable segments, identifiedin Note 13. In the first step of the goodwill impairment test, the fairvalue of each reporting unit is compared to its carrying value. If the fairvalue exceeds the carrying value, goodwill is not impaired and no furthertesting is performed. If the carrying value exceeds the fair value, then thesecond step must be performed, and the implied fair value of the reportingunit’s goodwill must be determined and compared to the carrying value of thegoodwill for the reporting unit. If the carrying value of a reporting unit’sgoodwill exceeds its implied fair value, then an impairment loss equal to thedifference is recorded. For the year ended November 30, 2003, noimpairment loss was recognized.  TheCompany’s annual impairment testing date is the beginning of the fiscal fourthquarter, which is September 1.

 

*Evaluation of long-lived and intangible assets*

 

For long-lived assets, otherthan goodwill, Financial Accounting Standards Board (FASB) Statement ofFinancial Accounting Standards (SFAS) No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, requires theevaluation for impairment whenever events or changes in circumstances haveindicated that an asset may not be recoverable. Long-lived assets evaluated forimpairment are grouped with other assets to the lowest level for whichidentifiable cash flows are largely independent of the cash flows of othergroups of assets and liabilities. If the sum of the projected undiscounted cashflows (excluding interest charges) is less than the carrying value of theassets, the assets will be written down to the estimated fair value, and theloss recognized in income from continuing operations in the period in which thedetermination is made. Management has determined that no impairment oflong-lived assets exists at November 30, 2003.

 

*Revenue recognition*

 

We recognize revenue fromthe sale of our check printing equipment and supplies and print servers to endusers, distributors, original equipment manufacturers (OEM) and resellers whenthe price is fixed and determinable, the product is shipped and the title istransferred to the buyer, with economic

 

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substance, net of anallowance for estimated returns, as long as no significant post-deliveryobligations exist and collection of the resulting receivable is probable andnot contingent on resale of the product. Revenue from equipment maintenancecontracts on check printing equipment and print servers is recorded as deferredincome when billed and is recognized straight-line over the term of thecontract.  We provide for estimatedreserves based upon our historical rates of returns and allowances.  Actual returns in any future period areinherently uncertain and thus may differ from our estimates.  We accrue for warranty expense at the timerevenue is recognized and maintain a warranty accrual for estimated futurewarranty obligations based upon the relationship between historical andanticipated warranty costs and sales volumes. To the extent we experience increased warranty claim activity orincreased costs associated with servicing those claims, our warranty accrualwill increase resulting in decreased gross profit.

 

We recognize revenue fromsoftware arrangements of our StarACHTM software in accordance with Statement ofPosition (“SOP”) 97-2, *Software RevenueRecognition* as amended by SOP 98-9, *Modificationof SOP 97-2 with Respect to Certain Transactions*. Revenue isrecognized when persuasive evidence of an arrangement exits and delivery hasoccurred, provided the fee is fixed or determinable, collectibility is probableand the arrangement does not require significant customization or modificationof the software.  For arrangements wherethe software requires significant customization or modification, the Companyrecognizes revenue for the software license and consulting services portion ofthe arrangement using the completed contract method of accounting under SOP81-1. Contracts are considered complete upon customer acceptance.  Maintenance revenue for the StarACHTMsoftware is recognized ratably over the term of the maintenance contract,typically 12 months.

 

Revenue from softwarelicense agreements with OEMs for print servers whereby we provide ongoingsupport over the term of the contract is recognized when the licensed softwareis incorporated into the OEMs’ products.

 

*Allowance for doubtful accounts*

 

We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. The amount of the reserve is based on historical experience and ouranalysis of the accounts receivable outstanding.  If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required which would result in an additional expense in theperiod such determination was made.

 

*Off-balance sheet financings and liabilities*

 

Other than leasecommitments and legal contingencies incurred in the normal course of business(see Notes 10 and 15), the Company does not have any off-balance sheetfinancing arrangements or liabilities. The Company does not have any majority-owned subsidiaries or anyinterests in, or relationships with, any material special-purpose entities thatare not included in the consolidated financial statements, except for a relatedparty lease arrangement.

 

*Comprehensive Income*

 

Managementhas determined that the functional currency of its foreign subsidiary locatedin Canada is the local currency, while the functional currency of its foreignsubsidiary located in Germany is the U.S. dollar. Assets and liabilities of theCompany’s foreign subsidiary whose local currency is the functional currencyare translated into U.S. dollars at the year-end exchange rates. Income andexpenses are translated at the average exchange rate for the period and theresulting translation adjustments are accumulated as a separate component ofstockholders’ equity, which totaled none and $33,000 at 

 

29

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November 30,2002 and 2003, respectively. The German subsidiary’s financial statements areremeasured at year-end exchange rates for monetary assets and liabilities, andhistorical exchange rates for nonmonetary assets and liabilities and equity.Income and expenses are translated at the average exchange rate for the period,and translation adjustments are included in income for foreign entities whosefunctional currency is the U.S. dollar, Foreign currency gains and losses fromtransactions denominated in other than respective local currencies are includedin income.  In the fiscal year endedNovember 30, 2003, unrealized foreign currency gains from translationadjustments of $158,000 were included in Selling, General and Administrativeexpense, and realized foreign currency gains from transactions denominated inother than respective local currencies of $200,000 were included in Cost ofGoods Sold.

 

*Income taxes*

 

Deferredtaxes are provided on a liability method whereby deferred tax assets arerecognized for deductible temporary differences and operating loss and taxcredit carryforwards and deferred tax liabilities are recognized for taxabletemporary differences.  Temporarydifferences are the differences between the reported amounts of assets andliabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when it is determinedto be more likely than not that some portion or all of the deferred tax assetswill not be realized. In evaluating the need for a valuation allowance, weconsider future taxable income, resolution of tax uncertainties and prudent andfeasible tax planning strategies. If we determine that we would not be able torealize all or part of our deferred tax assets in the future, an adjustment tothe carrying value of the deferred tax assets would be charged to income in theperiod in which such determination was made and may affect our annual effectiveincome tax rate.

 

*Stock-based compensation*

 

As allowed by Statementof Financial Accounting Standards (SFAS) No. 123, we have elected to continueto account for our employee stock-based compensation plan using the intrinsicvalue method in accordance with Accounting Principles Board (APB) Opinion No.25, *Accounting for Stock Issued toEmployees, and related Interpretations*, which does not requirecompensation to be recorded if the consideration to be received is at leastequal to the fair value of the common stock to be received at the measurementdate. Nonemployee stock-based transactions are accounted for under therequirements of  SFAS No. 123, *Accounting for Stock-Based Compensation*,which requires compensation to be recorded based on the fair value of thesecurities issued or the services received, whichever is more reliablymeasurable.

 

## **Contractual Obligations and Commercial Commitments**

## ** **

We have the followingcontractual obligations and commercial commitments. 

 
|                               |   | **Total** |      | **Less than  1 year** |   | **1-3 years** |   | **4-5 years** |    | **After 5  years** |   |
|------------------------------------|--------|-----------|-----------|-----------------------|--------|---------------|--------|---------------|---------|--------------------|--------|
| Related party operating lease      |   | $         | 1,238,000 |                  | $      | 286,000       |   | $             | 857,000 |               | $      | 95,000 |   | $ | — |   |
| Other operating leases             |   | 313,000   |      | 198,000               |   | 115,000       |   | —        |    | —             |   |
| Split dollar life insurance policy |   | **        |      | **                    |   | **            |   | **            |    | **                 |   |
| Total                              |   | $         | 1,551,000 |                  | $      | 484,000       |   | $             | 972,000 |               | $      | 95,000 |   | $ | — |   |

 

The annual commitmentsreflected in the table above are based on our November 30 year-end.

 

30

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**We previously hadcommitted to making payments on the split dollar life insurance policy based oncontinued employment. As of November 30, 2002 and November 30, 2003,we had a balance of advanced payments of $2,123,000 and $1,903,000, respectively, to affiliated stockholders inconnection with the purchase of split dollar life insurance policies.  Troy and the stockholders have executedsplit-dollar agreements governing the unsecured non-interest bearing advances.The advances are due on demand, however, we do not anticipate demanding paymentin the next 12 months and accordingly we have classified this amount aslong-term.  The Sarbanes-Oxley Act of2002 prohibits extensions of credit in the form of a personal loan to certaincompany insiders after July 29, 2002. As a result, since July 29, 2002 the Company has not funded theannual premium payments on these policies. If the SEC issues new regulations or other guidance that causes us toreevaluate our position, we may demand payment on the advance and terminate ourparticipation in these arrangements.

 

## **Pending Accounting Standards**

 

InMay 2003 FASB issued Statementof Financial Accounting Standards (SFAS) No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*, which requires that certain financialinstruments previously presented as equity or temporary equity be presented asliabilities.  Such instruments includemandatory redeemable preferred and common stock, and certain options andwarrants.  SFAS No.150 is effective forfinancial instruments issued, entered into or modified after May 31, 2003 andis generally effective at the beginning of the first interim period beginningafter June 15, 2003.  The adoptionof SFAS No.150 is not expected to have a material effect on the Company’sfinancial position or results of its operations.

 

In 2003, the FinancialAccounting Standards Board issued FASB Interpretation No. 46 (FIN 46), *Consolidation of Variable Interest Entities, anInterpretation of Accounting Research Bulletin No. 51*, asrevised. Prior to FIN 46, a company generally included another entity in thecompany’s financial statements only if it controlled the entity throughownership of the majority voting interests. FIN 46 requires certain variable interest entities to be consolidated bythe primary beneficiary of the entity if the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 is effective for theCompany for all variable interest entities beginning the quarter ending May 31,2004. We are currently analyzing the effect that the adoption of FIN 46 willhave on our results of operations and financial position, but expect that uponthe implementation date, it is reasonably possible that we will be required toconsolidate the related party leasing entity described Note 10 to ourconsolidated financial statements.

 

The financial statementsof the related party leasing entity for the year ended November 30, 2003are currently not available; however, management estimates that if this entityis required to be consolidated under the provisions of FIN 46, it would have noimpact on revenues and an insignificant impact on net income.  The assets, primarily land and building,would be less than 5% of total assets, the related liabilities, primarily notespayable to the bank, would be approximately 10% of total liabilities and thenet effect on stockholders’ equity would not be material.

 

The Company paid a totalof $270,000 to lease the manufacturing facility during each of the years endedNovember 30, 2001 and 2002, and $279,000 in the year endedNovember 30, 2003.  The future minimumlease commitments are included in Note 10 to our consolidated financialstatements.

 

When FIN 46 becomeseffective, the net amount that may be added to the Company’s balance sheet mayeither be reported as the cumulative effect of an accounting change, or byrestating previously issued financial statements with a cumulative-effectadjustment as of the beginning of the first year

 

31

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restated.  The Company has not yet determined themanner in which it will adopt FIN 46 in the event it is required to consolidatethe entity.

 

# **Item 7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Market risk is the riskof loss to future earnings, to fair values or to future cash flows that mayresult from changes in the price of a financial instrument.  The value of a financial instrument maychange as a result of changes in interest rates, exchange rates, commodityprices, equity prices and other market changes.  Market risk is attributed to all market sensitive financialinstruments, including long-term debt.

 

We do not utilizederivative financial instruments. Accordingly, our exposure to market risk is through our foreign currencytransactions and through our bank debt which bears interest at variable rates.    We do not hedge our exposure to foreigncurrency fluctuations. Rather, we monitor our foreign currency exposure on amonthly basis.  Principal foreigncurrencies are the Euro and the Canadian Dollar. The assets and liabilitiesdenominated in the Euro at November 30, 2003 are $2.5 million and $1.9million, respectively.  The assets andliabilities denominated in the Canadian Dollar at November 30, 2003are  $.8 million and $.3 million,respectively.   The bank debt is arevolving line of credit.  Borrowingsunder the line of credit bear interest at the lesser of the bank’s referencerate (4.0% at November 30, 2003) less 0.25% or the bank’s LIBOR rate(1.17% at November 30, 2003) plus 2% and are limited to 80% of eligibleaccounts receivable and 50% of eligible inventories if total liabilities totangible effective net worth is greater than two to one.  At November 30, 2003, there were noamounts outstanding under the line of credit agreement and, accordingly, asustained increase in the reference rate of 1% would not cause our annualinterest expense to change.

 

32

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# **Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

# ** **

*Financial Statements*.

 

Our consolidatedfinancial statements and related notes are contained on pages F-1 to F-24 ofthis report.  The index to such items isincluded on page 37 in Item 15(a)(1).

 

*Quarterly Results*

 

Fiscal 2003 (unaudited)(in thousands, except per share data)

 
|                  |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|-----------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| Net sales             |   | $                  | 14,408 |                | $      | 13,395             |   | $                   | 14,671 |   | $ | 14,102 |   |
| Gross profit          |   | 5,970              |   | 5,202               |   | 5,035              |   | 5,606               |   |
| Operating income      |   | 468                |   | 278                 |   | 169                |   | 665                 |   |
| Net income            |   | 282                |   | 190                 |   | 107                |   | 441                 |   |
| Net income per share: |   |               |   |                |   |               |   |                |   |
| Basic                 |   | .03                |   | .02                 |   | .01                |   | .04                 |   |
| Diluted               |   | .03                |   | .02                 |   | .01                |   | .04                 |   |
|                       |        |                    |        |                     |        |                    |        |                     |        |  |  |  |  |

 

Fiscal 2002 (unaudited)(in thousands, except per share data)

 
|                |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|---------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
|                |   |               |   |                |   |               |   |                |   |
| Net sales           |   | $                  | 13,571 |                | $      | 14,025             |   | $                   | 13,649 |   | $ | 13,753 |   |
| Gross profit        |   | 5,414              |   | 5,538               |   | 3,335              |   | 2,700               |   |
| Operating loss      |   | (298               | )      | (202                | )      | (1,806             | )      | (2,618              | )      |
| Net loss            |   | (180               | )      | (112                | )      | (1,165             | )      | (1,718              | )      |
| Net loss per share: |   |               |   |                |   |               |   |                |   |
| Basic               |   | (.02               | )      | (.01                | )      | (.11               | )      | (.16                | )      |
| Diluted             |   | (.02               | )      | (.01                | )      | (.11               | )      | (.16                | )      |
|                     |        |                    |        |                     |        |                    |        |                     |        |  |  |  |  |

 

In the fourth quarter of fiscal year 2002, the Company performed anextensive analysis of the Wireless and Connectivity Solutions segment due tochanges in the economic, technical and competitive conditions that occurredduring this period.  As a result, ofthis analysis, the Company recorded a charge for excess and obsoleteinventories of $1,878,000, and recorded an amortization charge of $707,000 towrite down capitalized software development costs to net realizable valueduring the fourth quarter.

 

# **Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE.**

 

*Changes in Accountants*

 

On May 31, 2002, ourAudit Committee approved a change in auditors and our Board of Directorsratified the Audit Committee’s dismissal of McGladrey & Pullen LLP.    We completed a formal engagement letterwith KPMG LLP to serve as our independent public accountants on July 5,2002.

 

33

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On January 13, 2003,our Audit Committee again approved a change in auditors and our Board of Directorsratified the Audit Committee’s dismissal of KPMG LLP as our independent publicaccountants.   We completed a formalengagement letter with McGladrey & Pullen LLP to serve as our independentpublic accountants on February 3, 2003.

 

The information requiredby Item 304(a) of Regulation S-K regarding these changes in our accountants hasbeen previously reported on Forms 8-K filed on June 4, 2002, July 9,2002, January 21, 2003 and February 7, 2003.

 

*Disagreements or Reportable Events.*

 

During our fiscal yearsended November 30, 2001 and 2000 and the subsequent interim period throughMay 28, 2002, the date we dismissed McGladrey and Pullen, there were nodisagreements between us and McGladrey & Pullen on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure, and there were no reportable events as described in Item304(a)(1)(v) of Regulation S-K.

 

During the period fromJuly 5, 2002 through January 13, 2003, the date we dismissed KPMG,except as set forth in the paragraphs below, there were no disagreementsbetween TROY and KPMG on any matter of accounting principles or practices, orfinancial statement disclosure, and there were no reportable events asdescribed in Item 304(a)(1)(v) of Regulation S-K.

 

On October 15, 2002,we issued a press release announcing that the filing of our Form 10-Q for thefiscal quarter ended August 31, 2002 would be delayed. We had conductedphysical inventory counts and discovered certain inventory adjustments. Wedelayed the filing of our Form 10-Q for the fiscal quarter endedAugust 31, 2002 in order to give us sufficient time to review the causesof such inventory adjustments and to determine if any of the financialstatements for prior periods would need to be restated.

 

At the time of theirdismissal, KPMG had not completed their review of the procedures andmethodology used by us in our review of the inventory adjustments in order todetermine the final amount of the adjustments and which prior periods wouldneed to be restated. Because these adjustments pertained to periods in whichMcGladrey & Pullen served as our independent auditors, our procedures andmethodology needed to be reviewed by McGladrey. KPMG had previously advised usthat the adjustments could have a material impact on the financial statementsfor the first and second quarters of fiscal 2002 and fiscal 2001.

 

KPMG had also expressed aconcern regarding material weaknesses in our inventory accounting controls.Since that time, we have implemented a number of corrective measures that webelieve addresses these concerns.

 

# **Item 9A. DISCLOSURE CONTROLS AND PROCEDURES**

 

**(a)****Evaluationof disclosure controls and procedures.**We maintain“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)under the Securities Exchange Act of 1934 (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in Securities andExchange Commission rules and forms and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure. In

 

34

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designing and evaluating our disclosure controls and procedures,management recognized that disclosure controls and procedures, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the disclosure controls and procedures aremet. Additionally, in designing disclosure controls and procedures, ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures. Thedesign of any disclosure controls and procedures also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

 

 Based on their evaluation as of the end of the period covered by this AnnualReport on Form   10-K, our ChiefExecutive Officer and Chief Financial Officer have concluded that, subject tothe limitations noted above, our disclosure controls and procedures wereeffective to ensure that material information relating to TROY is made known tothem by others, particularly during the period in which this Annual Report onForm 10-K was being prepared.

 

**(b)****Changes ininternal controls.**There was no change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under the Exchange Act)identified in connection with the evaluation described in Item 4(a) above thatoccurred during our last fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

35

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**PART III**

 

# **Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**

# ** **

(a)                                  *Directors ofthe Registrant*.

 

The information under thecaption “Election of Directors – Information About Nominees” and “OtherInformation About Nominees” in our 2003 Proxy Statement is incorporated hereinby reference.

 

(b)                                 *ExecutiveOfficers of the Registrant*.

 

The information under thecaption “Executive Officers of the Registrant” in our 2003 Proxy Statement isincorporated herein by reference.

 

(c)                                  *Compliancewith Section 16(a) of the Exchange Act*.

 

The information under thecaption “Section 16(a) Beneficial Ownership Reporting Compliance” in our2003 Proxy Statement is incorporated herein by reference.

 

# **Item 11. EXECUTIVE COMPENSATION.**

 

The information under thecaption “Executive Compensation” in our 2003 Proxy Statement is incorporatedherein by reference.

 

# **Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND**                                              MANAGEMENT.

 

The information under thecaption “Security Ownership of Certain Beneficial Owners and Management” in our2003 Proxy Statement is incorporated herein by reference.

 

# **Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

The information under thecaption “Executive Compensation – Certain Transactions” in our 2003 ProxyStatement is incorporated herein by reference.

 

# **Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

The information under thecaption “Principal Accountant Fees and Services” in our 2003 Proxy Statement isincorporated herein by reference.

 

36

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**PART IV**

 

# **Item15.  EXHIBITS**, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K

# ** **

(a)                                  *List of documents filed as part of this report**:*

 

(1)                                  *Financial Statements:*

 

The following financialstatements are included in this report on the pages indicated:

 
|   | Independent auditor’s  report                                                                 |   |
|--------|----------------------------------------------------------------------------------------------------|--------|
|   | Consolidated  balance sheets as of  November 30, 2003 and 2002                                |   |
|   | Consolidated  statements of operations for the years ended  November 30, 2003, 2002 and 2001  |   |
|   | Consolidated  statements of cash flows for the years ended  November 30, 2003, 2002 and 2001  |   |
|   | Consolidated  statements of stockholders’ equity as of  November 30, 2003, 2002 and 2001 |   |
|   | Notes to consolidated  financial statements                                                        |   |

 

(2)                                  *Financial Statement Schedules:*

 

Allfinancial statement schedules have been omitted because the requiredinformation is included in our consolidated financial statements or the relatednotes, or is not applicable.

 

(3)                                  *Exhibits*

 

Theexhibits to this Annual Report on Form 10-K are listed in the Exhibit Indexcontained on pages E-1 through E-5 of this report.

 

Wewill furnish a copy of any exhibit to a stockholder who requests a copy inwriting and pays a fee of $25.00 per exhibit. Requests should be sent to: James W. Klingler, Chief Financial Officer, Troy Group, Inc, 2331 SouthPullman Street, Santa Ana, California 92705.

 

Thefollowing is a list of each management contract or compensatory plan orarrangement required to be filed as an exhibit to this Annual Report on Form10-K pursuant to Item 15(c):

 

A.                                   1996 Stock Option Plan (incorporated byreference to Exhibit 10.7 to Troy Group’s Registration Statement on Form S-1(File No.  333-51523)).

 

B.                                     1998 Stock Incentive Plan, as amended(incorporated by reference to Exhibit 10.2 to Troy Group’s Form 10-Q for thequarter ended August 31, 2000 (File No. 000-24413)).

 

C.                                     1998 Employee Stock Purchase Plan(incorporated by reference to Exhibit 10.9 to Troy Group’s RegistrationStatement on Form S-1 (File No. 333-51523)).

 

37

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D.                                    Form of Indemnification Agreement fordirectors and executive officers of Troy Group (incorporated by reference toExhibit 10.14 to Troy Group’s Registration Statement on Form S-1 (File No.  333-51523)).

 

(b)                                 *Reports on Form 8-K**:*

 

On October 14, 2003, the Company filed aCurrent Report on Form 8-K dated October 10, 2003 under Item 9.  regarding a press release announcing itsfinancial results for the third quarter and nine months ended August 31,2003.

 

(c)                                  *Exhibits**:*

 

The response to thisportion of Item 15 is included as a separate section of this Annual Reporton Form 10-K.

 

(d)                                 *Financial Statement Schedules**:*                                                                   None.

 

38

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**INDEPENDENT AUDITOR’S REPORT**

 

To the Board of DirectorsTroy Group, Inc.Santa Ana, California

 

We have audited theaccompanying consolidated balance sheets of Troy Group, Inc. and subsidiariesas of November 30, 2003 and 2002, and the related consolidated statementsof operations, cash flows and stockholders’ equity for each of the three yearsin the period ended November 30, 2003. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Troy Group, Inc. and subsidiariesas of November 30, 2003 and 2002, and the results of their operations andtheir cash flows for each of the three years in the period endedNovember 30, 2003 in conformity with accounting principles generallyaccepted in the United States of America.

 

As described in Note 5 tothe financial statements, effective December 1, 2002, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and OtherIntangible Assets.”

 
|                    | McGLADREY & PULLEN,  LLP    |
|-------------------------|---------------------------------|
|                    |                            |
|                    | /s/ McGladrey & Pullen, LLP |   |
|                    |                            |
|                    |                            |
| Irvine, California      |                            |
|                    |                            |
| February 12,  2004 |                            |

 

F-1

----

**TROYGROUP, INC.**

** **

**CONSOLIDATEDBALANCE SHEETS**
|                                                                                                                          |   | **November  30,** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                          |   | **2002**          |       | **2003** |   |
| **ASSETS**                                                                                                                    |   |              |       |   |   |
| Current assets:                                                                                                               |   |              |       |   |   |
| Cash and cash equivalents                                                                                                     |   | $                 | 6,615,000  |   | $ | 1,727,000 |   |
| Investment in available-for-sale securities                                                                                   |   | 497,000           |       | 8,000,000 |   |
| Accounts receivable, less allowance for  doubtful accounts 2002 $884,000; 2003 $393,000                                       |   | 9,227,000         |       | 8,419,000 |   |
| Income tax refund receivable                                                                                                  |   | 1,076,000         |       | — |   |
| Inventories                                                                                                                   |   | 5,540,000         |       | 4,891,000 |   |
| Prepaid expenses and other                                                                                                    |   | 440,000           |       | 1,414,000 |   |
| Deferred tax assets                                                                                                           |   | 3,715,000         |       | 2,789,000 |   |
|                                                                                                                          |   |              |       |   |   |
| Total current  assets                                                                                                         |   | 27,110,000        |       | 27,240,000 |   |
|                                                                                                                          |   |              |       |   |   |
| Equipment and leasehold improvements, net                                                                                     |   | 2,039,000         |       | 3,213,000 |   |
| Goodwill, net                                                                                                                 |   | 235,000           |       | 281,000 |   |
| Other assets, including receivable from  stockholders 2002 $2,123,000; 2003 $1,903,000                                        |   | 4,155,000         |       | 4,226,000 |   |
|                                                                                                                          |   |              |       |   |   |
| Total assets                                                                                                                  |   | $                 | 33,539,000 |   | $ | 34,960,000 |   |
|                                                                                                                          |   |              |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                 |   |              |       |   |   |
|                                                                                                                          |   |              |       |   |   |
| Current liabilities:                                                                                                          |   |              |       |   |   |
| Current portion of long-term debt                                                                                             |   | $                 | 73,000     |   | $ | — |   |
| Accounts payable                                                                                                              |   | 4,138,000         |       | 2,172,000 |   |
| Accrued expenses                                                                                                              |   | 2,218,000         |       | 4,322,000 |   |
| Deferred revenue                                                                                                              |   | 1,364,000         |       | 1,807,000 |   |
|                                                                                                                          |   |              |       |   |   |
| Total current liabilities                                                                                                     |   | 7,793,000         |       | 8,301,000 |   |
|                                                                                                                          |   |              |       |   |   |
| Long-term debt, net of current portion                                                                                        |   | 120,000           |       | — |   |
|                                                                                                                          |   |              |       |   |   |
| Commitments and contingencies                                                                                                 |   |              |       |   |   |
|                                                                                                                          |   |              |       |   |   |
| Stockholders’ equity:                                                                                                    |   |              |       |   |   |
| Preferred stock, no par value, authorized  5,000,000 shares; issued none                                                      |   | —            |       | — |   |
| Common stock, par value $.01 per share;  authorized 50,000,000 shares; issued 2002 10,969,657 shares; 2003 10,974,170  shares |   | 110,000           |       | 110,000 |   |
| Additional paid-in capital                                                                                                    |   | 21,113,000        |       | 21,122,000 |   |
| Accumulated other comprehensive income                                                                                        |   | —            |       | 33,000 |   |
| Retained earnings                                                                                                             |   | 5,578,000         |       | 6,598,000 |   |
|                                                                                                                          |   | 26,801,000        |       | 27,863,000 |   |
| Less cost of treasury stock 2002 320,565  shares;2003 331,493 shares                                                          |   | 1,175,000         |       | 1,204,000 |   |
|                                                                                                                          |   |              |       |   |   |
| Total stockholders’ equity                                                                                               |   | 25,626,000        |       | 26,659,000 |   |
|                                                                                                                          |   |              |       |   |   |
| Total liabilities and stockholders’ equity                                                                               |   | $                 | 33,539,000 |   | $ | 34,960,000 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-2

----

 

**TROY GROUP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                                                                     |   | **Fiscal  Years Ended November 30,** |       |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                     |   | **2001**                             |       | **2002** |   | **2003** |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Net sales                                                                                                |   | $                                    | 49,218,000 |   | $ | 54,998,000 |   | $ | 56,576,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Cost of goods sold (including rent paid to  majority stockholders: 2001and 2002 $270,000; 2003 $279,000) |   | 30,766,000                           |       | 38,011,000 |   | 34,763,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Gross profit                                                                                             |   | 18,452,000                           |       | 16,987,000 |   | 21,813,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Operating expenses:                                                                                      |   |                                 |       |   |   |   |   |
| Selling, general and administrative                                                                      |   | 15,681,000                           |       | 14,908,000 |   | 14,676,000 |   |
| Research and development                                                                                 |   | 6,027,000                            |       | 6,872,000 |   | 5,449,000 |   |
| Amortization of intangible assets                                                                        |   | 1,235,000                            |       | 131,000 |   | 108,000 |   |
| Impairment of long-lived and intangible  assets                                                          |   | 5,634,000                            |       | — |   | — |   |
|                                                                                                     |   | 28,577,000                           |       | 21,911,000 |   | 20,233,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Operating income (loss)                                                                                  |   | (10,125,000                          | )          | (4,924,000 | ) | 1,580,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Interest income                                                                                          |   | 515,000                              |       | 101,000 |   | 89,000 |   |
| Interest expense                                                                                         |   | (138,000                             | )          | (34,000 | ) | (10,000 | ) |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Income (loss) before income taxes (credit)                                                               |   | (9,748,000                           | )          | (4,857,000 | ) | 1,659,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Provision for income taxes (credit)                                                                      |   | (3,803,000                           | )          | (1,682,000 | ) | 639,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Net income (loss)                                                                                        |   | $                                    | (5,945,000 | ) | $ | (3,175,000 | ) | $ | 1,020,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Net income (loss) per share:                                                                             |   |                                 |       |   |   |   |   |
| Basic                                                                                                    |   | $                                    | (0.55      | ) | $ | (0.30 | ) | $ | .10 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Diluted                                                                                                  |   | $                                    | (0.55      | ) | $ | (0.30 | ) | $ | .10 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Weighted average shares outstanding:                                                                     |   |                                 |       |   |   |   |   |
| Basic                                                                                                    |   | 10,775,000                           |       | 10,647,000 |   | 10,650,000 |   |
|                                                                                                     |   |                                 |       |   |   |   |   |
| Diluted                                                                                                  |   | 10,775,000                           |       | 10,647,000 |   | 10,650,000 |   |

 

See Notes to Consolidated Financial Statements

 

F-3

----

 

**TROY GROUP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**
|                                                                                    |   | **Fiscal  Years Ended November 30,** |       |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                    |   | **2001**                             |       | **2002** |   | **2003** |   |
| Cash flows from operating activities:                                                   |   |                                 |       |   |   |   |   |
| Net income (loss)                                                                       |   | $                                    | (5,945,000 | ) | $ | (3,175,000 | ) | $ | 1,020,000 |   |
| Adjustments to reconcile net income(loss)to  net cash provided by operating activities: |   |                                 |       |   |   |   |   |
| Depreciation and amortization                                                           |   | 2,013,000                            |       | 994,000 |   | 793,000 |   |
| Amortization of capitalized software                                                    |   | 46,000                               |       | 1,140,000 |   | 278,000 |   |
| Impairment of long-lived assets                                                         |   | 5,634,000                            |       | — |   | — |   |
| Provision for (recovery of) doubtful  accounts                                          |   | 953,000                              |       | (11,000 | ) | (491,000 | ) |
| Loss on disposal of furniture                                                           |   | —                               |       | — |   | 99,000 |   |
| Accrued interest on available for sale  securities                                      |   | (333,000                             | )          | (66,000 | ) | (14,000 | ) |
| Deferred taxes                                                                          |   | (2,218,000                           | )          | (1,331,000 | ) | 326,000 |   |
| Changes in working capital components, net  of effects from acquisition of companies:   |   |                                 |       |   |   |   |   |
| (Increase) decrease in:                                                                 |   |                                 |       |   |   |   |   |
| Accounts receivable                                                                     |   | (186,000                             | )          | 497,000 |   | 1,299,000 |   |
| Income tax refund receivable                                                            |   | (584,000                             | )          | (17,000 | ) | 1,076,000 |   |
| Inventories                                                                             |   | (1,409,000                           | )          | 3,711,000 |   | 649,000 |   |
| Prepaid expenses and other                                                              |   | 209,000                              |       | (82,000 | ) | (973,000 | ) |
| Increase (decrease) in:                                                                 |   |                                 |       |   |   |   |   |
| Accounts payable                                                                        |   | 1,994,000                            |       | (280,000 | ) | (1,966,000 | ) |
| Accrued expenses                                                                        |   | (329,000                             | )          | (238,000 | ) | 2,103,000 |   |
| Deferred revenue                                                                        |   | 918,000                              |       | 226,000 |   | 443,000 |   |
|                                                                                    |   |                                 |       |   |   |   |   |
| Net cash provided by operating activities                                               |   | 763,000                              |       | 1,368,000 |   | 4,642,000 |   |
|                                                                                    |   |                                 |       |   |   |   |   |
| Cash flows from investing activities:                                                   |   |                                 |       |   |   |   |   |
| Acquisition of companies                                                                |   | (2,051,000                           | )          | — |   | — |   |
| Purchase of available-for-sale securities                                               |   | (5,111,000                           | )          | (1,999,000 | ) | (8,243,000 | ) |
| Maturities of available-for-sale securities                                             |   | 10,215,000                           |       | 6,749,000 |   | 754,000 |   |
| Purchase of equipment and leasehold  improvements                                       |   | (1,221,000                           | )          | (374,000 | ) | (1,915,000 | ) |
| (Increase) in other assets                                                              |   | (1,615,000                           | )          | (338,000 | ) | 87,000 |   |
|                                                                                    |   |                                 |       |   |   |   |   |
| Net cash provided by (used in) investing  activities                                    |   | 217,000                              |       | 4,038,000 |   | (9,317,000 | ) |
|                                                                                    |   |                                 |       |   |   |   |   |
| Cash flows from financing activities:                                                   |   |                                 |       |   |   |   |   |
| Principal payments on debt                                                              |   | (67,000                              | )          | (70,000 | ) | (193,000 | ) |
| Proceeds from issuance of common stock                                                  |   | 158,000                              |       | 148,000 |   | 9,000 |   |
| Purchase of treasury stock                                                              |   | (1,096,000                           | )          | (79,000 | ) | (29,000 | ) |
|                                                                                    |   |                                 |       |   |   |   |   |
| Net cash used in financing activities                                                   |   | (1,005,000                           | )          | (1,000 | ) | (213,000 | ) |
|                                                                                    |   |                                 |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                   |   | (25,000                              | )          | 5,405,000 |   | (4,888,000 | ) |
|                                                                                    |   |                                 |       |   |   |   |   |
| Cash and cash equivalents, beginning of  period                                         |   | 1,235,000                            |       | 1,210,000 |   | 6,615,000 |   |
|                                                                                    |   |                                 |       |   |   |   |   |
| Cash and cash equivalents, end of period                                                |   | $                                    | 1,210,000  |   | $ | 6,615,000 |   | $ | 1,727,000 |   |

 

See Notes to Consolidated Financial Statements

 

F-4

----

 

**TROYGROUP, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                                                      |                |       |                  |    |       | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income** |       |    |   |       |   | **Total  Stockholders’Equity** |   | **Comprehensive  Income (Loss)** |       |
|-----------------------------------------------------------|---------------------|------------|-----------------------|---------|------------|----------------------------------|--------|------------------------|--------|-----------------------------------------------|------------|---------|--------|------------|--------|-------------------------------------|--------|----------------------------------|------------|
| **Common  Stock**                                         | **Treasury  Stock** |
| **Number  of Shares**                                     |                | **Amount** | **Number  of Shares** |    | **Amount** |
|                                                      |                |       |                  |    |       |                             |   |                   |   |                                          |       |    |   |       |   |                                |   |                             |       |
| Balance, November 30, 2000                                |                | 10,880,764 |                  | $       | 109,000    |                             | $      | 20,808,000             |   | $                                             | 14,698,000 |    | $      | —     |   | —                              |   | $                                | —     |   | $ | 35,615,000 |   | $ | — |   |
| Issuance of common stock for employee stock purchase plan |                | 40,268     |                  | —  |       | 158,000                          |   | —                 |   |                                          |       | —  |   | —     |   | 158,000                             |   |                             |       |
| Purchase of common stock for the treasury                 |                | —     |                  | —  |       | —                           |   | —                 |   |                                          |       | 295,320 |   | (1,096,000 | )      | (1,096,000                          | )      |                             |       |
| Net (loss)                                                |                | —     |                  | —  |       | —                           |   | (5,945,000             | )      |                                          |       | —  |   | —     |   | (5,945,000                          | )      | (5,945,000                       | )          |
| Comprehensive loss                                        |                |       |                  |    |       |                             |   |                   |   | —                                        |       |    |   |       |   |                                |   | (5,945,000                       | )          |
|                                                      |                |       |                  |    |       |                             |   |                   |   |                                          |       |    |   |       |   |                                |   |                             |       |
| Balance, November 30, 2001                                |                | 10,921,032 |                  | 109,000 |       | 20,966,000                       |   | 8,753,000              |   | —                                        |       | 295,320 |   | (1,096,000 | )      | 28,732,000                          |   |                             |       |
| Issuance of common stock for employee stock purchase plan |                | 38,625     |                  | 1,000   |       | 118,000                          |   | —                 |   |                                          |       | —  |   | —     |   | 119,000                             |   |                             |       |
| Common stock options exercised                            |                | 10,000     |                  | —  |       | 29,000                           |   | —                 |   |                                          |       | —  |   | —     |   | 29,000                              |   |                             |       |
| Purchase of common stock for the treasury                 |                | —     |                  | —  |       | —                           |   | —                 |   |                                          |       | 25,245  |   | (79,000    | )      | (79,000                             | )      |                             |       |
| Net (loss)                                                |                | —     |                  | —  |       | —                           |   | (3,175,000             | )      | —                                        |       | —  |   | (3,175,000 | )      | (3,175,000                          | )      | (3,175,000                       | )          |
| Comprehensive loss                                        |                |       |                  |    |       |                             |   |                   |   | —                                        |       |    |   |       |   |                                |   | (3,175,000                       | )          |
|                                                      |                |       |                  |    |       |                             |   |                   |   |                                          |       |    |   |       |   |                                |   |                             |       |
| Balance, November 30, 2002                                |                | 10,969,657 |                  | 110,000 |       | 21,113,000                       |   | 5,578,000              |   | —                                        |       | 320,565 |   | (1,175,000 | )      | 25,626,000                          |   |                             |       |
| Issuance of common stock for employee stock purchase plan |                | 4,513      |                  | —  |       | 9,000                            |   | —                 |   |                                          |       | —  |   | —     |   | 9,000                               |   |                             |       |
| Purchase of common stock for the treasury                 |                | —     |                  | —  |       | —                           |   | —                 |   |                                          |       | 10,928  |   | (29,000    | )      | (29,000                             | )      |                             |       |
| Foreign currency translation adjustment, net of tax       |                | —     |                  | —  |       | —                           |   | —                 |   | 33,000                                        |       | —  |   | —     |   | 33,000                              |   | 33,000                           |       |
| Net income                                                |                | —     |                  | —  |       | —                           |   | 1,020,000              |   | —                                        |       | —  |   | —     |   | 1,020,000                           |   | 1,020,000                        |       |
| Comprehensive income                                      |                |       |                  |    |       |                             |   |                   |   |                                          |       |    |   |       |   |                                |   | $                                | 1,053,000  |   |
|                                                      |                |       |                  |    |       |                             |   |                   |   |                                          |       |    |   |       |   |                                |   |                             |       |
| Balance, November 30, 2003                                |                | 10,974,170 |                  | $       | 110,000    |                             | $      | 21,122,000             |   | $                                             | 6,598,000  |    | $      | 33,000     |   | 331,493                             |   | $                                | (1,204,000 | ) | $ | 26,659,000 |   |   |   |

 

See Notes to Consolidated Financial Statements

 

F-5

----

 

**TROY GROUP, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note1.  Nature of Business and SignificantAccounting Policies**

 

*Natureof business*

 

TROY Group, Inc. (theCompany) offers a full range of products to its customers in two primary productlines: Secure Payment Systems (previously Security Printing Solutions and TROYSystems)  and Wireless and ConnectivitySolutions (previously TROY Wireless). Secure Payment Systems include SecurityPrinting Solutions which enable the secure printing and management of checksand Financial Service Solutions which enable secure electronic payments.Wireless and Connectivity Solutions include hardware and software solutionsthat enable enterprises to share intelligent devices, such as printers, eitherwirelessly or using traditional networks.

 

A summary of the Company’s significant accountingpolicies follows:

 

*Use ofestimates*

 

The preparation of financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from those estimates.

 

The Company’s operations are affected by numerousfactors including market acceptance, changes in technologies and new laws andgovernment regulations and policies. The Company cannot predict what impact, if any, the occurrence of theseor other events might have on our operations. Significant estimates and assumptions made by management are used for,but not limited to, the allowance for doubtful accounts, the reserve for slowmoving or obsolete inventories, the carrying value and fair value of long-livedand intangible assets, and the realizability of the deferred tax assets whichare subject to having adequate future taxable income.

 

*Principlesof consolidation*

 

The accompanying consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries.  All material intercompany balances andtransactions are eliminated in consolidation.

 

*Investmentin available-for-sale securities*

 

Management determines the appropriate classificationof the securities at the time they are acquired and evaluates theappropriateness of such classifications at each balance sheet date.  Management has determined that allsecurities should be classified as available-for-sale.  Available-for-sale securities are stated atfair value and unrealized holding gains and losses, net of the related deferredtax effect, are reported as a separate component of stockholders’ equity.  Realized gains and losses, including lossesfrom declines in value of specific securities determined by management to beother than temporary, are included in income. Realized gains and losses are determined on the basis of the specificidentification of the securities sold. As of November 30, 2002, the Company had approximately $500,000 incertificates of deposit, and as of November 30, 2003, the Company hadapproximately $8,000,000 in a taxable closed-end exchange-traded fund ofpreferred stock  which providesliquidity at par through auctions every 7 days.  Market values approximated carrying values.  Accordingly, no realized or unrealized gainsor losses were recorded during the three years ended November 30, 2003.

 

F-6

----

 

*Inventories*

 

Inventories are valued at the lower of cost or marketon a first-in, first-out basis.  TheCompany uses a standard cost system for purposes of determining cost.  The standards are adjusted periodically toensure they approximate actual costs. The Company writes down the carrying value of inventory to market valuefor estimated obsolete or excess inventory based upon assumptions about futuredemand and market conditions.  TheCompany compares current inventory levels on a product basis to current salesforecasts in order to assess the inventory balance. Sales forecasts are basedon economic conditions and trends (both current and projected), anticipatedcustomer demand, expected future products and other assumptions.  If actual market conditions are less favorablethan those projected by management, additional write-downs may be required.

 

*Equipmentand leasehold improvements*

 

Equipment and leasehold improvements are recorded atcost.  Equipment is depreciated usingthe straight-line method over their estimated useful lives, currently fiveyears.  Improvements to leased propertyare amortized over the lesser of the life of the lease or life of theimprovements.

 

*Intangibleassets*

 

Intangible assets consist of customer lists, and coretechnology which are being amortized on a straight-line basis over five toseven years.

 

*Goodwill and Other Intangible Assets*

 

The Company adopted Statement of FinancialAccounting Standards (SFAS) No. 142 *Goodwilland Other Intangible Assets*effective December 1, 2002 andperformed its initial transitional impairment test as of that date. Theprovisions of SFAS No. 142 require that the Company allocate its goodwillto its various reporting units, determine the carrying value of thosebusinesses, and estimate the fair value of the reporting units so that atwo-step goodwill impairment test can be performed. The Company’s reportingunits represent components of its operating segments, which are the same as thereportable segments, identified in Note 13. In the first step of thegoodwill impairment test, the fair value of each reporting unit is compared toits carrying value. If the fair value exceeds the carrying value, goodwill isnot impaired and no further testing is performed. If the carrying value exceedsthe fair value, then the second step must be performed, and the implied fairvalue of the reporting unit’s goodwill must be determined and compared to thecarrying value of the goodwill for the reporting unit. If the carrying value ofa reporting unit’s goodwill exceeds its implied fair value, then an impairmentloss equal to the difference is recorded. For the year ended November 30, 2003,no impairment loss was recognized.  TheCompany’s annual impairment testing date is the beginning of the fiscal fourthquarter, which is September 1.

 

*Evaluationof long-lived and intangible assets*

 

For long-lived assets, otherthan goodwill, Financial Accounting Standards Board (FASB) Statement ofFinancial Accounting Standards (SFAS) No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, requires theevaluation for impairment whenever events or changes in circumstances haveindicated that an asset may not be recoverable. Long-lived assets evaluated forimpairment are grouped with other assets to the lowest level for whichidentifiable cash flows are largely independent of the cash flows of othergroups of assets and liabilities. If the sum of the projected undiscounted cashflows (excluding interest charges) is less than the carrying value of theassets, the

 

F-7

----

 

assets will be written down tothe estimated fair value, and the loss recognized in income from continuingoperations in the period in which the determination is made. Management hasdetermined that no impairment of long-lived assets exists at November 30, 2003.

 

*Revenuerecognition*

 

Revenue from the sale of our check printing equipmentand supplies and print servers to end users, distributors, original equipmentmanufacturers (OEM) and resellers is recognized when the price is fixed anddeterminable, the product is shipped and the title is transferred to the buyerwith economic substance, net of an allowance for estimated returns, as long asno significant post-delivery obligations exist and collection of the resultingreceivable is probable and not contingent on resale of the product.  Revenue from equipment maintenance andservice contracts on check printing equipment and print servers is recorded asdeferred income when billed and is recognized straight-line over the term ofthe contract.  Warranty expense isestimated at the time revenue is recognized. A warranty accrual for estimated future warranty obligations is recordedbased upon the relationship between historical and anticipated warranty costsand sales volumes.  To the extentincreased warranty claim activity or increased costs associated with servicingthose claims is experienced, the warranty accrual will increase resulting indecreased gross profit.

 

Revenue from software arrangements of the Company’sStarACHTM software is recognized in accordance with Statement of Position(“SOP”) 97-2, “Software Revenue Recognition” as amended by SOP 98-9,“Modification of SOP 97-2 with Respect to Certain Transactions.” Revenue isrecognized when persuasive evidence of an arrangement exits and delivery hasoccurred, provided the fee is fixed or determinable, collectibility is probableand the arrangement does not require significant customization or modificationof the software.  For arrangements wherethe software requires significant customization or modification, the Companyrecognizes revenue for the software license and consulting services portion ofthe arrangement using completed contract method of accounting under SOP 81-1.  Contracts are considered complete uponcustomer acceptance. Maintenance revenue for the StarACHTM software isrecognized ratably over the term of the maintenance contract, typically 12months.

 

Revenue from software license agreements with OEMs forprint servers whereby the Company provides ongoing support over the term of thecontract is recognized when the licensed software is incorporated into theOEMs’ products.

 

*Tradereceivables*

 

Trade receivables are carried at original invoiceamount less an estimate made for doubtful receivables resulting from theinability of customers to make required payments.  The amount of the reserve is based on historical experience andan analysis of the accounts receivable outstanding.  If the financial condition of the customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required which would result in an additional expense in theperiod such determination was made.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previouslywritten off are recorded when received. Trade receivables are considered past due when they are not paidaccording to the agreed terms. No interest is recorded on trade receivables.

* *

*Researchand development*

 

The Company expensesresearch and development costs, which are primarily salaries and benefits, asthey are incurred.  The Company incursresearch and development costs in developing new products.

 

F-8

----

 

*CapitalizedSoftware Development Costs*

 

Costs incurred for computer software development priorto establishing technological feasibility are expensed as incurred.  Software development costs that theCompany  incurs following technologicalfeasibility, and prior to the time the product is available for general releaseto customers are capitalized. Technological feasibility is determined at theearlier of completion of a detailed program design or a working model. Softwaredevelopment costs capitalized were $1,314,000, none and none during the yearsended November 30, 2001, 2002 and 2003 respectively.  Capitalized software costs are amortized into cost of goods soldover the greater of (1) the ratio of current gross revenue for the product tothe current and anticipated future gross revenues or (2) the straight-linemethod over the remaining economic life of the product, estimated to be fiveyears.  Amortization expense related tocapitalized software costs was $46,000, $433,000 and $278,000 in fiscal years2001, 2002 and 2003, respectively. During fiscal year 2002, the Company evaluated the net realizable valueof the unamortized capitalized costs and recorded a charge to amortizationexpense of $707,000 to write down the carrying value.

 

*Off-balancesheet financings and liabilities*

 

Other than lease commitments and legal contingenciesincurred in the normal course of business (see Notes 10 and 15), the Companydoes not have any off-balance sheet financing arrangements or liabilities.  The Company does not have any majority-ownedsubsidiaries or any interests in, or relationships with, any materialspecial-purpose entities that are not included in the consolidated financialstatements, except for a related party lease arrangement.

 

*AdvertisingCosts*

 

Amounts incurred for advertising costs with thirdparties are expensed as incurred. Advertising expense totaled approximately $152,000, $193,000 and$333,000 for the years ended November 30, 2001, 2002 and 2003, respectively.

 

*Incometaxes*

 

Deferred taxes are provided on a liability methodwhereby deferred tax assets are recognized for deductible temporary differencesand operating loss and tax credit carryforwards and deferred tax liabilitiesare recognized for taxable temporary differences.  Temporary differences are the differences between the reportedamounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by avaluation allowance when, in the opinion of management, it is more likely thannot that some portion or all of the deferred tax assets will not berealized.  Deferred tax assets andliabilities are adjusted for the effects of changes in tax laws and rates onthe date of enactment.

 

*Stock-basedcompensation*

 

Statement of Financial Accounting Standards(SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFASNo. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,”prescribes accounting and reporting standards for all stock-based compensationplans, including employee stock option plans. As allowed by SFAS No. 123, theCompany has elected to continue to account for its employee stock-basedcompensation plan using the intrinsic value method in accordance withAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related Interpretations, which does not require compensationto be recorded if the consideration to be received is at least equal to thefair value of the common stock to be received at the measurement date. Underthe requirements of SFAS No. 123, non-employee stock-based transactions

 

F-9

----

 

require compensation to berecorded based on the fair value of the securities issued or the servicesreceived, whichever is more reliably measurable.

 

The following tableillustrates the effect on net income (loss) and net income (loss) per share hadcompensation costs for the stock-based compensation plan been determined basedon grant date fair values of awards under the provisions of SFAS No. 123, forthe years ended November 30 (in thousands, except per share data):

 
|                                                                                                                                       |   | **2001**   |       | **2002** |   | **2003**   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|----------|--------|------------|--------|
|                                                                                                                                       |   |       |       |     |   |       |   |
| Net income (loss) applicable to common  stockholders                                                                                       |   |       |       |     |   |       |   |
| As reported                                                                                                                                |   | $          | (5,945,000 | )        | $      | (3,175,000 | )      | $ | 1,020,000 |   |
|                                                                                                                                       |   |       |       |     |   |       |   |
| Less total stock-based employee compensation  expense determined under fair value-based method for all awards, net of  related tax effects |   | (1,334,000 | )          | (513,000 | )      | (721,000   | )      |
| Proforma                                                                                                                                   |   | $          | (7,279,000 | )        | $      | (3,688,000 | )      | $ | 299,000 |   |
|                                                                                                                                       |   |       |       |     |   |       |   |
| Net income (loss) per share applicable to  common stockholders, basic and diluted                                                          |   |       |       |     |   |       |   |
| As reported                                                                                                                                |   | $          | (.55       | )        | $      | (.30       | )      | $ | .10 |   |
| Proforma                                                                                                                                   |   | $          | (.68       | )        | $      | (.35       | )      | $ | .03 |   |

 

In determining the pro forma amounts above, the valueof each grant is estimated at the grant date using the Black-Scholesoption-pricing method with the following assumptions for grants in 2001and2002:  no dividends; risk-free interestrates of 3.61% to 4.96%,and 1.41% to 2.51, respectively; expected lives of fiveand ten years; expected amounts to be exercised of 100%; and price volatilityof 51% to 69%.  There were no grants in2003.

 

*ComprehensiveIncome*

 

Management has determinedthat the functional currency of its foreign subsidiary located in Canada is thelocal currency, while the functional currency of its foreign subsidiary locatedin Germany is the U.S. dollar. Assets and liabilities of the Company’s foreignsubsidiary whose local currency is the functional currency are translated intoU.S. dollars at the year-end exchange rates. Income and expenses are translatedat the average exchange rate for the period and the resulting translationadjustments are accumulated as a separate component of stockholders’ equity,which totaled none and $33,000 at November 30, 2002 and 2003,respectively. The German subsidiary’s financial statements are remeasured atyear-end exchange rates for monetary assets and liabilities, and historicalexchange rates for nonmonetary assets and liabilities and equity. Income andexpenses are translated at the average exchange rate for the period, andtranslation adjustments are included in income for foreign entities whosefunctional currency is the U.S. dollar. Foreign currency gains and losses fromtransactions denominated in other than respective local currencies are includedin income.   In the fiscal year endedNovember 30, 2003, unrealized foreign currency gains from translationadjustments of $158,000 were included in Selling, General and Administrativeexpense, and realized foreign currency gains from transactions denominated inother than respective local currencies of $200,000 were included in Cost ofGoods Sold.

 

F-10

----

 

*Fairvalue of financial instruments*

 

The Company’s financial instruments consist of cashand cash equivalents, available-for-sale securities, accounts receivable,shareholder receivable, accounts payable and notes payable.  The fair value of the shareholder receivableis not readily determinable due to the uncertainties regarding the split dollarlife insurance arrangement. The carrying value of the other instruments isconsidered to be representative of their fair value, based on the short-termnature of these instruments and market rates of interest.

 

*Earningsper share*

 

Basic earnings per share (EPS) is computed as netincome (loss) divided by the weighted average number of common sharesoutstanding for the period.  Diluted EPSreflects the potential dilution that could occur from common shares issuablethrough exercise of stock options and warrants. The dilutive effect of optionsand warrants, which were not included in the total of diluted shares becausethe effect was antidilutive, was 74,000, 51,000 and none shares in the fiscal years ended November 30, 2001, 2002and 2003, respectively.

 

*Newaccounting pronouncements*

 

InMay 2003 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”, which requires that certain financial instruments previously presentedas equity or temporary equity be presented as liabilities.  Such instruments include mandatoryredeemable preferred and common stock, and certain options and warrants.  SFAS No.150 is effective for financialinstruments issued, entered into or modified after May 31, 2003 and isgenerally effective at the beginning of the first interim period beginningafter June 15, 2003.  The adoption ofSFAS No.150 is not expected to have a material effect on the Company’sfinancial position or results of its operations.

 

In 2003, the FASB issued Interpretation No. 46(FIN 46), *Consolidation of Variable InterestEntities, an Interpretation of Accounting Research Bulletin No. 51*,as revised. Prior to FIN 46, a company generally included another entity in thecompany’s financial statements only if it controlled the entity throughownership of the majority voting interests. FIN 46 requires certain variable interest entities to be consolidated bythe primary beneficiary of the entity if the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. FIN 46 iseffective for the Company for all variable interest entities beginning thequarter ending May 31, 2004. We are currently analyzing the effect that theadoption of FIN 46 will have on our results of operations and financialposition, but expect that upon the implementation date, it is reasonably possiblethat we will be required to consolidate the related party leasing entitydescribed Note 10 to the consolidated financial statements.

 

The financial statements of the related party leasingentity for the year ended November 30, 2003 are currently not available;however, management estimates that if this entity is required to beconsolidated under the provisions of FIN 46, it would have no impact onrevenues and an insignificant impact on net income.  The assets, primarily land and building, would be less than 5% oftotal assets, the related liabilities, primarily notes payable to the bank,would be approximately 10% of total liabilities and the net effect onstockholders’ equity would not be material.

 

The Company paid a total of $270,000 to lease themanufacturing facility during each of the years ended November 30, 2001 and2002, and $279,000 in the year ended November 30, 2003.  The future minimum lease commitments areincluded in Note 10.

 

F-11

----

 

When FIN 46 becomes effective, the net amountthat may be added to the Company’s balance sheet may either be reported as thecumulative effect of an accounting change, or by restating previously issuedfinancial statements with a cumulative-effect adjustment as of the beginning ofthe first year restated.  The Companyhas not yet determined the manner in which it will adopt FIN 46 in the event itis required to consolidate the entity.

 

**Note2.  Inventories**

 

Inventories consisted of the following as of November30:

 
|                                              |   | **2002**   |      | **2003**   |   |
|---------------------------------------------------|--------|------------|-----------|------------|--------|
| Raw materials                                     |   | $          | 5,136,000 |       | $      | 4,671,000 |   |
| Work in process                                   |   | 205,000    |      | 401,000    |   |
| Finished goods                                    |   | 4,112,000  |      | 2,264,000  |   |
| Reserve for slow moving and obsolete  inventories |   | (3,913,000 | )         | (2,445,000 | )      |
|                                              |   | $          | 5,540,000 |       | $      | 4,891,000 |   |

 

 

**Note3.  Equipment and Leasehold Improvements**

 

Equipment and leasehold improvements consisted of thefollowing as of November 30:

 
|                                            |   | **2002**   |      | **2003**   |   |
|-------------------------------------------------|--------|------------|-----------|------------|--------|
| Machinery and equipment                         |   | $          | 8,491,000 |       | $      | 9,704,000 |   |
| Furniture and fixtures                          |   | 1,052,000  |      | 1,286,000  |   |
| Leasehold improvements                          |   | 1,457,000  |      | 1,430,000  |   |
|                                            |   | 11,000,000 |      | 12,420,000 |   |
| Less accumulated depreciation and  amortization |   | 8,961,000  |      | 9,207,000  |   |
|                                            |   | $          | 2,039,000 |       | $      | 3,213,000 |   |

 

**Note4.  Other Assets**

 

Other assets consisted of the following as of November30:

 
|                                                                                           |   | **2002**  |      | **2003**  |   |
|------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Customer list, net of accumulated  amortization 2002 $16,000 and 2003 $20,000                  |   | $         | 9,000     |      | $      | 5,000 |   |
| Core technology, net of accumulated  amortization2002 $132,000 and 2003 $236,000               |   | 260,000   |      | 156,000   |   |
| Assembled workforce, net of  accumulatedamortization 2002 $79,000 and 2003 none                |   | 46,000    |      | —    | (A)    |
| Cash surrender value of officers’ life  insurance                                         |   | 337,000   |      | 460,000   |   |
| Unsecured receivable from stockholders                                                         |   | 2,123,000 |      | 1,903,000 | (B)    |
| Software development costs, net of  accumulated amortization 2002 $1,233,000 and 2003 $278,000 |   | 650,000   |      | 372,000   |   |
| Long-term deferred tax assets                                                                  |   | 676,000   |      | 1,330,000 |   |
| Other                                                                                          |   | 54,000    |      | —    |   |
|                                                                                           |   | $         | 4,155,000 |      | $      | 4,226,000 |   |

 

----

(A)  Reclassifiedto goodwill as part of the Company’s implementation of SFAS no. 142

(B)   Unsecuredreceivable from stockholders was reduced primarily by  $168,000 for asplit dollar life insurance policy owned by the Chief Executive Officer thatwas returned to the Company and

 

F-12

----

 

then terminated with no residualcash value and whose premiums had been paid by the Company prior to theimplementation of the Sarbanes-Oxley Act.

 

**Note 5. Goodwill and Intangible Assets**

 

The Company adopted Statement of FinancialAccounting Standards (SFAS) No. 142 *Goodwilland Other Intangible Assets*effective December 1, 2002 andperformed its initial transitional impairment test as of that date. Theprovisions of SFAS No. 142 require that the Company allocate its goodwillto its various reporting units, determine the carrying value of thosebusinesses, and estimate the fair value of the reporting units so that atwo-step goodwill impairment test can be performed. The Company’s reportingunits represent components of its operating segments, which are the same as thereportable segments, identified in Note 13. In the first step of thegoodwill impairment test, the fair value of each reporting unit is compared toits carrying value. If the fair value exceeds the carrying value, goodwill isnot impaired and no further testing is performed. If the carrying value exceedsthe fair value, then the second step must be performed, and the implied fairvalue of the reporting unit’s goodwill must be determined and compared to thecarrying value of the goodwill for the reporting unit. If the carrying value ofa reporting unit’s goodwill exceeds its implied fair value, then an impairmentloss equal to the difference is recorded. For the year ended November 30, 2003,no impairment loss was recognized.  TheCompany’s annual impairment testing date is the beginning of the fiscal fourthquarter, which is September 1.

 

The Company’sintangible assets subject to amortization at November 30, 2002 and November 30,2003 are composed of (amounts in thousands):

 
|                                 |   | **November 30, 2002** |    | **November 30, 2003**         |   |
|--------------------------------------|--------|-----------------------|---------|-------------------------------|--------|
|                                 |   | **Gross**             |    | **Accumulated  Amortization** |   | **Net** |   | **Gross** |   | **Accumulated  Amortization** |   | **Net** |   |
| Customer  Lists                      |   | $                     | 25,000  |                          | $      | (16,000 | ) | $ | 9,000 |   | $ | 25,000 |   | $ | (20,000 | ) | $ | 5,000 |   |
|                                 |   |                  |    |                          |   |   |   |   |   |   |   |   |   |
| Core  Technology                     |   | 392,000               |    | (132,000                      | )      | 260,000 |   | 392,000 |   | (236,000 | ) | 156,000 |   |
|                                 |   |                  |    |                          |   |   |   |   |   |   |   |   |   |
| Total  amortizable intangible assets |   | $                     | 417,000 |                          | $      | (148,000 | ) | $ | 269,000 |   | $ | 417,000 |   | $ | (256,000 | ) | $ | 161,000 |   |

 

Amortizationexpense related to intangible assets was $131,000 and $108,000 for the yearsended November 30, 2002 and 2003, respectively.

 

Estimatedfuture amortization expense related to purchased intangible assets at November30, 2003 is as follows:

 
| **Fiscal year:** |   |   |    |
|------------------|--------|--------|---------|
| 2004             |   | $      | 108,000 |   |
| 2005             |   | 53,000 |    |
| Total            |   | $      | 161,000 |   |

 

F-13

----

 

OnDecember 1, 2002 the Company completed the allocation of goodwill (includingamounts previously classified as assembled workforce) to its reporting units aspart of its transitional impairment test. Goodwill allocated to the Company’sreporting units and their respective reportable segments as of November 30,2002 and 2003 is as follows:

 
|                                                      |   | **Wireless  &  Connectivity** |   | **Secure  Payment  Systems** |   | **Total** |   |
|-----------------------------------------------------------|--------|-----------------------------------|--------|------------------------------|--------|-----------|--------|
| Balance at November 30, 2001                              |   | $                                 | — |                         | $      | 308,000   |   | $ | 308,000 |   |
| Amortization                                              |   | —                            |   | (73,000                      | )      | (73,000   | )      |
|                                                      |   |                              |   |                         |   |      |   |
| Balance at November 30, 2002                              |   | $                                 | — |                         | $      | 235,000   |   | $ | 235,000 |   |
| Adjustment for previously classified  assembled workforce |   | —                            |   | 46,000                       |   | 46,000    |   |
| Balance at November 30, 2003                              |   | $                                 | — |                         | $      | 281,000   |   | $ | 281,000 |   |

 

Ifthe provisions of SFAS No. 142 had been in effect for all periodspresented, the Company’s net income (loss) and net income (loss) per sharewould have been as follows for the years ended November 30, 2002 and 2003:

 
|                                                          |   | **Years  ended November 30,** |       |
|---------------------------------------------------------------|--------|-------------------------------|------------|
|                                                          |   | **2001**                      |       | **2002** |   | **2003** |   |
| Net income (loss):                                            |   |                          |       |   |   |   |   |
| As reported                                                   |   | $                             | (5,945,000 | ) | $ | (3,175,000 | ) | $ | 1,020,000 |   |
| Add back amortization of goodwill                             |   | 191,000                       |       | 73,000 |   | — |   |
| Net income (loss), as adjusted                                |   | $                             | (5,754,000 | ) | $ | (3,102,000 | ) | $ | 1,020,000 |   |
|                                                          |   |                          |       |   |   |   |   |
| Net income (loss) per share, basic and  diluted               |   |                          |       |   |   |   |   |
| As reported                                                   |   | $                             | (.55       | ) | $ | (.30 | ) | $ | .10 |   |
| Add back amortization of goodwill                             |   | .02                           |       | .01 |   | — |   |
| Net income (loss) per share, basic and  diluted, net of taxes |   | $                             | (.53       | ) | $ | (.29 | ) | $ | .10 |   |

 

**Note 6.   NotesPayable**

 

The Company has a $5,000,000 line-of-credit agreementwith a bank.  As of November 30,2003, there were no borrowings outstanding against the line of credit.  Borrowings under the line of credit bearinterest at the lesser of the bank’s reference rate (4.0 % at November 30,2003) less 0.25% or the bank’s LIBOR rate (1.17 % at November 30, 2003) plus 2%and are limited to 80% of eligible accounts receivable and 50% of  eligible inventories if total liabilities totangible effective net worth is greater than two to one.   In connection with the line-of-credit agreement,the Company has a $650,000 standby letter-of-credit sublimit agreement of whichapproximately $80,000 was outstanding at November 30, 2003.  The line of credit is secured bysubstantially all of the Company’s assets. In connection with its borrowing arrangement, the Company is subject tocertain financial covenants.  As ofNovember 30,

 

F-14

----

 

2003, the Company hadapproximately $4,920,000 in availability under the line of credit.  The line-of-credit borrowings are due ondemand.  The agreement may be terminatedby either party.

 

**Note7.  Long-term Debt**

 

The Company had 4% to 5% economic, industrial andbusiness development notes payable at November 30, 2002 totaling $193,000,which matured through 2005.  The noteswere secured by certain equipment.  Oneof the notes was secured by a fourth trust deed on real property owned by acompany related through common ownership to the majority stockholders.  In November 2003, the notes were paid and,as of November 30, 2003, the Company had no long-term debt outstanding.

 

**Note8.  Accrued Expenses**

 

Accrued expensesconsisted of the following as of November 30:

 
|                       |   | **2002** |      | **2003** |   |
|----------------------------|--------|----------|-----------|----------|--------|
| Compensation               |   | $        | 1,654,000 |     | $      | 1,633,000 |   |
| Self insurance liability   |   | 307,000  |      | 343,000  |   |
| Income taxes payable       |   | —   |      | 148,000  |   |
| Maintenance invoices       |   | —   |      | 334,000  |   |
| Supply agreement liability |   | —   |      | 185,000  |   |
| Warranty liability         |   | 192,000  |      | 273,000  |   |
| Construction in progress   |   | —   |      | 243,000  |   |
| Inventory in transit       |   | —   |      | 372,000  |   |
| Professional fees          |   | —   |      | 335,000  |   |
| Other                      |   | 65,000   |      | 456,000  |   |
|                       |   | $        | 2,218,000 |     | $      | 4,322,000 |   |

 

Warrantyreserve activity for the fiscal year ended November 30, 2003 is as follows:

 

| Beginning balance, November 30, 2002 |   | $       | 192,000 |   |
|--------------------------------------|--------|---------|---------|--------|
| Provision charged off to expense     |   | 122,000 |    |
| Charge offs to reserve               |   | (41,000 | )       |
| Balance, November 30, 2003           |   | $       | 273,000 |   |

 

**Note9.  Stockholders’ Equity**

 

*Preferredstock*

 

The Board of Directors has the authority, withoutaction by the stockholders, to designate and issue any authorized but unissuedshares of preferred stock in one or more series and to designate the rights,preferences and privileges of each such series.

 

F-15

----

 

*Stockoption plans*

 

The Company has reserved 2,700,000 shares of commonstock for issuance under the Company’s 1998 Stock Incentive Plan, of which1,032,000 shares are subject to outstanding options as of November 30,2003.  Option prices for the incentivestock options will be 100% of the fair market value of the stock on the date theoption is granted with an exercise period of not more than ten years.  For incentive options granted to 10% or morestockholders, the option price is 110% of the fair market value of the stock onthe date the option is granted with an exercise period of not more than fiveyears.  Option prices for thenonqualified stock options shall not be less than 85% of the fair market valueof the stock on the date the options are granted with an exercise period of notmore than ten years.  Vesting terms aredetermined by the Company at the date of grant.

 

*StockWarrants*

 

The Company issued warrants to purchase 350,000 sharesof common stock of the Company, of which approximately 107,000 are outstandingat November 30, 2003, to a consultant and an attorney in connection withservices provided relating to acquisitions, the Company’s initial publicoffering and for other services.  Nowarrants were granted in 2002 or 2003. The warrants expire five years from thedate vested.  The Company’s value of thegrants were estimated at the measurement date using the Black-Scholesoption-pricing model with the following assumptions:  no dividends; expected life of three years; expected amounts tobe exercised of 100%; risk free interest rates of 5.45% to 5.58%; and expectedvolatility of 43% to 45%.

 

A summary of the status of the stock option plans andstock warrants and changes during fiscal years 2001, 2002 and 2003 is asfollows:

 
|                                                         |   | **Number of  Shares** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------------------------------------|--------|-----------------------|--------|----------------------------------------|--------|
|                                                         |   |                  |   |                                   |   |
| Outstanding, November 30, 2000 (exercisable  548,666 shares) |   | 1,678,666             |   | $                                      | 6.96   |   |
| Granted (weighted average fair value $2.85)                  |   | 581,000               |   | 3.86                                   |   |
| Exercised                                                    |   | —                |   | —                                 |   |
| Forfeited                                                    |   | (274,000              | )      | (6.78                                  | )      |
| Outstanding, November 30, 2001 (exercisable  753,877 shares) |   | 1,985,666             |   | 6.07                                   |   |
| Granted (weighted average fair value $2.25)                  |   | 350,000               |   | 4.12                                   |   |
| Exercised                                                    |   | (10,000               | )      | 2.94                                   |   |
| Forfeited                                                    |   | (858,000              | )      | (5.79                                  | )      |
| Outstanding, November 30, 2002 (exercisable  717,618 shares) |   | 1,467,666             |   | 5.79                                   |   |
| Granted                                                      |   | —                |   | —                                 |   |
| Exercised                                                    |   | —                |   | —                                 |   |
| Forfeited                                                    |   | (329,000              | )      | 7.05                                   |   |
| Outstanding, November 30, 2003 (exercisable  750,734 shares) |   | 1,138,666             |   | $                                      | 5.43   |   |

 

A further summary of the options and warrantsoutstanding at November 30, 2003 is as follows: 

 

F-16

----

 
| **Options  and Warrants Outstanding** |   | **Options  and Warrants  Exercisable** |       |
|---------------------------------------|--------|----------------------------------------|------------|
| **Range of   Exercise Prices**        |   | **Number of  Options**                 | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                  |   |                                   |       |   |   |   |   |   |   |   |   |
| $2.85 - $4.47                         |   | 662,666                                |       | $ | 3.93 |   | 6.5 |   | 366,581 |   | $ | 3.78 |   |
| 6.63 -8.75                            |   | 461,000                                |       | 7.32 |   | 5.8 |   | 379,154 |   | 7.33 |   |
| 13.16 -  14.25                        |   | 15,000                                 |       | 13.52 |   | 6.0 |   | 4,999 |   | 13.52 |   |
| $2.85 -  $14.25                       |   | 1,138,666                              |       | $ | 5.43 |   | 6.2 |   | 750,734 |   | $ | 5.64 |   |

 

There were 1,649,341 remaining options available forgrants under the plans at November 30, 2003.

 

 

*Employeestock purchase plan*

 

The Company discontinued the Employee Stock PurchasePlan in 2003.  Under the Plan shareswere purchased subsequent to the end of the annual offering period for 85% ofthe lower of the fair market value on the first day or last day of the Planyear offering period.  During the yearsended November 30, 2001, 2002 and 2003, 40,268, 38,625 and 4,513 shares werepurchased for $158,000, $118,000 and $9,000 respectively, under the plan.

 

*Retainedearnings*

 

The Company is limited in its ability to declare andpay dividends by the terms of certain debt agreements.

 

*StockRepurchase Program*

 

The Company established a stock repurchase programunder which common stock, with an aggregate market value up to $4.0 million,may be acquired in the open market.  Asof November 30, 2003, the Company has purchased 331,493 shares of common stockin the open market at an average price of $3.63 per share (total $1,204,000)under this program.

 

**Note10.  Related-party Transactions, LeaseCommitments and Rent Expense**

 

The Company leases its operating facilities undernon-cancelable operating lease agreements, including certain operatingfacilities from a company related through common ownership,  which expire through 2008.  The related-party lease requires monthlypayments of approximately $23,800.

 

Rent expense in fiscal years 2001, 2002 and 2003 wasapproximately $790,000, $925,000 and $719,000, respectively.  Future minimum rental commitments underthese leases in the fiscal years ending November 30 are as follows:  2004 $484,000; 2005 $367,000; 2006 $319,000;2007 $285,000; 2008 $95,000 (total $1,551,000, including $1,238,000 to arelated party).

 

As of November 30, 2003, the Company has advanced$1,903,000 to stockholders in connection with the purchase of split dollar lifeinsurance policies.  The Company and thestockholders have executed a split-dollar agreement governing the unsecured,non-interest-bearing receivable for the amount

 

F-17

----

 

of the advances.  The advances are due on demand, however theCompany does not anticipate demanding payment and accordingly has classifiedthis amount as long-term.

 

**Note11.  Income Tax Matters**

 

Net deferred tax assets consist of the followingcomponents as of November 30:

 
|                                                              |   | **2002**  |      | **2003**  |   |
|-------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Deferred tax liabilities:                                         |   |      |      |      |   |
| Equipment and leasehold improvements                              |   | $         | (53,000   | )         | $      | (13,000 | ) |
|                                                              |   |      |      |      |   |
| Deferred tax assets:                                              |   |      |      |      |   |
| Inventories valuation                                             |   | 1,472,000 |      | 943,000   |   |
| Accounts receivable allowance and valuation                       |   | 331,000   |      | 148,000   |   |
| Accrued compensation                                              |   | 186,000   |      | 219,000   |   |
| Accrued warranty and other                                        |   | 400,000   |      | 695,000   |   |
| Deferred revenue                                                  |   | 318,000   |      | 74,000    |   |
| Customer list, core technology, assembled  workforce and goodwill |   | 729,000   |      | 744,000   |   |
| Tax credit carryforwards                                          |   | 1,008,000 |      | 1,309,000 |   |
|                                                              |   | 4,444,000 |      | 4,132,000 |   |
|                                                              |   |      |      |      |   |
| Net deferred tax assets                                           |   | $         | 4,391,000 |      | $      | 4,119,000 |   |

 

The Company has not established a valuation allowancefor the deferred tax assets, because management believes the deferred taxassets are more likely than not to be realized based on current expectations offuture earnings and available tax planning strategies.

 

The net deferred tax assets have been classified onthe accompanying consolidated balance sheets as of November 30 as follows:

 
|             |   | **2002** |      | **2003**  |   |
|------------------|--------|----------|-----------|-----------|--------|
|             |   |     |      |      |   |
| Current assets   |   | $        | 3,715,000 |      | $      | 2,789,000 |   |
| Long-term assets |   | 676,000  |      | 1,330,000 |   |
|             |   | $        | 4,391,000 |      | $      | 4,119,000 |   |

 

The Company has tax credit carryforwards of$1,309,000. Of this amount, $697,000 are available to offset U.S. Federalincome tax and expire in 2022.  Theremaining credit carryforwards of $612,000 are available to offset certainstate income taxes.

 

F-18

----

 

The provision (benefit) for income taxes charged tooperations for the years ended November 30, 2001, 2002 and 2003 are as follows.

 
|         |   | **2001**   |       | **2002**   |   | **2003**   |   |
|--------------|--------|------------|------------|------------|--------|------------|--------|
| Current:     |   |       |       |       |   |       |   |
| U.S. federal |   | $          | (1,961,000 | )          | $      | (643,000   | )      | $ | — |   |
| State        |   | 56,000     |       | 37,000     |   | —     |   |
| Foreign      |   | 320,000    |       | 255,000    |   | 313,000    |   |
|         |   | (1,585,000 | )          | (351,000   | )      | 313,000    |   |
| Deferred:    |   |       |       |       |   |       |   |
| U.S. federal |   | (2,065,000 | )          | (1,002,000 | )      | 315,000    |   |
| State        |   | (133,000   | )          | (331,000   | )      | 11,000     |   |
| Foreign      |   | (20,000    | )          | 2,000      |   | —     |   |
|         |   | (2,218,000 | )          | (1,331,000 | )      | 326,000    |   |
|         |   |       |       |       |   |       |   |
|         |   | $          | (3,803,000 | )          | $      | (1,682,000 | )      | $ | 639,000 |   |

 

The historical income tax provision for fiscal years2001, 2002 and 2003 differs from the amount of income tax determined byapplying the U.S. federal income tax rate to pretax income due to the following:

 
|                                             |   | **2001** |   | **2002** |   | **2003** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                             |   |     |   |     |   |     |   |
| Computed “expected” tax rate (benefit) |   | (35      | %)     | (35      | )%     | 35       | %      |
| Increase (decrease)                              |   |     |   |     |   |     |   |
| State income taxes, net of federal benefit       |   | —   |   | —   |   | 3        | %      |
| Research and development and other tax  credits  |   | (11      | )      | (5       | )      | (13      | )%     |
| Goodwill amortization and impairment             |   | 4        |   | —   |   | —   |   |
| Other                                            |   | 3        |   | 5        |   | 16       |   |
|                                             |   |     |   |     |   |     |   |
|                                             |   | (39      | )%     | (35      | )%     | 41       | %      |

 

Pretax income (loss) subject to foreign and U.S.income taxes for fiscal year 2001 was: $451,000 and $(2,191,000), respectively,for fiscal year 2002, was: $624,000 and $(3,241,000), and for fiscal year 2003,was 802,000 and (960,000),respectively.

 

**Note12.  Major Vendors**

 

The Company purchases keycomponents from a vendor and also sells products to this same vendor.  Purchases from this vendor for fiscal years2001, 2002 and 2003 were: $5,906,000, $8,798,000, and $9,410,000,respectively.  Net payable balances asof November 30, 2001, 2002 and 2003 were: $397,000, $396,000, and $149,000,respectively.

 

F-19

----

 

**Note13.  Segment Information andGeographical Information**

 

*Segmentinformation*

 

The Company’s reportable segments are strategicbusiness units.  They are managedseparately because each business unit requires different technology andmarketing strategies.

 

There are two reportable segments:  Secure Payment Systems (previously SecurityPrinting Solutions and TROY Systems) and Wireless and Connectivity Solutions(previously TROY Wireless).  SecurePayment Sytems includes software, firmware, hardware and imaging supplies thatprovide state-of-the-art payment systems ranging from high security digitalcheck printing systems to electronic payment and funds transfer solutions.  Wireless and Connectivity Solutions productsinclude software, firmware and hardware that enable enterprises to shareintelligent devices like printers either wirelessly or using traditionalnetworks.

 

The accounting policies applied to determine thesegment information are the same as those described in the summary ofsignificant accounting policies. Intersegment sales and transfers are accounted for at amounts thatassume the sales or transfers were to unrelated third parties at the currentmarket prices at the time of the transactions. Management evaluates the performance of each segment based on income orloss from operations before income taxes.

 

F-20

----

 

Financial information with respect to the reportablesegments follows:

 
|                                            |   | **Secure  Payment  Systems** |      | **Wireless  and  Connectivity  Solutions** |   | **Total**  |   |
|-------------------------------------------------|--------|------------------------------|-----------|--------------------------------------------|--------|------------|--------|
| ***Fiscal year 2001***                          |   |                         |      |                                       |   |       |   |
| Revenue:                                        |   |                         |      |                                       |   |       |   |
| Software, firmware and hardware                 |   | $                            | 3,670,000 |                                       | $      | 11,136,000 |   | $ | 14,806,000 |   |
| Printers and services                           |   | 10,386,000                   |      | —                                     |   | 10,386,000 |   |
| Imaging supplies                                |   | 24,310,000                   |      | —                                     |   | 24,310,000 |   |
| Total revenue                                   |   | 38,366,000                   |      | 11,136,000                                 |   | 49,502,000 |   |
| Intersegment revenue                            |   | 230,000                      |      | 54,000                                     |   | 284,000    |   |
| Depreciation and amortization expense           |   | 1,263,000                    |      | 796,000                                    |   | 2,059,000  |   |
| Impairment of long-lived and intangible  assets |   | (1,945,000                   | )         | (3,689,000                                 | )      | (5,634,000 | )      |
| Interest income                                 |   | 515,000                      |      | —                                     |   | 515,000    |   |
| Interest expense                                |   | (138,000                     | )         | —                                     |   | (138,000   | )      |
| Segment profit (loss)                           |   | (1,294,000                   | )         | (8,454,000                                 | )      | (9,748,000 | )      |
| Income taxes (credit)                           |   | (732,000                     | )         | (3,071,000                                 | )      | (3,803,000 | )      |
| Net income (loss)                               |   | (562,000                     | )         | (5,383,000                                 | )      | (5,945,000 | )      |
| Goodwill                                        |   | 308,000                      |      | —                                     |   | 308,000    |   |
| Segment assets                                  |   | 42,058,000                   |      | 10,259,000                                 |   | 52,317,000 |   |
| Expenditures for segment assets                 |   | 451,000                      |      | 770,000                                    |   | 1,221,000  |   |
|                                            |   |                         |      |                                       |   |       |   |
| ***Fiscal year 2002***                          |   |                         |      |                                       |   |       |   |
| Revenue:                                        |   |                         |      |                                       |   |       |   |
| Software, firmware and hardware                 |   | 3,044,000                    |      | 13,224,000                                 |   | 16,268,000 |   |
| Printers and services                           |   | 11,709,000                   |      | —                                     |   | 11,709,000 |   |
| Imaging supplies                                |   | 27,326,000                   |      | —                                     |   | 27,326,000 |   |
| Total revenue                                   |   | 42,079,000                   |      | 13,224,000                                 |   | 55,303,000 |   |
| Intersegment revenue                            |   | 305,000                      |      | —                                     |   | 305,000    |   |
| Depreciation and amortization expense           |   | 986,000                      |      | 1,148,000                                  |   | 2,134,000  |   |
| Interest income                                 |   | 101,000                      |      | —                                     |   | 101,000    |   |
| Interest expense                                |   | (34,000                      | )         | —                                     |   | (34,000    | )      |
| Segment profit (loss)                           |   | 1,941,000                    |      | (6,798,000                                 | )      | (4,857,000 | )      |
| Income taxes (credit)                           |   | 455,000                      |      | (2,137,000                                 | )      | (1,682,000 | )      |
| Net income (loss)                               |   | 1,486,000                    |      | (4,661,000                                 | )      | (3,175,000 | )      |
| Goodwill                                        |   | 235,000                      |      | —                                     |   | 235,000    |   |
| Segment assets                                  |   | 36,115,000                   |      | 10,339,000                                 |   | 46,454,000 |   |
| Expenditures for segment assets                 |   | 334,000                      |      | 40,000                                     |   | 374,000    |   |
|                                            |   |                         |      |                                       |   |       |   |
| ***Fiscal year 2003***                          |   |                         |      |                                       |   |       |   |
| Revenue:                                        |   |                         |      |                                       |   |       |   |
| Software, firmware and hardware                 |   | 3,119,000                    |      | 15,342,000                                 |   | 18,461,000 |   |
| Printers and services                           |   | 10,384,000                   |      | —                                     |   | 10,384,000 |   |
| Imaging supplies                                |   | 28,032,000                   |      | —                                     |   | 28,032,000 |   |
| Total revenue                                   |   | 41,535,000                   |      | 15,342,000                                 |   | 56,877,000 |   |
| Intersegment revenue                            |   | 301,000                      |      | —                                     |   | 301,000    |   |
| Depreciation and amortization expense           |   | 748,000                      |      | 323,000                                    |   | 1,071,000  |   |
| Interest income                                 |   | 56,000                       |      | 33,000                                     |   | 89,000     |   |
| Interest expense                                |   | (10,000                      | )         | —                                     |   | (10,000    | )      |
| Segment profit (loss)                           |   | 2,701,000                    |      | (1,042,000                                 | )      | 1,659,000  |   |
| Income taxes (credit)                           |   | 976,000                      |      | (337,000                                   | )      | 639,000    |   |
| Net income (loss)                               |   | 1,725,000                    |      | (705,000                                   | )      | 1,020,000  |   |
| Goodwill                                        |   | 281,000                      |      | —                                     |   | 281,000    |   |
| Segment assets                                  |   | 29,083,000                   |      | 11,281,000                                 |   | 40,364,000 |   |
| Expenditures for segment assets                 |   | 1,888,000                    |      | 16,000                                     |   | 1,904,000  |   |
|                                                 |        |                              |           |                                            |        |            |        |  |  |  |

 

F-21

----

 

The following schedule is presented to reconcilefiscal years 2001, 2002 and 2003 amounts in the foregoing segment informationto the amounts reported in the Company’s consolidated financial statements. 

 
|                                 |   | **2001**    |       | **2002**    |   | **2003**   |   |
|--------------------------------------|--------|-------------|------------|-------------|--------|------------|--------|
| Assets                               |   |        |       |        |   |       |   |
| Total assets of reportable segments  |   | $           | 52,317,000 |        | $      | 46,454,000 |   | $ | 39,471,000 |   |
| Intersegment receivables             |   | (14,928,000 | )          | (12,681,000 | )      | (5,170,000 | )      |
| Investment in subsidiaries           |   | (382,000    | )          | (234,000    | )      | (234,000   | )      |
|                                 |   |        |       |        |   |       |   |
| Consolidated assets                  |   | $           | 37,007,000 |        | $      | 33,539,000 |   | $ | 34,067,000 |   |
|                                 |   |        |       |        |   |       |   |
| Revenue                              |   |        |       |        |   |       |   |
| Total revenue of reportable segments |   | $           | 49,502,000 |        | $      | 55,303,000 |   | $ | 56,877,000 |   |
| Intersegment revenue                 |   | (284,000    | )          | (305,000    | )      | (301,000   | )      |
| Consolidated revenue                 |   | $           | 49,218,000 |        | $      | 54,998,000 |   | $ | 56,576,000 |   |

 

*Geographicinformation*

 

The Company operates in both U.S. and foreignmarkets.  Geographic sales informationis based on the ordering location of the customer.  Equipment and leasehold improvements information is based on thephysical location of the assets.  Thefollowing is net sales and equipment and leasehold improvements by geographicregion:

 
|                                      |   | **United  States** |       | **All other  Countries** |   | **Total** |   |
|-------------------------------------------|--------|--------------------|------------|--------------------------|--------|-----------|--------|
| ***Fiscal year 2001***                    |   |               |       |                     |   |      |   |
| Net sales                                 |   | $                  | 41,876,000 |                     | $      | 7,342,000 |   | $ | 49,218,000 |   |
| Equipment and leasehold improvements, net |   | 2,349,000          |       | 180,000                  |   | 2,529,000 |   |
|                                      |   |               |       |                     |   |      |   |
| ***Fiscal year 2002***                    |   |               |       |                     |   |      |   |
| Net sales                                 |   | $                  | 45,632,000 |                     | $      | 9,366,000 |   | $ | 54,998,000 |   |
| Equipment and leasehold improvements, net |   | 1,891,000          |       | 148,000                  |   | 2,039,000 |   |
|                                      |   |               |       |                     |   |      |   |
| ***Fiscal year 2003***                    |   |               |       |                     |   |      |   |
| Net sales                                 |   | $                  | 46,665,000 |                     | $      | 9,911,000 |   | $ | 56,576,000 |   |
| Equipment and leasehold improvements, net |   | 3,110,000          |       | 103,000                  |   | 3,213,000 |   |
|                                      |   |               |       |                     |   |      |   |

 

F-22

----

 

**Note14.  Impairment of Long-Lived Assets**

 

During the fourth quarter of fiscal year 2001, theCompany initiated an analysis of its long-lived assets in accordance with SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of”, to determine if there was impairment of itslong-lived assets.  This analysis wasinitiated due to changes in the Company’s business environment, which werehighlighted during the Company’s annual business planning process, and certainchanges in Company’s management.  Thisanalysis was done on a business unit by unit basis as it was determined thatthese units were independent of each other and were the lowest level for whichcash flows could be identified.  Thebusiness units identified were similar to the businesses acquired by theCompany since 1998.  The analysisdemonstrated that the acquired print server products and technologies were ator approaching their end-of life and that the ACH processing services  were not generating the cash flowsanticipated when this business unit was acquired.  The Company completed this analysis with the assistance of anindependent valuation firm.  Theanalysis indicated that these business units would not generate sufficientpositive cash flows over the projected period of five years, which approximatedthe remaining life of the long-lived assets, and that there was no currentvalue or residual value beyond the value of the net current assets and certain propertyand equipment.  Substantially all of theintangible assets of certain of these business units were written off atNovember 30, 2001 because they are projected to generate insufficient positivecash flows.  Certain property andequipment of these business units were not written off because they continue tobe used in operations and were determined to have value.  As a result of this analysis, the Companyrecorded a charge in 2001 of $5,634,000 for the impairment of long-lived assetson a business unit by unit basis as follows:

 
| **Business  Unit**    |   | **Amount** |      | **Segment**               |                      |
|-----------------------|--------|------------|-----------|---------------------------|---------------------------|
|                  |   |       |      |                      |                      |
| XCD                   |   | $          | 1,085,000 |                      | Wireless and Connectivity |   |
| American  Development |   | 1,945,000  |      | Secure Payment Systems    |                      |
| CableNet              |   | 2,074,000  |      | Wireless and Connectivity |                      |
| ESI                   |   | 530,000    |      | Wireless and Connectivity |                      |
| Total                 |   | $          | 5,634,000 |                      |                      |   |

 

The amortization expense recorded for these assets in2001 prior to the recorded impairment charge was $1,261,000.

 

**15.Contingencies**

 

On November 21, 2002, Tom Lloyd filed an action in theSuperior Court of the State of California in and for Orange County against TROYand its directors, alleging that defendants breached their fiduciary duties inconnection with the Merger Agreement by attempting to provide the Dirk familywith preferential treatment in connection with their efforts to complete a saleof the TROY. The complaint sought to enjoin an acquisition of TROY by the Dirkfamily, as well as attorneys’ fees. Following termination of the MergerAgreement, the plaintiff filed a motion for dismissal of the action and awardof attorney’s fees and expenses of $387,250. TROY filed a motion in support of the plaintiff’s motion for dismissalof the action and in opposition to plaintiff’s motion for fees.  The court has issued a ruling granting themotion for dismissal, and continuing the motion for attorney’s fees to March 4,2004. TROY has accrued an estimate of expenses to be incurred in connectionwith this litigation in fiscal 2003  inexcess of the deductible amount which was recorded as an expense in the 2002 financialstatements.

 

The Company is partially self-insured for its medical,dental and vision benefits it provides to its employees. It carries anaggregate and excess loss insurance policy for claims over $50,000  per employee

 

F-23

----

 

and over an aggregate total of$1.8 million .  The Company estimatesits self-insurance liability based on historical claims incurred.  Total claims expense for the years endedNovember 30, 2001, 2002, and 2003 was $1.1 million, $1.3 million, and $1.8million, respectively.

 

**Note16.  Cash Flow and Other Information**

 
|                                                                              |   | **2001**  |      | **2002**   |   | **2003**   |   |
|-----------------------------------------------------------------------------------|--------|-----------|-----------|------------|--------|------------|--------|
|                                                                              |   |      |      |       |   |       |   |
| Cash paid for:                                                                    |   |      |      |       |   |       |   |
| Interest                                                                          |   | $         | 139,000   |       | $      | 51 ,000    |   | $ | 10 ,000 |   |
|                                                                              |   |      |      |       |   |       |   |
| Income taxes                                                                      |   | $         | 418,000   |       | $      | 299 ,000   |   | $ | 638,000 |   |
|                                                                              |   |      |      |       |   |       |   |
| Supplemental schedule of noncash  operating,investing and financing activities:   |   |      |      |       |   |       |   |
| Purchase of  certain assets of Extended   Systems Incorporated in 2001: |   |      |      |       |   |       |   |
| Working capital                                                                   |   | $         | 1,475,000 |       | $      | —     |   | $ | — |   |
| Equipment and leasehold improvements                                              |   | 46,000    |      | —     |   | —     |   |
| Intangible assets                                                                 |   | 530,000   |      | —     |   | —     |   |
| Cash  purchase price                                                              |   | $         | 2,051,000 |       | $      | —     |   | $ | — |   |
|                                                                              |   |      |      |       |   |       |   |
| Accounts receivable charged off                                                   |   | $         | 507,000   |       | $      | 234,000    |   | 472,000 |   |
|                                                                              |   |      |      |       |   |       |   |
| Reserve for slow moving and obsolete  inventories:                                |   |      |      |       |   |       |   |
| Balance, beginning of year                                                        |   | $         | 881,000   |       | $      | 2,507,000  |   | $ | 3,913,000 |   |
| Provision charged off to expense                                                  |   | 2,371,000 |      | 2,619,000  |   | 741,000    |   |
| Charge offs to reserve                                                            |   | (745,000  | )         | (1,213,000 | )      | (2,209,000 | )      |
| Balance, end of year                                                              |   | $         | 2,507,000 |       | $      | 3,913,000  |   | $ | 2,445,000 |   |

 

F-24

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
| Dated:   February 13, 2004 | TROY GROUP, INC. |
|-------------------------------------------|------------------|
|                                      |             |
|                                      |             |
|                                      | By               |         /s/Patrick  J. Dirk |   |
|                                      |             | Patrick J. Dirk |
|                                      |             | Chief Executive Officer |

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below on February 13, 2004 bythe following persons on behalf of the Registrant and in the capacitiesindicated.

 
| **Signature**        |   | **Title** |
|----------------------|--------|-----------|
|                 |   |      |
| /s/Patrick J. Dirk   |   |      | Chairman and Chief Executive Officer  (Principal Executive Officer) |
| Patrick J. Dirk      |   |      |   |
|                 |   |      |
| /s/Brian Dirk        |   |      | Vice Chairman, Senior Vice President, and  Secretary |
| Brian P. Dirk        |   |
|                 |   |      |
|                 |   |      |
| /s/James W. Klingler |   |      | Vice President-Finance, Treasurer and Chief  Financial Officer (Principal Financial and  Accounting Officer) |
| James W. Klingler    |   |
|                 |
|                 |   |      |
|                 |   |      |
| /s/Gene Bier         |   |      | Director |
| Gene Bier            |   |      |   |
|                 |   |      |
|                 |   |      |
| /s/Lambert Gerhart   |   |      | Director |
| Lambert Gerhart      |   |      |   |
|                 |   |      |
|                 |   |      |
| /s/Stephen Holmes    |   |      | Director |
| Stephen Holmes       |   |      |   |

 

* * * * *

 

*The written statements requiredpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, have been filed as exhibits to this report.*

 

47

----

 

**TROYGROUP, INC.**

** **

Exhibit Index to Annual Report

 

on Form 10-K

 

For the fiscal year ended November 30, 2003

 
| **Item  No.** |   | **Description**                                                                                                                               |   | **Method of  Filing**                                                                                                                        |
|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1           |   | Merger  Purchase Agreement dated October 28, 1998 between TROY Group, TROY Merger  Subsidiary, Inc. and XCD Incorporated and its stockholders |   | Incorporated  by reference to Exhibit 2.1 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).               |
|          |   |                                                                                                                                          |   |                                                                                                                                         |
| 3.1           |   | Certificate  of Incorporation of TROY Group                                                                                                   |   | Incorporated  by reference to Exhibit 3.1 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).               |
|          |   |                                                                                                                                          |   |                                                                                                                                         |
| 3.2           |   | Bylaws of  TROY Group                                                                                                                         |   | Incorporated  by reference to Exhibit 3.2 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).               |
|          |   |                                                                                                                                          |   |                                                                                                                                         |
| 10.1          |   | Lease dated  March 16, 1995 between TROY Systems International, Inc. and Ragco, as amended  on May 18, 1998                              |   | Incorporated  by reference to Exhibit 10.1 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).              |
|          |   |                                                                                                                                          |   |                                                                                                                                         |
| 10.2          |   | Amendment to  the Lease dated August 24, 2000 between TROY Systems International, Inc. and  Ragco, a general partnership                      |   | Incorporated  by reference to Exhibit 10.1 to TROY Group’s Form 10-Q for the quarter ended  August 31, 2000 (File No.  000-24413). |
|          |   |                                                                                                                                          |   |                                                                                                                                         |
| 10.3          |   | Lease dated  July 28, 1993 between Dirk Investments, Inc. and TROY Group                                                                      |   | Incorporated  by reference to Exhibit 10.2 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).              |
|          |   |                                                                                                                                          |   |                                                                                                                                         |
| 10.4          |   | Lease  Amendment to Lease dated July 28, 1993 between Dirk Investments, Inc. and  TROY Group                                                  |   | Incorporated  by reference to Exhibit 10.3 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).              |

 

E-1

----

 
| **Item  No.** |   | **Description**                                                                                                                                                                                                             |   | **Method of  Filing**                                                                                                                                                |
|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.5          |   | Addendum to  Lease dated March 16, 1995 between Dirk Investments, Inc. and TROY Group                                                                                                                                       |   | Incorporated  by reference to Exhibit 10.4 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                      |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.6          |   | Lease  Amendment to Lease dated September 1, 1996 between Dirk Investments,  Inc. and TROY Group                                                                                                                       |   | Incorporated  by reference to Exhibit 10.5 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                      |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.7          |   | Lease dated  March 1, 1998 between Sanwa Bank California and XCD, Inc. and a Consent to  Assignment of Lease, Assignment and Acceptance dated October 23, 1998 between  Sanwa Bank California, XCD, Inc. and TROY XCD, Inc. |   | Incorporated  by reference to Exhibit 10.6 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                      |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.8          |   | 1996 Stock  Option Plan                                                                                                                                                                                                     |   | Incorporated  by reference to Exhibit 10.7 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                      |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.9          |   | 1998 Stock  Incentive Plan, as amended                                                                                                                                                                                      |   | Incorporated  by reference to Exhibit 10.2 to TROY Group’s Form 10-Q for the quarter ended  August 31, 2000 (File No. 000-24413).                               |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.10         |   | 1998  Employee Stock Purchase Plan                                                                                                                                                                                          |   | Incorporated  by reference to Exhibit 10.9 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                      |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.11         |   | Non-Competition  Agreement dated November 27, 1996 between Robert Messina and TROY Group.                                                                                                                                   |   | Incorporated  by reference to Exhibit 10.12 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.12         |   | Restated  Consulting Agreement dated October 1, 1997 between TROY Group and Broadland  Capital Partners, as amended through November 1, 1999                                                                                |   | Incorporated  by reference to Exhibit 10.11 to TROY Group’s Annual Report on Form 10-K for  the fiscal year ended November 30, 1999 (File No.  000-24413). |
|          |   |                                                                                                                                                                                                                        |   |                                                                                                                                                                 |
| 10.13         |   | Form of  Indemnification Agreement for directors and executive officers of TROY Group                                                                                                                                       |   | Incorporated  by reference to Exhibit 10.14 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |

 

E-2

----

 
| **Item  No.** |   | **Description**                                                                                                                                  |   | **Method of  Filing**                                                                                                                                                |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.14         |   | MICR  Supplies Agreement dated February 6, 1998 between TROY Group and IBM Printing  Systems Company (1)                                         |   | Incorporated  by reference to Exhibit 10.15 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.15         |   | Form of Tax  Agreement Relating to S Corporation Distributions by and between TROY Group  and the Dirk Stockholders                              |   | Incorporated  by reference to Exhibit 10.16 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.16         |   | Loan  Agreement and Security Agreement dated October 20, 1998 between TROY Group  and Comerica Bank-California                                   |   | Incorporated  by reference to Exhibit 10.17 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.17         |   | Amendment  No. 1 to Loan and Security Agreement (Accounts and Inventory) dated October  28, 1999 between TROY Group and Comerica Bank-California |   | Incorporated  by reference to Exhibit 10.16 to TROY Group’s Annual Report on Form 10-K for  the fiscal year ended November 30, 1999 (File No.  000-24413). |
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.18         |   | Variable  Rate Installment Note dated October 20, 1998 in favor of Comerica  Bank-California                                                     |   | Incorporated  by reference to Exhibit 10.18 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.19         |   | Variable  Rate Installment Note dated October 20, 1998 in favor of Comerica  Bank-California                                                     |   | Incorporated  by reference to Exhibit 10.19 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.20         |   | Acquisition  Note dated October 28, 1999 in favor of Comerica Bank – California                                                             |   | Incorporated  by reference to Exhibit 10.19 to Troy Group’s Annual Report on Form 10-K for  the fiscal year ended November 30, 1999 (File No.  000-24413). |
|          |   |                                                                                                                                             |   |                                                                                                                                                                 |
| 10.21         |   | Guaranty  dated October 20, 1998 by the majority stockholders                                                                                    |   | Incorporated  by reference to Exhibit 10.20 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                                     |

 

E-3

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| **Item  No.** |   | **Description**                                                                                                                                                                      |   | **Method of  Filing**                                                                                                                                          |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.22         |   | Letter dated  October 3, 1997 to RAGCO from TROY Group                                                                                                                               |   | Incorporated  by reference to Exhibit 10.21 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                               |
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.23         |   | Form of  Subscription Agreement                                                                                                                                                      |   | Incorporated  by reference to Exhibit 10.23 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                               |
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.24         |   | Reseller  Agreement dated April 1, 1996 between TROY Group and Hewlett-Packard  Company (1)                                                                                     |   | Incorporated  by reference to Exhibit 10.24 to TROY Group’s Registration Statement on Form  S-1 (File No.  333-51523).                               |
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.25         |   | Joinder Agreement  dated March 3, 2000 between TROY AMDev and Comerica Bank – California                                                                                        |   | Incorporated  by reference to Exhibit 10.25 to TROY Group’s Annual Report on Form 10-K for  the fiscal year ended November 30, 2000 (File No. 000-24413). |
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.26         |   | Amendment No.  2 to Loan and Security Agreement (Accounts and Inventory) dated October 1,  2000 among TROY Group, TROY Systems International, TROY XCD and Comerica  Bank-California |   | Incorporated  by reference to Exhibit 10.26 to TROY Group’s Annual Report on Form 10-K for  the fiscal year ended November 30, 2000 (File No. 000-24413). |
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.27         |   | Asset  Purchase Agreement, dated as of May 30, 2001, among TROY Group, Extended  Systems of Idaho and Extended Systems Incorporated                                                  |   | Incorporated  by reference to Exhibit 2.1 to TROY Group’s Current Report on Form 8-K filed  on June 14, 2001 (File No. 000-24413).                        |
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.28         |   | Separation  Agreement and Release Letter, dated as of November 1, 2001 between TROY Group  and Robert S. Messina                                                                     |   | Incorporated  by reference to Exhibit 10.28 to TROY Group’s Annual Report on Form 10-K for  the fiscal year ended November 30, 2001 (File No. 000-24413). |
|          |   |                                                                                                                                                                                 |   |                                                                                                                                                           |
| 10.29         |   | Lease dated  April 1,2002 between Dirk Investments, Inc. and TROY Group                                                                                                              |   | Incorporated  by reference to Exhibit 10.29 to TROY Group’s Annual Report on Form 10-K for  the fiscal year ended November 30, 2002 (File No. 000-24413). |

 

E-4

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| **Item  No.** |   | **Description**                                                                                                            |   | **Method of  Filing** |
|---------------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|
|          |   |                                                                                                                       |   |                  |
| 21.1          |   | Subsidiaries  of the Registrant                                                                                            |   | Filed  herewith.      |
|          |   |                                                                                                                       |   |                  |
| 23.1          |   | Consent of  McGladrey & Pullen, LLP,   Independent Auditors                                                       |   | Filed  herewith.      |
|          |   |                                                                                                                       |   |                  |
| 31.1          |   | Rule  13a-14(a) Certification of Chief Executive Officer                                                                   |   | Filed  herewith.      |
|          |   |                                                                                                                       |   |                  |
| 31.2          |   | Rule  13a-14(a) Certification of Chief Financial Officer                                                                   |   | Filed  herewith.      |
|          |   |                                                                                                                       |   |                  |
| 32.1          |   | Certification  of the Chief Executive Officer   Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002       |   | Filed  herewith.      |
|          |   |                                                                                                                       |   |                  |
| 32.2          |   | Certification  of the Chief  Financial Officer  Pursuant to Section 906 of the  Sarbanes-Oxley Act  of 2002 |   | Filed herewith.       |

 

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(1)           Confidentialtreatment has been requested with respect to designated portions containedwithin such document.  Such portionshave been omitted and filed separately with the Commission pursuant to Rule 406of the Securities Act of 1933, as amended.

 

E-5

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