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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

|           |  |                                                                                                                                 |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | 
|(Mark One) |  |                                                                                                                                 |  | 
|           |  |                                                                                                                                 |  | 
|x          |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended January 31, 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 number: 0-29045

T/R Systems, Inc.

(Exact name of registrant as specified in its charter)

|                                         |  |                    
|---------------------------------------- |  | -------------------
|Georgia                                  |  | 58-1958870         
|                                         |  |                    
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|1300 Oakbrook Drive                      |  |                    
|Norcross, Georgia                        |  | 30093              
|(Address of principal executive offices) |  | (Zip Code)         

Registrants telephone number, including area code: (770) 448-9008

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value, together with Preferred Share Purchase Rights
(Title of class)



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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 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 information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  x

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

The aggregate market value of the common stock held by non-affiliates of the
registrant (based upon the closing price of the registrants common stock on
July 31, 2002 of $0.70 per share) was $8.7 million. As of April 10, 2003,
12,469,415 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days after the registrants
fiscal year ended January 31, 2003 are incorporated by reference in Part III of
this Form 10-K.



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TABLE OF CONTENTS



|                                             |                                                                                                         |  |  |  |  |  |  | 
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                      
|                                             | ITEM 1. BUSINESS                                                                                       
|                                             | ITEM 2. PROPERTIES                                                                                     
|                                             | ITEM 3. LEGAL PROCEEDINGS                                                                              
|                                             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II                                     
|                                             | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                          
|                                             | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                           
|                                             | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|                                             | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                             | ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                       
|                                             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|PART III                                    
|                                             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|                                             | ITEM 11. EXECUTIVE COMPENSATION                                                                        
|                                             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                                             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                             | ITEM 14. CONTROLS AND PROCEDURES                                                                       
|PART IV                                     
|                                             | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                               
|EX-10.29 CHANGE OF CONTROL AGREEMENTS       
|EX-10.30 LETTER AGREEMENT WITH MICHAEL LIESS
|EX-23.1 CONSENT OF DELOITTE & TOUCHE LLP    
|EX-99.1 SECTION 906 CERTIFICATIONS          



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TABLE OF CONTENTS

|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|        |  |                                                                                       |  |     
|        |  | PART I                                                                                |  |     
|Item 1  |  | Business                                                                              |  | 1   
|Item 2  |  | Properties                                                                            |  | 12  
|Item 3  |  | Legal Proceedings                                                                     |  | 13  
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                   |  | 13  
|        |  | PART II                                                                               |  |     
|Item 5  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 14  
|Item 6  |  | Selected Financial Data                                                               |  | 16  
|Item 7  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|Item 7A |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 24  
|Item 8  |  | Consolidated Financial Statements and Supplementary Data                              |  | 25  
|Item 9  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 25  
|        |  | PART III                                                                              |  |     
|Item 10 |  | Directors and Executive Officers of the Registrant                                    |  | 25  
|Item 11 |  | Executive Compensation                                                                |  | 25  
|Item 12 |  | Security Ownership of Certain Beneficial Owners and Management and Related            |  | 25  
|        |  | Stockholder Matters                                                                   |  |     
|Item 13 |  | Certain Relationships and Related Transactions                                        |  | 25  
|Item 14 |  | Controls and Procedures                                                               |  | 25  
|        |  | PART IV                                                                               |  |     
|Item 15 |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 27  





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PART I




ITEM 1. BUSINESS

Overview

T/R Systems designs, develops and markets innovative software and hardware
applications designed to help organizations manage, store, distribute and
produce digital documents. We offer two main digital document applications:



| |  |  | the MicroPress®, our digital document production output management system; and              
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | Digital StoreFront, our web-based print job submission, management and control application.

The MicroPress consists of software that enhances the print process, a
server and links to production-oriented printers. The MicroPress allows users
to automate much of the workflow involved in the printing process, thus
eliminating many steps that had been handled manually. Additionally, a process
known as clustering allows MicroPress users to link multiple printers to our
server resulting in those printers functioning as a unified printing system.
Typical users of the MicroPress include corporate, educational or governmental
organizations that have in-house printing capabilities, as well as entities
that provide print services for a fee.

Digital StoreFront simplifies print job submission and proofing over the
Internet. Digital StoreFront allows print center customers to submit print
jobs directly to a print center, review proofs of their job and receive an
order confirmation over the Internet or an intranet. Once a job is submitted,
Digital StoreFront creates a job ticket and can automatically route the job to
a wide range of printing devices or systems or hold the job for scheduling.
Digital StoreFronts users are similar to those of the MicroPress. Digital
StoreFront can be sold with the MicroPress or as a stand-alone application.

Most of our sales to end users are the result of distribution through our
original equipment manufacturer, or OEM, reseller network consisting
principally of Canon USA, Inc., Minolta Co., Ltd. and Ricoh Corporation, as
well as through their subsidiaries and affiliated companies, and our reseller
relationship with IKON Office Solutions, Inc. as well as through its
subsidiaries and affiliated companies.

T/R Systems was incorporated in Georgia in September 1991. Our principal
executive offices are located at 1300 Oakbrook Drive, Norcross, Georgia 30093,
and our telephone number at that address is (770) 448-9008.

Industry Background

Historically, document output needs were met by costly stand-alone,
monochrome print devices based on analog technology that were dedicated to a
single print, copy or scan function and that produced output which had to be
distributed manually. Since the advent of digital document technologies and
with the proliferation of personal computers, desktop publishing software,
digital photography and network computing, documents are increasingly being
managed in digital formats. Faster processing speeds, expanded system memory
and increased storage capacity have combined with advanced software packages to
enable complex image processing and manipulation, distribution and production
of digital documents. These new digital technologies have improved control
over the document creation process, enabled documents to be produced more
quickly and efficiently, and led to increased demand for additional
capabilities. Additionally, advances in digital document technologies have
resulted in an increase in the use of digital print devices and growth in the
typical number of devices utilized within an organization. Finally, the
proliferation of Internet-based business processes has furthered the need to
transfer and manage documents over the Internet.

These advances in digital document and computer technologies, as well as
Internet-based business processes, have resulted in a shift from the market for
simple document output produced by stand-alone devices to a more advanced
market for output management. Increasingly, users in organizations of all
sizes are looking for faster and more cost-effective methods of managing,
storing, distributing and producing digital documents and managing the devices
used to print those documents. These needs have created the output management
market, which involves the management of processes and printers/copiers used in
the production and distribution of documents.

The users of output management solutions include:



| |  |  | corporate entities  organizations as a whole, as well as their in-house print shops and functional departments;     
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | educational institutions  primary, secondary and higher education institutions, including colleges and universities;
|
| |  |  | facilities management companies  service providers that manage print operations for other entities;                 

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| |  |  | print-for-pay organizations  quick printers, printing service
bureaus, commercial printers and offset printers that provide printing
and/or copying services for outside entities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | government entities  local, city, state and federal agencies, as well as public utilities; and                                                                                    
|
| |  |  | book publishers  organizations that provide publishing services, including on-demand book publishing.                                                                             

Within the output management market, requirements can vary depending on
the needs of the user and the requirements of specific jobs. Often, corporate
in-house print shops, facilities management companies, print-for-pay
organizations and book publishers require production output management
capabilities, which allow them to store, manage and print documents quickly and
in desired quantities. The requirements of these users can vary greatly
depending on production volumes and the number of print devices they utilize.
Certain customers are focused on distributed output management, which is the
ability to manage document distribution and workflow, as well as the print
devices used to produce hard copies of digital documents. The proliferation of
Internet-based business processes now requires many organizations to implement
Internet-based document management solutions, which allow them to manage,
control and track the transfer of documents over the Internet or a network,
including submitting jobs to production facilities. Finally, many users may
have multiple requirements, which could potentially include the need for
production output management, distributed output management and Internet-based
document management, or any combination of these capabilities, all within the
same environment.

T/R Systems Solutions

T/R Systems applications are uniquely positioned to address the needs of
customers throughout the output management market. Our applications enable
organizations to effectively manage the storage, distribution and production of
documents from creation  which could include the conversion of hard copy
documents to digital documents  to delivery, whether in hard copy or digital
format.

Production output management needs are met primarily by the MicroPress,
our digital document production output management system. The MicroPress uses
industry-standard open architecture to provide a cost-effective, high-speed
digital document production system capable of producing complex, variable
length color and monochrome images. The MicroPress X Series, which consists of
the MicroPress SX, the MicroPress DX and the MicroPress MX, provides users a
broader range of options from a simple print management application to a
complete production output system. Our Digital StoreFront application
simplifies the process of submitting, tracking and routing documents and files
over the Internet or a network.

T/R Systems solutions offer the following primary benefits:

Highly Functional.Our applications offer a high degree of functionality
in the areas of clustering, workflow management, job management and document
processing. Our clustering capabilities provide the ability to distribute a
document among multiple print devices and print at speeds several times faster
than a single device could produce independently, regardless of page complexity
or variability. The workflow management capabilities of our applications
enable a user to manage a document from creation in a native application until
final output, providing for smooth and efficient document processing. The job
management functionality of our products enables users to, among other things,
submit and track jobs over the Internet or a network and provides the ability
to route a job to a specific location or locations, including archiving jobs.
The document processing capabilities of our applications allow for
modifications to be made to a document after it is submitted from its native
application, including the insertion of tabs, variable data, document merging,
color calibration, electronic collation and imposition.

Scalable, Configurable and Customizable.Our applications are scalable,
configurable and customizable. Users of the MicroPress can add color,
monochrome or wide-format print devices, as well as additional distribution
locations. The MicroPress SX can route output to up to four print devices, the
MicroPress DX can cluster two to four print devices and the MicroPress MX can
support up to twelve print devices, including multiple clusters with up to
eight print devices in a single cluster. Additionally, users can easily and
cost-effectively upgrade from an SX to a DX and from a DX to an MX. Our
products can also be customized to meet a users specific requirements. Each
Digital StoreFront is customized during its implementation to meet the workflow
and business needs of each specific customer. In addition, users of any of our
applications can add other T/R Systems applications and increase functionality
seamlessly, without having to replace existing equipment and losing the value
of their original investment.

Flexible and Reliable.Our applications allow users to manage, distribute
and produce documents of varying sizes and complexities across multiple
locations or to a single location regardless of whether that location is a
print device, network folder, e-mail address or file transfer protocol, or FTP,
site. Additionally, the MicroPress supports mission-critical print production
applications by recognizing available resources and automatically rerouting
print jobs if utilized print devices become inoperable, as well as by providing
full error recovery, thus ensuring that every page is printed.

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Easy to Use.Our applications are designed to make managing documents and
workflow easier, require minimal training for the operator and end user, and
seamlessly integrate with other T/R Systems applications. Also, Digital
StoreFront is designed so that, once implemented, users submitting jobs to
print providers can easily navigate the application without training, and much
of the processing of the job can be automated to increase a print providers
efficiency. Finally, we provide user-friendly documentation, manuals and
online help.

Our Strategy

T/R Systems objective is to be the leading provider of digital document
applications. To achieve this objective, our strategy includes the following
key elements:

Maintain and Expand the Leadership Position of Our Software Functionality.
We believe that we have established a leading position based on the
functionality of our clustering, web storefront and post-RIP document
processing technologies. Post-RIP document processing technologies permit the
processing of a document after it has been translated from the language of the
documents native application to the language of the printer using our RIP, or
raster image processor, software. Post-RIP processing provides for faster, more
efficient document processing. We will continue to leverage our product
development efforts by developing new, and improving existing, technologies to
provide users with the most advanced and robust digital document management,
distribution and production products available.

Leverage Our Distribution Relationships to Expand Our Business.As of
January 31, 2003, our products were distributed internationally principally
through our OEM reseller relationships with Canon, Minolta, Ricoh and Lanier
Worldwide, Inc. (a subsidiary of Ricoh), as well as through our reseller
relationship with IKON. Our intent is to continue to expand these principal
reseller relationships and leverage their existing distribution infrastructures
with products like the MicroPress X Series, which allows us to reach the low-,
mid- and high-volume production output management customers of our resellers,
while simplifying their selling process. Additionally, we intend to further
leverage our resellers established international distribution infrastructures
to expand the sales of our products outside North America, specifically in
Europe and Asia. Finally, as we develop new products, it is our intention to
introduce them through our principal reseller channels to expand the exposure
of these new products.

Increase Our Sales Through Focus on the Most Successful Dealerships.Our
experience has shown that certain dealerships within our principal distribution
network have a greater technology focus and that those dealerships typically
have a better chance of success in selling our products when our sales force
assists them. We intend to focus our sales efforts on those dealerships.
During the second half of fiscal 2003, our principal resellers have all
publicly embraced the strategy of selling their print devices as part of an
overall solution containing third party software, including ours. We believe
that this software-oriented strategy should result in a broadening of the
technological aptitude within the distribution network of our principal
resellers, providing additional and improved opportunities for the sale of our
products.

Develop New Applications and Features.As the market for digital document
technologies continues to evolve and expand, our intent is to continue to add
additional applications and functionality to existing applications, as well as
develop additional applications that will work in concert with our existing
applications, in order to maintain and expand our market position. We intend
to continue to focus on the needs of users of our solutions, as well as the
evolution of the markets for digital document management and distribution. For
example, Digital StoreFront was developed largely in response to feedback from
customers, which led us to modify our existing e-Ticket product to include an
implementation of a customized web storefront and other features to meet the
specific needs of each customer. Our ability to continue to introduce new
applications and features that complement our existing products will be
critical to our future success.

Increase Sales Opportunities Through Product Integration.Our products
are designed to seamlessly integrate with each other to meet the complex output
management needs of our customers. The MicroPress and Digital StoreFront can
work in concert with one another to improve and simplify an organizations
ability to manage, store, distribute and produce digital documents. The
compatibility of our products with one another allows us to market them as
integrated solutions, which provides the opportunity to increase sales to
existing customers, as well as increase the appeal of our products to potential
customers.

Expand Internet Functionality.Our Digital StoreFront application
currently offers electronic job submission over the Internet or a network and
automatic processing of that job. We intend to continue to develop this and
other products for customers that require Internet-based document management
solutions.

Focus on Core Technologies and Build on Industry-Standard
Open-Architecture Technologies.Our expectation is to continue to use
industry-standard technologies, such as Microsoft® Windows® software, the
latest Intel® Pentium® processors and Global Graphics ScriptWorks® RIP, on an
ongoing basis. Our belief is that utilizing standards-based open systems
enables us to bring new product features to market more quickly and to permit
functionality with a wide variety of computer networks, devices and
complementary software. In

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addition, this approach allows us to quickly upgrade to next-generation
computer hardware and software systems, which then allows us to focus on
developing the core technologies that differentiate our products.

Our Products

T/R Systems offers two main digital document management, production and
distribution applications: the MicroPress and Digital StoreFront. Each of
these stand-alone applications can be seamlessly integrated with our other
applications. The MicroPress, which is the foundation of our product
offerings, has historically accounted for the majority of our revenue. During
fiscal 2003 we began to distribute the MicroPress X Series, which consists of
three different models, designed to make the MicroPress accessible to a broader
range of customers. Digital StoreFront, which was introduced during fiscal
2002, accounted for less than ten percent of our revenue in fiscal 2003.

The MicroPress

The MicroPress is a universal server providing digital document production
and job management. The MicroPress is a software and hardware solution that is
capable of managing multiple print devices as an integrated document production
system. Additionally, the MicroPress provides a seamless interface between
document creation and submission tools and the connected output devices.

In the latter half of the fourth quarter of fiscal 2002, we introduced the
MicroPress X Series in order to make the MicroPress a cost-effective
alternative for a broader range of customers and to simplify the selling
process. The MicroPress X Series consists of three models: the MicroPress SX,
the MicroPress DX and the MicroPress MX. The MicroPress SX drives up to four
black-and-white or color print devices while offering full make-ready
capabilities. The SX is tailored to meet the needs of organizations that have
low- to mid-volume production output requirements but that still require the
flexibility and functionality of a robust document production management
system. The MicroPress DX is designed for organizations with mid- to
high-volume production needs. With the DX, an organization can cluster two to
four black-and-white or color print devices, enabling it to parse large jobs
across multiple print devices to maximize productivity. The DX offers full
make-ready functionality and can be easily and cost-effectively upgraded as an
organization expands its production requirements. The MicroPress MX is
designed for mid- to high-volume organizations with complex, mission-critical
document output needs. The MicroPress MX supports up to twelve black-and-white
or color print devices and provides advanced software functionality in a fully
scalable production output system.

The MicroPress comes equipped with software functionality that shifts the
burden of printing and image management tasks from an individual workstation to
a centralized server by RIPing the document and providing for additional
processing and management of the document in a post-RIP environment. The
software functionality offered by the MicroPress includes:



| |  |  | Make-ready capabilities. All three models of the MicroPress X
Series come equipped with extensive make-ready capabilities that
enable users to make job- and page-level changes to a file after it
has been RIPped. The job-level make-ready capabilities provide the
ability to manipulate how a document appears when printed, including
the ability to merge pages from separate files; insert, delete or
replace pages; number pages; impose the position of the print on the
page and apply variable information for job personalization. The
ability to manipulate individual pages within a document includes the
capability to cut, copy and paste page content, add lines, arrows or
objects to a page, clean and straighten pages and reformat page
content to accommodate punching, stapling or other finishing options.
Additionally, the MicroPress X Series includes color management
tools to ensure consistent and accurate color on all pages and across
multiple color print devices.                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Mission-critical capabilities. The mission-critical
capabilities of the MicroPress include universal and cluster
printing, as well as error recovery capabilities. Universal printing
is the ability to route single or multiple jobs to any number of
disparate, connected print devices without reprocessing the job for a
specific print device. Cluster printing is the ability to route one
or more jobs to multiple similar devices connected to the MicroPress
and run those devices as one high-speed device. Cluster printing
capabilities come standard on the MicroPress DX and the MicroPress MX
and are available as an option on the MicroPress SX. The error
recovery capabilities of the MicroPress X Series include the ability
to re-route a job to one or more connected print devices if any
connected print device becomes inoperable, as well as the ability to
recover non-printed pages. Additionally, the MicroPress is capable
of notifying the user of certain events, including job initiation,
completion and failure.
|
| |  |  | Additional functionality.In addition to the make-ready and
mission-critical capabilities described above, the MicroPress MX
comes equipped with additional software functionality, including the
ability to script jobs, manipulate scanned input and control jobs
remotely over the Internet or a network. Job scripting, which is
done by our TRueScript software application, is the ability to write
a customized set of instructions to process a job in the MicroPress
and to save this set of instructions for use on future jobs.
TRueScript is also available as an option for the MicroPress SX and
the MicroPress DX. The ability to manipulate scanned input is
provided by our MicroImager application. MicroImager provides the
ability to process,                                                                                                                                                                                                                                                                                

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| |  |  | archive and distribute scanned input from a compliant scanner.
MicroImager is also available as an option for the MicroPress SX and the
MicroPress DX. Finally, the MicroPress MX offers e-PSM, a software
application used to remotely access and control the MicroPress over the
Internet or a network.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The MicroPress connects to monochrome and color digital print devices
either by a direct connection or by a network connection. For a direct
connection, cabling and a T/R Systems Connectivity Kit, consisting of our
PrintLink and enabling software, are used to allow the MicroPress to interface
with supported third-party print devices. For a network connection, enabling
software is used to allow the MicroPress to interface with supported
third-party print devices over a network. The MicroPress currently connects to
print devices from Canon, Hitachi, Kyocera Mita, Minolta, M.G.I., Océ, Ricoh,
Toshiba and Hewlett-Packard.

Digital StoreFront

Digital StoreFront is a fully automated web storefront application that
simplifies the process of submitting print jobs over the Internet. Digital
StoreFront allows for on-line proofing and automatic routing of a job to a
print device or production schedule to help maximize device utilization by the
print provider. Each Digital StoreFront is sold with a custom implementation,
which customizes the application to meet workflow, job-management and customer
needs of each print provider. Digital StoreFront is licensed, hosted and
controlled by the print providers, which allows them to further customize their
storefront as needed and enables them to maintain the confidentiality of their
customers documents. Digital StoreFronts fully automated processes allow the
customers of print providers to submit files in their native format over the
Internet. A proof of the document is automatically prepared for the customer
to review once the job is submitted. Once the customers specifications for
the job are received, a job ticket is then prepared with all the details of the
job, and it can be automatically queued into the print providers workflow.
Digital StoreFront can automatically route files to any PDF or
postscript-compliant printing system, including the MicroPress. Optional
features can be added to Digital StoreFront to, among other things, allow for
unique pricing for print jobs, provide an on-line catalog, allow credit card
billing, design business cards and integrate Digital StoreFront with accounting
and billing systems.

Other Products

In addition to these two core products, we offer a digital imaging
software application, MicroImager, which scans hard-copy documents into a
digital format and provides the ability to process, archive and distribute the
newly created digital documents to the appropriate destination. MicroImager,
when combined with a compliant scanner, can create digital documents from
scanned input that can be modified to ensure the quality of the presentation of
the new scanned document. Once the scanned document has been edited, it can be
distributed to destinations, such as print devices, document repositories, FTP
sites, e-mail or the MicroPress. MicroImager is sold as an add-on to the
MicroPress or as a stand-alone application.

Additionally, we offer M@estro, which provides distributed output
management and device administration and enables digital document distribution
over the Internet or a network. M@estro is configurable and scalable,
providing for the management of up to 255 print devices, as well as
distribution of output to destinations consisting of networked print devices,
the MicroPress, e-mail, networked folders and FTP sites. M@estro employs our
patented cluster printing technology for the distribution of documents across
managed print devices. With M@estro, users can manage print devices on their
networks, monitor consumables levels on those devices, establish custom
workflows across the network, cluster multiple network-connected print devices
and manage document distribution routes. M@estro is available as a stand-alone
application or it can be integrated with our other applications to meet the
diverse output management needs of organizations of all sizes.

Manufacturing

Many of the hardware components of our products are outsourced. These
components include PrintLinks and the circuit boards incorporated in our
products. Additionally, we install our software on customized servers for the
MicroPress. T/R Systems then integrates hardware components with internally
developed software to create the various configurations of the MicroPress. We
also resell scanners purchased from third-party manufacturers under our brand
name as part of the MicroPress. Before shipping products to customers, we test
both the hardware and software to assure successful integration.

Sales and Marketing

In fiscal 2003, T/R Systems distributed the MicroPress, Digital StoreFront
and related products in North America and internationally through distribution
relationships principally with Canon, Minolta, Ricoh, Lanier and IKON. We
began distributing through the Canon network in April of 2002 and presently
only distribute to Canons North American operations. We also presently are
only distributing to Lanier in North America. Products are distributed in
Europe through Minolta, IKON, Ricoh and M.G.I. France and in Asia though Ricoh

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and Hitachi Koki, Ltd., as well as through a network of independent
dealers. Our sales force consists of regional managers whose principal duties
are to facilitate and help close sales through the dealer channels of our
resellers. Assisting our regional managers are field analysts, who provide
technical support to our regional managers, our resellers and end users. As of
January 31, 2003, we had thirteen regional managers throughout the United
States, one in Canada and one in each of France, Germany and the United
Kingdom. We also had four field analysts in the United States and one in
Canada.

Dealers sell our products to end users and service our products in local
geographical areas. In the United States, these dealers typically are:



| |  |  | office products, computer and peripheral resellers;                                                                                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | copier or graphic arts dealers; or                                                                                                                                                   
|
| |  |  | independent service organizations that provide customized software
and hardware solutions and specialize in providing services that cannot
be obtained through product manufacturers.

During fiscal 2003, Canon accounted for 25.1%, Ricoh and its affiliated
subsidiaries accounted for 19.8% and Minolta accounted for 13.4% of our total
revenue.

Sales shipped internationally were 15.9% of total revenue in fiscal 2003,
30% of total revenue in fiscal 2002 and 19.1% of total revenue in fiscal 2001.
Sales shipped internationally to customers in any one country did not exceed
10% of total revenue in any of the last three fiscal years, except that sales
shipped to customers in Japan represented 18.9% of our total revenue in fiscal
2002. For additional information on our geographic segments, see note 11 of
the notes to our consolidated financial statements included elsewhere in this
report.

As of January 31, 2003, we had a backlog of firm orders totaling $49,000.
These orders were shipped in the first quarter of fiscal 2004. At January 31,
2002 we had a backlog of firm orders totaling $45,000, all of which were filled
in the first quarter of fiscal 2003.

As of January 31, 2003, T/R Systems maintained a marketing organization
that is responsible for product management, market research, branding,
advertising, public relations, events, lead management and channel marketing.
We rely upon industry-specific research and customer interaction to assist in
marketing planning. Market awareness is enhanced through public relations and
trade shows. Our belief is that our reseller relationships further enhance
market awareness. In addition, we intend to continue expanding market awareness
of our products through consistent promotion of our T/R Systems, MicroPress and
Digital StoreFront brands in marketing events, advertising, channel promotions
and public relations activities.

Customer Service

T/R Systems provides an array of services to support and enhance our
products, including customer support, dealer and end-user training,
installation services, customized product implementations and product-related
consulting. We believe that providing quality customer support to our OEM
resellers, dealers and end users is critical to customer satisfaction.
Resellers are considered the primary support contact for end users, with T/R
Systems performing secondary support. We offer service plans, generally for one
to three years, which entitle end users to call our customer support
organization for assistance. We provide training for MicroPress users at our
training facilities and at users locations. Each Digital StoreFront sale
includes implementation, which customizes the application to meet workflow,
job-management and customer needs of each print provider. Our product-related
consulting services focus on providing customized software applications that
meet the needs of end users, including additional customization of Digital
StoreFront after implementation.

Research and Development

T/R Systems has devoted a significant amount of resources to research and
development. Research and development expenses were $5.8 million for fiscal
2003, $7.0 million for fiscal 2002 and $5.1 million for fiscal 2001.

The markets for our products are characterized by rapid change, and we
believe that there are three factors that are critical to the success of our
research and development efforts. We must:



| |  |  | accelerate the rate of product line expansion in terms of device
connectivity and system features;
| | - |  | --------------------------------------------------------------------------------------------------

6



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| |  |  | continue to develop software applications and feature enhancements
that leverage performance gains realized through the release of new
generations of software and hardware; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | attract and retain qualified technical professionals.                                                                                                                           

Intellectual Property

To be successful, we depend, in part, on the proprietary technology in our
products. T/R Systems relies on a combination of patent, copyright, trade
secret and trademark laws, and nondisclosure and other contractual
restrictions, to protect our proprietary rights. Trade secret and copyright
laws provide only limited protection of our software, documentation and other
written materials. We hold 14 United States patents and, as of January 31,
2003, had filed for an additional 17 patents in the United States and abroad
which have not yet been issued. In addition, to protect our intellectual
property and proprietary rights, we:



| |  |  | enter into confidentiality and nondisclosure agreements with our employees, consultants and resellers;
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | limit access to, and distribution of, our software and other proprietary information; and             
|
| |  |  | employ hardware security devices and unique key codes to limit unauthorized use of our software.      

Despite the efforts taken to protect our intellectual property, we cannot
assure you that we will be able to do so. Any failure to protect our
intellectual property could harm our business.

Competition

Our output management applications compete with a variety of other digital
document management and production solutions on various levels. Competition for
output management solutions is based primarily on product performance,
functionality, price and customer service. Some of our competitors are
substantially larger than we are, with greater financial, technical, marketing
and other resources, more established sales channels, greater name recognition
and broader product lines. Our present or future competitors could introduce
products with capabilities identical to or greater than ours. Further, these
competitors may have much greater financial resources than we do, which could
enable them to sell competing products at prices less than we charge.

Competition for the MicroPress can be categorized into the following four
groups:



| |  |  | manufacturers such as Xerox, which currently offer digital copiers
that operate as printers through the use of RIPs and controllers, as
well as host print computers;                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | high-end electronic printing system vendors that are currently
selling systems primarily to commercial and large in-house printers;                                                                  
|
| |  |  | RIP and controller board providers, whose products enable digital
copiers to also function as printers, and which typically operate as
OEMs to major, international printing equipment companies; and
|
| |  |  | companies that have products with features similar to our clustering
concept.                                                                                                                        

At mid- to high-volume levels, the MicroPress MX and DX compete with high-end
digital printer/copiers using RIPs and controllers, commercial printing systems
and products with features similar to our clustering concept. At lower volume
levels, the MicroPress SX competes with RIP and controller providers. We do not
believe that any of these products offer the features and functionality of the
MicroPress X Series.

Digital StoreFront competes with similar available offerings primarily
based on functionality and price. The market is highly fragmented and there is
no one dominant competitor. Many of these similar offerings are sold as
application service provider, or ASP, systems, in which the vendor hosts the
storefront for the print provider and charges a periodic or per-transaction
fee. T/R Systems believes Digital StoreFront has a competitive advantage over
ASP systems in that print providers license and host Digital StoreFront, which
enables them to modify their storefront as needed, better ensure the
confidentiality of their customers information and eliminate transaction fees.
Additionally, we do not believe that any of these similar products, whether or
not based on an ASP system, offer the functionality and customizability at the
price that Digital StoreFront offers.

7



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We believe that none of our competitors is dominant in our market.
Further, we do not believe that any of our competitors have competitively
priced products that currently offer all of the capabilities of our
applications. Additionally, we believe that none of our competitors provides a
solution as complete and fully integrated as we offer. However, in the future,
these or other competitors could develop similar or more advanced products than
ours.

Employees

As of January 31, 2003, we had a total of 79 employees, substantially all
of whom were full-time. Of our employees, 19 were in research and development,
37 were in sales and marketing and 9 were in customer services, with the
remaining 14 in operations, finance and administration. None of our employees
is represented by a labor union, and we have never experienced a work stoppage.
We consider our relations with our employees to be good.

Risk Factors

We have a history of losses, and we may not be able to achieve or maintain
profitability.

During fiscal 2003, T/R Systems incurred an operating loss of $14.9
million. A loss of $13.4 million was incurred in fiscal 2002. Although we had
operating income of $2.5 million in fiscal 2001 and $585,000 in fiscal 2000,
prior to fiscal 2000, we incurred operating losses in each fiscal year since
our inception. We had an accumulated deficit of $34.5 million as of January
31, 2003, as a result of the fiscal 2003 loss and prior years losses. We may
not be able to achieve or maintain profitability in the future. Despite
cost-saving measures taken in fiscal 2002 and in fiscal 2003, including
reductions in headcount, we continue to make investments in research and
development, sales and marketing and our operating infrastructure. If we do
not increase our revenue to a level that exceeds this spending, we will
continue to have operating losses. If our revenue does not grow sufficiently,
we will need time to further scale back expenses. If we are not able to react
quickly enough to unanticipated decreases in revenue, we will not be able to
achieve profitability. We had $6.5 million in cash and cash equivalents at
January 31, 2003. During fiscal 2003, net cash used in operating activities
was $6.8 million. Although we believe that the cost-saving measures mentioned
above will reduce our consumption of cash in fiscal 2004, continued losses
could ultimately use the remainder of our cash. In that event, we would be
forced to severely curtail our operations or sell our assets.

Our operating results have fluctuated and we expect them to continue to
fluctuate, so you should not rely on historical operating results as an
indicator of future performance.

Our operating results have fluctuated from quarter to quarter and year to
year in the past, and we expect them to continue to fluctuate in the future.
For example, we reported operating income in the first three quarters of fiscal
2001, followed by operating losses in the final quarter of fiscal 2001 and in
each quarter of fiscal 2002 and fiscal 2003. As a result, you should not rely
on our historical operating results as an indicator of future performance. We
may experience further fluctuations in our operating results because of:



| |  |  | competitive market conditions for our current products;                                      
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | the level of acceptance of new products we introduce;                                        
|
| |  |  | the general level of sales of printer/copiers which connect to our products;                 
|
| |  |  | the cost and availability of components of our products;                                     
|
| |  |  | general economic conditions which impact the demand for information technology equipment; and
|
| |  |  | variations in the proportions of hardware and software in systems we sell.                   

Our common stock has failed to meet the minimum bid requirement of the Nasdaq
SmallCap Index, and this could eventually result in a delisting of our stock by
Nasdaq.

In November of 2002, we transferred the listing of our common stock from
the Nasdaq National Market to the Nasdaq SmallCap Market due to our failure to
maintain a minimum bid price of $1 for the required period under the Nasdaq
listing rules. If we do not establish a minimum bid price of $1 per share for
ten consecutive trading days prior to August 8, 2003, or fail to meet any of
the other criteria for inclusion on that date, our common stock would be traded
over the counter, which could cause our stock price to decline and make it
difficult for shareholders to obtain accurate quotations or to dispose of our
stock. Further, even if we qualify for continued listing on that date, if we
fail to establish a minimum bid price of $1 per share for ten consecutive
trading days prior to November 6, 2003, our common stock would be traded over
the counter.

8



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In an effort to maintain our Nasdaq listing, our board of directors may
recommend that the shareholders vote to effect a reverse stock split during or
prior to October 2003. There is no assurance that a reverse stock split would
result in establishing a minimum bid price of $1 per share for ten consecutive
trading days prior to November 6, 2003. In addition, a reverse stock split
could negatively affect our trading volume due to the reduced number of shares
that would be outstanding after a reverse stock split. A decline in the
overall market capitalization of our stock could occur subsequent to a reverse
stock split or subsequent to any announcement that the board of directors has
recommended a reverse stock split.

Our stock price has been and may continue to be volatile.

Our initial public offering was completed in January 2000. Since then,
the market price of our common stock has been highly volatile and subject to
wide fluctuations. Additionally, in recent years, the stock market in general,
and the stock prices of technology companies in particular, have experienced
extreme price fluctuations, sometimes unrelated to their operating performance.
These market fluctuations may result in a material decline in the market price
of our common stock. In addition to these market fluctuations, there are many
factors that are likely to cause the price of our common stock to fluctuate,
including:



| |  |  | fluctuations in our quarterly operating results;                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | failure of our quarterly operating results to meet the expectations of investors;                           
|
| |  |  | announcements of technological innovations, new products or significant agreements by us or our competitors;
|
| |  |  | changes in stock market analysts recommendations regarding us; and                                         
|
| |  |  | future sales of significant amounts of our common stock.                                                    

Since many of the potential end users in our market are small businesses, if
their businesses fail or they cannot obtain third-party financing, our sales
will decline.

Many of the potential end-user customers in our market are small
businesses and run a greater risk of business failure than large businesses,
particularly in a weak economy. If their businesses fail, we will lose
potential sales and our revenue may decrease. Further, if these customers are
unable to obtain acceptable third party financing, they may not purchase our
products. Some of our competitors are able to use their significant financial
resources to offer more attractive financing terms than the financing terms
otherwise available to purchase our products. These factors could limit or
reduce our customer base, causing our sales to suffer.

We have historically relied on sales of one product and do not have an
alternate source of significant amounts of revenue should demand for this
product decline.

To date, substantially all of our revenue has been generated from one
product, the MicroPress. If potential customers choose to purchase competing
products, we will lose a substantial amount of revenue. Further, our revenue
has been and may continue to be adversely impacted if our customers choose to
defer their purchases of the MicroPress. Additionally, this product may not be
profitable for other reasons, including pricing pressures or manufacturing
difficulties. If the MicroPress is not profitable, we will not be profitable.

We cannot be sure that any of our new products will be commercially
successful, or that sales of one product will not negatively impact sales of
another.

In the past, we have introduced products that have not been commercially
successful. For example, in fiscal 2001, we introduced e-Ticket, an
Internet-based document submission and catalog application. During fiscal
2002, we made available two new products, Digital StoreFront, a fully-automated
web storefront application that is designed to improve upon e-Ticket, and
M@estro, a software application providing distributed output management and
device management. Although these products are now commercially available, to
date, our sales of these products have not been significant, and sales of
M@estro have been very low. There can be no assurance that these products will
receive wide-scale commercial acceptance. Failure of these products to achieve
commercial acceptance may result in harm to our reputation, increased costs or
lost sales.

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We derive an increasingly large percentage of our revenue from our resellers, a
large percentage of which is derived from a few resellers; a loss of any of
these resellers would reduce our revenue and our results of operations would
suffer.

Since fiscal 1998, our resellers have represented a significant and
increasing portion of our revenue. In fiscal 2003, our largest reseller
accounted for 25.1% of our total revenue, while sales to all of our resellers
accounted for 73.4% of our revenue. Sales to our resellers accounted for 64.2%
of our revenue in fiscal 2002 and 62.1% in fiscal 2001. If we lose one of our
resellers or they decrease orders of our products, our revenue will decline and
our results of operations will suffer. Additionally, a reseller could decrease
its orders for our products if demand for its products declines or it chooses
to purchase a competitors products.

Because our products depend on software licensed to us by third parties, any
loss of any of these licenses would result in increased costs and production
delays.

Our products depend on software licensed to us on a non-exclusive basis by
third parties. If those parties fail to continue to license their software to
us or to support their software, we would incur costs and experience delays of
at least several months in integrating alternate software into our products.
This would result in diversion of our research and development resources,
delays in production and could result in lost revenue and harm to our
reputation. In some instances, there are a limited number of suppliers of
specialized software and we could have difficulty in obtaining an alternate
supplier.

New releases by our software suppliers or the development of superior software
by their competitors could result in delays in shipment or loss of revenue.

We may be required to expend significant time and resources to make our
systems compatible with new releases by our software suppliers, which could
result in product shipment and revenue recognition delays. In addition, if the
competitors of our suppliers develop superior software, our products may not
achieve market acceptance and we will lose revenue unless we obtain a license
for the superior software. We may not be able to obtain new software licenses
on commercially reasonable terms, or at all.

If third-party suppliers of equipment fail to deliver, we could incur
significant costs and delays in product shipment.

We purchase hardware, such as board components and scanners, from
third-party manufacturers and resell it under our brand as part of our
applications. In addition, we outsource the manufacturing of some of the
hardware components of our products. If those third party manufacturers fail to
deliver these products or components, we would have to find alternate
suppliers, would incur significant development costs and could experience
delays in product shipments. Failure to find alternative suppliers of other
components could affect our product availability and sales. Additionally, since
we purchase many parts and components from manufacturers in Asia, instability
in this region could impact the pricing or availability of these products.

Our market is extremely competitive and many of our competitors have greater
market presence and resources than we have.

The market for our products is extremely competitive, and we expect
competition to increase. Many of our existing and potential competitors have
longer operating histories, significantly greater resources and greater name
recognition than we have. As a result, these competitors may have an advantage
over us in gaining market acceptance, may respond more effectively to changes
in the market and may be able to devote greater resources to the development,
promotion, sale and support of their products. Increased competition could
result in a loss of revenue as a result of loss of market share and significant
price reductions, which would reduce our profits.

A substantial portion of our revenue is derived from international sales, and
these sales are subject to regulatory, political and currency exchange rate
risk.

Shipments to customers outside the United States represented 15.9% of our
total revenue in fiscal 2003. Our international revenue could decrease if
tariffs, duties or taxes increase the cost of doing business, or of our
products, in foreign countries. Our foreign product sales could be limited by
the imposition of government controls or political and economic instability,
which would result in lower revenues. We may also experience delays in receipt
of revenue or increased difficulties in collecting accounts receivable.

Additionally, our results of operations could be harmed by changes in
currency exchange rates. Currently, substantially all of our sales are
denominated in U.S. dollars. If the value of the U.S. dollar increases relative
to a particular foreign currency, our products could become relatively more
expensive. This could result in a reduction in our sales in a particular
country.

10



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Our market is characterized by rapid technological change, and if we fail to
develop and market new technologies rapidly, our results of operations will
suffer.

Customers are continually demanding faster products with more software
features and our competitors are developing new technologies to meet these
demands. If we do not continually develop new technologies and improvements to
our existing technologies, we will not remain competitive and our sales and
results of operations will suffer.

The product life cycle is shortening as new technologies are marketed,
while development of new technologies requires an increasing amount of time and
money. We may experience delays in product development due to technological
constraints, which could result in lost sales. In addition, our cost to develop
the technologies may be so great that we cannot make a profit selling products
using these technologies. Finally, our competitors may develop technologies
that make our technologies obsolete or less attractive to potential customers,
which would also harm our sales.

If our products contain defects, our sales could suffer and we could have
increased costs, which would hurt our results of operations.

Complex products like ours may contain defects or errors that can only be
detected when the product is in use. Despite extensive testing of our products,
we may release products into the market with undetected errors, which could
result in:



| |  |  | loss or delay of revenue;                          
| | - |  | ---------------------------------------------------
|
| |  |  | loss of market share;                              
|
| |  |  | diversion of research and development resources; or
|
| |  |  | increased service and warranty costs.              

In addition, if our products are not reliable, we may lose credibility with
existing and potential customers, which would result in lost sales.

We may not be able to protect our intellectual property and proprietary rights,
which could harm our competitive position, resulting in decreased revenue.

Our success is based, in part, on our proprietary technology. If we cannot
protect our intellectual property and proprietary rights, we may not remain
competitive. Trade secret and copyright laws provide only limited protection of
our software, documentation and other written materials. We may not be able to
protect our rights if the patents for which we apply or have applied are not
granted or if our patents are challenged or invalidated. Further, because we
sell many of our products in foreign countries where intellectual property laws
are not well developed or are poorly enforced, we may not be able to protect
our proprietary technology in these countries.

A third party could reverse engineer our products, bypass hardware
security devices and obtain access to our software, or independently develop
similar software or proprietary information and use it to compete with us.

Infringement claims by third parties could be costly and cause product shipment
delays.

Third parties may file claims against us alleging infringement of their
patents, copyrights or other intellectual property rights. Regardless of its
merit, an infringement claim against us could:



| |  |  | require significant management time and effort;
| | - |  | -----------------------------------------------
|
| |  |  | result in costly litigation; or                
|
| |  |  | cause product shipment delays.                 

Further, any claims may require us to enter into royalty or licensing
agreements, which may not be obtainable on terms acceptable to us.

11



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Our failure to retain and attract personnel could harm our business, operations
and product development efforts.

Our future success depends, in significant part, upon the continued
service of key personnel and our ability to attract, retain and motivate highly
qualified employees. In particular, the services of Michael E. Kohlsdorf, our
president and chief executive officer; E. Neal Tompkins, our executive vice
president and chief technology officer; and Michael W. Barry, our senior vice
president, development and engineering, are critical to our business. If we
lose any of our key personnel, or fail to attract qualified new employees, our
business, operations and product development efforts would suffer. Although we
have employment agreements with Messrs. Kohlsdorf and Tompkins, these
agreements do not obligate them to remain in our employ. We do not have key
man insurance on any of our employees.

Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995

A number of the matters and subject areas discussed in this annual report
on Form 10-K that are not historical or current facts deal with potential
future circumstances and developments. The discussion of such matters and
subject areas is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may materially differ from T/R Systems
actual future experience involving any one or more of such matters and subject
areas. Such risks and uncertainties include those referred to above in the
Risk Factors section, as well as:



| |  |  | the impact on our revenue of a general economic slowdown;                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in purchasing patterns by our OEM resellers and end users;                                                         
|
| |  |  | market acceptance of our technology and new product offerings;                                                             
|
| |  |  | general economic conditions in new markets we are targeting or where our resellers are located; and                        
|
| |  |  | other risks and uncertainties described form time to time in
our reports filed with the Securities and Exchange Commission.

These risk factors should be considered by investors when reviewing any
forward-looking statements contained in this annual report on Form 10-K, in any
of our public filings or press releases, or in any oral statements made by T/R
Systems or any of its officers or other persons acting on its behalf. The
factors that could affect forward-looking statements are subject to change.
We undertake no obligation to update any forward-looking statements.




ITEM 2. PROPERTIES

T/R Systems leases its principal facility, totaling approximately 52,000
square feet, in Norcross, Georgia under a lease expiring in March 2008.
Additionally, we have a training and operations facility totaling approximately
59,000 square feet of warehouse and office space in Norcross, Georgia under a
lease that also expires in March 2008. Due to reductions in staff and
inventory, and in an effort to lower our overall expenses, we consolidated our
Norcross operations into our principal facility during the third quarter of
fiscal 2003. We are actively attempting to sublet the training and operations
facility or to relinquish the lease obligation. We also lease office and
training facilities in Eidenhoven, The Netherlands, as well as office space in
Dusseldorf, Germany and Orsay, France. We are currently attempting to sublet
the space in Eidenhoven.

12



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ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. We are not
currently engaged in any legal proceedings that we expect would have a material
adverse effect on our business, financial condition or results of operations.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal 2003.

EXECUTIVE OFFICERS OF THE REGISTRANT

Michael E. Kohlsdorf,age 47, has served as our president, chief executive
officer and a director since September 1996. From 1993 to September 1996, Mr.
Kohlsdorf held a variety of positions at Brock Control Systems, Inc., a sales
automation software company, now known as FirstWave Technologies, Inc., most
recently serving as president, chief operating officer and chief financial
officer.

Michael T. Liess,age 39, has served as our executive vice president and
chief operating officer since April 2002. From January 2001 to February 2002,
Mr. Liess served as vice president of direct sales at Gateway Inc., a
manufacturer and distributor of personal computers. From October 1998 to
December 2000, Mr. Liess served as vice president and general manager at ENCAD,
Inc., a manufacturer and distributor of digital printing devices. From
September 1990 to October 1998, Mr. Liess held various positions at Océ Inc., a
manufacturer and distributor of printing devices, most recently serving as vice
president of Western operations.

E. Neal Tompkins,age 58, is a co-founder of T/R Systems and has served as
a director and chief technology officer since our founding in September 1991.
Mr. Tompkins served as our president from September 1991 until September 1996,
and has served as our executive vice president since that date.

Lyle W. Newkirk,age 50, joined us in September 1997 and has served as a
senior vice president since May 2000, as well as serving as our chief financial
officer, secretary and treasurer since November 1997. From 1992 to September
1997, Mr. Newkirk held various positions with Peachtree Software, Inc., a maker
of accounting software, which became a subsidiary of Automatic Data Processing,
Inc., a provider of technology-based outsourcing solutions, most recently
serving as vice president and chief financial officer.

Michael W. Barry, age 45, has served as our senior vice president,
development and engineering since August 1998. From July 1995 to August 1998,
Mr. Barry served as our vice president of systems development. Before that, he
served as our director of systems development from our founding in September
1991 until July 1995.

13



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PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock commenced public trading on January 26, 2000 on the
Nasdaq National Market under the symbol TRSI. On November 14, 2002, we
transferred our stock listing from the Nasdaq National Market to the Nasdaq
SmallCap Market under the same Nasdaq trading symbol. The high and low closing
sales prices for our common stock, as reported on the Nasdaq National Market,
or on the Nasdaq SmallCap Market for the four quarters of the fiscal years
ended January 31, 2003 and 2002 were as follows:

|                                           |  |      |      |     |  |   |      |  | 
|------------------------------------------ |  | ---- | ---- | --- |  | - | ---- |  | 
|For the Fiscal Year Ended January 31, 2003
|                                          
|Quarter                                    |  |      |      |     |  |   |      | 
|Ended                                      |  | High |      | Low
|                                           |  |      |      |    
|April 30, 2002                             |  | $    | 3.36 |     |  | $ | 2.00 | 
|July 31, 2002                              |  |      | 2.00 |     |  |   | 0.46 | 
|October 31, 2002                           |  |      | 0.77 |     |  |   | 0.30 | 
|January 31, 2003                           |  |      | 0.64 |     |  |   | 0.32 | 

|                                           |  |      |      |     |  |   |      |  | 
|------------------------------------------ |  | ---- | ---- | --- |  | - | ---- |  | 
|For the Fiscal Year Ended January 31, 2002
|                                          
|Quarter                                    |  |      |      |     |  |   |      | 
|Ended                                      |  | High |      | Low
|                                           |  |      |      |    
|April 30, 2001                             |  | $    | 8.50 |     |  | $ | 3.60 | 
|July 31, 2001                              |  |      | 5.30 |     |  |   | 2.78 | 
|October 31, 2001                           |  |      | 3.64 |     |  |   | 1.79 | 
|January 31, 2002                           |  |      | 4.00 |     |  |   | 1.80 | 

As of April 10, 2003, there were approximately 127 holders of record of
our common stock.

Dividends

We have never paid cash dividends on our common stock. We currently
intend to retain our earnings to fund the development and growth of our
business. Further, our revolving line of credit does not allow us to declare
or pay any cash dividends. Therefore, we currently do not anticipate paying
any cash dividends on our common stock.

Recent Sales of Unregistered Securities

We had no sales of unregistered securities during the fiscal year ended
January 31, 2003.

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Securities Authorized for Issuance Under Equity Compensation Plans

|                                                           |  |                                      |           |                   |  |                     |      |                     |  |                     |         | 
|---------------------------------------------------------- |  | ------------------------------------ | --------- | ----------------- |  | ------------------- | ---- | ------------------- |  | ------------------- | ------- | 
|                                                           |  | Equity Compensation Plan Information |           |                   |  |                    
|                                                           |  | Fiscal Year Ended January 31,2003    |           |                   |  |                    
|                                                           |  |                                      |           | Number of        
|                                                           |  |                                      |           |                   |  |                     |      |                     |  | securities         
|                                                           |  |                                      |           |                   |  |                     |      |                     |  | remaining available
|                                                           |  | Number of                            |           |                   |  |                     |      | for future issuance
|                                                           |  | securities to be                     |           |                   |  |                     |      | under equity       
|                                                           |  | issued upon                          |           | Weighted-average  |  | compensation plans 
|                                                           |  | exercise of                          |           | exercise price of |  | (excluding         
|                                                           |  | outstanding                          |           | outstanding       |  | securities         
|                                                           |  | options, warrants                    |           | options, warrants |  | reflected in column
|Plan category                                              |  | and rights                           |           | and rights        |  | (a))               
|                                                           |  |                                      |           |                   |  |                    
|                                                           |  | (a)                                  |           | (b)               |  | (c)                
|                                                           |  |                                      |           |                   |  |                    
|Equity compensation plans approved by security holders     |  |                                      | 2,806,490 |                   |  | $                   | 3.79 |                     |  |                     | 768,828 | 
|Equity compensation plans not approved by security
holders |  |                                      |          |                   |  |                     |     |                     |  |                     |        | 
|                                                           |  |                                      |           |                   |  |                     |      |                     |  |                     |         | 
|Total                                                      |  |                                      | 2,806,490 |                   |  | $                   | 3.79 |                     |  |                     | 768,828 | 
|                                                           |  |                                      |           |                   |  |                     |      |                     |  |                     |         | 

Use of Proceeds

In connection with our initial public offering, the Securities and
Exchange Commission, or SEC, declared our registration statement on Form S-1
(file no. 333-88439) effective on January 25, 2000.

As of January 31, 2003, we had used $18.5 million of the net proceeds from
our initial public offering to fund our working capital and capital expenditure
needs. None of these payments was made to any of our directors, officers or
their associates, holders of 10% or more of our equity securities or any other
affiliate of T/R Systems. We have invested the remaining $6.9 million of the
net offering proceeds in government securities, money market mutual funds and
certificates of deposit, all with original maturities of 90 days or less, as
well as interest-bearing checking accounts.

15



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##### Table of Contents






ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes selected consolidated financial data as of
and for the five fiscal years ended January 31, 2003. You should read this
data in conjunction with Item 7  Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated financial
statements and the related notes.

|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |       |        | 
|--------------------------------------------------------- | ------------------------ | ------------------------ | ------- | ------------------------------------- | ------ | ---- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                                          |                          |                          |         | Fiscal Year Ended January 31,        
|                                                          |                          |                          |         |                                      
|                                                          |                          |                          |         | 2003                                  |        | 2002 |         | 2001   |        | 2000 |        | 1999  
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |       
|                                                          |                          |                          |         | (In thousands, except per share data)
|Statement of Operations Data:                             |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|Imaging systems                                           |                          | $                        | 12,263  |                                       |        | $    | 11,772  |        |        | $    | 27,093 |        |        | $ | 20,969 |       |        | $ | 14,094 |      
|Services                                                  |                          |                          | 2,476   |                                       |        |      | 5,846   |        |        |      | 5,153  |        |        |   | 1,353  |       |        |   | 1,753  |      
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|                                                          |                          | Total revenue            |         |                                       | 14,739 |      |         |        | 17,618 |      |        |        | 32,246 |   |        |       | 22,322 |   |        |       | 15,847 | 
|Operating expenses:                                       |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|                                                          | Cost of imaging systems  |                          |         | 8,962                                 |        |      |         | 9,141  |        |      |        | 12,166 |        |   |        | 9,487 |        |   |        | 6,579 |       
|                                                          | Research and development |                          |         | 5,784                                 |        |      |         | 7,042  |        |      |        | 5,078  |        |   |        | 3,488 |        |   |        | 3,202 |       
|                                                          | Sales and marketing      |                          |         | 10,184                                |        |      |         | 10,923 |        |      |        | 9,418  |        |   |        | 6,599 |        |   |        | 4,891 |       
|General and administrative                                |                          |                          | 4,723   |                                       |        |      | 3,880   |        |        |      | 3,101  |        |        |   | 2,163  |       |        |   | 1,708  |      
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|                                                          |                          | Total operating expenses |         |                                       | 29,653 |      |         |        | 30,986 |      |        |        | 29,763 |   |        |       | 21,737 |   |        |       | 16,380 | 
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|Operating (loss) income                                   |                          |                          | (14,914 | )                                     |        |      | (13,368 | )      |        |      | 2,483  |        |        |   | 585    |       |        |   | (533   | )    
|Interest income, net                                      |                          |                          | 135     |                                       |        |      | 673     |        |        |      | 1,622  |        |        |   | 117    |       |        |   | 150    |      
|Other expenses                                            |                          |                          |        |                                       |        |      |        |        |        |      |       |        |        |   |       |       |        |   | (240   | )    
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|(Loss) income before provision (benefit)
for income taxes |                          |                          | (14,779 | )                                     |        |      | (12,695 | )      |        |      | 4,105  |        |        |   | 702    |       |        |   | (623   | )    
|Provision (benefit) for income taxes                      |                          |                          |        |                                       |        |      | 2,672   |        |        |      | (2,229 | )      |        |   | 25     |       |        |   |       |      
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|Net (loss) income                                         |                          | $                        | (14,779 | )                                     |        | $    | (15,367 | )      |        | $    | 6,334  |        |        | $ | 677    |       |        | $ | (623   | )    
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|Net (loss) income per common share  Basic                |                          | $                        | (1.19   | )                                     |        | $    | (1.25   | )      |        | $    | 0.53   |        |        | $ | 0.25   |       |        | $ | (0.26  | )    
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|Weighted average shares outstanding  Basic               |                          |                          | 12,406  |                                       |        |      | 12,257  |        |        |      | 12,008 |        |        |   | 2,641  |       |        |   | 2,444  |      
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|Net (loss) income per common share  Diluted              |                          | $                        | (1.19   | )                                     |        | $    | (1.25   | )      |        | $    | 0.49   |        |        | $ | 0.07   |       |        | $ | (0.26  | )    
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      
|Weighted average shares outstanding  Diluted             |                          |                          | 12,406  |                                       |        |      | 12,257  |        |        |      | 12,886 |        |        |   | 9,861  |       |        |   | 2,444  |      
|                                                          |                          |                          |         |                                       |        |      |         |        |        |      |        |        |        |   |        |       |        |   |        |      

|                                        |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|--------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | -
|                                        |  | January 31,   
|                                        |  |               
|                                        |  | 2003           |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                        |  |                |        |      |  |      |        |      |  |     
|                                        |  | (In thousands)
|Balance Sheet Data:                     |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|Cash and cash equivalents               |  | $              | 6,542  |      |  | $    | 13,026 |      |  | $    | 26,194 |  |  | $ | 27,314 |  |  | $ | 1,966   |  
|Working capital                         |  |                | 5,592  |      |  |      | 17,575 |      |  |      | 33,535 |  |  |   | 31,191 |  |  |   | 3,892   |  
|Total assets                            |  |                | 15,295 |      |  |      | 28,488 |      |  |      | 45,391 |  |  |   | 37,172 |  |  |   | 7,770   |  
|Redeemable, convertible preferred stock |  |                |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   | 15,042  |  
|Total shareholders equity (deficit)    |  |                | 9,329  |      |  |      | 23,975 |      |  |      | 39,196 |  |  |   | 32,249 |  |  |   | (10,238 | )

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our
consolidated financial statements and the related notes. This discussion
contains forward-looking statements that involve risks and uncertainties. The
statements relate to future events or our future financial performance. In many
cases, you can identify forward-looking statements by the use of words such as
may, will, should, expect, plan, anticipate, believe, estimate, predict,
potential or continue, or the negative of these terms or other comparable
terminology. Our actual results could be materially different from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under Risk Factors in Item 1 of this
annual report on Form 10-K and elsewhere in this report.

Overview

T/R Systems was founded in 1991 as an engineering services company
providing consulting services to the printing, copying and multimedia markets.
In 1993, we began development of our own products, and in 1995, we introduced
the MicroPress, our digital document production management system. Since 1995,
we have continually improved the MicroPress by adding software functionality
and device connectivity.

Historically, we have derived our revenue primarily from the sale of
imaging systems and related add-on software and hardware for the management,
distribution and production of digital documents. Additionally, we receive or
have received revenue from:



| |  |  | engineering services for the development of technology;                                        
| | - |  | -----------------------------------------------------------------------------------------------
|
| |  |  | the sale of consumable products, such as toner, and replacement parts that support our systems;
|
| |  |  | customer service plans;                                                                        
|
| |  |  | fees for other customer services, such as training and product-related consulting; and         
|
| |  |  | royalties for previously licensed technology.                                                  

Our products are distributed in North America and internationally through
OEM distribution relationships, principally with Canon, Minolta, Ricoh and
Lanier, as well as through reseller agreements with IKON and through a network
of independent dealers. T/R Systems first sold products under an OEM agreement
with Minolta in fiscal 2000. We began selling products under an OEM agreement
with Ricoh and under reseller agreements with IKON in fiscal 2001, an OEM
agreement with Lanier in fiscal 2002, and an OEM agreement with Canon in fiscal
2003.

Sales shipped internationally were $2.3 million, or 15.9% of revenue, in
fiscal 2003. We expect that sales shipped internationally will continue to
represent a significant portion of our revenue. Currently, substantially all of
our sales are denominated in U.S. dollars. If the value of the U.S. dollar
increases relative to a particular foreign currency, our products could become
relatively more expensive, which could result in a reduction in our sales in a
particular country.

Critical Accounting Policies and Estimates

Revenue recognition. Imaging systems revenue is recognized based on the
guidance in the American Institute of Certified Public Accountants Statement of
Position, or SOP, 97-2, Software Revenue Recognition, and SOP 98-9,
Modification Of SOP 97-2, Software Revenue Recognition. We recognize revenue
from imaging systems when persuasive evidence of an arrangement exists, the
system has been shipped, the fee is fixed or determinable and collectibility of
the fee is probable. Under multiple element arrangements, we allocate revenue
to the various elements based on vendor-specific objective evidence of fair
value. Revenue from products requiring significant customization in order to
meet the customers objectives, such as our Digital StoreFront application, is
recognized upon completion of the required customization.

We recognize engineering service fees for development of technology
typically related to the development of a connection between an OEM resellers
print device and our products. Engineering service fees typically consist of a
combination of cash payments and print devices or other equipment, related to
the development project, given to us by the OEM resellers in lieu of additional
cash payments. The amount of revenue recognized is equal to the total of the
market value of the print devices and other equipment and cash received.
Engineering service fees are recognized on a percentage-of-completion basis
based on the hours of work done on a project as a percent of

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the total estimated hours required to complete the project, which
necessarily involves subjective judgment and may result in fluctuations in
quarterly results.

Revenue from the sale of printing consumables is recognized upon shipment.
Revenue from customer service plans is recognized ratably over the term of each
plan, which is typically one to three years. Nonrefundable prepaid royalties
are recognized as revenue over the term of the royalty agreement based on the
greater of actual royalties earned or the straight-line method. Revenue from
royalties, which is included in service revenue, has been less than 10% of
total revenue in each of our last three fiscal years.

Research and Development Costs.Research and development costs are
charged to expense when incurred. Software development costs are expensed as
incurred until technological feasibility is determined. To date, we have
expensed all software development costs as incurred due to the immaterial
amount of costs incurred between the establishment of technological feasibility
and the time that the software is generally available for sale.

Inventory/Inventory Valuation Reserves.Inventory is valued at the lower
of cost or market. Cost is determined on the first-in, first-out basis. We
provide for inventory obsolescence based upon assumptions about future demand
for our products, market conditions and estimates of product life cycles. If
future demand or market conditions are worse or product life cycles are shorter
than we estimate, additional inventory write-downs may be required.



| |                                                                     
| | --------------------------------------------------------------------
| | Income Taxes.T/R Systems records deferred tax assets as a result of:



| |  |  | net operating losses;                                                                                                               
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | differences between the basis of assets and liabilities
for financial reporting purposes versus their basis for income tax
purposes;
|
| |  |  | tax benefits from the exercise of employee stock options subsequent to our public offering; and                                     
|
| |  |  | other tax benefits.                                                                                                                 

After consultation with our independent accountants, we determine whether or
not to establish a valuation allowance as an offset to our deferred tax assets.
A valuation allowance is established when it is not likely that some or all of
the tax asset balances will be realized within the foreseeable future. We
consider principally our recent operating results in conjunction with other
available evidence to determine if a valuation allowance is required.

Before the fourth quarter of fiscal 2001, we had established and
maintained a valuation allowance to offset our deferred tax assets. During the
fourth quarter of fiscal 2001, our history of profitability in the previous
twelve quarters, combined with our then estimated future profitability, was
considered by us to be persuasive evidence that the valuation allowance was not
necessary. Therefore, we reversed the entire allowance and recorded a $2.4
million deferred income tax benefit in our results of operations. However, due
principally to the significant losses in fiscal 2002, and in the absence of
other persuasive evidence, we reestablished a valuation allowance against our
deferred tax assets resulting in a deferred tax expense of $7.2 million in the
fourth quarter of fiscal 2002.

At January 31, 2003, we had approximately $29.8 million in federal income
tax net operating loss carryforwards available to offset future income taxes
payables, which, if not utilized, expire beginning in 2016. We expect that we
will maintain our valuation allowance against our entire deferred tax asset
throughout fiscal 2004, although we will review the valuation allowance each
quarter.

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##### Table of Contents



Consolidated Results of Operations

The following table presents our consolidated operating data as a
percentage of total revenue.

|                                     |                            |               |                          |      |                   |       |       |      |       |       |      |      |       |      | 
|------------------------------------ | -------------------------- | ------------- | ------------------------ | ---- | ----------------- | ----- | ----- | ---- | ----- | ----- | ---- | ---- | ----- | ---- | 
|                                     |                            |               |                          |      | Fiscal Year Ended
|                                     |                            |               |                          |      | January 31,      
|                                     |                            |               |                          |      |                  
|                                     |                            |               |                          |      | 2003              |       | 2002  |      | 2001 
|                                     |                            |               |                          |      |                   |       |       |      |      
|Imaging systems                      |                            |               | 83.2                     | %    |                   |       | 66.8  | %    |       |       | 84.0 | %   
|Services                             |                            |               | 16.8                     |      |                   |       | 33.2  |      |       |       | 16.0 |     
|                                     |                            |               |                          |      |                   |       |       |      |       |       |      |     
|                                     |                            | Total revenue |                          |      | 100.0             |       |       |      | 100.0 |       |      |      | 100.0 |     
|Operating expenses:                  |                            |               |                          |      |                   |       |       |      |       |       |      |     
|                                     | Cost of imaging systems    |               |                          | 60.8 |                   |       |       | 51.9 |       |       |      | 37.7 |      
|                                     | Research and development   |               |                          | 39.2 |                   |       |       | 40.0 |       |       |      | 15.8 |      
|                                     | Sales and marketing        |               |                          | 69.1 |                   |       |       | 62.0 |       |       |      | 29.2 |      
|                                     | General and administrative |               |                          | 32.0 |                   |       |       | 22.0 |       |       |      | 9.6  |      
|                                     |                            |               |                          |      |                   |       |       |      |       |       |      |     
|                                     |                            |               | Total operating expenses |      |                   | 201.1 |       |      |       | 175.9 |      |      |       | 92.3 | 
|                                     |                            |               |                          |      |                   |       |       |      |       |       |      |     
|Operating (loss) income              |                            |               | (101.1                   | )    |                   |       | (75.9 | )    |       |       | 7.7  |     
|Interest income, net                 |                            |               | 0.9                      |      |                   |       | 3.8   |      |       |       | 5.0  |     
|                                     |                            |               |                          |      |                   |       |       |      |       |       |      |     
|(Loss) income before taxes           |                            |               | (100.2                   | )    |                   |       | (72.1 | )    |       |       | 12.7 |     
|Provision (benefit) for income taxes |                            |               |                         |      |                   |       | 15.2  |      |       |       | (6.9 | )   
|                                     |                            |               |                          |      |                   |       |       |      |       |       |      |     
|Net (loss) income                    |                            |               | (100.2                   | )%   |                   |       | (87.3 | )%   |       |       | 19.6 | %   
|                                     |                            |               |                          |      |                   |       |       |      |       |       |      |     

Comparison of Fiscal Years Ended January 31, 2003, 2002 and 2001

Total Revenue.Revenue decreased to $14.7 million in fiscal 2003,
compared to $17.6 million in fiscal 2002 and $32.2 million in fiscal 2001,
which represented a 16.5% decrease from fiscal 2002 to fiscal 2003 and a 45.4%
decrease from fiscal 2001 to fiscal 2002. The decrease of $2.9 million from
fiscal 2002 to fiscal 2003 resulted primarily from a decrease in engineering
service fees of $4.2 million, partially offset by an increase in other service
revenue and a slight increase in imaging systems revenue. The decrease in
revenue of $14.6 million from fiscal 2001 to fiscal 2002 was due to a decrease
in imaging systems revenue.

Imaging systems revenue is derived from the shipment of digital document
management and production systems, as well as software, hardware and
consumables related to those systems. Our imaging systems revenue increased
$500,000, or 4.2%, from $11.8 million in fiscal 2002 to $12.3 million in fiscal
2003. OEM imaging systems revenue increased $3.2 million in fiscal 2003 over
fiscal 2002. Imaging systems revenue from independent resellers decreased $2.7
million in the same period. The decrease in sales through independent resellers
was due in part to a shift in our sales strategy away from the independent
reseller channel toward our OEM reseller channels. Imaging systems revenue
decreased $15.3 million, or 56.5%, from $27.1 million in fiscal 2001 to $11.8
million in fiscal 2002, due to decreased orders from our OEM resellers, as well
as our independent resellers.

We recognize services revenue primarily from engineering service fees,
customer service plans, training and product-related consulting. During fiscal
2003, services revenue decreased $3.4 million, from $5.8 million in fiscal 2002
to $2.5 million in fiscal 2003, due to a decrease in engineering service fees
of $4.2 million in fiscal 2003 compared to fiscal 2002. Engineering service
fees, which are primarily derived from the development of new technology for
the connection of additional print devices to the MicroPress, decreased as the
number of connectivity projects between the two periods decreased. The decrease
in engineering fees was partially offset by an increase of $816,000 for other
services from fiscal 2003 compared to fiscal 2002. Service revenues increased
$693,000 from fiscal 2001 to fiscal 2002. Engineering service fees increased
$833,000 from fiscal 2001 to fiscal 2002, partially offset by decreases in
other services revenue.

During fiscal 2003, we derived $2.3 million, or 15.9%, of our total
revenue from sales shipped internationally. This compares to $5.3 million, or
30.0% of total revenue, in fiscal 2002 and $6.2 million, or 19.1% of total
revenue, in fiscal 2001. Revenue from sales outside the United States
decreased from fiscal 2002 to fiscal 2003 primarily due to a decrease in
engineering service fees from Asian customers. Revenue from sales outside the
United States also decreased in fiscal 2002 over fiscal 2001 due to a decrease
in engineering fees. Revenue from sales shipped internationally as a percent
of total revenue decreased as domestic revenue grew at a faster rate than
international revenue in fiscal 2003 and 2002 due to greater focus on the
domestic market by our OEM resellers, and to a lesser extent through our
independent resellers, as well as our more established domestic distribution
infrastructure. Revenue from sales shipped internationally was derived from
sales in Asia, Europe and Canada in fiscal 2003, fiscal 2002 and fiscal 2001.
Fiscal 2002 revenue from sales to Asia represented 19.5% of total revenue. No
other region represented more than 10% of revenue in any of the three fiscal
years.

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During fiscal 2003, we implemented a restructuring plan designed to reduce
operating costs and preserve cash. The restructuring plan resulted in our
recording certain charges totaling $4.9 million. The following table
summarizes these charges (in thousands):

|                                |  |   |       | 
|------------------------------- |  | - | ----- | 
|Property and equipment disposal |  | $ | 1,821 | 
|Facility consolidation          |  |   | 1,410 | 
|Inventory reserve adjustment    |  |   | 648   | 
|Provision for doubtful accounts |  |   | 350   | 
|Severance and related charges   |  |   | 372   | 
|Other                           |  |   | 308   | 
|                                |  |   |       | 
|Total                           |  | $ | 4,909 | 
|                                |  |   |       | 

Operating Expenses.Operating expenses decreased $1.3 million, or 4.3%,
from $31.0 million in fiscal 2002 to $29.7 million in fiscal 2003. Operating
expenses increased $1.2 million, or 4.1%, from $29.8 million in fiscal 2001 to
$31.0 million in fiscal 2002. Operating expenses as a percentage of revenue
were 201.1% in fiscal 2003, 175.9% in fiscal 2002 and 92.3% in fiscal 2001. We
have implemented a restructuring plan to reduce costs and preserve cash as a
result of our decreased revenue and the continued global economic weakness. We
reduced our number of employees by 34 people, or 30.0%, in fiscal 2003 and by
35 people, or 23.7%, in fiscal 2002. During fiscal 2003, we recorded
restructuring charges of $4.9 million. Excluding these charges, operating
expenses would have decreased $6.2 million in fiscal 2003 over fiscal 2002.
The charges are mainly due to a consolidation of facilities in Norcross,
Georgia and in Europe, the disposal or expected disposal of print engines,
copiers, and other equipment due in part to the facilities consolidation, the
write-down of inventory and accounts receivable, and severance for terminated
employees. The facility consolidation in Norcross is the result of excess
space at our operations and training facility. In addition, as our sales
channels have changed, we are able to operate with less inventory than in the
past and have less need for warehouse space.

Cost of Imaging Systems.Cost of imaging systems consists primarily of
third party hardware, principally servers, print devices, board components,
finished boards and consumables, and third-party software, as well as labor and
overhead. Cost of imaging systems was $9.0 million, or 73.1% of imaging
systems revenue, in fiscal 2003 as compared to $9.1 million, or 77.7% of
imaging systems revenue, in fiscal 2002 and $12.2 million, or 44.9% of imaging
systems revenue, in fiscal 2001. The decrease in cost of imaging systems as a
percent of imaging systems revenue in fiscal 2003 over fiscal 2002 was
primarily due to the transition to an OEM based revenue stream in which the
products sold contain a lower amount of hardware, thus lowering the cost of the
product. Included in cost of imaging systems were non cash charges of $778,000
and $1.3 million in fiscal 2003 and 2002, respectively, for the write down of
print devices and other hardware components in inventory to their net
realizable value.

Cost of imaging systems as a percent of imaging systems revenue increased
in fiscal 2002 as compared to fiscal 2001 due the following:



| |  |  | during fiscal 2002, we recorded non-cash charges of $1.3
million in cost of imaging systems for the write down of print
devices and other hardware components in inventory to their net
realizable value, as compared to $182,000 during fiscal 2001;                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the labor and overhead components of cost of imaging systems
increased as a percentage of imaging systems revenue primarily due to
a decrease in imaging systems revenue; and                                                                                                     
|
| |  |  | imaging systems revenue from sales to our OEM resellers
decreased as a percentage of total imaging systems revenue. Systems
sold to our OEM resellers have lower levels of hardware content, and
thus carry a lower cost of sales, than systems sold to our
independent resellers.

Cost of imaging systems excluding the non-cash charges were $8.2 million in
fiscal 2003, $7.8 million in fiscal 2002 and $12.0 million in fiscal 2001.

Research and Development.Research and development expenses consist
primarily of employee salaries and benefits, equipment depreciation, software
and hardware supplies used in product development and an allocation of
overhead. Research and development costs are expensed as incurred. Research
and development expenses were $5.8 million in fiscal 2003, $7.0 million in
fiscal 2002 and $5.1 million in fiscal 2001. Research and development expenses
represented 39.2% of total revenue in fiscal 2003, 40.0% of total revenue in
fiscal 2002 and 15.8% of total revenue in fiscal 2001. Research and
development expenses decreased approximately $1.3 million, or

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17.9%, from fiscal 2002 to fiscal 2003. Excluding special charges of
$900,000 in fiscal 2003, research and development fees decreased $2.1 million,
or 30.4%, from fiscal 2003 to fiscal 2002. This decrease was primarily due to
a decrease in personnel-related expenses as a result of workforce reductions
and other personnel attrition since fiscal 2002. Staffing expenses in research
and development decreased $1.5 million, or 31.9%, from fiscal 2002 to fiscal
2003. As the number of print device connectivity projects decreased during the
second half of fiscal 2002, it was necessary to eliminate research and
development staff personnel who had been added to accommodate the workload of
these projects. We believe we have maintained sufficient research and
development staff to meet the current level of connectivity projects and to
continue to add value to our products. Research and development expenses
increased approximately $2.0 million, or 38.7%, from fiscal 2001 to fiscal
2002, due in part to an increase in personnel-related expenses of $756,000
resulting from the hiring of additional research and development personnel
during fiscal 2001 and the first quarter of fiscal 2002 to assist in the
further development of our products. Also contributing to the increase was an
increase of $734,000 in depreciation expense and $295,000 in certain
project-related expenses, due primarily to the addition of equipment for the
development and testing of connectivity of new print devices to our products.

Sales and Marketing.Sales and marketing expenses consist primarily of
employee salaries and benefits, sales commissions, technical support and
travel-related expenses. Sales and marketing expenses were $10.2 million in
fiscal 2003, or 69.1% of total revenue. These expenses were $10.9 million, or
62.0% of total revenue, in fiscal 2002, and $9.4 million, or 29.2% of total
revenue, in fiscal 2001. Excluding special charges of $1.2 million in fiscal
2003, sales and marketing expenses were $9.0 million, a decrease of $1.9
million from fiscal 2002. This decrease was primarily due to a decrease in
personnel-related and travel-related expenses as a result of the workforce
reduction made since fiscal 2002. In fiscal 2003 compared to fiscal 2002,
staffing expenses decreased $492,000, or 7.6%, and travel-related expenses
decreased $405,000, or 23.7%. Marketing expenses also decreased $581,000, or
79.5%, from fiscal 2002 to fiscal 2003. This was principally the result of
reduced trade show expenses during fiscal 2003. The increase from fiscal 2001
to fiscal 2002 was primarily due to an increase in personnel-related expenses
of $799,000 as a result of the hiring of additional sales and technical support
personnel during fiscal 2001 and the first quarter of fiscal 2002 to support
the anticipated growth of our business. Additionally, depreciation and other
facilities-related expenses increased by $527,000, primarily due to the
expansion of our training and product demonstration facilities during the
second half of fiscal 2001.

General and Administrative.General and administrative expenses include
employee salaries and benefits and professional service fees. General and
administrative expenses were $4.7 million, or 32.0% of revenue, in fiscal 2003,
compared to $3.9 million, or 22.0% of revenue, in fiscal 2002 and $3.1 million,
or 9.6% of revenue, in fiscal 2001. General and administrative expenses
included the following:



| |  |  | special charges and provision for doubtful accounts of $2.0
million in fiscal 2003. General and administrative expenses in
fiscal 2003 excluding these items were $2.7 million;  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an increase in the provision for doubtful accounts of $893,000
in fiscal 2002. General and administrative expenses in fiscal 2002
excluding this provision were $3.0 million; and
|
| |  |  | a provision for doubtful accounts of $140,000 in fiscal 2001.
General and administrative expenses in fiscal 2001 excluding this
provision were $3.0 million.                     

Interest Income, Net.Interest income, net was $135,000 in fiscal 2003,
$673,000 in fiscal 2002 and $1.6 million in fiscal 2001. The decreases in
interest income from fiscal 2002 to fiscal 2003 and from fiscal 2001 to fiscal
2002 were due to a decrease in cash available for short-term investments during
the last three fiscal years, as we used cash to fund our operations and capital
expenditures, as well as lower market interest rates during this period.

Income Tax Expense (Benefit).We did not record income tax expense in
fiscal 2003 as a result of our net loss.In fiscal 2002, we recorded income
tax expense of $2.7 million, resulting from the recognition of a valuation
allowance for the balance of our deferred tax assets at January 31, 2002. In
fiscal 2001, we recognized a $2.2 million benefit for income taxes, which
included the recognition of $2.4 million in deferred income tax assets offset
by a $198,000 current provision for alternative minimum income taxes.

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Net Income (Loss) and Net Income (Loss) per Share.We recorded a net loss
of $14.8 million in fiscal 2003, a net loss of $15.4 million in fiscal 2002 and
net income of $6.3 million in fiscal 2001. We recognized a diluted loss of
$1.19 per share in fiscal 2003 as compared to diluted loss of $1.25 per share
in fiscal 2002 and diluted earnings of $0.49 per share in fiscal 2001. As
discussed above, the fiscal 2003 net loss includes special charges relating to
our restructuring plan.

Liquidity and Capital Resources

From inception, we have funded our operations and investments in property
and equipment primarily through the sale of equity securities. In January
2000, we completed our initial public offering and received $25.4 million in
cash, net of underwriting discounts, commissions and other offering costs.

Prior to our initial public offering, we funded our operations primarily
through the private placement of preferred stock totaling about $16.1 million.
We also obtained additional funding through the private placement of our common
stock primarily with our founders, other employees and private investors. Prior
to our initial public offering, we received $1.2 million through the sale of
common stock. During fiscal 2003, fiscal 2002 and fiscal 2001, we received
$764,000 from the sale of common stock under our employee stock plans. We had
no other sales of stock during fiscal 2003, fiscal 2002 or fiscal 2001.

Cash and cash equivalents were $6.5 million (excluding long-term
restricted cash of $612,000) at January 31, 2003, down from $13.0 million at
January 31, 2002.

Net cash used in operating activities in fiscal 2003 was $6.8 million as
compared to net cash used in operating activities in fiscal 2002 of $11.3
million and net cash provided by operating activities of $2.0 million in fiscal
2001. Net cash used in operating activities in fiscal 2003 and fiscal 2002 was
the result of net losses of $14.8 million and $15.4 million, respectively. The
decrease in net cash used in operating activities from fiscal 2002 to fiscal
2003 was the result of our lower net loss, excluding non-cash special charges,
offset by slight decreases in receivables, inventories and accounts payable and
an increase in other liabilities. Net cash provided by operating activities
was the result of $6.3 million of net income recorded in fiscal 2001, offset by
increases in receivables and inventories as a result of the increase in our
sales and cost of imaging systems during fiscal 2001.

Net cash provided by investing activities, which consists of sales of
property and equipment, was $580,000 in fiscal 2003. Net cash used in
investing activities was $2.2 million in fiscal 2002 and $3.0 million in fiscal
2001, reflecting purchases of property and equipment. The net cash provided by
investing activities in fiscal 2003 compared to net cash used in investing
activities in fiscal 2002 and fiscal 2001 was primarily due to the following
factors:



| |  |  | Purchases of property and equipment decreased from fiscal 2001
to fiscal 2002 and from fiscal 2002 to fiscal 2003 as a result of
fiscal 2001 and fiscal 2002 spending on leasehold improvements and
equipment for a newly leased operations and training center in
Norcross, Georgia and for the expansion of office space in our main
office building. Purchases of property and equipment were curtailed
in fiscal 2003 and fiscal 2002 due in part to the decrease in our
number of employees; and                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the quarter ended October 31, 2002, we entered into a
sale-leaseback transaction for certain print engines that we had
previously purchased. The transaction is considered to be an
operating lease. The proceeds from the lease were $612,000. The
equipment is being leased for a three-year period with the option to
purchase the equipment at the fair market value at the end of the
lease term. We deferred the gain of $180,000 from this transaction
and are recognizing it over 36 months, the life of the lease.

In addition to our purchases of property and equipment, we capitalized
print devices received from our OEM resellers for partial payment of
engineering service fees in the amount of $1.9 million in fiscal 2003 and $2.4
million in fiscal 2002. We capitalized $863,000 worth of such equipment in
fiscal 2001.

We have no plans for significant capital expenditures in fiscal year 2004.

We have a $2.0 million secured revolving line of credit from a bank, which
expires on December 31, 2003. Under the terms of the line of credit, we are
allowed to borrow against portions of our accounts receivable. There were
borrowings of $220,000 against this line of credit at January 31, 2003. We
repaid the $220,000 in February 2003. There were no borrowings against this
line of credit at January 31, 2002 or 2001. All borrowings under the line of
credit bear interest at prime plus 0.50% and are secured by our assets. The
line of credit requires that we comply with various covenants, including a
restriction on paying dividends, and financial ratio tests. As of January 31,
2003, we were not in compliance with the quick ratio covenant associated with
the line of credit. However, we subsequently received a waiver from the bank
of the non-compliance. The agreement also provides for up to $500,000 in
letters of credit. Any letters of credit issued reduce the amount available
for borrowing under the line. In April 1998, we issued a $250,000 letter of
credit under this facility in

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connection with an operating lease obligation. This letter of credit has
been reduced annually by $50,000, and as of January 31, 2003 only $50,000
remained under this obligation.

Net cash used in financing activities was $259,000 in fiscal 2003 as
compared to net cash provided by financing activities of $318,000 in fiscal
2002 and net cash used in financing activities of $81,000 in fiscal 2001. The
net cash used in financing activities in fiscal 2003 represented an increase in
restricted cash used to secure a lease entered in fiscal 2003, partially offset
by the proceeds from sales of common stock through our employee stock plans.
The net cash provided by financing activities in fiscal 2002 represented the
proceeds from sales of common stock through our employee stock plans, as well
as a decrease in restricted cash used to secure a letter of credit, which
expired in fiscal 2002. The net cash used in fiscal 2001 was the result of the
settlement of a bank overdraft outstanding at the beginning of the fiscal year
along with the payment of additional costs from our initial public offering in
fiscal 2000. These uses of cash in fiscal 2001 were offset by the proceeds
from the sales of our common stock through our employee stock plans.

We believe that our current cash and cash equivalents and cash generated
by operations will be sufficient to meet our anticipated cash needs for working
capital, capital expenditures and business expansion for the current fiscal
year. However, if cash generated by operations is insufficient to satisfy our
operating requirements, we may be required to raise additional funds, through
either debt or equity financings, or further reduce our operations. There can
be no assurance that we will be able to obtain any financing on terms
acceptable to us, if at all.

Inflation has had no material impact on our operations to date.

T/R Systems, Inc. has two wholly owned foreign subsidiaries, T/R Systems
Canada Inc. and T/R Systems (Holland) B.V., which we maintain for regulatory
and tax compliance in foreign jurisdictions. The results of operations, cash
flows and balance sheets of these subsidiaries are consolidated in our
financial statements and all significant intercompany transactions and balances
are eliminated in consolidation. We have no other subsidiaries which are not
consolidated, nor do we have any structured-finance or other special-purpose
entities. Additionally, we did not enter into any significant off-balance
sheet arrangements or transactions other than operating leases during any of
the fiscal years discussed herein.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS No. 141, Business
Combinations,and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and indicates that the use of the
pooling-of-interests method of accounting is no longer allowed. SFAS No. 142
requires that upon adoption, amortization of goodwill will cease and instead,
the carrying value of goodwill will be evaluated for impairment on an annual
basis. Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The new standards did not have an impact on our
consolidated financial statements in fiscal 2003.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting
for reorganization and similar costs and supersedes previous accounting
guidance, principally Emerging Issues Task Force, or EITF Issue No. 94-3,
Liability Recognition for Certain Employee Benefits and Other Costs to Exit an
Activity. SFAS No. 146 requires that the liability for costs associated with
an exit or disposal activity be recognized when the liability is incurred.
Under EITF, Issue No. 94-3, a liability for an exit cost should be recognized
at the date of a companys commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognition of
any future reorganization costs as well as the amount recognized. The
provisions of SFAS No. 146 are effective for reorganization activities
initiated after December 31, 2002. We adopted this statement on January 1,
2003.

In November 2002, the FASB issued Interpretation No. 45 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for
the fair value of the obligation undertaken in issuing such a guarantee. FIN 45
also requires additional disclosure about the guarantors obligations under
certain guarantees that it has issued. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 30, 2002 and the disclosure
requirements are effective after December 15, 2002. The Company does not have
any material guarantees at January 31, 2003. The adoption of FIN 45 is not
expected to have a material impact on the Companys financial position or
results of operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe our exposure to market rate fluctuations on our cash
equivalents is minor due to the short-term maturities of those investments,
typically 90 days or less. We have market risk relating to borrowings under our
credit facility because the interest rates under the facility are variable. As
of January 31, 2003, we had borrowings of $220,000 under our revolving credit
facility. To date, we have not entered into any derivative instruments to
manage interest rate exposure or any other exposures.

A significant portion of our revenue is derived from sales shipped
internationally. Currently, substantially all of our sales shipped
internationally are denominated in U.S. dollars. If the value of the U.S.
dollar increases relative to a particular foreign currency, our products could
become relatively more expensive, which could result in a reduction in our
sales in a particular country.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information with respect to this item is contained in our audited
consolidated financial statements presented elsewhere in this annual report on
Form 10-K as indicated on the index to the audited consolidated financial
statements below.

|                                                                                                              |  |      |     | 
|------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                              |  | Page
|                                                                                                              |  |     
|Independent Auditors Report                                                                                  |  |      | F-2 | 
|Consolidated Balance Sheets as of
January 31, 2003 and 2002                                                   |  |      | F-3 | 
|Consolidated Statements of Operations for the
Years Ended January 31, 2003, 2002 and 2001                     |  |      | F-4 | 
|Consolidated Statements of Shareholders Equity (Deficit) for the
Years Ended January 31, 2003, 2002 and 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
Years Ended January 31, 2003, 2002 and 2001                     |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                    |  |      | F-7 | 




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information in Part I of this annual report on Form 10-K under the
caption Executive Officers of the Registrant is incorporated by reference
herein. The information required by this item with respect to directors and
Section 16(a) reporting is incorporated by reference to the information under
the captions Election of Directors and Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys definitive proxy statement for the 2003
Annual Meeting of Shareholders (the Proxy Statement) to be filed with the
SEC.




ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
information under the captions Election of Directors  Director Compensation
and Executive Compensation in the Proxy Statement to be filed with the SEC.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information in Part I, Item 5 of this annual report on Form 10-K under
the caption Securities Authorized for Issuance Under Equity Compensation
Plans and under the caption Security Ownership of Certain Beneficial Owners
and Management in the Proxy Statement to be filed with the SEC is incorporated
by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.




ITEM 14. CONTROLS AND PROCEDURES

T/R Systems maintains disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
SEC rules and forms. As required by the rules of the SEC, we have evaluated
our disclosure controls and procedures within 90 days of the filing of this
annual report, on Form 10-K. This evaluation was carried out under the

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supervision and with the participation of our management, including our
chief executive officer and chief financial officer. Based on this evaluation,
the chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective.

Subsequent to the date of the most recent evaluation, there were no
significant changes in our internal controls or in other factors that could
significantly affect these controls.

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PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Documents filed as part of Form 10-K:

|    |  |                                                                                                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Consolidated Financial Statements                                                                                                                    
|    |  | The information required by this item is included on pages F-1 through
F-16 of this annual report on Form 10-K as specified in the index on
page F-1.
|(2) |  | Financial Statement Schedules                                                                                                                        
|    |  | Schedule II  Valuation and Qualifying Accounts                                                                                                      
|    |  | No additional financial statement schedules are required to be presented.                                                                            
|(3) |  | Exhibits                                                                                                                                             

|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Number  |  |   |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3.1     |  |  |  | Restated Articles of Incorporation of T/R Systems, Inc.
(incorporated by reference to Exhibit 3.1 to the
Companys annual report on Form 10-K for the year ended
January 31, 2001)                                                                                                                                                                                                                                                                                                                               
|3.1.1   |  |  |  | Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock of T/R
Systems, Inc. (incorporated by reference to Exhibit
3.1.1 to the Companys annual report on Form 10-K for
the year ended January 31, 2001)                                                                                                                                                                                                                                                            
|3.2     |  |  |  | Amended and Restated Bylaws of T/R Systems, Inc.
(incorporated by reference to Exhibit 3.2 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                                                                              
|4.1     |  |  |  | Second Amended and Restated Registration Rights
Agreement, dated March 31, 1997, among the Company and
the Shareholders named therein, as amended by First
Amendment to Stock Purchase Agreement, Second Amended
and Restated Shareholders Agreement and Second Amended
and Restated Registration Rights Agreement, dated June
20, 1997, among the Company and the Shareholders named
therein (incorporated by reference to Exhibit 4.1 to the
Companys registration statement on Form S-1, File No.
333-88439)
|4.2     |  |  |  | Registration Rights Agreement, dated June 29, 1998,
among the Company and the Shareholders named therein
(incorporated by reference to Exhibit 4.2 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                      
|4.3     |  |  |  | 1999 Registration Rights Agreement, dated September 10,
1999, by and among the Company and the Shareholders
named therein (incorporated by reference to Exhibit 4.3
to the Companys registration statement on Form S-1,
File No. 333-88439)                                                                                                                                                                                                                                                                     
|4.4     |  |  |  | Rights Agreement, dated as of November 9, 2000, by and
between T/R Systems, Inc. and EquiServe Trust Company,
N. A., as rights agent (incorporated by reference to
Exhibit 4.1 to the Companys registration statement on
Form 8-A, File No. 000-29045)                                                                                                                                                                                                                                                          
|10.1#   |  |  |  | T/R Systems, Inc. 1992 Stock Option Plan (incorporated
by reference to Exhibit 4 to the Companys registration
statement on Form S-8, File No. 333-36910)                                                                                                                                                                                                                                                                                                                                                        
|10.2#   |  |  |  | T/R Systems, Inc. 1994 Stock Option Plan (incorporated
by reference to Exhibit 4 to the Companys registration
statement on Form S-8, File No. 333-36918)                                                                                                                                                                                                                                                                                                                                                        
|10.3#   |  |  |  | T/R Systems, Inc. 1994 Associates Stock Option Plan
(incorporated by reference to Exhibit 4 to the Companys
registration statement on Form S-8, File No. 333-63012)                                                                                                                                                                                                                                                                                                                                             
|10.4#   |  |  |  | T/R Systems, Inc. 1995 Stock Option Plan (incorporated
by reference to Exhibit 4 to the Companys registration
statement on Form S-8, File No. 333-36934)                                                                                                                                                                                                                                                                                                                                                        
|10.5#   |  |  |  | T/R Systems, Inc. 1999 Stock Option Plan (incorporated
by reference to Exhibit 4 to the Companys registration
statement on Form S-8, File No. 333-63022)                                                                                                                                                                                                                                                                                                                                                        

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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Number  |  |   |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.6    |  |  |  | Loan and Security Agreement, dated as of October 17,
1997, by and between Silicon Valley Bank and T/R
Systems, Inc., as amended by Loan Modification
Agreement, dated as of March 31, 1998, by and between
T/R Systems, Inc. and Silicon Valley Bank, as further
amended by Second Loan Modification Agreement, dated as
of October 16, 1998, by and between T/R Systems, Inc.
and Silicon Valley Bank, as further amended by Third
Loan Modification Agreement, dated as of January 18,
1999, by and between T/R Systems, Inc. and Silicon
Valley Bank, and as further amended by Letter Agreement,
dated as of February 2, 1999 (incorporated by reference
to Exhibit 10.6 to the Companys registration statement
on Form S-1, File No. 333-88439)
|10.7#   |  |  |  | Letter Agreement with Mike Kohlsdorf, dated September 6,
1996, as amended by Letter Agreement with Mike
Kohlsdorf, dated December 17, 1997 (incorporated by
reference to Exhibit 10.7 to the Companys registration
statement on Form S-1, File No. 333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.8#   |  |  |  | Employment Agreement, dated as of September 1, 1992, by
and between T/R Systems, Inc. and E. Neal Tompkins
(incorporated by reference to Exhibit 10.8 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.9    |  |  |  | Indemnification Agreement, dated as of March 4, 1994, by
and between T/R Systems, Inc. and E. Neal Tompkins
(incorporated by reference to Exhibit 10.9 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.11   |  |  |  | Indemnification Agreement, dated as of March 4, 1994, by
and between T/R Systems, Inc. and Charles H. Phipps
(incorporated by reference to Exhibit 10.11 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.12  |  |  |  | Reseller Agreement, dated as of September 18, 1997, by
and between T/R Systems, Inc. and Mita Industrial Co.,
Ltd., as amended by First Addendum to Reseller
Agreement, dated as of September 17, 1998, by and
between T/R Systems, Inc. and Mita Industrial Co., Ltd.
(incorporated by reference to Exhibit 10.12 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                                                                                          
|10.13  |  |  |  | Supply Agreement, dated as of January 28, 1999, by and
between Minolta Co., Ltd. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.13 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.14  |  |  |  | Agreement, dated as of April 1, 1999, by and between
Hitachi Koki Imaging Solutions, Inc. and T/R Systems,
Inc. (incorporated by reference to Exhibit 10.14 to the
Companys registration statement on Form S-1, File No.
333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.15  |  |  |  | Agreement, dated as of September 1, 1999, by and between
Ricoh Corporation and T/R Systems, Inc. (incorporated by
reference to Exhibit 10.15 to the Companys registration
statement on Form S-1, File No. 333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.16   |  |  |  | Fourth Loan Modification Agreement, dated as of October
15, 1999, by and between T/R Systems, Inc. and Silicon
Valley Bank (incorporated by reference to Exhibit 10.16
to the Companys registration statement on Form S-1,
File No. 333-88439)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.17  |  |  |  | Master Assembly and Distribution Agreement, dated as of
February 19, 2000, by and between Toshiba America
Business Solutions, Inc. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.17 to the
Companys annual report on Form 10-K for the year ended
January 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.18  |  |  |  | Master Assembly and Distribution Agreement, dated July
27, 2000, by and between IKON Office Solutions, Inc. and
T/R Systems, Inc. (incorporated by reference to Exhibit
10.18 to the Companys quarterly report on Form 10-Q for
the quarter ended July 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.19  |  |  |  | Second Addendum to Reseller Agreement, dated as of
August 1, 2000, by and between T/R Systems, Inc. and
Kyocera Mita Corporation (formerly Mita Industrial Co.,
Ltd.) (incorporated by reference to Exhibit 10.19 to the
Companys quarterly report on Form 10-Q for the quarter
ended October 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.20   |  |  |  | Loan Modification Agreement, dated as of October 11,
2000, by and between Silicon Valley Bank and T/R
Systems, Inc. (incorporated by reference to Exhibit
10.20 to the Companys quarterly report on Form 10-Q for
the quarter ended October 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.21   |  |  |  | Loan Modification Agreement, dated as of December 19,
2000, by and between Silicon Valley Bank and T/R
Systems, Inc. (incorporated by reference to Exhibit
10.21 to the Companys annual report on Form 10-K for
the year ended January 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

28



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##### Table of Contents



|         |  |   |  |                                                                                                                                                                                                                                                                                     
|-------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |   |  |                                                                                                                                                                                                                                                                                     
|Number   |  |   |  | Description of Exhibit                                                                                                                                                                                                                                                              
|         |  |   |  |                                                                                                                                                                                                                                                                                     
|10.22   |  |  |  | Master Development Agreement, dated as of April 10, 2000
(signed January 2001), by and between Minolta Co., Ltd.
and T/R Systems, Inc. (incorporated by reference to
Exhibit 10.22 to the Companys annual report on Form
10-K for the year ended January 31, 2001)                 
|10.22.1 |  |  |  | Addendum to Master Development Agreement, dated as of
April 10, 2000 (signed January 2001), by and between
Minolta Co., Ltd. and T/R Systems, Inc. (incorporated by
reference to Exhibit 10.22.1 to the Companys annual
report on Form 10-K for the year ended January 31, 2001)   
|10.22.2 |  |  |  | Addendum to Master Development Agreement, dated as of
November 20, 2000 (signed January 2001), by and between
Minolta Co., Ltd. and T/R Systems, Inc. (incorporated by
reference to Exhibit 10.22.2 to the Companys annual
report on Form 10-K for the year ended January 31, 2001)
|10.22.3 |  |  |  | Addendum to Master Development Agreement, dated as of
November 20, 2000 (signed January 2001), by and between
Minolta Co., Ltd. and T/R Systems, Inc. (incorporated by
reference to Exhibit 10.22.3 to the Companys annual
report on Form 10-K for the year ended January 31, 2001)
|10.23   |  |  |  | Master Assembly and Distribution Agreement, dated
January 31, 2001, by and between Kyocera Mita America
and T/R Systems, Inc. (incorporated by reference to
Exhibit 10.23 to the Companys annual report on Form
10-K for the year ended January 31, 2001)                          
|10.24   |  |  |  | Software Development and License Agreement, dated July
31, 2001, by and between Xerox Corporation and T/R
Systems, Inc. (incorporated by reference to Exhibit
10.24 to the Companys quarterly report on Form 10-Q for
the quarter ended July 31, 2001)                             
|10.25   |  |  |  | Software & Hardware Development Agreement, effective as
of January 1, 2001 (signed August 2001), by and between
Canon Inc. and T/R Systems, Inc. (incorporated by
reference to Exhibit 10.24 to the Companys quarterly
report on Form 10-Q for the quarter ended October 31,
2001) 
|10.26    |  |  |  | Loan Modification Agreement, dated as of January 8,
2002, by and between Silicon Valley Bank and T/R
Systems, Inc. (incorporated by reference to Exhibit 10.26 to the Companys annual report on
Form 10-K for the year ended January 31, 2002)                                     
|10.27   |  |  |  | Distribution Agreement, dated February 11, 2002, by and
between Canon U.S.A., Inc. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.27 to the
Companys quarterly report on Form 10-Q for the quarter
ended April 30, 2002)                                           
|10.28   |  |  |  | Master Agreement, effective as of January 2002 (signed
February 2002), by and between IKON Office Solutions,
Inc. and T/R Systems, Inc. (incorporated by reference to
Exhibit 10.28 to the companys quarterly report or Form
10-Q for the quarter ended April 30, 2002)            
|10.29#   |  |  |  | Change of Control Agreements with Michael Liess, Michael
Barry, Lyle Newkirk and Neal Tompkins                                                                                                                                                                                      
|10.30#   |  |  |  | Letter Agreement with Michael Liess, dated February 12,
2002, as supplemented by Addendum dated February 15,
2002                                                                                                                                                                   
|21.1     |  |  |  | Subsidiaries of the registrant (incorporated by
reference to Exhibit 21.1 to the Companys annual report
on Form 10-K for the year ended January 31, 2001)                                                                                                                          
|23.1     |  |  |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                    
|99.1     |  |  |  | Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            


Confidential treatment has been requested with respect to portions of
this exhibit
# Management agreement or compensatory plan

(b)  Reports on Form 8-K



| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 15, 2002, we filed a current report on Form 8-K to announce the
transfer of the listing of our common stock to the Nasdaq SmallCap Market,
which was effective at the opening of business on November 14, 2002 and
continued under the Nasdaq trading symbol TRSI.

29



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Norcross, State of Georgia, on April 16, 2003.

| |  |     |  |                                                                                  
| |  | --- |  | ---------------------------------------------------------------------------------
| |  |     |  | T/R SYSTEMS, INC.                                                                
|
| |  |     |  |                                                                                  
|
| |  | By: |  | /s/ Michael E. KohlsdorfMichael E. KohlsdorfPresident and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

|                                             |  |                                                                                                                                         |  |               
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Title                                                                                                                                   |  | Date          
|                                             |  |                                                                                                                                         |  |               
|/s/ Michael E. KohlsdorfMichael E. Kohlsdorf |  | President and Chief Executive Officer
(Principal Executive Officer)                                                                     |  | April 17, 2003
|                                            
|/s/ Lyle W. NewkirkLyle W. Newkirk           |  | Senior Vice President, 
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer) |  | April 17, 2003
|                                            
|                                             |  |                                                                                                                                         |  |               
|                                            
|/s/ Charles H. PhippsCharles H. Phipps       |  | Director                                                                                                                                |  | April 17, 2003
|                                            
|                                             |  |                                                                                                                                         |  |               
|                                            
|/s/ Joseph R. ChinniciJoseph R. Chinnici     |  | Director                                                                                                                                |  | April 17, 2003
|                                            
|                                             |  |                                                                                                                                         |  |               
|                                            
|/s/ C. Harold GaffinC. Harold Gaffin         |  | Director                                                                                                                                |  | April 17, 2003
|                                            
|                                             |  |                                                                                                                                         |  |               
|                                            
|/s/ Philip T. GianosPhilip T. Gianos         |  | Director                                                                                                                                |  | April 17, 2003
|                                            
|                                             |  |                                                                                                                                         |  |               
|                                            
|/s/ Kevin J. McGarityKevin J. McGarity       |  | Director                                                                                                                                |  | April 17, 2003
|                                            
|                                             |  |                                                                                                                                         |  |               
|                                            
|/s/ Barbara A. PellowBarbara A. Pellow       |  | Director                                                                                                                                |  | April 17, 2003
|                                            
|                                             |  |                                                                                                                                         |  |               
|                                            
|/s/ E. Neal TompkinsE. Neal Tompkins         |  | Director                                                                                                                                |  | April 17, 2003

30



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##### Table of Contents



CERTIFICATIONS

I, Michael E. Kohlsdorf, Chief Executive Officer of T/R Systems, Inc., certify
that:

1.     I have reviewed this annual report on Form 10-K of T/R Systems, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| | a) |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                      |  |                                                                     
|--------------------- |  | --------------------------------------------------------------------
|Date:  April 17, 2003 |  | /s/ Michael E. KohlsdorfMichael E. Kohlsdorf
Chief Executive Officer

31



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##### Table of Contents



CERTIFICATIONS

I, Lyle W. Newkirk, Chief Financial Officer of T/R Systems, Inc., certify that:

1.     I have reviewed this annual report on Form 10-K of T/R Systems, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| | a) |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                           
|-------------------- |  | ----------------------------------------------------------
|Date: April 17, 2003 |  | /s/ Lyle W. NewkirkLyle W. Newkirk
Chief Financial Officer

32



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                              |  |      |     | 
|------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                              |  | Page
|                                                                                                              |  |     
|Independent Auditors Report                                                                                  |  |      | F-2 | 
|Consolidated Balance Sheets as of
January 31, 2003 and 2002                                                   |  |      | F-3 | 
|Consolidated Statements of Operations for the
Years Ended January 31, 2003, 2002 and 2001                     |  |      | F-4 | 
|Consolidated Statements of Shareholders Equity (Deficit) for the
Years Ended January 31, 2003, 2002 and 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
Years Ended January 31, 2003, 2002 and 2001                     |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                    |  |      | F-7 | 

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholders of T/R Systems, Inc.:

We have audited the accompanying consolidated balance sheets of T/R Systems,
Inc. and subsidiaries (the Company) as of January 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders equity (deficit),
and cash flows for each of the three years in the period ended January 31,
2003. Our audits also included the financial statement schedule listed at Item
15 of this annual report on Form 10-K. These consolidated financial statements
and the financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
January 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia
March 3, 2003

F-2



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##### Table of Contents



T/R SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

|                            |                                                                                                                                    |   |                            |                                      |   |             |        |         |   |        |  | 
|--------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------- | ------------------------------------ | - | ----------- | ------ | ------- | - | ------ |  | 
|                            |                                                                                                                                    |   |                            |                                      |   | January 31,
|                            |                                                                                                                                    |   |                            |                                      |   |            
|                            |                                                                                                                                    |   |                            |                                      |   | 2003        |        | 2002   
|                            |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            |                                                                                                                                    |   |                            | ASSETS                               |   |             |        |         |   |        |  | 
|Current
Assets:             |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            | Cash and cash equivalents                                                                                                          |   | $                          | 6,542                                |   |             | $      | 13,026  |  
|                            | Restricted cash                                                                                                                    |   |                            | 612                                  |   |             |        |        |  
|                            | Receivables, net of allowance of $168 and $389, respectively                                                                       |   |                            | 1,919                                |   |             |        | 4,667   |  
|                            | Inventories, net                                                                                                                   |   |                            | 2,180                                |   |             |        | 4,108   |  
|                            | Prepaid expenses and other                                                                                                         |   |                            | 305                                  |   |             |        | 287     |  
|                            |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            |                                                                                                                                    |   | Total current assets       |                                      |   | 11,558      |        |         |   | 22,088 | 
|Property and equipment, net |                                                                                                                                    |   | 3,737                      |                                      |   |             | 6,400  |        
|Deferred income taxes       |                                                                                                                                    |   |                           |                                      |   |             |       |        
|                            |                                                                                                                                    | $ | 15,295                     |                                      |   | $           | 28,488 |        
|                            |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            |                                                                                                                                    |   |                            | LIABILITIES AND SHAREHOLDERS EQUITY |   |             |        |         |   |        |  | 
|Current
Liabilities:        |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            | Line of credit                                                                                                                     |   | $                          | 220                                  |   |             | $      |        |  
|                            | Accounts payable                                                                                                                   |   |                            | 1,492                                |   |             |        | 2,386   |  
|                            | Deferred revenue                                                                                                                   |   |                            | 673                                  |   |             |        | 456     |  
|                            | Accrued salaries and wages                                                                                                         |   |                            | 932                                  |   |             |        | 883     |  
|                            | Other liabilities                                                                                                                  |   |                            | 2,649                                |   |             |        | 788     |  
|                            |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            |                                                                                                                                    |   | Total current liabilities  |                                      |   | 5,966       |        |         |   | 4,513  | 
|Commitments (Note 10)       |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            | Shareholders Equity:                                                                                                              |   |                            |                                      |   |             |        |         |  
|                            | Common stock, $0.01 par value, 88,000,000 shares authorized,
12,469,415 and 12,295,903 shares issued and outstanding, respectively |   |                            | 124                                  |   |             |        | 123     |  
|                            | Additional paid-in capital                                                                                                         |   |                            | 43,664                               |   |             |        | 43,532  |  
|                            | Accumulated deficit                                                                                                                |   |                            | (34,459                              | ) |             |        | (19,680 | )
|                            |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            |                                                                                                                                    |   | Total shareholders equity |                                      |   | 9,329       |        |         |   | 23,975 | 
|                            |                                                                                                                                    |   |                            |                                      |   |             |        |        
|                            |                                                                                                                                    | $ | 15,295                     |                                      |   | $           | 28,488 |        
|                            |                                                                                                                                    |   |                            |                                      |   |             |        |        

See notes to consolidated financial statements

F-3



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##### Table of Contents



T/R SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |        |        |        | 
|--------------------------------------------------------- | -------------------------- | ------------------------ | ------------- | ------ | ---------------------- | ------ | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                                          |                            |                          |               |        | Year Ended January 31,
|                                                          |                            |                          |               |        |                       
|                                                          |                            |                          |               |        | 2003                   |        | 2002    |        | 2001  
|                                                          |                            |                          |               |        |                        |        |         |        |       
|Imaging systems                                           |                            | $                        | 12,263        |        |                        | $      | 11,772  |        |        | $      | 27,093 |       
|Services                                                  |                            |                          | 2,476         |        |                        |        | 5,846   |        |        |        | 5,153  |       
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       
|                                                          |                            |                          | Total revenue |        |                        | 14,739 |         |        |        | 17,618 |        |        |        | 32,246 | 
|Operating expenses:                                       |                            |                          |               |        |                        |        |         |        |        |        |        |       
|                                                          | Cost of imaging systems    |                          |               | 8,962  |                        |        |         | 9,141  |        |        |        | 12,166 |       
|                                                          | Research and development   |                          |               | 5,784  |                        |        |         | 7,042  |        |        |        | 5,078  |       
|                                                          | Sales and marketing        |                          |               | 10,184 |                        |        |         | 10,923 |        |        |        | 9,418  |       
|                                                          | General and administrative |                          |               | 4,723  |                        |        |         | 3,880  |        |        |        | 3,101  |       
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       
|                                                          |                            | Total operating expenses |               |        | 29,653                 |        |         |        | 30,986 |        |        |        | 29,763 |       
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       
|Operating (loss) income                                   |                            |                          | (14,914       | )      |                        |        | (13,368 | )      |        |        | 2,483  |       
|Interest income, net                                      |                            |                          | 135           |        |                        |        | 673     |        |        |        | 1,622  |       
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       
|(Loss) income before provision (benefit)
for income taxes |                            |                          | (14,779       | )      |                        |        | (12,695 | )      |        |        | 4,105  |       
|Provision (benefit) for income taxes                      |                            |                          |              |        |                        |        | 2,672   |        |        |        | (2,229 | )     
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       
|Net (loss) income                                         |                            | $                        | (14,779       | )      |                        | $      | (15,367 | )      |        | $      | 6,334  |       
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       
|Net (loss) income per common share  Basic                |                            | $                        | (1.19         | )      |                        | $      | (1.25   | )      |        | $      | 0.53   |       
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       
|Net (loss) income per common share  Diluted              |                            | $                        | (1.19         | )      |                        | $      | (1.25   | )      |        | $      | 0.49   |       
|                                                          |                            |                          |               |        |                        |        |         |        |        |        |        |       

See notes to consolidated financial statements

F-4



---



##### Table of Contents



T/R SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
(In thousands, except per share data)

|                           |                                                      |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         |         |   |   |        |         |  
|-------------------------- | ---------------------------------------------------- |  | --------------- |  | ------------ | - | ---------- |  | -------- |  | ----------- | --- | ------------ | - | ------- | - | ----- | - | ------ | ---- | - | - | --- | -- |  | - | ------- | ------- | - | - | ------ | ------- | -
|                           |                                                      |  | Series D        |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |        
|                           |                                                      |  | Preferred Stock |  | Common Stock |   | Additional |  |          |  |             |     |              |   |         |   |       |   |       
|                           |                                                      |  |                 |  |              |   | Paid-In    |  | Deferred |  | Accumulated |     |              |   |        
|                           |                                                      |  | Shares          |  | Amount       |   | Shares     |  | Amount   |  | Capital     |     | Compensation |   | Deficit |   | Total
|                           |                                                      |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |      
|Balance  January 31,
2000 |                                                      |  |                |  |              | $ |           |  |          |  | 11,733      |     |              | $ | 117     |   |       | $ | 42,839 |      |   | $ | (60 | )  |  | $ | (10,647 | )       |   | $ | 32,249 |        
|                           | Stock option exercises                               |  |                 |  |              |   |            |  |          |  |             | 471 |              |   |         | 5 |       |   |        | 438  |   |   |     |    |  |   |         |         |   |   |        | 443     |  
|                           | Employee stock purchase
plan exercises               |  |                 |  |              |   |            |  |          |  |             | 11  |              |   |         |  |       |   |        | 69   |   |   |     |    |  |   |         |         |   |   |        | 69      |  
|                           | Tax benefit from the
exercise
of stock options       |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        | 200  |   |   |     |    |  |   |         |         |   |   |        | 200     |  
|                           | Additional offering costs of
initial public offering |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        | (131 | ) |   |     |    |  |   |         |         |   |   |        | (131    | )
|                           | Amortization of deferred
compensation                |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     | 32 |  |   |         |         |   |   |        | 32      |  
|                           | Net income                                           |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         | 6,334   |   |   |        | 6,334   |  
|                           |                                                      |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         |         |   |   |        |        
|Balance
 January 31, 2001 |                                                      |  |                |  |              |   |           |  |          |  | 12,215      |     |              |   | 122     |   |       |   | 43,415 |      |   |   | (28 | )  |  |   | (4,313  | )       |   |   | 39,196 |        
|                           | Stock option exercises                               |  |                 |  |              |   |            |  |          |  |             | 57  |              |   |         | 1 |       |   |        | 55   |   |   |     |    |  |   |         |         |   |   |        | 56      |  
|                           | Employee stock purchase
plan exercises               |  |                 |  |              |   |            |  |          |  |             | 24  |              |   |         |  |       |   |        | 62   |   |   |     |    |  |   |         |         |   |   |        | 62      |  
|                           | Amortization of deferred
compensation                |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     | 28 |  |   |         |         |   |   |        | 28      |  
|                           | Net loss                                             |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         | (15,367 | ) |   |        | (15,367 | )
|                           |                                                      |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         |         |   |   |        |        
|Balance  January 31,
2002 |                                                      |  |                |  |              |   |           |  |          |  | 12,296      |     |              |   | 123     |   |       |   | 43,532 |      |   |   |    |    |  |   | (19,680 | )       |   |   | 23,975 |        
|                           | Stock option exercises                               |  |                 |  |              |   |            |  |          |  |             | 154 |              |   |         | 1 |       |   |        | 123  |   |   |     |    |  |   |         |         |   |   |        | 124     |  
|                           | Employee stock purchase
plan exercises               |  |                 |  |              |   |            |  |          |  |             | 19  |              |   |         |  |       |   |        | 9    |   |   |     |    |  |   |         |         |   |   |        | 9       |  
|                           | Net loss                                             |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         | (14,779 | ) |   |        | (14,779 | )
|                           |                                                      |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         |         |   |   |        |        
|Balance  January 31,
2003 |                                                      |  |                |  |              | $ |           |  |          |  | 12,469      |     |              | $ | 124     |   |       | $ | 43,664 |      |   | $ |    |    |  | $ | (34,459 | )       |   | $ | 9,329  |        
|                           |                                                      |  |                 |  |              |   |            |  |          |  |             |     |              |   |         |   |       |   |        |      |   |   |     |    |  |   |         |         |   |   |        |        

See notes to consolidated financial statements

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T/R SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  |  |  | 
|--------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------- | ---------------------------------- | -------------------------------------------------------- | ---- | ---------------------- | ------- | ------- | ------ | ----- | ------- | ------ | ------ | --- | ------ | - |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    |                                                          |      | Year Ended January 31, |         |         |        |      
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |      
|                                                          |                                                                                                    |                                         |                                    |                                                          |      | 2003                   |         | 2002    |        | 2001  |         |        |        |    
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |    
|Operating Activities:                                     |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |  
|                                                          | Net (loss).income                                                                                  |                                         | $                                  | (14,779                                                  | )    |                        | $       | (15,367 | )      |       | $       | 6,334  |        |     |        |   | 
|                                                          | Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities: |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   | 
|                                                          |                                                                                                    |                                         | Depreciation                       |                                                          |      | 3,715                  |         |         |        | 2,197 |         |        |        | 949 |        |   |  |  | 
|                                                          |                                                                                                    |                                         | Deferred compensation expense      |                                                          |      |                       |         |         |        | 28    |         |        |        | 32  |        |   |  |  | 
|                                                          |                                                                                                    |                                         | Loss on sale of fixed assets       |                                                          |      | 242                    |         |         |        |       |         |        |        |     |        |   |  |  | 
|                                                          |                                                                                                    |                                         | Changes in assets and liabilities: |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  |  | 
|                                                          |                                                                                                    |                                         |                                    | Decrease (increase) in receivables                       |      |                        | 874     |         |        |       | 12      |        |        |     | (3,278 | ) |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    | Decrease (increase) in inventories                       |      |                        | 1,928   |         |        |       | 709     |        |        |     | (1,338 | ) |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    | (Increase) decrease in prepaid expenses
and other assets |      |                        | (18     | )       |        |       | 214     |        |        |     | (26    | ) |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    | Decrease (increase) in deferred income tax assets        |      |                        |        |         |        |       | 2,626   |        |        |     | (2,426 | ) |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    | (Decrease) increase in accounts payable                  |      |                        | (894    | )       |        |       | (606    | )      |        |     | 1,721  |   |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    | Increase (decrease) in deferred revenue                  |      |                        | 217     |         |        |       | (347    | )      |        |     | (224   | ) |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    | Increase (decrease) in accrued salaries and wages        |      |                        | 49      |         |        |       | (602    | )      |        |     | 97     |   |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    | Increase (decrease) in other liabilities                 |      |                        | 1,861   |         |        |       | (127    | )      |        |     | 140    |   |  |  |  | 
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 
|                                                          |                                                                                                    |                                         |                                    | Net cash (used in) provided by operating activities      |      |                        | (6,805  | )       |        |       | (11,263 | )      |        |     | 1,981  |   |  |  |  | 
|Investing Activities:                                     |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |  
|                                                          |                                                                                                    | Proceeds from the sale of assets        |                                    |                                                          | 839  |                        |         |         |       |       |         |        |       |     |        |   |  | 
|                                                          |                                                                                                    | Purchases of property and equipment     |                                    |                                                          | (259 | )                      |         |         | (2,223 | )     |         |        | (3,020 | )   |        |   |  | 
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 
|                                                          |                                                                                                    |                                         |                                    | Net cash provided by (used in) investing activities      |      |                        | 580     |         |        |       | (2,223  | )      |        |     | (3,020 | ) |  |  |  | 
|Financing Activities:                                     |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |  
|                                                          |                                                                                                    | Increase in borrowing on line of credit |                                    |                                                          | 220  |                        |         |         |       |       |         |        |       |     |        |   |  | 
|                                                          |                                                                                                    | (Increase) decrease in restricted cash  |                                    |                                                          | (612 | )                      |         |         | 200    |       |         |        | -      |     |        |   |  | 
|                                                          |                                                                                                    | (Decrease) increase in bank overdrafts  |                                    |                                                          |     |                        |         |         |       |       |         |        | (462   | )   |        |   |  | 
|                                                          |                                                                                                    | Proceeds from sale of common stock      |                                    |                                                          | 133  |                        |         |         | 118    |       |         |        | 512    |     |        |   |  | 
|                                                          |                                                                                                    | Costs of initial public offering        |                                    |                                                          |     |                        |         |         |       |       |         |        | (131   | )   |        |   |  | 
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 
|Net cash (used in) provided by financing activities       |                                                                                                    |                                         | (259                               | )                                                        |      |                        | 318     |         |        |       | (81     | )      |        |     |        |  
|Net decrease in cash and cash equivalents                 |                                                                                                    |                                         | (6,484                             | )                                                        |      |                        | (13,168 | )       |        |       | (1,120  | )      |        |     |        |  
|Cash and Cash Equivalents:                                |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |  
|                                                          | Beginning of year                                                                                  |                                         |                                    | 13,026                                                   |      |                        |         | 26,194  |        |       |         | 27,314 |        |     |        |   | 
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 
|                                                          | End of year                                                                                        |                                         | $                                  | 6,542                                                    |      |                        | $       | 13,026  |        |       | $       | 26,194 |        |     |        |   | 
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 
|Cash paid for interest                                    |                                                                                                    | $                                       | 1                                  |                                                          |      | $                      |        |         |        | $     |        |        |        |     |        |  
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 
|Cash paid for income taxes                                |                                                                                                    | $                                       |                                   |                                                          |      | $                      | 83      |         |        | $     | 173     |        |        |     |        |  
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 
|Supplemental Disclosure of Non-cash Investing Activities: |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |  
|                                                          | Equipment received for payment of engineering fees                                                 |                                         | $                                  | 1,874                                                    |      |                        | $       | 2,395   |        |       | $       | 863    |        |     |        |   | 
|                                                          |                                                                                                    |                                         |                                    |                                                          |      |                        |         |         |        |       |         |        |        |     |        |   |  | 

See notes to consolidated financial statements

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T/R SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business

T/R Systems, Inc. was incorporated in Georgia in September 1991. We
design, develop and market innovative software and hardware applications
designed to help organizations manage, store, distribute and produce digital
documents. We distribute our products in the United States and internationally
primarily through distribution relationships with Canon USA, Inc., Minolta Co.,
Ltd., Ricoh Corporation, Lanier Worldwide, Inc. and IKON Office Solutions,
Inc., as well as through a network of independent dealers.

2. Significant Accounting Policies

Principles of Consolidation The consolidated financial statements
include the accounts of T/R Systems, Inc. and its subsidiaries, all of which
are wholly owned. All significant intercompany transactions and balances have
been eliminated in consolidation.

Cash and Cash Equivalents Cash equivalents are stated at cost, which
approximates market value, and include investments in a money market account
and government securities with original maturities of three months or less.

Restricted Cash During the quarter ended October 31, 2002, we entered
into a sale-leaseback transaction for certain print engines that we had
previously purchased. The transaction is considered to be an operating lease.
The proceeds from the lease were $612,000. The equipment is being leased for a
three-year period with the option to purchase the equipment at the fair market
value at the end of the lease term. As security for the sale-leaseback, we are
required to maintain a certificate of deposit of $612,000. The certificate of
deposit is classified as restricted cash through October 31, 2005, the end of
the lease term.

Revenue Recognition Imaging systems revenue is recognized based on the
guidance in American Institute of Certified Public Accountants Statement of
Position, or SOP, 97-2, Software Revenue Recognition,and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition. We recognize revenue
from imaging systems when persuasive evidence of an arrangement exists, the
system has been shipped, the fee is fixed or determinable and collectibility of
the fee is probable. Under multiple element arrangements, we allocate revenue
to the various elements based on vendor-specific objective evidence of fair
value. Revenue from products requiring significant customization in order to
meet customers objectives, such as our Digital StoreFront application, is
recognized upon completion of the required customization.

Engineering service fees are recognized on a percentage-of-completion
basis based on the hours of work done on a project as a percent of the total
estimated hours required to complete the project. We recognize revenue from
the sale of printing consumables upon shipment. We recognize revenue from
customer service plans ratably over the term of each plan, which is typically
one to three years. Nonrefundable prepaid royalties are recognized as revenue
over the term of the royalty agreement based on the greater of actual royalties
earned or the straight-line method. Revenue from royalties, which is included
in service revenue, has been less than 10% of total revenue in each of the last
three fiscal years.

Receivables, Net Receivables, net include unbilled engineering service
fees of $10,000 at January 31, 2003 and $2.1 million at January 31, 2002. The
revenue recognition process for these nonrecurring engineering fees was
complete, but we could not bill the customers due to contractual terms.

Research and Development Costs Research and development costs are
charged to expense when incurred. Software development costs are expensed as
incurred until technological feasibility is determined. To date, we have
expensed all software development costs.

Inventory Inventory is valued at the lower of cost or market. Cost is
determined on the first-in, first-out basis.

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Property and Equipment Property and equipment is stated at cost.
Depreciation is computed on a straight-line basis over the estimated lives of
the assets, which are generally one and one-half to seven years. Leasehold
improvements are amortized over the lesser of useful life or the remaining
lease term.

Product Warranty We provide for estimated future warranty costs as
products are sold.

Accounts Payable Accounts payable are valued at cost.

Income Taxes Deferred tax assets and liabilities are determined for
differences between the financial reporting basis and income tax basis of the
assets and liabilities that will result in taxable or deductible amounts in the
future, based on enacted tax rates applicable to the periods in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

Impairment of Long-Lived Assets Long-lived assets are reviewed for
impairment when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Any impairment losses are reported
in the period that the recognition criteria are first applied, based on the
fair value of the asset. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.

Stock-Based Compensation We account for compensation cost related to
employee stock options based on the guidance in Accounting Principles Board, or
APB, Opinion 25, Accounting for Stock Issued to Employees. In fiscal 1997, we
adopted the disclosure requirements of Statement of Financial Accounting
Standards, or SFAS, Statement No. 123, Accounting for Stock-Based Compensation.
This statement established a fair-value based method of accounting for
compensation cost related to stock options and other forms of stock-based
compensation plans. The adoption of the recognition provisions related to
employee arrangements under SFAS No. 123 is optional; however, the pro forma
effects on operations had these recognition provisions been elected are
required to be disclosed in financial statements. The following table
illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation (in thousands,
except per share amounts):

|                                                                                                                                            |                       |   |                        |       |      |   |         |       |   |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ---------------------- | ----- | ---- | - | ------- | ----- | - | - | ------ | ---- | 
|                                                                                                                                            |                       |   | Year Ended January 31,
|                                                                                                                                            |                       |   |                       
|                                                                                                                                            |                       |   | 2003                   |       | 2002 |   | 2001   
|                                                                                                                                            |                       |   |                        |       |      |   |        
|                                                                                                                                            |                       |   | (In thousands)        
|Net (loss) income, as reported                                                                                                              |                       | $ | (14,779                | )     |      | $ | (15,367 | )     |   | $ | 6,334  |     
|Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects |                       |   | (3,158                 | )     |      |   | (3,666  | )     |   |   | (2,394 | )   
|                                                                                                                                            |                       |   |                        |       |      |   |         |       |   |   |        |     
|Pro forma net (loss) income                                                                                                                 |                       | $ | (17,937                | )     |      | $ | (19,033 | )     |   | $ | 3,940  |     
|                                                                                                                                            |                       |   |                        |       |      |   |         |       |   |   |        |     
|Earnings per share                                                                                                                          |                       |   |                        |       |      |   |         |       |   |   |        |     
|                                                                                                                                            | Basic  as reported   |   | $                      | (1.19 | )    |   | $       | (1.25 | ) |   | $      | 0.53 | 
|                                                                                                                                            |                       |   |                        |       |      |   |         |       |   |   |        |     
|                                                                                                                                            | Basic  pro forma     |   |                        | (1.45 | )    |   |         | (1.55 | ) |   |        | 0.33 | 
|                                                                                                                                            |                       |   |                        |       |      |   |         |       |   |   |        |     
|                                                                                                                                            | Diluted  as reported |   | $                      | (1.19 | )    |   | $       | (1.25 | ) |   | $      | 0.49 | 
|                                                                                                                                            |                       |   |                        |       |      |   |         |       |   |   |        |     
|                                                                                                                                            | Diluted  pro forma   |   |                        | (1.45 | )    |   |         | (1.55 | ) |   |        | 0.31 | 
|                                                                                                                                            |                       |   |                        |       |      |   |         |       |   |   |        |     

We have estimated the fair value of options at the date of grant using the
Black-Scholes option-pricing model using the following weighted-average
assumptions:

|                      |  |                        |       |      |  |      |       |   |  |  |       |  
|--------------------- |  | ---------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                      |  | Year Ended January 31,
|                      |  |                       
|                      |  | 2003                   |       | 2002 |  | 2001
|                      |  |                        |       |      |  |     
|Expected life (years) |  |                        | 5.5   |      |  |      | 5.6   |   |  |  | 5.8   |  
|Interest rate         |  |                        | 2.8   | %    |  |      | 3.6   | % |  |  | 6.2   | %
|Volatility            |  |                        | 114.3 | %    |  |      | 109.1 | % |  |  | 128.8 | %
|Dividend yield        |  |                        | 0.0   | %    |  |      | 0.0   | % |  |  | 0.0   | %

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Net Income or Loss Per Common Share Net income or loss per common share
is computed based on the guidance in SFAS No. 128, Earnings Per Share. Basic
net income or loss per common share is computed by dividing net income or loss
available to common shareholders by the weighted average common shares
outstanding. Diluted net income or loss per common share is computed by
dividing net income or loss available to common shareholders by the weighted
average common shares outstanding plus the dilutive effect of stock options;
see note 13.

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

Comprehensive Income We report comprehensive income in accordance with
SFAS No. 130, Reporting Comprehensive Income.This statement establishes
standards for reporting and displaying comprehensive income and its components,
including revenues, expenses, gains and losses in a full set of general purpose
financial statements.

Fair Value of Financial Instruments The carrying value of our cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair values, due to the short-term nature of these
instruments.

New Accounting Pronouncements In July 2001, the Financial Accounting
Standards Board, or FASB, issued SFAS No. 141, Business Combinations,and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 and indicates that the use of the pooling-of-interests
method of accounting is no longer allowed. SFAS No. 142 requires that upon
adoption, amortization of goodwill will cease and instead, the carrying value
of goodwill will be evaluated for impairment on an annual basis. Identifiable
intangible assets will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
The new standards did not have an impact on our consolidated financial
statements in fiscal 2003.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting
for reorganization and similar costs and supersedes previous accounting
guidance, principally Emerging Issues Task Force, or EITF Issue No. 94-3,
Liability Recognition for Certain Employee Benefits and Other Costs to Exit an
Activity. SFAS No. 146 requires that the liability for costs associated with
an exit or disposal activity be recognized when the liability is incurred.
Under EITF, Issue No. 94-3, a liability for an exit cost should be recognized
at the date of a companys commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognition of
any future reorganization costs as well as the amount recognized. The
provisions of SFAS No. 146 are effective for reorganization activities
initiated after December 31, 2002. We adopted this statement on January 1,
2003.

In November 2002, the FASB issued Interpretation No. 45 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for
the fair value of the obligation undertaken in issuing such a guarantee. FIN 45
also requires additional disclosure about the guarantors obligations under
certain guarantees that it has issued. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 30, 2002 and the disclosure
requirements are effective after December 15, 2002. The Company does not have
any material guarantees at January 31, 2003. The adoption of FIN 45 is not
expected to have a material impact on the Companys financial position or
results of operations.

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Reclassifications Certain amounts in fiscal 2002 and fiscal 2001 have
been reclassified to conform to the fiscal 2003 financial statement
presentation.

3. Inventories

Inventories at January 31, 2003 and 2002 consisted of the following:

|                                  |  |                |       |      |  |   |       | 
|--------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                  |  | January 31,   
|                                  |  |               
|                                  |  | 2003           |       | 2002
|                                  |  |                |       |     
|                                  |  | (In thousands)
|Components and supplies           |  | $              | 1,901 |      |  | $ | 3,715 | 
|Finished goods                    |  |                | 607   |      |  |   | 1,355 | 
|                                  |  |                |       |      |  |   |       | 
|                                  |  |                | 2,508 |      |  |   | 5,070 | 
|Less reserve for potential losses |  |                | 328   |      |  |   | 962   | 
|                                  |  |                |       |      |  |   |       | 
|                                  |  | $              | 2,180 |      |  | $ | 4,108 | 
|                                  |  |                |       |      |  |   |       | 

4. Property and Equipment

Property and equipment at January 31, 2003 and 2002 consisted of the
following:

|                              |  |                |       |      |  |   |        | 
|----------------------------- |  | -------------- | ----- | ---- |  | - | ------ | 
|                              |  | January 31,   
|                              |  |               
|                              |  | 2003           |       | 2002
|                              |  |                |       |     
|                              |  | (In thousands)
|Furniture and fixtures        |  | $              | 1,372 |      |  | $ | 1,462  | 
|Equipment and software        |  |                | 5,276 |      |  |   | 7,878  | 
|Leasehold improvements        |  |                | 1,205 |      |  |   | 1,202  | 
|                              |  |                |       |      |  |   |        | 
|                              |  |                | 7,853 |      |  |   | 10,542 | 
|Less accumulated depreciation |  |                | 4,116 |      |  |   | 4,142  | 
|                              |  |                |       |      |  |   |        | 
|                              |  | $              | 3,737 |      |  | $ | 6,400  | 
|                              |  |                |       |      |  |   |        | 

Depreciation expense was $3,715,000 in fiscal 2003, $2,197,000 in fiscal
2002 and $949,000 in fiscal 2001. Excluding special charges of $1,729,000
million recorded in fiscal 2003, depreciation expense was $1,986,000 in fiscal
2003.

5. Accrued Liabilities

Current liabilities at January 31, 2003 and January 31, 2002 consisted of the
following:

|                      |  |                |       |      |  |   |     | 
|--------------------- |  | -------------- | ----- | ---- |  | - | --- | 
|                      |  | January 31,   
|                      |  |               
|                      |  | 2003           |       | 2002
|                      |  |                |       |     
|                      |  | (In thousands)
|Facility exit costs   |  | $              | 1,234 |      |  | $ |    | 
|Royalties             |  |                | 226   |      |  |   | 14  | 
|Professional services |  |                | 132   |      |  |   | 129 | 
|Other                 |  |                | 1,057 |      |  |   | 645 | 
|                      |  |                |       |      |  |   |     | 
|                      |  | $              | 2,649 |      |  | $ | 788 | 
|                      |  |                |       |      |  |   |     | 

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6. Income Taxes

(Loss) income before income taxes for the years ended January 31, 2003, 2002
and 2001 consisted of the following:

|                                  |  |                        |         |      |  |      |         |   |  |   |       | 
|--------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ----- | 
|                                  |  | Year Ended January 31,
|                                  |  |                       
|                                  |  | 2003                   |         | 2002 |  | 2001
|                                  |  |                        |         |      |  |     
|                                  |  | (In thousands)        
|Domestic                          |  | $                      | (14,863 | )    |  | $    | (12,776 | ) |  | $ | 4,059 | 
|Foreign                           |  |                        | 84      |      |  |      | 81      |   |  |   | 46    | 
|                                  |  |                        |         |      |  |      |         |   |  |   |       | 
|(Loss) income before income taxes |  | $                      | (14,779 | )    |  | $    | (12,695 | ) |  | $ | 4,105 | 
|                                  |  |                        |         |      |  |      |         |   |  |   |       | 

Provision (benefit) for income taxes for the years ended January 31, 2003, 2002
and 2001 consisted of the following:

|                                     |                               |   |                        |        |      |   |       |        |   |   |        |        |  
|------------------------------------ | ----------------------------- | - | ---------------------- | ------ | ---- | - | ----- | ------ | - | - | ------ | ------ | -
|                                     |                               |   | Year Ended January 31,
|                                     |                               |   |                       
|                                     |                               |   | 2003                   |        | 2002 |   | 2001 
|                                     |                               |   |                        |        |      |   |      
|                                     |                               |   | (In thousands)        
|Current:                             |                               |   |                        |        |      |   |       |        |   |   |        |       
|                                     | Federal                       |   | $                      |       |      |   | $     |       |   |   | $      | 161    |  
|                                     | State                         |   |                        | 6      |      |   |       | 13     |   |   |        | 30     |  
|                                     | Foreign                       |   |                        | 34     |      |   |       | 32     |   |   |        | 7      |  
|                                     |                               |   |                        |        |      |   |       |        |   |   |        |        |  
|                                     |                               |   | 40                     |        |      |   | 45    |        |   |   | 198    |       
|Deferred:                            |                               |   |                        |        |      |   |       |        |   |   |        |       
|                                     | Federal & state               |   |                        | (5,568 | )    |   |       | (4,622 | ) |   |        | 1,371  |  
|                                     | Foreign                       |   |                        |       |      |   |       |       |   |   |        |       |  
|                                     | Change in valuation allowance |   |                        | 5,528  |      |   |       | 7,249  |   |   |        | (3,798 | )
|                                     |                               |   |                        |        |      |   |       |        |   |   |        |        |  
|                                     |                               |   |                       |        |      |   | 2,627 |        |   |   | (2,427 | )     
|                                     |                               |   |                        |        |      |   |       |        |   |   |        |        |  
|Provision (benefit) for income taxes |                               | $ |                       |        |      | $ | 2,672 |        |   | $ | (2,229 | )     
|                                     |                               |   |                        |        |      |   |       |        |   |   |        |        |  

For the years ended January 31, 2003, 2002 and 2001, the reconciliation between
the amounts computed by applying the United States federal statutory tax rate
of 34% to (loss) income before income taxes and the actual tax expense follows:

|                                                                      |  |                        |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                      |  | Year Ended January 31,
|                                                                      |  |                       
|                                                                      |  | 2003                   |        | 2002 |  | 2001
|                                                                      |  |                        |        |      |  |     
|                                                                      |  | (In thousands)        
|Income tax (benefit) expense at statutory rate                        |  | $                      | (5,025 | )    |  | $    | (4,316 | ) |  | $ | 1,396  |  
|State income tax (benefit) expense, net of
federal income tax benefit |  |                        | (692   | )    |  |      | (376   | ) |  |   | 123    |  
|Change in valuation allowance                                         |  |                        | 5,528  |      |  |      | 7,249  |   |  |   | (3,798 | )
|Other                                                                 |  |                        | 189    |      |  |      | 115    |   |  |   | 50     |  
|                                                                      |  |                        |        |      |  |      |        |   |  |   |        |  
|Provision (benefit) for income taxes                                  |  | $                      |       |      |  | $    | 2,672  |   |  | $ | (2,229 | )
|                                                                      |  |                        |        |      |  |      |        |   |  |   |        |  

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The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at January 31, 2003 and 2002 are summarized below:

|                               |                                     |   |                |        |      |   |        |       | 
|------------------------------ | ----------------------------------- | - | -------------- | ------ | ---- | - | ------ | ----- | 
|                               |                                     |   | January 31,   
|                               |                                     |   |               
|                               |                                     |   | 2003           |        | 2002
|                               |                                     |   |                |        |     
|                               |                                     |   | (In thousands)
|Current deferred tax assets:   |                                     |   |                |        |      |   |        |      
|                               | Accounts receivable                 |   | $              | 62     |      |   | $      | 144   | 
|                               | Accrued liabilities                 |   |                | 134    |      |   |        | 148   | 
|                               | Deferred revenue                    |   |                | 110    |      |   |        | 166   | 
|                               | Inventory                           |   |                | 129    |      |   |        | 356   | 
|                               |                                     |   |                |        |      |   |        |       | 
|                               | Total current deferred tax assets   |   |                | 435    |      |   |        | 814   | 
|                               |                                     |   |                |        |      |   |        |       | 
|Long term deferred tax assets: |                                     |   |                |        |      |   |        |      
|                               | Net operating loss carryforwards    |   |                | 11,350 |      |   |        | 6,078 | 
|                               | Deferred rent                       |   |                | 49     |      |   |        | 31    | 
|                               | Other assets                        |   |                | 531    |      |   |        | 248   | 
|                               | Property and equipment              |   |                | 412    |      |   |        | 78    | 
|                               |                                     |   |                |        |      |   |        |       | 
|                               | Total long-term deferred tax assets |   |                | 12,342 |      |   |        | 6,435 | 
|                               |                                     |   |                |        |      |   |        |       | 
|Total deferred tax assets      |                                     |   | 12,777         |        |      |   | 7,249  |      
|Valuation allowance            |                                     |   | (12,777        | )      |      |   | (7,249 | )    
|                               |                                     |   |                |        |      |   |        |       | 
|Net deferred tax assets        |                                     | $ |               |        |      | $ |       |      
|                               |                                     |   |                |        |      |   |        |       | 

At January 31, 2003 and 2002, net deferred tax assets were fully offset by
a valuation allowance. In estimating the realization of our deferred tax
assets, we consider both positive and negative evidence and give greater weight
to evidence that is objectively verifiable. Due to our cumulative losses, we
believe that the future realization of our deferred tax assets is uncertain.
The valuation allowance increased by $5.5 million in fiscal 2003, increased by
$7.2 million in fiscal 2002 and decreased by $3.8 million in fiscal 2001.

At January 31, 2003, we had approximately $29.8 million in federal income
tax net operating loss carryforwards available to offset future income taxes
payable which, if not utilized, expire beginning in 2016 through 2023. The
utilization of these net operating loss carryforwards depends primarily on the
recognition of taxable income in future years. Our net operating loss
carryforwards and related expiration dates are summarized below:

|                        |  |                |        | 
|----------------------- |  | -------------- | ------ | 
|Year of Expiration
    |  |                |        | 
|Year Ending January 31, |  | Amount        
|                        |  |               
|                        |  | (In thousands)
|2016                    |  | $              | 1,578  | 
|2017                    |  |                | 674    | 
|2018                    |  |                | 1,075  | 
|2019                    |  |                | 64     | 
|2022                    |  |                | 12,760 | 
|2023                    |  |                | 13,692 | 

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7. Special Charges

During the last half of fiscal 2003, we implemented a restructuring plan
designed to reduce operating costs and preserve cash. The restructuring plan
resulted in our recording certain charges totaling $4.9 million during fiscal
2003. The following table summarizes restructuring charges through January 31,
2003 and activities related to accrued restructuring charges (in thousands):

|                                |  |                 |   |          |  |               |       |       |  |                  |      |   |  |   |        |   |  |   |       | 
|------------------------------- |  | --------------- | - | -------- |  | ------------- | ----- | ----- |  | ---------------- | ---- | - |  | - | ------ | - |  | - | ----- | 
|                                |  |                 |   |          |  | Additions     |       |       |  |                  |      |   |  |  
|                                |  |                 |   |          |  | to Reserve;   |       |       |  |                  |      |   |  |  
|                                |  |                 |   |          |  | Charged to    |       |       |  |                  |      |   |  |  
|                                |  | Balance 1/31/02 |   | Expenses |  | Cash Payments |       | Other |  | Balance 01/31/03
|                                |  |                 |   |          |  |               |       |       |  |                 
|Property and equipment disposal |  | $               |  |          |  | $             | 1,821 |       |  | $                |     |   |  | $ | (1,729 | ) |  | $ | 92    | 
|Facility consolidation          |  |                 |  |          |  |               | 1,410 |       |  |                  | (176 | ) |  |   |       |   |  |   | 1,234 | 
|Inventory reserve adjustment    |  |                 |  |          |  |               | 648   |       |  |                  |     |   |  |   | (252   | ) |  |   | 396   | 
|Provision for doubtful accounts |  |                 |  |          |  |               | 350   |       |  |                  |     |   |  |   | (341   | ) |  |   | 9     | 
|Severance and related charges   |  |                 |  |          |  |               | 372   |       |  |                  | (153 | ) |  |   |       |   |  |   | 219   | 
|Other                           |  |                 |  |          |  |               | 308   |       |  |                  | (1   | ) |  |   | (244   | ) |  |   | 63    | 
|                                |  |                 |   |          |  |               |       |       |  |                  |      |   |  |   |        |   |  |   |       | 
|Total                           |  | $               |  |          |  | $             | 4,909 |       |  | $                | (330 | ) |  | $ | (2,566 | ) |  | $ | 2,013 | 
|                                |  |                 |   |          |  |               |       |       |  |                  |      |   |  |   |        |   |  |   |       | 

Of the special charges of $4.9 million, $800,000 was charged to cost of imaging
systems, $1.2 million was charged to sales and marketing, $900,000 was charged
to research and development and $2.0 million was charged to general and
administration. The column labeled Other on the above table refers to
disposals of property and equipment, adjustment to reserves and write-offs
recorded in fiscal year 2003.

8. Credit Facility

We have a $2.0 million secured revolving line of credit from a bank, which
expires on December 31, 2003. Under the terms of the line of credit, we are
allowed to borrow against portions of our accounts receivable. There were
borrowings of $220,000 against this line of credit at January 31, 2003. We
repaid the $220,000 in February 2003. There were no borrowings against this
line of credit at January 31, 2002 or 2001. All borrowings under the line of
credit bear interest at prime plus 0.50% and are secured by our assets. The
line of credit requires that we comply with various covenants, including a
restriction on paying dividends, and financial ratio tests. As of January 31,
2003, we were not in compliance with the quick ratio covenant associated with
the line of credit. However, we subsequently received a waiver from the bank
of the non-compliance. The agreement also provides for up to $500,000 in
letters of credit. Any letters of credit issued reduce the amount available
for borrowing under the line. In April 1998, we issued a $250,000 letter of
credit under this facility in connection with an operating lease obligation.
This letter of credit has been reduced annually by $50,000, and as of January
31, 2003 only $50,000 remained under this obligation.

9. Shareholders Equity

Preferred Stock We are authorized to issue up to 12,000,000 shares of
$0.01 par value preferred stock. As of November 2000, we had designated 880,000
shares as Series A Junior Participating Preferred Stock. No shares of this
junior participating preferred stock were issued or outstanding at January 31,
2003.

Common Stock We are authorized to issue up to 88,000,000 shares of $0.01
par value common stock.

During the fourth quarter of fiscal 2001, we adopted a shareholder rights
plan. Under the plan, our board of directors authorized and declared a
dividend distribution of one right for each share of our common stock
outstanding. Under the plan, the rights initially trade with the common stock
and are not exercisable. In the absence of further action by our board of
directors, the rights generally will become exercisable and allow the holder to
acquire shares of our common stock at a discounted price if a person or group
acquires beneficial ownership of 15% or more of the outstanding shares of our
common stock. Rights held by persons or groups that exceed the applicable
threshold will be void. In certain circumstances, the rights entitle the
holder to buy shares in an acquiring entity at a discounted price. Our board
of directors may, at its option, redeem all rights for $0.01 per right
generally at any time prior to the rights becoming exercisable. In certain
circumstances, our board of directors may, at its option, exchange all or part
of the exercisable rights for shares of our common

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stock at an exchange ratio of one share of common stock per right. The
rights will expire on November 27, 2010 unless earlier redeemed, exchanged or
amended by our board of directors. The issuance of the rights was not a
taxable event, does not affect our reported financial results, including
earnings per share, and did not change the way our common stock is traded.

Stock Option Plans At January 31, 2003, we had stock option plans that
provide for the granting of stock options to officers, employees, and key
persons to purchase up to 5,827,273 shares of our common stock, of which
options to purchase up to 726,686 shares were available for future grants. The
plans allow for the grant of both incentive and nonqualified stock options. The
exercise price of the incentive stock options may not be less than fair market
value of the stock on the date of grant. Generally, these options are
exercisable ratably over three or four years and expire at the earlier of three
months after the optionees employment terminates or after ten years from the
date of grant.

Under our 1994 associates stock option plan, as amended, we may issue, to
nonemployees who act as directors, consultants or advisors, nonqualified stock
options to purchase up to 80,303 shares of our common stock, of which options
to purchase up to 42,142 shares were available for future grants at January 31,
2003. Generally, these options are exercisable as early as six months from the
date of the grant and expire at the earlier of three months after the
nonemployee ceases to be associated with T/R Systems or ten years from the date
of grant.

The following table presents the activity in the above plans:

|                                                               |  |                        |       |       |      |           |      |       |  |        |       |           |      |   |      |  |  |           |       |   |      |   |       | 
|-------------------------------------------------------------- |  | ---------------------- | ----- | ----- | ---- | --------- | ---- | ----- |  | ------ | ----- | --------- | ---- | - | ---- |  |  | --------- | ----- | - | ---- | - | ----- | 
|                                                               |  | Year Ended January 31,
|                                                               |  |                       
|                                                               |  | 2003                   |       | 2002  |      | 2001     
|                                                               |  |                        |       |       |      |          
|                                                               |  |                        |       |       |      | Weighted- |      |       |  |        |       | Weighted- |      |   |      |  |  | Weighted-
|                                                               |  |                        |       |       |      | Average   |      |       |  |        |       | Average   |      |   |      |  |  | Average  
|                                                               |  |                        |       |       |      | Exercise  |      |       |  |        |       | Exercise  |      |   |      |  |  | Exercise 
|                                                               |  | Shares                 |       | Price |      | Shares    |      | Price |  | Shares |       | Price    
|                                                               |  |                        |       |       |      |           |      |       |  |        |       |          
|                                                               |  | (Shares in thousands)  |       |       |      |           |      |       |  |       
|Options outstanding as of
the beginning of the period          |  |                        | 2,356 |       |      | $         | 5.17 |       |  |        | 1,734 |           |      | $ | 6.88 |  |  |           | 1,484 |   |      | $ | 2.83  | 
|Granted                                                        |  |                        | 1,143 |       |      |           | 2.95 |       |  |        | 1,168 |           |      |   | 2.95 |  |  |           | 835   |   |      |   | 10.75 | 
|Exercised                                                      |  |                        | (159  | )     |      |           | 0.99 |       |  |        | (57   | )         |      |   | 0.99 |  |  |           | (470  | ) |      |   | 0.92  | 
|Forfeited                                                      |  |                        | (534  | )     |      |           | 6.43 |       |  |        | (489  | )         |      |   | 6.43 |  |  |           | (115  | ) |      |   | 7.04  | 
|                                                               |  |                        |       |       |      |           |      |       |  |        |       |           |      |   |      |  |  |           |       |   |      |   |       | 
|Options outstanding as of
the end of the period                |  |                        | 2,806 |       |      |           | 3.78 |       |  |        | 2,356 |           |      |   | 5.17 |  |  |           | 1,734 |   |      |   | 6.88  | 
|                                                               |  |                        |       |       |      |           |      |       |  |        |       |           |      |   |      |  |  |           |       |   |      |   |       | 
|Options exercisable as of
the end of the period                |  |                        | 1,029 |       |      |           | 5.19 |       |  |        | 885   |           |      |   | 4.36 |  |  |           | 591   |   |      |   | 2.02  | 
|                                                               |  |                        |       |       |      |           |      |       |  |        |       |           |      |   |      |  |  |           |       |   |      |   |       | 
|Weighted-average fair value of
options granted during the
year |  |                        |       | $     | 0.94 |           |      |       |  |        |       | $         | 2.26 |   |      |  |  |           |       | $ | 9.26 |   |       | 
|                                                               |  |                        |       |       |      |           |      |       |  |        |       |           |      |   |      |  |  |           |       |   |     

The following table summarizes information about stock options outstanding at
January 31, 2003:

|                      |  |                |       |              |  |           |     |                |  |           |       |  |  |  |       |  |  |   |       | 
|--------------------- |  | -------------- | ----- | ------------ |  | --------- | --- | -------------- |  | --------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                      |  | Number         |       | Average      |  | Weighted- |     | Number         |  | Weighted-
|                      |  | Outstanding at |       | Remaining    |  | Average   |     | Exercisable at |  | Average  
|Range of              |  | January 31,    |       | Contractual  |  | Exercise  |     | January 31,    |  | Exercise 
|Exercise Prices       |  | 2003           |       | Life (Years) |  | Price     |     | 2003           |  | Price    
|                      |  |                |       |              |  |           |     |                |  |          
|(Shares in thousands)
|$0.17 to $1.01        |  |                | 1,080 |              |  |           | 7.7 |                |  | $         | 0.65  |  |  |  | 353   |  |  | $ | 0.82  | 
|1.80 to 3.30          |  |                | 735   |              |  |           | 8.7 |                |  |           | 2.35  |  |  |  | 187   |  |  |   | 2.44  | 
|3.87 to 4.95          |  |                | 442   |              |  |           | 7.6 |                |  |           | 3.95  |  |  |  | 143   |  |  |   | 4.10  | 
|5.78 to 6.60          |  |                | 104   |              |  |           | 6.5 |                |  |           | 6.44  |  |  |  | 67    |  |  |   | 6.46  | 
|8.25 to 10.00         |  |                | 91    |              |  |           | 6.7 |                |  |           | 9.52  |  |  |  | 74    |  |  |   | 9.69  | 
|11.00 to 13.55        |  |                | 268   |              |  |           | 5.7 |                |  |           | 12.89 |  |  |  | 156   |  |  |   | 12.91 | 
|17.00                 |  |                | 86    |              |  |           | 6.0 |                |  |           | 17.00 |  |  |  | 49    |  |  |   | 17.00 | 
|                      |  |                |       |              |  |           |     |                |  |           |       |  |  |  |       |  |  |   |       | 
|$0.17 to $17.00       |  |                | 2,806 |              |  |           | 7.6 |                |  |           | 3.79  |  |  |  | 1,029 |  |  |   | 5.19  | 
|                      |  |                |       |              |  |           |     |                |  |           |       |  |  |  |       |  |  |   |       | 

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During the year ended January 31, 1998, we recorded $130,000 in deferred
compensation, which represented the excess of the estimated market value of our
common stock over the exercise price of stock options granted at date of grant.
Deferred compensation is amortized over the vesting period of the stock
options, which is four years. Compensation expense related to stock options
was $28,000 in fiscal 2002 and $32,000 in fiscal 2001. There was no
compensation expense related to stock options in fiscal 2003.

Employee Stock Purchase Plan During fiscal 2001, our shareholders
approved our 2000 employee stock purchase plan with an initial reserve of
200,000 shares of our common stock. The plan allows eligible employees to
purchase shares of our common stock at 85% of the lower of the fair market
value of our common stock on the first or last day of an offering period
through payroll deductions of up to 10% of each employees compensation.
Offering periods typically last six months. The plan is intended to qualify as
an employee stock purchase plan within the meaning of Section 423 of the
Internal Revenue Code. We sold 19,299 shares of our common stock under this
plan in fiscal 2003, 24,918 in fiscal 2002 and 10,858 shares in fiscal 2001.

10. Commitments

We lease existing office facilities and equipment under operating lease
agreements, which have terms expiring through 2010. We have the option to
renew two of our facility leases for one five-year term at the expiration of
the original term. The future noncancelable minimum rent schedule for these
leases is as follows:

|                        |       |        |                |       | 
|----------------------- | ----- | ------ | -------------- | ----- | 
|Year Ending January 31, |       | Amount
|                        |       |       
|                        |       |        | (In thousands)
|2004                    |       | $      | 890            |      
|2005                    |       |        | 864            |      
|2006                    |       |        | 779            |      
|2007                    |       |        | 669            |      
|2008                    |       |        | 702            |      
|Thereafter              |       |        | 189            |      
|                        |       |        |                |      
|                        | Total |        | $              | 4,093 | 
|                        |       |        |                |      

Rent expense was $2.3 million for fiscal 2003, $753,000 for fiscal 2002
and $556,000 for fiscal 2001. Excluding special charges of $1.4 million
recorded in fiscal 2003, rent expense was $900,000 in fiscal 2003.

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11. Segment Information

We operate in one reportable segment, the output management market, and
assess performance based on operating income. Revenue by geographic area is
summarized below:

|                        |  |                        |        |      |  |      |        |  |  |   |        | 
|----------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                        |  | Year Ended January 31,
|                        |  |                       
|                        |  | 2003                   |        | 2002 |  | 2001
|                        |  |                        |        |      |  |     
|                        |  | (In thousands)        
|United States           |  | $                      | 12,397 |      |  | $    | 12,331 |  |  | $ | 26,091 | 
|Asia                    |  |                        | 394    |      |  |      | 3,432  |  |  |   | 2,155  | 
|Europe                  |  |                        | 871    |      |  |      | 1,364  |  |  |   | 2,494  | 
|Canada                  |  |                        | 1,063  |      |  |      | 479    |  |  |   | 1,505  | 
|Other foreign countries |  |                        | 14     |      |  |      | 12     |  |  |   | 1      | 
|                        |  |                        |        |      |  |      |        |  |  |   |        | 
|Total                   |  | $                      | 14,739 |      |  | $    | 17,618 |  |  | $ | 32,246 | 
|                        |  |                        |        |      |  |      |        |  |  |   |        | 

Revenue by geographic area is based on where we ship our products.
Substantially all of our long-lived assets are located in the United States.

For the year ended January 31, 2003, our three largest customers
represented 25.1%, 19.8% and 13.4% of our total revenue. For the year ended
January 31, 2002, our largest customer represented 22.4% of our total revenue.
For the year ended January 31, 2001, our three largest customers represented
20.8%, 18.7% and 12.7% of our total revenue. At January 31, 2003, four
customers represented 21.8%, 15.2%, 12.7% and 11.8% of our total receivables.
At January 31, 2002, two customers represented 26.2% and 19.6% of our total
receivables. At January 31, 2001, two customers represented 20.3% and 11.5% of
our total receivables.

12. Employee Retirement Saving Plan

We have a pretax saving plan under Section 401(k) of the Internal Revenue
Code for all eligible U.S. employees. Under the plan, eligible employees are
able to contribute up to 15% of their compensation, not to exceed the maximum
IRS deferral amount. Our discretionary contribution is determined by our board
of directors. Historically, we have matched 50% of each participants
contribution, up to 6% of the participants compensation. Our contributions
vest for each employee ratably over four years beginning on the employees date
of hire. We suspended matching employee contributions in July 2002 in an
effort to preserve cash. We contributed $160,000 to the plan during fiscal
2003, $216,000 during fiscal 2002 and $181,000 during fiscal 2001.

13. Net Income (Loss) Per Common Share

The following table summarizes the computation of basic and diluted net
income (loss) per common share:

|                                                                    |                                                                       |   |                                       |         |      |   |       |         |   |   |      |        | 
|------------------------------------------------------------------- | --------------------------------------------------------------------- | - | ------------------------------------- | ------- | ---- | - | ----- | ------- | - | - | ---- | ------ | 
|                                                                    |                                                                       |   | Year Ended January 31,               
|                                                                    |                                                                       |   |                                      
|                                                                    |                                                                       |   | 2003                                  |         | 2002 |   | 2001 
|                                                                    |                                                                       |   |                                       |         |      |   |      
|                                                                    |                                                                       |   | (In thousands, except per share data)
|Numerator:                                                          |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       
|                                                                    | Net income (loss)                                                     |   | $                                     | (14,779 | )    |   | $     | (15,367 | ) |   | $    | 6,634  | 
|                                                                    |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       
|                                                                    | Net income (loss) applicable to common
shareholders  Basic & Diluted |   |                                       | (14,779 | )    |   |       | (15,367 | ) |   |      | 6,634  | 
|                                                                    |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       
|Denominator:                                                        |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       
|                                                                    | Weighted average shares
outstanding  Basic                           |   |                                       | 12,406  |      |   |       | 12,257  |   |   |      | 12,008 | 
|                                                                    | Effect of outstanding stock options                                   |   |                                       |        |      |   |       |        |   |   |      | 878    | 
|                                                                    |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       
|                                                                    | Total  Diluted                                                       |   |                                       | 12,406  |      |   |       | 12,257  |   |   |      | 12,886 | 
|                                                                    |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       
|Net income (loss) per common
shares  Basic                         |                                                                       | $ | (1.19                                 | )       |      | $ | (1.25 | )       |   | $ | 0.53 |       
|                                                                    |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       
|Net income (loss) per common and
common equivalent shares  Diluted |                                                                       | $ | (1.19                                 | )       |      | $ | (1.25 | )       |   | $ | 0.49 |       
|                                                                    |                                                                       |   |                                       |         |      |   |       |         |   |   |      |       

For the years ended January 31, 2003, 2002 and 2001, the historical
diluted computations exclude the effects of all stock options which were
antidilutive. At each corresponding period ended January 31, 2003, 2002 and
2001, common shares issuable under these arrangements which were antidilutive
were 1,348,370, 2,356,000 and 706,000.

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14. Unaudited Quarterly Consolidated Financial Data

The following tables summarize our supplemental unaudited quarterly
consolidated financial data for fiscal 2003 and fiscal 2002:

|                                            |  |                                          |        |               |  |                  |        |                  |  |   |        |   |  |   |        |  
|------------------------------------------- |  | ---------------------------------------- | ------ | ------------- |  | ---------------- | ------ | ---------------- |  | - | ------ | - |  | - | ------ | -
|                                            |  | Quarter Ended                           
|                                            |  |                                         
|                                            |  | April 30, 2002                           |        | July 31, 2002 |  | October 31, 2002 |        | January 31, 2003
|                                            |  |                                          |        |               |  |                  |        |                 
|                                            |  | (In thousands, except per share amounts)
|Total revenue                               |  | $                                        | 3,262  |               |  | $                | 3,921  |                  |  | $ | 4,022  |   |  | $ | 3,534  |  
|Operating loss                              |  |                                          | (3,309 | )             |  |                  | (6,914 | )                |  |   | (1,718 | ) |  |   | (2,973 | )
|Net loss                                    |  |                                          | (3,263 | )             |  |                  | (6,872 | )                |  |   | (1,689 | ) |  |   | (2,955 | )
|Net loss per common share  Basic & Diluted |  | $                                        | (0.27  | )             |  | $                | (0.55  | )                |  | $ | (0.14  | ) |  | $ | (0.24  | )

|                                            |  |                                          |        |               |  |                  |        |                  |  |   |        |   |  |   |        |  
|------------------------------------------- |  | ---------------------------------------- | ------ | ------------- |  | ---------------- | ------ | ---------------- |  | - | ------ | - |  | - | ------ | -
|                                            |  | Quarter Ended                           
|                                            |  |                                         
|                                            |  | April 30, 2001                           |        | July 31, 2001 |  | October 31, 2001 |        | January 31, 2002
|                                            |  |                                          |        |               |  |                  |        |                 
|                                            |  | (In thousands, except per share amounts)
|Total revenue                               |  | $                                        | 5,894  |               |  | $                | 5,565  |                  |  | $ | 3,064  |   |  | $ | 3,095  |  
|Operating loss                              |  |                                          | (2,656 | )             |  |                  | (1,963 | )                |  |   | (5,568 | ) |  |   | (3,181 | )
|Net loss                                    |  |                                          | (1,522 | )             |  |                  | (1,147 | )                |  |   | (3,478 | ) |  |   | (9,220 | )
|Net loss per common share  Basic & Diluted |  | $                                        | (0.12  | )             |  | $                | (0.09  | )                |  | $ | (0.28  | ) |  | $ | (0.75  | )

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SCHEDULE II

T/R SYSTEMS, INC.

Valuation and Qualifying Accounts
(In thousands)

|            |                                                                  |           |            |          |            |                |            |               |  |        |   |    |        |  |            |        |   |  |   |     | 
|----------- | ---------------------------------------------------------------- | --------- | ---------- | -------- | ---------- | -------------- | ---------- | ------------- |  | ------ | - | -- | ------ |  | ---------- | ------ | - |  | - | --- | 
|            |                                                                  |           | Balance at |          | Charged to |                |            |               |  |        |   |    |        |  | Balance at
|            |                                                                  |           | Beginning  |          | Costs and  |                | Charged to |               |  |        |   |    | End of
|Description |                                                                  | of Period |            | Expenses |            | Other Accounts |            | Deductions(1) |  | Period
|            |                                                                  |           |            |          |            |                |            |               |  |       
|            | Year ended January 31, 2003 allowance for doubtful accounts      |           | $          | 389      |            |                | $          | 365           |  |        | $ |   |        |  | $          | (586   | ) |  | $ | 168 | 
|            | Year ended January 31, 2002 allowance for doubtful accounts      |           |            | 300      |            |                |            | 893           |  |        |   |   |        |  |            | (804   | ) |  |   | 389 | 
|            | Year ended January 31, 2001 allowance for doubtful accounts      |           |            | 150      |            |                |            | 140           |  |        |   | 12 |        |  |            | (2     | ) |  |   | 300 | 
|            | Year ended January 31, 2003 allowance for inventory obsolescence |           | $          | 962      |            |                | $          | 590           |  |        | $ |   |        |  | $          | (1,224 | ) |  | $ | 328 | 
|            | Year ended January 31, 2002 allowance for inventory obsolescence |           |            | 499      |            |                |            | 1,309         |  |        |   |   |        |  |            | (846   | ) |  |   | 962 | 
|            | Year ended January 31, 2001 allowance for inventory obsolescence |           |            | 421      |            |                |            | 182           |  |        |   |   |        |  |            | (104   | ) |  |   | 499 | 



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|(1) |  | Deductions represent write-offs to the respective reserve accounts.
|--- |  | -------------------------------------------------------------------

S-1