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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 10-Q

(Mark One)

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

For the quarterly period ended May 31, 2001.

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

For the transition period from  to

Commission File Number: 000-24413

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TROY GROUP, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

33-0807798(IRS Employer Identification No.)2331 South Pullman Street
Santa Ana, California(Address of principal executive offices)

92705(Zip code)


(949) 250-3280(Registrant's telephone number, including area code)

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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 / /

As
of July 13, 2001, there were 10,921,032 shares of our common stock outstanding.

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TROY GROUP, INC.    Quarterly Report on Form 10-Q for the    Quarterly Period Ended May 31, 2001

INDEX

|                               |  |                                                                                                               |  | Page No.
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | --------
|PART I:  FINANCIAL INFORMATION |  |                                                                                                              
|Item 1.                        |  | Financial Statements                                                                                          |  |         
|                               |  | Consolidated Balance Sheets
May 31, 2001 and November 30, 2000                                                |  | 3       
|                               |  | Consolidated Statements of Operations
for the Three Months and Six Months
ended May 31, 2001 and May 31, 2000 |  | 4       
|                               |  | Consolidated Statements of Cash Flows
for the Three Months and Six Months
ended May 31, 2001 and May 31, 2000 |  | 5       
|                               |  | Notes to Consolidated Financial Statements                                                                    |  | 6-10    
|Item 2.                        |  | Management's Discussion and Analysis of
Financial Condition and Results of Operations                         |  | 11      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 16      
|PART II:  OTHER INFORMATION    |  |                                                                                                              
|Item 1.                        |  | Legal Proceedings                                                                                             |  | 17      
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                                                     |  | 17      
|Item 3.                        |  | Defaults Upon Senior Securities                                                                               |  | 17      
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                           |  | 17      
|Item 5.                        |  | Other Information                                                                                             |  | 17      
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                              |  | 17      

2

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PART I: FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

TROY GROUP, INC.    CONSOLIDATED BALANCE SHEETS    (in thousands, except share amounts)

|                                          |                                                                                                                                                 | May 31,
2001                               |        | November 30,
2000
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -----------------
|
|Assets                                    |                                                                                                                                                 |                                            |        |                  
|Current assets:                           |                                                                                                                                                 |                                            |        |                  
|                                          | Cash and cash equivalents                                                                                                                       |                                            | $      | 545              
|                                          | Investment in available-for-sale securities                                                                                                     |                                            |        | 7,733            
|                                          | Accounts receivable, less allowance for doubtful accounts of $627 and $684, respectively                                                        |                                            |        | 7,949            
|                                          | Income tax refund receivable                                                                                                                    |                                            |        | 299              
|                                          | Inventories                                                                                                                                     |                                            |        | 9,165            
|                                          | Prepaid expenses and other                                                                                                                      |                                            |        | 463              
|                                          | Deferred tax assets                                                                                                                             |                                            |        | 1,313            
|                                          |                                                                                                                                                 |                                            |        |                  
|                                          |                                                                                                                                                 | Total current assets                       |        |                  
|Equipment and leasehold improvements, net |                                                                                                                                                 |                                            | 2,342  |                  
|Other assets                              |                                                                                                                                                 |                                            | 9,292  |                  
|                                          |                                                                                                                                                 |                                            |        |                  
|                                          |                                                                                                                                                 | Total assets                               |        | $                
|                                          |                                                                                                                                                 |                                            |        |                  
|Liabilities and Stockholders' Equity      |                                                                                                                                                 |                                            |        |                  
|Current liabilities:                      |                                                                                                                                                 |                                            |        |                  
|                                          | Checks issued not yet presented for payment                                                                                                     |                                            | $      | 66               
|                                          | Line of credit                                                                                                                                  |                                            |        | 775              
|                                          | Current portion of long-term debt                                                                                                               |                                            |        | 59               
|                                          | Accounts payable                                                                                                                                |                                            |        | 1,907            
|                                          | Accrued expenses                                                                                                                                |                                            |        | 2,618            
|                                          | Deferred service revenue                                                                                                                        |                                            |        | 338              
|                                          |                                                                                                                                                 |                                            |        |                  
|                                          |                                                                                                                                                 | Total current liabilities                  |        |                  
|                                          |                                                                                                                                                 |                                            |        |                  
|Long-term debt, net of current portion    |                                                                                                                                                 |                                            | 238    |                  
|                                          |                                                                                                                                                 |                                            |        |                  
|Deferred tax liabilities                  |                                                                                                                                                 |                                            | 413    |                  
|                                          |                                                                                                                                                 |                                            |        |                  
|Stockholders' equity:                     |                                                                                                                                                 |                                            |        |                  
|                                          | Common stock, par value $.01 per share; authorized 50,000,000 shares, issued and outstanding 2001 10,921,032 shares; and 2000 10,880,764 shares |                                            |        | 109              
|                                          | Preferred stock, no par value, authorized 5,000,000 shares, issued none                                                                         |                                            |        |                 
|                                          | Additional paid-in capital                                                                                                                      |                                            |        | 20,964           
|                                          | Retained earnings                                                                                                                               |                                            |        | 12,532           
|                                          |                                                                                                                                                 |                                            |        |                  
|                                          |                                                                                                                                                 |                                            | 33,605 |                  
|                                          | Less cost of treasury stock254,120 common shares in 2001 and none in 2000                                                                      |                                            |        | 918              
|                                          |                                                                                                                                                 |                                            |        |                  
|                                          |                                                                                                                                                 | Total stockholders' equity                 |        |                  
|                                          |                                                                                                                                                 |                                            |        |                  
|                                          |                                                                                                                                                 | Total liabilities and stockholders' equity |        | $                
|                                          |                                                                                                                                                 |                                            |        |                  

See
Notes to Consolidated Financial Statements.

3

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TROY GROUP, INC.    CONSOLIDATED STATEMENTS    OF OPERATIONS    (Unaudited)    (in thousands, except per share amounts)

|                                     |                                             | Three Months Ended      |       | Six Months Ended |       
|------------------------------------ | ------------------------------------------- | ----------------------- | ----- | ---------------- | ------
|
|Net sales                            |                                             | $                       | 9,800 |                  | $     
|Cost of goods sold                   |                                             |                         | 6,226 |                  |       
|                                     |                                             |                         |       |                  |       
|                                     | Gross profit                                |                         |       | 3,574            |       
|                                     |                                             |                         |       |                  |       
|Operating expenses:                  |                                             |                         |       |                  |       
|                                     | Selling, general and administrative         |                         |       | 3,933            |       
|                                     | Research and development                    |                         |       | 1,723            |       
|                                     | Amortization of intangible assets           |                         |       | 320              |       
|                                     |                                             |                         |       |                  |       
|                                     |                                             | Operating income (loss) |       |                  | (2,402
|Interest income                      |                                             |                         | 156   |                  |       
|Interest expense                     |                                             |                         | (45   | )                |       
|                                     |                                             |                         |       |                  |       
|                                     | Income (loss) before income taxes (credits) |                         |       | (2,291           | )     
|Provision for income taxes (credits) |                                             |                         | (710  | )                |       
|                                     |                                             |                         |       |                  |       
|                                     |                                             | Net income (loss)       |       | $                | (1,581
|                                     |                                             |                         |       |                  |       
|Net income (loss) per share:         |                                             |                         |       |                  |       
|                                     | Basic                                       |                         | $     | (.15             | )     
|                                     |                                             |                         |       |                  |       
|                                     | Diluted                                     |                         | $     | (.15             | )     
|                                     |                                             |                         |       |                  |       
|Weighted-average shares outstanding: |                                             |                         |       |                  |       
|                                     | Basic                                       |                         |       | 10,860           |       
|                                     |                                             |                         |       |                  |       
|                                     | Diluted                                     |                         |       | 10,860           |       
|                                     |                                             |                         |       |                  |       

See
Notes to Consolidated Financial Statements.

4

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TROY GROUP, INC.    CONSOLIDATED STATEMENTS    OF CASH FLOWS    (Unaudited)    (in thousands)

|                                               |                                                                                                    | Six Months Ended                                                                                            |                             
|---------------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ----------------------------
|
|Cash flows from operating activities:          |                                                                                                    |                                                                                                             |                             
|                                               | Net income (loss)                                                                                  |                                                                                                             | $                           
|                                               | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                                                             |                             
|                                               |                                                                                                    | Depreciation and amortization                                                                               |                             
|                                               |                                                                                                    | Provision (recovery) for doubtful accounts                                                                  |                             
|                                               |                                                                                                    | Deferred taxes                                                                                              |                             
|                                               |                                                                                                    | Accretion of investment discounts                                                                           |                             
|                                               |                                                                                                    | Changes in working capital components, net of effects from acquisition of companies (Increase) decrease in: |                             
|                                               |                                                                                                    |                                                                                                             | Accounts receivable         
|                                               |                                                                                                    |                                                                                                             | Income tax refund receivable
|                                               |                                                                                                    |                                                                                                             | Inventories                 
|                                               |                                                                                                    |                                                                                                             | Prepaid expenses and other  
|                                               |                                                                                                    | Increase (decrease) in:                                                                                     |                             
|                                               |                                                                                                    |                                                                                                             | Accounts payable            
|                                               |                                                                                                    |                                                                                                             | Accrued expenses            
|                                               |                                                                                                    |                                                                                                             | Income taxes payable        
|                                               |                                                                                                    |                                                                                                             | Deferred service revenue    
|                                               |                                                                                                    |                                                                                                             |                             
|                                               |                                                                                                    | Net cash provided by (used in) operating activities                                                         |                             
|                                               |                                                                                                    |                                                                                                             |                             
|Cash flows from investing activities:          |                                                                                                    |                                                                                                             |                             
|                                               | Acquisition of businesses                                                                          |                                                                                                             |                             
|                                               | Purchase of equipment and leasehold improvements                                                   |                                                                                                             |                             
|                                               | Purchase of available-for-sale securities                                                          |                                                                                                             |                             
|                                               | Maturities of available-for-sale securities                                                        |                                                                                                             |                             
|                                               | Increase in other assets, net                                                                      |                                                                                                             |                             
|                                               |                                                                                                    |                                                                                                             |                             
|                                               |                                                                                                    | Net cash provided by (used in) investing activities                                                         |                             
|                                               |                                                                                                    |                                                                                                             |                             
|Cash flows from financing activities:          |                                                                                                    |                                                                                                             |                             
|                                               | Net borrowings on revolving line of credit                                                         |                                                                                                             |                             
|                                               | Payments on notes payable                                                                          |                                                                                                             |                             
|                                               | Decrease in checks issued not presented for payment                                                |                                                                                                             |                             
|                                               | Proceeds from issuance of common stock                                                             |                                                                                                             |                             
|                                               | Purchase of treasury stock                                                                         |                                                                                                             |                             
|                                               |                                                                                                    |                                                                                                             |                             
|                                               |                                                                                                    | Net cash provided by (used in) financing activities                                                         |                             
|                                               |                                                                                                    |                                                                                                             |                             
|                                               |                                                                                                    | Net increase (decrease) in cash and cash equivalents                                                        |                             
|Cash and cash equivalents, beginning of period |                                                                                                    |                                                                                                             | 2,090                       
|                                               |                                                                                                    |                                                                                                             |                             
|Cash and cash equivalents, end of period       |                                                                                                    | $                                                                                                           | 545                         
|                                               |                                                                                                    |                                                                                                             |                             

See
Notes to Consolidated Financial Statements.

5

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TROY GROUP, INC.    NOTES TO CONSOLIDATED    FINANCIAL STATEMENTS    (unaudited)

Note 1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments)
considered necessary for a fair presentation have been included. Operating results for the three and six months ended May 31, 2001 are not necessarily indicative of the results that may be
expected for the year ended November 30, 2001. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for its fiscal year ended November 30, 2000 (File No. 000-24413).

Certain
reclassifications have been made to the May 31, 2000 consolidated income statement and segment information to conform to the May 31, 2001 presentation with no
effect on net income or stockholders' equity.

Note 2. Inventories

Inventories consisted of the following as of May 31, 2001 and November 30, 2000 (amounts in thousands):

May 31, 2001

November 30, 2000Raw materials

$
6,173

$
4,016Work-in-process


306


150Finished goods


2,686


2,076Total

$
9,165

$
6,242


Note 3. Investment in Available-for-sale Securities

As of May 31, 2001, the Company had approximately $7.7 million in corporate debt securities with contractual maturity dates of up to one year,
which management has determined should be classified as available-for-sale. Market values approximated carrying values. Accordingly, no unrealized gains or losses were recorded
at May 31, 2001. There were no gains or loss recognized for the six months ended May 31, 2001 or May 31, 2000.

Note 4. Stock Option and Stock Warrant Plans

During the six months ended May 31, 2001, the Company granted options to acquire 312,500 shares of common stock at a weighted-average exercise price of
$3.79 per share and 259,000 options

6

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were forfeited at a weighted-average exercise price of $7.00 per share. The following is a summary of total outstanding options and stock warrants at May 31, 2001:

|  |               | Options and Warrants Outstanding |           | Options and Warrants Exercisable
|- | ------------- | -------------------------------- | --------- | --------------------------------
|
|$ | 2.94 - 4.13   |                                  | 419,166   |                                 
|$ | 6.31 - 8.75   |                                  | 1,288,000 |                                 
|$ | 13.16 - 14.25 |                                  | 25,000    |                                 
|  |               |                                  |           |                                 
|  |               |                                  | 1,732,166 |                                 

At
May 31, 2001, there were 1,091,000 shares remaining available for grant under the Company's option plans.

Note 5. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:

|                                                                                      |  | Three months ended |        | Six months ended
|------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------
|
|
|Numerator for basic and diluted net income per share:                                 |  |                    |        |                 
|Net income (loss)                                                                     |  | $                  | (1,581 | )               
|                                                                                      |  |                    |        |                 
|Denominator:                                                                          |  |                    |        |                 
|Denominator for basic net income (loss) per shareweighted-average shares outstanding |  |                    | 10,860 |                 
|Effect of employee stock options and warrants                                         |  |                    |       |                 
|                                                                                      |  |                    |        |                 
|Denominator for diluted net income (loss) per share                                   |  |                    | 10,860 |                 
|                                                                                      |  |                    |        |                 
|Net income (loss) per share:                                                          |  |                    |        |                 
|Basic                                                                                 |  | ($                 | .15    | )               
|                                                                                      |  |                    |        |                 
|Diluted                                                                               |  | ($                 | .15    | )               
|                                                                                      |  |                    |        |                 

If
the Company would have generated net income for the three and six months ended May 31, 2001, then the denominator for diluted net income per share would have been 10,903,000
and 10,938,000, respectively, after adjusting the basic weighted-average shares outstanding by 43,000 and 47,000 shares, respectively, for the effect of stock options and warrants.

Note 6. Business Combinations

American Development, Inc.

On February 18, 2000, the Company acquired certain assets and assumed certain liabilities of American Development, Inc., a software development
company, in exchange for 42,654 shares of $0.01 par value common stock, $1,179,000 in cash and $54,000 in direct expenses. The total acquisition cost

7

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was $2,652,000, including $330,000 recorded in connection with warrants issued to a consultant, and was allocated as follows:

Current assets

$
177,000Equipment and leasehold improvements


61,000Other assets


94,000Intangible assets, including customer list, assembledworkforce, core technology and goodwill


2,703,000Current liabilities assumed


(383,000
)$
2,652,000


The
acquisition has been accounted for as a purchase and results of operations of American Development, Inc. since the date of acquisition are included in the Company's
consolidated financial statements.

CableNet Technologies

On May 9, 2000, the Company acquired North Carolina-based CableNet Technologies, which specializes in printer enhancement and connectivity technology,
in exchange for 54,386 shares of $0.01 par value common stock, $1,945,000 in cash, $62,000 in direct expenses and $306,000 recorded in connection with warrants issued to a consultant. The total
acquisition cost was $3,088,000 and was allocated as follows:

Current assets

$
301,000Equipment and leasehold improvements


17,000Intangible assets, including customer list, assembled workforce, core technology and goodwill


2,817,000Current liabilities assumed


(47,000
)$
3,088,000


The
acquisition has been accounted for as a purchase and results of operations of CableNet Technologies since the date of acquisition are included in the Company's consolidated
financial statements.

Extended Systems Incorporated

On May 31, 2001, the Company acquired certain assets and assumed certain liabilities of Extended Systems Incorporated, a print server manufacturer, in
exchange for $1,133,000 in cash, $70,000 in direct expenses and a $628,000 payable to the Seller. The total acquisition cost was $1,831,000 and was preliminarily allocated as follows:

Inventories

$
1,686,000Equipment


46,000Intangible assets, including manufacturing process, customer list and core technology


224,000Current liabilities assumed


(125,000
)$
1,831,000


8

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The
acquisition has been accounted for as a purchase. Since the acquisition occurred on the last day of the second quarter, no results of operations for Extended Systems Incorporated
are included in the Company's consolidated financial statements.

Pro
Forma consolidated results of operations for the six months ended May 31, 2001 and 2000 as though American Development, Inc., CableNet Technologies and Extended
Systems Incorporated had been acquired as of December 1, 1999 are as follows (amounts in thousands, except per share data):

|                             |         | 6 Months Ended
|---------------------------- | ------- | --------------
|
|Sales                        |         | $             
|                             |         |               
|Net income (loss)            |         | $             
|                             |         |               
|Net income (loss) per share: |         |               
|                             | Basic   |               
|                             |         |               
|                             | Diluted |               
|                             |         |               

The
above amounts reflect pro forma adjustments for amortization of intangibles and number of shares outstanding. This pro forma financial information does not purport to be
indicative of the results of operations had the American Development, Inc., CableNet Technologies and Extended Systems Incorporated acquisition actually taken place at the earlier date.

Note 7. Segment Information

The following tables summarize revenues and net income (loss) by operating segment and unallocated corporate for the three and six months ended May 31,
2001 and May 31, 2000:

|                                         |  | Three months ended |        | Six months ended |  
|---------------------------------------- |  | ------------------ | ------ | ---------------- | -
|
|
|Revenues:                                |  |                    |        |                  |  
|Financial Payments Group                 |  | $                  | 7,684  |                  | $
|Wireless and Internet Connectivity Group |  |                    | 2,179  |                  |  
|Less intersegment revenue                |  |                    | (63    | )                |  
|                                         |  |                    |        |                  |  
|                                         |  | $                  | 9,800  |                  | $
|                                         |  |                    |        |                  |  
|Net income (loss):                       |  |                    |        |                  |  
|Financial Payments Group                 |  | $                  | (203   | )                | $
|Wireless and Internet Connectivity Group |  |                    | (490   | )                |  
|Unallocated Corporate                    |  |                    | (888   | )                |  
|                                         |  |                    |        |                  |  
|                                         |  | $                  | (1,581 | )                | $
|                                         |  |                    |        |                  |  

|                |                                          | May 31, 2001 |        | November 30, 2000
|--------------- | ---------------------------------------- | ------------ | ------ | -----------------
|Segment Assets: |                                          |              |        |                  
|                | Financial Payments Group                 |              | $      | 11,804           
|                | Wireless and Internet Connectivity Group |              |        | 1,827            
|                | Unallocated Corporate                    |              |        | 26,450           
|                |                                          |              |        |                  
|                |                                          | $            | 40,081 |                  
|                |                                          |              |        |                  

9

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The
following schedule is presented to reconcile May 31, 2001 and November 30, 2000 segment assets to the amounts reported in the Company's consolidated financial
statements.

|                                    |                     | May 31, 2001 |        | November 30, 2000 |  
|----------------------------------- | ------------------- | ------------ | ------ | ----------------- | -
|Total Assets of Reportable Segments |                     | $            | 40,081 |                   | $
|Intersegment Receivables            |                     |              | (23    | )                 |  
|Investment in Subsidiaries          |                     |              | (957   | )                 |  
|                                    |                     |              |        |                   |  
|                                    | Consolidated assets |              | $      | 39,101            |  
|                                    |                     |              |        |                   |  

Note 8. Cash Flow Information

Supplemental disclosure of cash flow information

|                                                                    |                         | Six months ended                                                                            
|------------------------------------------------------------------- | ----------------------- | --------------------------------------------------------------------------------------------
|
|
|Cash paid during the period for:                                    |                         |                                                                                             
|                                                                    | Interest                |                                                                                             
|                                                                    |                         |                                                                                             
|                                                                    | Income taxes            |                                                                                             
|                                                                    |                         |                                                                                             
|Supplemental schedule of noncash investing and financing activities |                         |                                                                                             
|                                                                    | Purchase of businesses: |                                                                                             
|                                                                    |                         | Total purchase price                                                                        
|                                                                    |                         | Less payable to Seller                                                                      
|                                                                    |                         | Less fair value of common stock and stock warrants issued in connection with the acquisition
|                                                                    |                         |                                                                                             
|                                                                    |                         | Cash purchase price                                                                         
|                                                                    |                         |                                                                                             

10

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ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included in this report. This
report contains forward-looking statements within the meaning of the Private Securities Litigation Reform act of 1995. The statements contained in this report that are not historical in nature,
particularly those that utilize terminology such as "may," "will," "should," "expects," "anticipates," "estimates," "believes" or "plans," or comparable terminology, are forward-looking statements
based on current expectations and assumptions.

Various
risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements. These risks and uncertainties include the growth in
acceptance of TROY's electronic payment solutions by online brokerage firms, e-merchants and other bill payment applications; the timely and successful development and integration of the
Bluetooth and other wireless standards; the market acceptance of products incorporating wireless printing technologies; the ability to continue to develop and market other e-commerce
payment, networked payment and wireless and other connectivity technologies; TROY's ability to refocus its management and resources on these emerging technologies; the ability to hire and retain
qualified management, technology and other personnel; the impact of competition from existing and new technologies and companies; the ability to identify and assimilate acquired companies and
technologies; the continued demand for printed financial documents; and other factors.

We
own or have rights to trademarks that we use in connection with the sale of our products. Troy®, Sharespool®, Extendnet®,
Sharelink®, Extendhub®, eCheck Secure, PrintraNet, TROYmark, StarACH, ExtendedLink, PocketPro,
PocketPrint Server, SerialLink, Status 3000, PrintTRAK, ExtendView, and NetworkAlert are among the trademarks that we own.

Background

We are a leading worldwide provider of financial payment solutions. Our software, firmware and hardware solutions enable businesses to electronically transmit
and output financial payment information across computer networks and the Internet.

Our
products consist of financial payment solutions and connectivity products that serve a wide variety of industries including e-commerce retailers, online brokerages,
telecommunications, financial services, insurance, computer hardware, automotive, personnel and others.

Our
financial payment solutions consist of e-commerce payment solutions and networked computer payment solutions. Our e-commerce payment solutions enable
Internet merchants to accept payments from their customers' checking accounts as an alternative to credit cards. Our networked computer payment solutions include software, firmware, hardware and
imaging supplies that enable standard laser printers to print MICR lines, graphics, barcodes and forms and to perform additional functions such as auditing, status checking and security.

Our
connectivity products enhance the connectivity of devices that transmit information over computer networks and the Internet.

Overview

Net sales are generated from the sale of our connectivity and financial payment solutions and services. We recognize revenue from the sale of our products when
the goods are shipped to the customer and we recognize service revenue over the period of the contract on a straight-line basis. We recognize revenue from the sale of software licenses
using the percentage of completion method, which typically results in recognition of a substantial portion of the revenue in the quarter in which the software license is sold. All sales are made
through purchase orders.

11

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Results of Operations

The following table sets forth, for the periods indicated, certain information derived from our consolidated statements of operations expressed as a percentage
of net sales:

|                                             |  | Three Months Ended |    | Six Months Ended |  
|-------------------------------------------- |  | ------------------ | -- | ---------------- | -
|
|Net sales                                    |  | 100.0              | %  | 100.0            | %
|Cost of goods sold                           |  | 63.5               |    | 58.5             |  
|                                             |  |                    |    |                  |  
|Gross Profit                                 |  | 36.5               |    | 41.5             |  
|Selling, general and administrative expenses |  | 40.1               |    | 29.8             |  
|Research and development expenses            |  | 17.6               |    | 8.6              |  
|Amortization of intangible assets            |  | 3.3                |    | 2.2              |  
|                                             |  |                    |    |                  |  
|Operating income (loss)                      |  | (24.5              | )  | 0.9              |  
|Interest income                              |  | 1.6                |    | 2.0              |  
|Interest expense                             |  | (0.4               | )  |                 |  
|                                             |  |                    |    |                  |  
|Income (loss) before income taxes (credits)  |  | (23.3              | )  | 2.9              |  
|Provision for income taxes (credits)         |  | (7.2               | )  | (1.0             | )
|                                             |  |                    |    |                  |  
|Net income (loss)                            |  | (16.1              | )% | 1.9              | %
|                                             |  |                    |    |                  |  

Three Months Ended May 31, 2001 Compared to Three Months Ended May 31, 2000

Net Sales.Our net sales were $9.8 million for the three months ended May 31, 2001, with
$7.6 million attributable to financial payment solutions and $2.2 million attributable to connectivity products and software. Net sales in the three months ended May 31, 2001
decreased by $2.0 million, or 16.8%, from $11.8 million in the three months ended May 31, 2000. This decrease in net sales represents a $2.3 million decrease in sales of
our laser printers, impact printers, proprietary imaging supplies, services, and electronic payment solutions. These decreases were partially offset by an increase of $300,000 in sales of our
connectivity products and software. Net sales were not significantly affected by price changes. The decrease in our net sales for the three months ended May 31, 2001, as compared to net sales
for the three months ended May 31, 2000, can be attributed to a reduction in demand as a result of weak economic conditions and the implementation of our strategy to shift our focus away from
our established financial payment solutions and toward our electronic payment solutions and wireless printing opportunities. To the extent that our mix of revenue sources shifts toward sales of
connectivity products and technology licenses, our net sales could vary from historical patterns.

Cost of Goods Sold.Cost of goods sold decreased by $659,000 or 9.6% to $6.2 million in the three months ended
May 31, 2001 from $6.9 million in the three months ended May 31, 2000. This decrease was primarily due to decreased net sales but was also attributable to the inclusion of
approximately $400,000 in restructuring costs associated with our actions to streamline operations and improve efficiencies. Cost of goods sold as a percentage of net sales increased to 63.5% in the
three months ended May 31, 2001 from 58.5% in the three months ended May 31, 2000. In connection with our shift in focus, we may enter into agreements to license technology from other
companies. As a result of these agreements, cost of goods sold could vary from historical patterns.

Gross Profit.As a result of the above factors, gross profit decreased by $1.3 million to $3.6 million in
the three months ended May 31, 2001 from $4.9 million in the three months ended May 31, 2000. Gross
profit as a percentage of net sales decreased to 36.5% in the three months ended May 31, 2001 from 41.5% in the three months ended May 31, 2000.

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Selling, General and Administrative Expenses.Selling, general and administrative expenses increased by $423,000 or
12.1% to $3.9 million in the three months ended May 31, 2001 from $3.5 million in the three months ended May 31, 2000. This increase was due primarily to additional
operating expenses of $73,000 as a result of our acquisitions and an increase of $350,000 due to increases in personnel, promotions and other expenses associated with our shift in focus and
restructuring costs. Selling, general and administrative expenses as a percentage of net sales increased to 40.1% in the three months ended May 31, 2001 from 29.8% in the three months ended
May 31, 2000, due to our acquisition strategy and our associated growth requirements. In connection with our shift in focus, we intend to continue to invest in marketing expenditures, increase
the size of the sales force, and add technical resources as required. As a result of these expenditures and hiring initiatives, we expect selling, general and administrative expenses to continue to
exceed historical levels. This forward-looking statement will be impacted by the timing and amount of these expenditures, our ability to attract and retain sales and marketing personnel and the
associated costs of such personnel, and the success of our marketing efforts.

Research and Development Expenses.Research and development expenses increased by $711,000 or 70.3% to
$1.7 million in the three months ended May 31, 2001 from $1.0 million in the three months ended May 31, 2000. Of this increase, $58,000 was due to additional research and
development expenses as a result of our acquisitions and $653,000 was due to increases in personnel and related costs and restructuring costs. Research and development expenses as a percentage of net
sales was 17.6% in the three months ended May 31, 2001 and 8.6% in the three months ended May 31, 2000. In connection with our growth initiatives and efforts to develop new wireless
printing technologies, we expect research and development expenses to continue to exceed historical levels as we add additional personnel and incur additional related costs. This forward-looking
statement will be impacted by the timing and amount of additional research and development expenditures and our ability to attract and retain research and development personnel and the associated
costs of such personnel.

Amortization of Intangible Assets.Amortization of intangible assets increased by $58,000 or 22.1% to $320,000 in the
three months ended May 31, 2001 from $262,000 in the three months ended May 31, 2000. This increase was the result of increases in the intangible assets associated with our acquisitions.

Operating Income (Loss).As a result of the above factors, operating income decreased by $2.5 million to
$2.4 million loss in the three months ended May 31, 2001 from $108,000 in the three months ended May 31, 2000. Operating income as a percentage of net sales decreased to (24.5)%
in the three months ended May 31, 2001 from 0.9% in the three months ended May 31, 2000.

Interest Income.Interest income decreased by $76,000 to $156,000 in the three months ended May 31, 2001 from
$232,000 in the three months ended May 31, 2000. This income was due to our investment of proceeds from our initial public offering. This decrease is the result of reductions in our investment
in
available-for-sale securities due to an acquisition, our stock repurchase program and working capital requirements.

Interest Expense.Interest expense increased by $40,000 to $45,000 in the three months ended May 31, 2001 from
$5,000 in the three months ended May 31, 2000. This increase was due to increased borrowings under our line of credit.

Income Taxes.Income taxes decreased to a $710,000 tax credit in the three months ended May 31, 2001 from a
$118,000 expense in the three months ended May 31, 2000. This decrease is a result of decreased income before income taxes. Income taxes (credits) as a percentage of pretax income (loss)
decreased to 31.0% in the three months ended May 31, 2001 from 35.2% in the three months ended May 31, 2000.

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Six Months Ended May 31, 2001 Compared to Six Months Ended May 31, 2000

Net Sales.Our net sales were $21.1 million for the six months ended May 31, 2001, with
$16.8 million attributable to financial payment solutions and $4.3 million attributable to connectivity products and software. Net sales in the six months ended May 31, 2001
decreased by $4.7 million, or 18.2%, from $25.8 million in the six months ended May 31, 2000. This decrease in net sales represents a $3.4 million decrease in sales of our
laser printers, impact printers, proprietary imaging supplies and services, and a decrease of $1.7 million in sales of our connectivity products and software. These decreases were partially
offset by an increase of $400,000 in sales of our electronic payment solutions. Net sales were not significantly affected by price changes. The decrease in our net sales for the six months ended
May 31, 2001, as compared to net sales for the six months ended May 31, 2000, can be attributed to a $1.9 million non-recurring sale of a software license in the first
quarter of 2000, a reduction in demand during the six months ended May 31, 2001 as a result of weak economic conditions and the implementation of our strategy to shift our focus away from our
established financial payment solutions and toward our electronic payment solutions and wireless printing opportunities. In connection with our shift in focus, we may continue to license our software
technology to third parties as we consider appropriate. To the extent that our mix of revenue sources continues to shift toward sales of connectivity products and technology licenses, our net sales
could vary from historical patterns.

Cost of Goods Sold.Cost of goods sold decreased by $1.1 million or 8.0% to $13.1 million in the six
months ended May 31, 2001 from $14.2 million in the six months ended May 31, 2000. This decrease was primarily due to decreased net sales but was also attributable to the
inclusion of approximately $400,000 in restructuring costs associated with our actions to streamline operations and improve efficiencies. Cost of goods sold as a percentage of net sales increased to
62.0% in the six months ended
May 31, 2001 from 55.1% in the six months ended May 31, 2000. In connection with our shift in focus, we may enter into agreements to license technology from other companies. As a result
of these agreements, cost of goods sold could vary from historical patterns.

Gross Profit.As a result of the above factors, gross profit decreased by $3.6 million to $8.0 million in
the six months ended May 31, 2001 from $11.6 million in the six months ended May 31, 2000. Gross profit as a percentage of net sales decreased to 38.0% in the six months ended
May 31, 2001 from 44.9% in the six months ended May 31, 2000. This decrease was also primarily due to a software licensing sale in the six months ended May 31, 2000.

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased by
$1.4 million or 20.6% to $7.9 million in the six months ended May 31, 2001 from $6.6 million in the six months ended May 31, 2000. This increase was due primarily to
additional operating expenses of $343,000 as a result of our acquisitions and an increase of $957,000 due to increases in personnel, promotions and other expenses associated with our shift in focus
and restructuring costs. Selling, general and administrative expenses as a percentage of net sales increased to 37.7% in the six months ended May 31, 2001 from 25.5% in the six months ended
May 31, 2000, due to our acquisition strategy and our associated growth requirements. In connection with our shift in focus, we intend to continue to invest in marketing expenditures, increase
the size of the sales force, and add technical resources as required. As a result of these expenditures and hiring initiatives, we expect selling, general and administrative expenses to continue to
exceed historical levels. This forward-looking statement will be impacted by the timing and amount of these expenditures, our ability to attract and retain sales and marketing personnel and the
associated costs of such personnel, and the success of our marketing efforts.

Research and Development Expenses.Research and development expenses increased by $1.0 million or 51.1% to
$3.0 million in the six months ended May 31, 2001 from $2.0 million in the six months ended May 31, 2000. Of this increase, $229,000 was due to additional research and

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development expenses as a result of our acquisitions and $771,000 was due to increases in personnel and related costs and restructuring costs . Research and development expenses as a percentage of net
sales was 14.3% in the six months ended May 31, 2001 and 7.8% in the six months ended May 31, 2000. In connection with our growth initiatives and efforts to develop new wireless printing
technologies, we expect research and development expenses to continue to exceed historical levels as we add additional personnel and incur additional related costs. This forward-looking statement will
be impacted by the timing and amount of additional research and development expenditures and our ability to attract and retain research and development personnel and the associated costs of such
personnel.

Amortization of Intangible Assets.Amortization of intangible assets increased by $218,000 or 51.7% to $640,000 in the
six months ended May 31, 2001 from $422,000 in the six months ended May 31, 2000. This increase was the result of increases in the intangible assets associated with our acquisitions.

Operating Income (Loss).As a result of the above factors, operating income decreased by $6.2 million to
$3.6 million loss in the six months ended May 31, 2001 from $2.6 million in the six months ended May 31, 2000. Operating income as a percentage of net sales decreased to
(17.0)% in the six months ended May 31, 2001 from 10.0% in the six months ended May 31, 2000.

Interest Income.Interest income decreased by $58,000 to $366,000 in the six months ended May 31, 2001 from
$424,000 in the six months ended May 31, 2000. This income was due to our investment of proceeds from our initial public offering. This decrease is the result of reductions in our investment in
available-for-sale securities due to an acquisition, our stock repurchase program and working capital requirements.

Interest Expense.Interest expense increased by $52,000 to $64,000 in the six months ended May 31, 2001 from
$12,000 in the six months ended May 31, 2000. This increase was due to borrowings under our line of credit.

Income Taxes.Income taxes decreased to a $1.1 million tax credit in the six months ended May 31, 2001
from a $1.2 million expense in the six months ended May 31, 2000. This decrease is a result of decreased income before income taxes. Income taxes (credits) as a percentage of pretax
income (loss) decreased to 34.0% in the six months ended May 31, 2001 from 38.6% in the six months ended May 31, 2000.

Liquidity and Capital Resources

Prior to our initial public offering in July, 1999, our primary source of liquidity was through cash generated from operations and borrowings under our
revolving credit facility and term loans.

Cash
flows used by operating activities were $1.1 million in the six months ended May 31, 2001 compared to $6.3 million provided by operating activities in the
six months ended May 31, 2000. This decrease was due primarily to generating a loss of $2.2 million in 2001 compared to income of $1.8 million in 2000 and an increase in
inventories and a decrease in accounts payable and accrued expenses, offset by a decrease in accounts receivable, the income tax receivable and prepaid expenses. The accounts receivable decrease
resulted primarily from collections. The increase in inventories resulted primarily from purchases of printers in anticipation of model changes and anticipated sales of connectivity and wireless
products.

Cash
flows provided by investing activities were $400,000 in the six months ended May 31, 2001 compared to $4.7 million used in the six months ended May 31, 2000.
Included in cash flows provided by investing activities in the six months ended May 31, 2001 was $2.5 million in net sales of available-for-sale securities. This
cash in flow was offset by $2.1 million used for an acquisition of a

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business, equipment and leaseholds and other assets. In connection with split-dollar life insurance arrangements with our majority shareholders, we have agreed to pay the underlying life insurance
premiums as a condition of continued employment. Annual premiums on these policies are approximately $428,000 per year.

Cash
flows used in financing activities were $809,000 in the six months ended May 31, 2001 compared to cash flows provided by financing activities of $317,000 in the six months
ended May 31, 2000. Included in cash flows used in financing activities in the six months ended May 31, 2001 was $900,000 in net borrowings and proceeds from issuance of common stock
offset by $1.7 million used for the reduction of checks issued not presented for payment and the purchase of treasury stock.

We
currently have a $5.0 million general line of credit and a $10.0 million acquisition line of credit with Comerica BankCalifornia. Both lines of credit
are secured by substantially all of our assets and are subject to certain financial covenants. In connection with the general line of credit agreement, we have a $650,000 standby letter of credit
sublimit agreement of which $80,000 was outstanding at May 31, 2001. As of May 31, 2001, $775,000 was outstanding against the general line of credit and no borrowings were outstanding
against the acquisition line of credit and $4,145,000 was available under the general line of credit and all $10.0 million was available under the acquisition line of credit. The acquisition
line of credit expires on October 1, 2001. The general line of credit has no expiration date.

We
believe that cash generated by operating activities, the net proceeds from our initial public offering and funds available under our credit facility will be sufficient to finance
our operating activities for at least the next 12 months. To the extent that the funds generated from these sources are insufficient to finance our operating activities, we would need to raise
additional funds through public or private financing. We cannot assure you that additional financing will be available on terms favorable to us, or at all.

In
March 2001, Troy established a stock repurchase program under which Troy's common stock, with an aggregate market value up to $4.0 million, may be acquired in the
open market. As of July 13, 2001, Troy has purchased approximately 254,000 shares of common stock in the open market, at an average price of $3.61 per share, under the stock repurchase program.
Approximately $3.1 million remains available for future common stock repurchases.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We
do not utilize derivative financial instruments. Accordingly, our exposure to market risk is through our investments in available-for-sale securities and
our bank debt which bears interest at variable rates. Available-for-sale securities consist of corporate debt securities. Approximately all of these securities have contractual
maturity dates of up to one year. At May 31, 2001, market values approximated carrying values. Due to the short-term maturities of these securities, management believes that there
is no significant market risk. At May 31, 2001, we had approximately $8.3 million in cash, cash equivalents and investments in available-for-sale securities, and,
accordingly, a sustained decrease in the rate of interest earned of 1% would cause a decrease in the annual amount of interest earned of $83,000. The bank debt is a revolving line of credit. All
borrowings bear interest based upon the reference rate per annum as announced by the bank (7.0% at May 31, 2001) less 0.25%. At May 31, 2001, there was $775,000 outstanding under the
line of credit agreement and, accordingly, a sustained increase in the reference rate of 1% would cause an increase in the annual amount of interest expense of $8,000.

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PART II: OTHER INFORMATION

ITEM 1LEGAL PROCEEDINGS

Not applicable.

ITEM 2CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Our Annual Meeting of Stockholders was held on April 5, 2001. The following individuals were elected at the Annual Meeting as Directors of the Company
to serve until the next annual meeting or until their respective successors are elected and qualified. Shares voted in favor of these Directors and shares withheld were as follows:

|Director            |  | Shares For |  | Shares Withheld
|------------------- |  | ---------- |  | ---------------
|Patrick J. Dirk     |  | 9,739,229  |  | 14,661         
|Brian P. Dirk       |  | 9,738,801  |  | 15,089         
|Robert S. Messina   |  | 9,738,801  |  | 15,089         
|Norman B. Keider    |  | 9,746,292  |  | 7,598          
|John B. Zaepfel     |  | 9,746,920  |  | 6,970          
|William P. O'Reilly |  | 9,743,705  |  | 10,185         
|Gene A. Bier        |  | 9,743,720  |  | 10,170         
|Dr. Harold L. Clark |  | 9,746,292  |  | 7,598          

Shareholders
ratified the appointment of McGladrey & Pullen, LLP as the Company's independent auditor for the fiscal year ending November 30, 2001, with shares voted as
follows:

Shares For:  9,745,685

Shares Against:  3,780Shares Abstaining:  4,425


ITEM 5OTHER INFORMATION

None.

ITEM 6EXHIBITS AND REPORTS ON FORM 8-K



Exhibit
Number

DescriptionNone.






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SIGNATURES

Pursuant to the requirements 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.

|              |  | TROY GROUP, INC.
|------------- |  | ----------------
|July 16, 2001 |  | By:             
|              |  |                 
|              |  | By:             
|              |  |                 

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