**UNITED STATESSECURITIES A****ND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM10-Q**

 
| **(Mark One)** |
|----------------|
|           |   |
| **ý**     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE  ACT OF 1934** |
|           |   |
|           | **For the quarterly period ended May 31,  2004.** |
|           |   |
| **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:  000-24413**

 

**TROYGROUP, INC.**

(Exact name of registrant as specified in itscharter)

 
|                                                       | **Delaware**                                                    |   | **33-0807798**                       |   |
|------------------------------------------------------------|-----------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                       | (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |   |
|                                                       |                                                            |   |                                 |   |
|                                                       | **2331 South Pullman Street****Santa Ana, California**          |   | **92705**                            |   |
|                                                       | (Address of principal executive offices)                        |   | (Zip code)                           |   |
|                                                       |                                                            |   |                                 |   |
| **(949) 250-3280**                                         |
| (Registrant’s telephone number, including  area code) |
|                                                            |                                                                 |        |                                      |        |

 

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

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of1934).   Yes   o   No   ý

 

As of June 30, 2004, 10,642,677 shares of the Registrant’s CommonStock were outstanding.

 

 

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**TROY GROUP, INC.**

**Quarterly Report on Form 10-Q for the**

**Quarterly Period Ended May 31, 2004**

 

**INDEX**

 
| **PART I:  FINANCIAL INFORMATION** |   |
|-----------------------------------------|--------|
|                                    |   |   |   |
| Item 1.                                 |   | Financial  Statements |   |
|                                    |   |   |   |
|                                    |   | Condensed  Consolidated Balance Sheets May 31, 2004 (unaudited) and November 30,  2003 |   |
|                                    |   |   |   |
|                                    |   | Condensed Consolidated Statements of  Operations for the Three and Six Months ended May 31, 2004 and 2003  (unaudited) |   |
|                                    |   |   |   |
|                                    |   | Condensed Consolidated Statements of Cash Flows for the Six Months  ended May 31, 2004 and 2003 (unaudited) |   |
|                                    |   |   |   |
|                                    |   | Condensed Consolidated Statement of  Stockholders’ Equity Six Months ended May 31, 2004 (unaudited) |   |
|                                    |   |   |   |
|                                    |   | Notes to Condensed Consolidated Financial  Statements (unaudited) |   |
|                                    |   |   |   |
| Item 2.                                 |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                    |   |   |   |
| Item 3.                                 |   | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                    |   |   |   |
| Item 4.                                 |   | Controls  and Procedures |   |
|                                    |   |   |   |
| **PART II:  OTHER INFORMATION**    |   |
|                                    |   |   |   |
| Item 1.                                 |   | Legal Proceedings |   |
|                                    |   |   |   |
| Item  4.                                |   | Submission  of Matters to a Vote of Security Holders |   |
|                                    |   |   |   |
| Item 5.                                 |   | Other Information |   |
|                                    |   |   |   |
| Item 6.                                 |   | Exhibits  and Reports on Form 8-K |   |
|                                    |   |   |   |
| **SIGNATURE**                           |   |
|                                    |   |   |   |
| **EXHIBIT INDEX**                       |   |

 

2

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**PARTI****: FINANCIAL INFORMATION**

 

**ITEM 1****- FINANCIAL STATEMENTS**

 

**TROY GROUP, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**(in thousands, except share data)**

 
|                                                                                                                               |   | **May 31,  2004** |   | **November 30,  2003 (a)** |    |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|---------------------------------|---------|
|                                                                                                                               |   | **(Unaudited)**   |   |                            |    |
| **Assets**                                                                                                                         |   |              |   |                            |    |
| Current assets:                                                                                                                    |   |              |   |                            |    |
| Cash and cash equivalents                                                                                                          |   | $                 | 2,571  |                            | $       | 1,727 |   |
| Investment in available-for-sale securities                                                                                        |   | 8,000             |   | 8,000                           |    |
| Accounts receivable, less allowance for  doubtful accounts $626 in 2004; $393 in 2003                                              |   | 8,665             |   | 8,419                           |    |
| Inventories, net                                                                                                                   |   | 5,221             |   | 4,891                           |    |
| Prepaid expenses and other                                                                                                         |   | 1,333             |   | 1,414                           |    |
| Deferred tax assets                                                                                                                |   | 2,789             |   | 2,789                           |    |
| Total current assets                                                                                                               |   | 28,579            |   | 27,240                          |    |
| Equipment and leasehold improvements, net                                                                                          |   | 3,183             |   | 3,213                           |    |
| Goodwill                                                                                                                           |   | 281               |   | 281                             |    |
| Receivable from stockholders                                                                                                       |   | 1,903             |   | 1,903                           |    |
| Deferred tax assets                                                                                                                |   | 1,240             |   | 1,330                           |    |
| Other assets                                                                                                                       |   | 614               |   | 993                             |    |
| Total assets                                                                                                                       |   | $                 | 35,800 |                            | $       | 34,960 |   |
|                                                                                                                               |   |              |   |                            |    |
| **Liabilities and Stockholders’ Equity**                                                                                      |   |              |   |                            |    |
| Current liabilities:                                                                                                               |   |              |   |                            |    |
| Accounts payable                                                                                                                   |   | $                 | 3,412  |                            | $       | 2,172 |   |
| Accrued expenses                                                                                                                   |   | 3,560             |   | 4,322                           |    |
| Deferred revenue                                                                                                                   |   | 1,840             |   | 1,807                           |    |
| Total current liabilities                                                                                                          |   | 8,812             |   | 8,301                           |    |
| Commitments and contingencies                                                                                                      |   |              |   |                            |    |
| Stockholders’ equity:                                                                                                         |   |              |   |                            |    |
| Preferred stock, no par value authorized  5,000,000 shares, issued none                                                            |   | —            |   | —                          |    |
| Common stock, par value $.01 per share  authorized 50,000,000 shares, issued 10,642,677 shares in 2004; 10,974,170  shares in 2003 |   | 107               |   | 110                             |    |
| Additional paid-in capital                                                                                                         |   | 19,921            |   | 21,122                          |    |
| Accumulated other comprehensive income                                                                                             |   | 10                |   | 33                              |    |
| Retained earnings                                                                                                                  |   | 6,958             |   | 6,598                           |    |
|                                                                                                                               |   | 26,996            |   | 27,863                          |    |
| Less cost of treasury stock, 2,800 shares  in 2004; 331,493 shares in 2003                                                         |   | (8                | )      | (1,204                          | )  |
| Total stockholders’ equity                                                                                                    |   | 26,988            |   | 26,659                          |    |
| Total liabilities and stockholders’ equity                                                                                    |   | $                 | 35,800 |                            | $       | 34,960 |   |

 

----

(a)                                     Derived from theaudited consolidated financial statements for the year ended November 30,2003

 

See Notes to Condensed Interim ConsolidatedFinancial Statements.

 

3

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**TROY GROUP, INC.**

**CONDENSED CONSOLIDATED STATEMENTS****OF OPERATIONS**

**(Unaudited)**

**(in thousands, except per share amounts)**

 
|                                   |   | **Three  Months Ended May 31,** |   | **Six Months  Ended May 31,** |   |
|----------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                   |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
|                                   |   |                            |   |                          |   |   |   |   |   |
| Net sales                              |   | $                               | 14,422 |                          | $      | 13,395 |   | $ | 28,039 |   | $ | 27,803 |   |
| Cost of goods sold                     |   | 8,756                           |   | 8,193                         |   | 17,029 |   | 16,631 |   |
| Gross profit                           |   | 5,666                           |   | 5,202                         |   | 11,010 |   | 11,172 |   |
|                                   |   |                            |   |                          |   |   |   |   |   |
| Operating expenses:                    |   |                            |   |                          |   |   |   |   |   |
| Selling, general and administrative    |   | 4,500                           |   | 3,683                         |   | 8,090 |   | 7,712 |   |
| Research and development               |   | 1,099                           |   | 1,230                         |   | 2,336 |   | 2,692 |   |
| Amortization of intangible assets      |   | 24                              |   | 11                            |   | 51 |   | 22 |   |
| Operating income                       |   | 43                              |   | 278                           |   | 533 |   | 746 |   |
|                                   |   |                            |   |                          |   |   |   |   |   |
| Interest income                        |   | 23                              |   | 23                            |   | 53 |   | 26 |   |
| Interest expense                       |   | —                          |   | (6                            | )      | — |   | (8 | ) |
|                                   |   |                            |   |                          |   |   |   |   |   |
| Income before income taxes             |   | 66                              |   | 295                           |   | 586 |   | 764 |   |
| Provision for income taxes             |   | 26                              |   | 105                           |   | 226 |   | 292 |   |
| Net income                             |   | $                               | 40     |                          | $      | 190 |   | $ | 360 |   | $ | 472 |   |
|                                   |   |                            |   |                          |   |   |   |   |   |
| Net income per share:                  |   | $                               | — |                          | $      | .02 |   | $ | .03 |   | $ | .04 |   |
| Basic                                  |   | $                               | — |                          | $      | .02 |   | $ | .03 |   | $ | .04 |   |
| Diluted                                |   |                            |   |                          |   |   |   |   |   |
|                                   |   |                            |   |                          |   |   |   |   |   |
| Shares used in per share computations: |   |                            |   |                          |   |   |   |   |   |
| Basic                                  |   | 10,640                          |   | 10,651                        |   | 10,641 |   | 10,650 |   |
| Diluted                                |   | 10,640                          |   | 10,651                        |   | 10,644 |   | 10,650 |   |

 

See Notes to Condensed Interim ConsolidatedFinancial Statements.

 

4

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**TROY GROUP, INC.**

**CONDENSED CONSOLIDATED STATEMEN****TSOF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
|                                                                               |   | **Six Months  Ended May 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **2004**                      |   | **2003** |   |
|                                                                               |   |                          |   |   |   |
| **Cash flows from  operating activities:**                                         |   |                          |   |   |   |
| Net income                                                                         |   | $                             | 360    |   | $ | 472 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                          |   |   |   |
| Depreciation and amortization                                                      |   | 528                           |   | 591 |   |
| Impairment of long-lived assets                                                    |   | 284                           |   | — |   |
| Provision for doubtful accounts                                                    |   | 233                           |   | 200 |   |
| Changes in working capital components:                                             |   |                          |   |   |   |
| (Increase) decrease in:                                                            |   |                          |   |   |   |
| Accounts receivable                                                                |   | (480                          | )      | 759 |   |
| Income tax refund receivable                                                       |   | —                        |   | 49 |   |
| Inventories                                                                        |   | (330                          | )      | (1,135 | ) |
| Prepaid expenses and other                                                         |   | 81                            |   | 151 |   |
| Deferred taxes                                                                     |   | 90                            |   | — |   |
| Increase (decrease) in:                                                            |   |                          |   |   |   |
| Accounts payable                                                                   |   | 1,240                         |   | (1,563 | ) |
| Accrued expenses                                                                   |   | (761                          | )      | 643 |   |
| Deferred revenue                                                                   |   | 33                            |   | (119 | ) |
| Net cash provided by operating activities                                          |   | 1,278                         |   | 48 |   |
|                                                                               |   |                          |   |   |   |
| **Cash flows from  investing activities:**                                         |   |                          |   |   |   |
| Purchase of equipment and leasehold  improvements                                  |   | (373                          | )      | (621 | ) |
| Maturities of available-for-sale securities                                        |   | —                        |   | 497 |   |
| Increase in other assets, net                                                      |   | (30                           | )      | (39 | ) |
| Net cash used in investing activities                                              |   | (403                          | )      | (163 | ) |
|                                                                               |   |                          |   |   |   |
| **Cash flows from  financing activities:**                                         |   |                          |   |   |   |
| Payments on notes payable                                                          |   | —                        |   | (35 | ) |
| Proceeds from issuance of common stock                                             |   | —                        |   | 9 |   |
| Purchase of treasury stock                                                         |   | (8                            | )      | — |   |
| Net cash used in financing activities                                              |   | (8                            | )      | (26 | ) |
|                                                                               |   |                          |   |   |   |
| **Effect of foreign  currency translation**                                        |   | (23                           | )      | — |   |
|                                                                               |   |                          |   |   |   |
| **Net increase  (decrease) in cash and cash equivalents**                          |   | 844                           |   | (141 | ) |
| **Cash and cash  equivalents, beginning of period**                                |   | 1,727                         |   | 6,615 |   |
| **Cash and cash  equivalents, end of period**                                      |   | $                             | 2,571  |   | $ | 6,474 |   |

 

See Notes to Condensed Interim ConsolidatedFinancial Statements.

 

5

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**TROY GROUP, INC.**

**CONDENSED CONSOLIDATED STATEMENT OF STOCKH****OLDERS’ EQUITY**

**(Unaudited)**

**(in thousands except share amounts)**

 
|                                                |   |              |   |           |   |        |   | **Accumulated**   |   |                |   |          |   |       |   |                   |   |               |   |
|-----------------------------------------------------|--------|-------------------|--------|----------------|--------|-------------|--------|-------------------|--------|---------------------|--------|---------------|--------|------------|--------|------------------------|--------|--------------------|--------|
|                                                |   | **Common  Stock** |   | **Additional** |   | **Other**   |   |              |   | **Treasury  Stock** |   | **Total**     |   |       |   |
|                                                |   | **Number**        |   |           |   | **Paid-in** |   | **Comprehensive** |   | **Retained**        |   | **Number**    |   |       |   | **Stockholders’** |   | **Comprehensive**  |   |
|                                                |   | **of Shares**     |   | **Amount**     |   | **Capital** |   | **Income**        |   | **Earnings**        |   | **of Shares** |   | **Amount** |   | **Equity**             |   | **Income  (Loss)** |   |
|                                                |   |              |   |           |   |        |   |              |   |                |   |          |   |       |   |                   |   |               |   |
| Balance, November 30, 2003                     |   | 10,974,170        |   | $              | 110    |        | $      | 21,122            |   | $                   | 33     |          | $      | 6,598      |   | 331,493                |   | $                  | (1,204 | ) | $ | 26,659 |   | $ | — |   |
| Retirement of treasury stock                        |   | (331,493          | )      | (3             | )      | (1,201      | )      | —            |   | —              |   | (331,493      | )      | 1,204      |   | —                 |   | —             |   |
| Purchase of common stock for the treasury           |   | —            |   | —         |   | —      |   | —            |   | —              |   | 2,800         |   | (8         | )      | (8                     | )      | —             |   |
| Foreign currency translation adjustment, net of tax |   | —            |   | —         |   | —      |   | (23               | )      | —              |   | —        |   | —     |   | (23                    | )      | (23                | )      |
|                                                |   |              |   |           |   |        |   |              |   |                |   |          |   |       |   |                   |   |               |   |
| Net income                                          |   | —            |   | —         |   | —      |   | —            |   | 360                 |   | —        |   | —     |   | 360                    |   | 360                |   |
| Balance, May 31, 2004                               |   | 10,642,677        |   | $              | 107    |        | $      | 19,921            |   | $                   | 10     |          | $      | 6,958      |   | 2,800                  |   | $                  | (8     | ) | $ | 26,988 |   | $ | 337 |   |

 

**See Notes to Condensed Interim Consolidated FinancialStatements**

 

6

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**TROY GROUP, INC.**

**NOTES TO CONDENSED INTERIM CONSOLIDAT****EDFINANCIAL STATEMENTS**

(unaudited)

 

**Note 1.  Basis of Presentation**

 

The accompanying unaudited consolidated financial statements of TROYGroup, Inc. (the “Company”) have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financialstatements.  In the opinion of management, all adjustments (consisting ofnormal recurring accruals and adjustments) considered necessary for a fairpresentation have been included.  Operating results for the three and sixmonths ended May 31, 2004 are not necessarily indicative of the results thatmay be expected for the year ending November 30, 2004.  For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K for its fiscalyear ended November 30, 2003.

 

Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure,” prescribes accountingand reporting standards for all stock-based compensation plans, includingemployee stock option plans. As allowed by SFAS No. 123, the Company haselected to continue to account for its employee stock-based compensation planusing the intrinsic value method in accordance with Accounting Principles Board(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedInterpretations, which does not require compensation to be recorded if theconsideration to be received is at least equal to the fair value of the commonstock to be received at the measurement date. Under the requirements of SFASNo. 123, non-employee stock-based transactions require compensation to berecorded based on the fair value of the securities issued or the servicesreceived, whichever is more reliably measurable.

 

The following table illustrates the effect on net income and net incomeper share had compensation costs for the stock-based compensation plan beendetermined based on the fair values of awards on the grant date under theprovisions of SFAS No. 123, for the three-month and six-month periods ended May31, 2004 and 2003 (amounts in thousands, except per share data):

 
|                                                                                                                                       |   | **Three  months ended May 31,** |   | **Six months  ended May 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                                                                                       |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
|                                                                                                                                       |   |                            |   |                          |   |   |   |   |   |
| Net income (loss) applicable to common  stockholders:                                                                                      |   |                            |   |                          |   |   |   |   |   |
| As reported                                                                                                                                |   | $                               | 40     |                          | $      | 190 |   | $ | 360 |   | $ | 472 |   |
| Less total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of related tax effects |   | (163                            | )      | (100                          | )      | (333 | ) | (202 | ) |
| Proforma                                                                                                                                   |   | $                               | (123   | )                             | $      | 90 |   | $ | 27 |   | $ | 270 |   |
|                                                                                                                                       |   |                            |   |                          |   |   |   |   |   |
| Net income per share applicable to common  stockholders, basic and diluted:                                                                |   |                            |   |                          |   |   |   |   |   |
| As reported                                                                                                                                |   | $                               | — |                          | $      | .02 |   | $ | .03 |   | $ | .04 |   |
| Proforma                                                                                                                                   |   | $                               | (.01   | )                             | $      | .01 |   | $ | — |   | $ | .03 |   |

 

There were no stock option grants in the quarter ended May 31, 2004.

 

**Recent Accounting Pronouncements**

 

In May 2003 FASB issued Statement of Financial Accounting Standards(SFAS) No. 150,*Accounting for CertainFinancial*

 

7

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*Instruments with Characteristics of bothLiabilities and Equity*, which requires that certainfinancial instruments previously presented as equity or temporary equity bepresented as liabilities.  Such instruments include mandatory redeemablepreferred and common stock, and certain options and warrants.  SFAS No.150is effective for financial instruments issued, entered into or modified afterMay 31, 2003 and is generally effective at the beginning of the first interimperiod beginning after June 15, 2003.  The adoption of SFAS No.150 isnot expected to have a material effect on the Company’s financial position orresults of its operations.

 

In 2003, the Financial Accounting Standards Board issued FASBInterpretation No. 46 (FIN 46),*Consolidation of Variable Interest Entities, an Interpretation of AccountingResearch Bulletin No. 51*, as revised. Prior to FIN 46, acompany generally included another entity in the company’s financial statementsonly if it controlled the entity through ownership of the majority votinginterests.  FIN 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  We have adopted FIN 46effective with the quarter ending May 31, 2004, and we have determined that wedo not have any variable interest entities that are required to be consolidatedin our financial statements.

 

**Note 2.  Inventories**

 

Inventories consisted of the following as of May 31, 2004 andNovember 30, 2003 (amounts in thousands):

 
|                                              |   | **May 31,  2004** |   | **November 30,  2003** |   |
|---------------------------------------------------|--------|-------------------|--------|-----------------------------|--------|
|                                              |   | **(unaudited)**   |   |                        |   |
| Raw materials                                     |   | $                 | 3,052  |                        | $      | 4,671 |   |
| Work-in-process                                   |   | 438               |   | 401                         |   |
| Finished goods                                    |   | 4,070             |   | 2,264                       |   |
| Reserve for slow moving and obsolete  inventories |   | (2,339            | )      | (2,445                      | )      |
| Total                                             |   | $                 | 5,221  |                        | $      | 4,891 |   |

 

**Note 3.  Other Assets**

 

Other assets consisted of the following at May 31, 2004 andNovember 30, 2003 (amounts in thousands):

 
|                                                                                  |   | **May 31,  2004** |   | **November 30,  2003** |   |
|---------------------------------------------------------------------------------------|--------|-------------------|--------|-----------------------------|--------|
|                                                                                  |   | **(unaudited)**   |   |                        |   |
| Customer list, net of accumulated  amortization  2004 $22 and 2003 $20                |   | $                 | 3      |                        | $      | 5 |   |
| Core technology, net of accumulated  amortization  2004 $272 and 2003 $236            |   | 120               |   | 156                         |   |
| Purchased software, net of accumulated  amortization  2004 $133 and 2003 $120         |   | —            |   | 13                          |   |
| Software development costs, net of  accumulated amortization  2004 $718 and 2003 $359 |   | —            |   | 359                         |   |
| Cash surrender value of officers’ life  insurance                                |   | 491               |   | 460                         |   |
|                                                                                  |   | $                 | 614    |                        | $      | 993 |   |

 

**Note 4.  Goodwill and Intangible Assets**

 

The Company adopted SFAS No. 142*Goodwill and Other Intangible Assets* effective December 1, 2002and performed the initial transitional impairment test as of that date. Theprovisions of SFAS No. 142 require that the Company allocate its goodwillto its various reporting units, determine the carrying value of thosebusinesses, and estimate the fair value of the reporting units so that atwo-step goodwill impairment test can be performed. The Company’s reportingunits represent components of its operating segments, which are the same as thereportable segments, identified in Note 11. In the first step of thegoodwill impairment test, the fair value of each reporting unit is compared toits carrying value. If the fair value exceeds the carrying value, goodwill isnot impaired and no

 

8

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further testing is performed. If the carrying value exceeds the fairvalue, then the second step must be performed, and the implied fair value ofthe reporting unit’s goodwill must be determined and compared to the carryingvalue of the goodwill for the reporting unit. If the carrying value of areporting unit’s goodwill exceeds its implied fair value, then an impairmentloss equal to the difference is recorded.

 

For the year ended November 30, 2003, no impairment loss wasrecognized. However, future goodwill impairment tests could result in a chargeto earnings. The Company will continue to evaluate goodwill on an annual basisas of the beginning of the fourth fiscal quarter, and whenever events and changesin circumstances indicate that there may be a potential impairment.

 

On December 1, 2002, the Company completed the allocation ofgoodwill (including amounts previously classified as assembled workforce) toits reportable segments as part of its transitional impairment test. Goodwillallocated to the Company’s reportable segments as of November 30, 2003 andMay 31, 2004 are as follows (amounts in thousands):

 
|                                |   | **Wireless  &  Connectivity** |   | **Secure  Payment  Systems** |   | **Total** |   |
|-------------------------------------|--------|-----------------------------------|--------|------------------------------|--------|-----------|--------|
| Balance at November 30, 2003   |   | $                                 | — |                         | $      | 281       |   | $ | 281 |   |
| Balance at May 31, 2004 (unaudited) |   | $                                 | — |                         | $      | 281       |   | $ | 281 |   |

 

The Company’s intangible assets subject to amortization at May 31, 2004and November 30, 2003 are composed of (amounts in thousands):

 
|                                |   | **May 31,  2004** |   | **November 30,  2003**   |   |
|-------------------------------------|--------|-------------------|--------|-------------------------------|--------|
|                                |   | **(unaudited)**   |   |                          |   |   |   |   |   |
|                                |   | **Gross**         |   | **Accumulated  Amortization** |   | **Net** |   | **Gross** |   | **Accumulated  Amortization** |   | **Net** |   |
| Customer Lists                      |   | $                 | 25     |                          | $      | (22 | ) | $ | 3 |   | $ | 25 |   | $ | (20 | ) | $ | 5 |   |
| Core Technology                     |   | 392               |   | (272                          | )      | 120 |   | 392 |   | (236 | ) | 156 |   |
| Purchased Software                  |   | 133               |   | (133                          | )      | — |   | 133 |   | (120 | ) | 13 |   |
|                                |   |              |   |                          |   |   |   |   |   |   |   |   |   |
| Total amortizable intangible assets |   | $                 | 550    |                          | $      | (427 | ) | $ | 123 |   | $ | 550 |   | $ | (376 | ) | $ | 174 |   |

 

For long-lived assets, other than goodwill, Financial AccountingStandards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, requires the evaluation forimpairment whenever events or changes in circumstances have indicated that anasset may not be recoverable. Long-lived assets evaluated for impairment are grouped with other assetsto the lowest level for which identifiable cash flows are largely independentof the cash flows of other groups of assets and liabilities.  If the sum of the projected undiscounted cashflows (excluding interest charges) is less than the carrying value of theassets, the assets will be written down to the estimated fair value, and theloss recognized in income from continuing operations in the period in which thedetermination is made.

 

In the second quarter of fiscal 2004, management evaluated thelong-lived intangible assets for impairment using the methodology describedabove and determined that the asset representing the capitalized softwaredevelopment costs for ACH software was impaired. As a result, the unamortizedamount of $284,000 at April 30, 2004 was written off in the secondquarter.

 

Amortization expense related to intangible assets was approximately$24,000 and $11,000 for each of the three-month periods and $51,000 and $22,000for each of the six-month periods ended May 31, 2004 and 2003, respectively.

 

9

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Estimated future amortization expense related to purchased intangibleassets at May 31, 2004 is as follows:

 
| **Fiscal year:** |   | **(In  thousands)** |   |
|------------------|--------|---------------------|--------|
| 2004             |   | $                   | 37     |   |
| 2005             |   | 75                  |   |
| 2006             |   | 11                  |   |
| Total            |   | $                   | 123    |   |

 

**Note 5. Notes Payable**

 

The Company has a $5.0 million line-of-credit agreement with ComericaBank.  As of May 31, 2004, there were no borrowings outstanding againstthe line of credit.  Borrowings under the line of credit bear interest atthe lesser of the bank’s reference rate (4.00 % at May 31, 2004) less 0.25% orthe bank’s LIBOR rate (1.11 % at May 31, 2004) plus 2% and are limited to 80%of eligible accounts receivable and 50% of eligible inventories if totalliabilities to tangible effective net worth is greater than two to one. No formula is required if total liabilities to tangible effective net worth isless than two to one. In connection with the line-of-credit agreement, theCompany has a $650,000 standby letter-of-credit sub-limit, of whichapproximately $80,000 was outstanding at May 31, 2004.  This line ofcredit is secured by substantially all of the Company’s assets.  Theborrowing arrangement requires the Company to comply with certain financial covenantsand other restrictions, including its ability to pay dividends, and as of May31, 2004 the Company was in compliance with those covenants. As of May 31,2004, the Company had approximately $4.9 million in availability under the lineof credit.  The line-of-credit borrowings are due on demand. The agreementmay be terminated by either party at any time.

 

**Note 6.  Stock Option and Stock WarrantPlans**

 

During the six months ended May 31, 2004, the Company granted 40,000stock options to employees and a director. The following is a summary of totaloutstanding options and stock warrants at May 31, 2004:

 
|                          |   | **Options  and Warrants Outstanding** |   | **Options  and Warrants Exercisable**   |   |
|-------------------------------|--------|---------------------------------------|--------|-----------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number of  Shares**                 |   | **Weighted -  Average  Exercise Price** |   | **Weighted -  Average  Remaining  Contractual Life** |   | **Number of  Shares** |   | **Weighted -  Average  Exercise Price** |   |
| $2.85 - $4.51                 |   | 702,666                               |   | $                                       | 3.87   |   | 6.2 years |   | 469,332 |   | $ | 3.81 |   |
| 6.63 - 8.75                   |   | 461,000                               |   | 7.32                                    |   | 5.6 years |   | 385,569 |   | 7.35 |   |
| 13.16 - 14.25                 |   | 15,000                                |   | 13.52                                   |   | 5.8 years |   | 9,998 |   | 13.52 |   |
| $2.85 - $14.25                |   | 1,178,666                             |   | $                                       | 5.34   |   | 6.0 years |   | 864,899 |   | $ | 5.50 |   |

 

At May 31, 2004, there were 1,618,000 shares remaining available forgrant under the Company’s stock option plan.

 

10

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**Note 7.  Net Income Per Share**

 

The following table sets forth the computation of basic and diluted netincome per share (amounts in thousands, except per share data):

 
|                                                   |   | **Three  months ended May 31,** |   | **Six months  ended May 31,** |   |
|--------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                   |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
|                                                   |   |                            |   |                          |   |   |   |   |   |
| Numerator for basic and diluted net income  per share: |   |                            |   |                          |   |   |   |   |   |
| Net income                                             |   | $                               | 40     |                          | $      | 190 |   | $ | 360 |   | $ | 472 |   |
|                                                   |   |                            |   |                          |   |   |   |   |   |
| Denominator for basic net income per share             |   |                            |   |                          |   |   |   |   |   |
| Weighted-average shares outstanding                    |   | 10,640                          |   | 10,651                        |   | 10,641 |   | 10,650 |   |
| Effect of employee stock options and  warrants         |   | —                          |   | —                        |   | 3 |   | — |   |
|                                                   |   |                            |   |                          |   |   |   |   |   |
| Denominator for diluted net income per  share          |   | 10,640                          |   | 10,651                        |   | 10,644 |   | 10,650 |   |
|                                                   |   |                            |   |                          |   |   |   |   |   |
| Net income per share:                                  |   |                            |   |                          |   |   |   |   |   |
| Basic                                                  |   | $                               | — |                          | $      | .02 |   | $ | .03 |   | $ | .04 |   |
| Diluted                                                |   | $                               | — |                          | $      | .02 |   | $ | .03 |   | $ | .04 |   |

 

**Note 8.  Contractual Obligations andCommercial Commitments**

 

We have the following minimum non-cancelable contractual obligationsand commercial commitments (amounts in thousands):

 
|                               |   | **Total** |   | **Fiscal  2004** |   | **Fiscal  2005-07** |   | **Fiscal  2008** |   |
|------------------------------------|--------|-----------|--------|------------------|--------|---------------------|--------|------------------|--------|
| Related party operating lease      |   | $         | 1,096  |             | $      | 143                 |   | $                | 858    |   | $ | 95 |   |
| Other operating leases             |   | 380       |   | 182              |   | 198                 |   | —           |   |
| Split dollar life insurance policy |   | **        |   | **               |   | **                  |   | **               |   |
| Total                              |   | $         | 1,476  |             | $      | 325                 |   | $                | 1,056  |   | $ | 95 |   |

 

 The annual commitments reflected in the table above are based onour November 30 year-end.

 

The Company leases its operating facilities under non-cancelableoperating lease agreements, including certain operating facilities from acompany related through common ownership, which expire through 2008.  The related-party lease requires monthlypayments of approximately $23,800.

 

As of May 31, 2004 and November 30, 2003, we had a balance ofadvanced payments of $1,903,000 to affiliated stockholders in connection withthe purchase of split dollar life insurance policies.  The Company and thestockholders have executed split-dollar agreements governing the unsecurednon-interest bearing advances. The advances are due upon the death, terminationor retirement of the Company’s Chairman, Chief Executive Officer and majoritystockholder. We previously had committed to making payments on the splitdollar life insurance policies based on continued employment; however, theSarbanes-Oxley Act of 2002 prohibits extensions of credit in the form of apersonal loan to certain company insiders after July 29, 2002.  As aresult, since July 29, 2002 we have not funded the annual premium paymentson these policies.  If the SEC issues new regulations or other guidancethat causes us to reevaluate our position, we may demand payment on the advanceand terminate our participation in these arrangements.

 

**Note 9.  Major Vendors**

 

The Company purchases key components from a vendor and also sellsproducts to this same vendor.  Purchases from this vendor for the sixmonths ended May 31, 2004 and 2003 were (in thousands): $6,238, and $4,677,respectively.  Net payable balances to this vendor as of May 31, 2004 andNovember 30, 2003 were (in thousands): $780 and $149, respectively.

 

**Note 10. Major Customers**

 

There were no customers that accounted for 10% or more of net sales inthe first six months of fiscal 2004, or fiscal 2003.

 

11

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**Note 11.  Segment Information andGeographical Information**

 

*Segment Information*

 

The following tables summarize net sales and net income by theCompany’s operating segments, Secure Payment Systems and Wireless andConnectivity Solutions, for the three months and six months ended May 31, 2004and 2003 (amounts in thousands):

 
|                                |   | **Three  months ended May 31,** |   | **Six months  ended May 31,** |   |
|-------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                |   | **(unaudited)**                 |   | **(unaudited)**               |   |
|                                |   | **2004**                        |   | **2003**                      |   | **2004** | ** ** | **2003** | ** ** |
|                                |   |                            |   |                          |   |   |   |   |   |
| Net Sales:                          |   |                            |   |                          |   |   |   |   |   |
|  Secure Payment Systems        |   | $                               | 9,887  |                          | $      | 10,099 |   | $ | 19,394 |   | $ | 20,438 |   |
| Wireless and Connectivity Solutions |   | 4,535                           |   | 3,296                         |   | 8,645 |   | 7,365 |   |
|                                |   | $                               | 14,422 |                          | $      | 13,395 |   | $ | 28,039 |   | $ | 27,803 |   |
|                                |   |                            |   |                          |   |   |   |   |   |
| Net Income:                         |   |                            |   |                          |   |   |   |   |   |
|  Secure Payment Systems        |   | $                               | 257    |                          | 343    |   | 261 |   | 607 |   |
| Wireless and Connectivity Solutions |   | $                               | (217   | )                             | (153   | ) | 99 |   | (135 | ) |
|                                |   | $                               | 40     |                          | $      | 190 |   | $ | 360 |   | $ | 472 |   |

 
|                                |   | **May 31,  2004** |       | **November 30,  2003** |       |
|-------------------------------------|--------|-------------------|------------|-----------------------------|------------|
|                                |   | **(unaudited)**   | ** ** |                        | ** ** |
| Segment Assets:                     |   |              |       |                        |       |
| Secure Payment Systems              |   | $                 | 30,748     |                        | $          | 29,083 |   |
| Wireless and Connectivity Solutions |   | 10,923            |       | 11,281                      |       |
|                                |   | $                 | 41,671     |                        | $          | 40,364 |   |

 

The following schedule is presented to reconcile May 31, 2004 andNovember 30, 2003 segment assets to the amounts reported in the Company’sconsolidated financial statements (amounts in thousands).

 
|                                |   | **May 31,  2004** |   | **November 30,  2003** |   |
|-------------------------------------|--------|-------------------|--------|-----------------------------|--------|
|                                |   | **(unaudited)**   |   |                        |   |
| Total assets of reportable segments |   | $                 | 41,671 |                        | $      | 40,364 |   |
| Inter-segment receivables           |   | (5,637            | )      | (5,170                      | )      |
| Investment in subsidiaries          |   | (234              | )      | (234                        | )      |
| Consolidated assets                 |   | $                 | 35,800 |                        | $      | 34,960 |   |

 

*Geographical Information*

 
|                |   | **Three  months ended May 31,** |   | **Six months  ended May 31,** |   |
|---------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                |   | **(unaudited)**                 |   | **(unaudited)**               |   |
|                |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
|                |   |                            |   |                          |   |   |   |   |   |
| Net Sales:          |   |                            |   |                          |   |   |   |   |   |
| United States       |   | $                               | 11,004 |                          | $      | 9,911 |   | $ | 21,772 |   | $ | 21,462 |   |
| All Other Countries |   | 3,418                           |   | 3,484                         |   | 6,267 |   | 6,341 |   |
|                |   | $                               | 14,422 |                          | $      | 13,395 |   | $ | 28,039 |   | $ | 27,803 |   |

 

12

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**Note 12.  Cash Flow Information**

 

Supplemental disclosure of cash flow information; (amounts inthousands):

 
|                                             |   | **Six months  ended May 31,** |   |
|--------------------------------------------------|--------|-------------------------------|--------|
|                                             |   | **(unaudited)**               |   |
|                                             |   | **2004**                      |   | **2003** |   |
| Cash paid during the period for:                 |   |                          |   |   |   |
| Interest                                         |   | $                             | — |   | $ | 8 |   |
| Income taxes                                     |   | $                             | 192    |   | $ | 271 |   |
| Supplemental disclosure of non-cash  activities: |   |                          |   |   |   |
| Retirement of treasury stock                     |   | $                             | 1,204  |   | $ | — |   |

 

**Note 13. Income Taxes**

 

Deferred taxes are provided on a liability method whereby deferred taxassets are recognized for deductible temporary differences and operating lossand tax credit carry forwards and deferred tax liabilities are recognized fortaxable temporary differences.  Temporary differences are the differencesbetween the reported amounts of assets and liabilities and their taxbases.  Deferred tax assets are reduced by a valuation allowance when itis determined to be more likely than not that some portion or all of thedeferred tax assets will not be realized. In evaluating the need for a valuationallowance, the Company considers future taxable income and prudent and feasibletax planning strategies. The Company has placed substantial reliance on itscurrent projections of future taxable income.  The Company re-assesses itsprojections of taxable income on a quarterly basis.  If it is determinedthat the Company would not be able to realize all or part of its deferred taxassets in the future, which would include the Company’s failure to materiallymeet its projections of taxable income, an adjustment to the carrying value ofthe deferred tax assets would be charged to income in the period in which suchdetermination was made and may affect our annual effective income tax rate.

 

Management currently believes the deferred tax assets are more likelythan not to be realized based on current expectations of future earnings andavailable tax planning strategies.  Deferred tax assets and liabilitiesare adjusted for the effects of changes in tax laws and rates on the date ofenactment.

 

The net deferred tax assets have been classified on the accompanyingconsolidated balance sheets as follows (in thousands):

 
|             |   | **May 31,  2004** |   | **November 30,  2003** |   |
|------------------|--------|-------------------|--------|-----------------------------|--------|
|             |   |              |   |                        |   |
| Current assets   |   | $                 | 2,789  |                        | $      | 2,789 |   |
| Long-term assets |   | 1,240             |   | 1,330                       |   |
|             |   | $                 | 4,029  |                        | $      | 4,119 |   |

 

**Note 14. Proposed Merger**

 

On May 26, 2004, we announced that TROY had entered into a mergeragreement (the “Merger”) with Dirk, Inc., a company controlled by Patrick Dirk,the founder of TROY, and his family members, pursuant to which Mr. Dirk and hisfamily will acquire the outstanding shares of TROY common stock that they donot already own.  TROY expects theMerger to close in August 2004. The Merger is subject to approval by TROY stockholders as required underapplicable state law, to completion of financing arrangements necessary toaccomplish the Merger, and to certain other closing conditions.  On June 17, 2004, we filed aPreliminary Proxy Statement on Schedule 14A and a Schedule 13E-3 inconnection with the proposed Merger.

 

**Note 15. Litigation**

 

On November 21, 2002, Tom Lloyd filed an action in the SuperiorCourt of the State of California in and for Orange County against TROY and itsdirectors, alleging that defendants breached their fiduciary duties inconnection with the previous merger by attempting to provide the Dirk familywith preferential treatment in connection with their efforts to complete a saleof TROY. The complaint

 

13

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sought to enjoin an acquisition of TROY by the Dirk family, as well asattorneys’ fees. Following termination of the previous merger Agreement, theplaintiff filed a motion for dismissal of the action and award of attorney’sfees and expenses of $387,250.  TROY filed a motion in support of theplaintiffs motion for dismissal of the action and in opposition to plaintiffsmotion for fees.  On March 4, 2004 the court issued a ruling grantingthe motion for dismissal with prejudice, and granting the motion for attorneysfees of $175,000. On April 30, 2004, TROY filed a notice of appeal. TROYhas accrued an estimate of expenses to be incurred in connection with thislitigation in fiscal 2003 in excess of the deductible amount, which wasrecorded as an expense in fiscal 2002.

 

Following the announcement of the proposed Merger, Osmium Partners LLC,Ralph Hamer, Roy Liedtke, and Tilson Growth Fund, LP, respectively, filedpurported class action complaints in the California Superior Court for OrangeCounty against TROY and our directors. The Liedtke complaint also names Dirk, Inc. In all four actions,plaintiffs allege that defendants breached their fiduciary duties in connectionwith the Merger by attempting to provide the Dirk family with preferentialtreatment in connection with their efforts to complete a sale of TROY.Plaintiffs in all four actions seek declaratory relief, an order enjoining theacquisition, and attorneys fees.  TheLiedtke complaint also seeks damages. TROY and our directors have not yet been served with the Liedtke andTilson Growth Fund complaints.  OsmiumPartners LLC has served discovery requests, but discovery has not commenced inthe other actions.  No trial date hasbeen set in any of these actions.  Ifthese actions are successful in enjoining the transaction, or the Liedtkeaction is successful in obtaining damages, it could have a material adverseeffect on our business, financial position, or results of operation.  Currently, the amount of such an adverseeffect cannot be estimated.

 

**Note 16. Guarantees**

 

*Indemnifications*

 

In the ordinary course ofbusiness, TROY enters into contractual arrangements under which TROY may agreeto indemnify the third party in the arrangement from any losses incurredrelating to services performed on behalf of TROY or for losses arising fromcertain events as defined within the particular contract, which may includelitigation or claims relating to past performance.  These arrangements include, but are not limited to, TROY’sindemnification of its officers and directors to the maximum extent under thelaws of the state of Delaware, the indemnification of its lessors for certainclaims arising from the use of the facilities, and the indemnification of itsbank for certain claims arising from the bank's grants of credit to TROY.  Such indemnification obligations may not besubject to maximum loss clauses. Historically, payments, if any, or if made or required related to theseindemnifications have been immaterial.

 

*Warranty*

 

TROY accrues for warrantyexpense at the time revenue is recognized and maintains a warranty accrual forestimated future warranty obligations based upon the relationship betweenhistorical and anticipated warranty costs and sales volumes.  To the extent TROY experiences increasedwarranty claim activity or increased costs associated with servicing thoseclaims, our warranty accrual will increase resulting in decreased grossprofit.  The standard warranty periodfor TROY’s products ranges from one month to five years.

 

*Deferred Revenue*

 

TROY offers fixed-price supportor maintenance contracts, including extended warranties, to its customers.  Revenue from equipment maintenance contractson check printing equipment and software is recorded as deferred income whenbilled and is recognized straight-line over the term of the contract.

14

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**ITEM 2.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis should be read in conjunctionwith our Consolidated Financial Statements and related Notes included in this report. This report contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995.  The statementscontained in this report that are not historical in nature, particularly thosethat 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.* Such forward looking statements include, butare not limited to, statements regarding the proposed merger with Dirk, Inc.,our ability to finance our operating activities, our critical accountingpolicies and recent accounting pronouncements, international sales, compliancewith laws and regulations, benefits of our ERP system, our current litigationand our efforts to defend such litigation.*

 

Various risks and uncertainties could cause actual results to differmaterially from those expressed in forward-looking statements.  Theserisks and uncertainties include, but are not limited to, completion of theproposed merger, the continued demand for printed financial documents; theuseful life of our products, the market acceptance of products incorporatingwireless printing technologies; the impact of competition from existing and newtechnologies and companies; the impact of litigation regarding the proposedmerger; and the other factors set forth below under the heading “CertainImportant Factors” and in our other periodic reports and other documents thatwe file from time to time with the Securities and ExchangeCommission. These forward-looking statements speak only as of the datehereof.  We expressly disclaim any obligation or undertaking to releasepublicly any updates or revisions to any forward-looking statements containedherein to reflect any change in our expectations with regard thereto or anychange in events, conditions or circumstances on which any such statement isbased.

 

We own or have rights to trademarks that we use in connection with thesale of our products.  TROY®,*e*CheckSecureTM, PrintraNetTM, TROYmarkTM, StarACHTM, EtherwindTM, WindconnectTM, WindportTM,EtherSyncTM, Exact MICR TechnologyTM (ExMTTM) and Exact Positioning TechnologyTM(ExPTTM) are among the trademarks that we own.  This report also makesreference to trademarks and trade names of other companies.

 

All references to “TROY,” “we,” “us” or “our” means TROY Group, Inc.and its subsidiaries, except where it is made clear that the term means onlythe parent company.

 

**Recent Developments**

 

On May 26, 2004, we announced that TROY had entered into a mergeragreement (the “Merger”) with Dirk, Inc., a company controlled by Patrick Dirk,the founder of TROY, and his family members, pursuant to which Mr. Dirk and hisfamily will acquire the outstanding shares of TROY common stock that they donot already own.  TROY expects theMerger to close in August 2004. The Merger is subject to approval by TROY stockholders as required underapplicable state law, to completion of financing arrangements necessary toaccomplish the Merger, and to certain other closing conditions.  On June 17, 2004, we filed aPreliminary Proxy Statement on Schedule 14A and a Schedule 13E-3 inconnection with the proposed Merger.

 

**Background**

 

TROY offers a full range of products to its customers in two primaryproduct lines: Secure Payment Systems and Wireless and Connectivity Solutions.Secure Payment Systems include Security Printing Solutions, which enable thesecure printing and management of checks, and Financial Service Solutions,which enable secure electronic payments. Wireless and Connectivity Solutionsincludes hardware and software solutions that enable enterprises to shareintelligent devices, such as printers, either wirelessly or using traditionalnetworks.

 

Our products have been adopted by a wide variety of industriesincluding electronic bill payment utilities, retail and brokerage firms,telecommunications, financial services, insurance, computer hardware,automotive, personnel and others.  We market our products in 55 countriesand had more than 7,000 active customers in the past year.  In the firstsix months of fiscal 2004, there were no customers who accounted for 10% ormore of our net sales.

 

15

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**Results of Operations**

 

The following table sets forth, for the periods indicated, certaininformation derived from our consolidated statements of operations expressed asa percentage of net sales:

 
|                                          |   | **Three  Months Ended May 31,** |   | **Six Months  Ended May 31,** |   |
|-----------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                          |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Net sales                                     |   | 100.0                           | %      | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |   | 60.7                            |   | 61.2                          |   | 60.7 |   | 59.8 |   |
| Gross profit                                  |   | 39.3                            |   | 38.8                          |   | 39.3 |   | 40.2 |   |
| Selling, general and administrative  expenses |   | 31.2                            |   | 27.5                          |   | 28.9 |   | 27.7 |   |
| Research and development expenses             |   | 7.6                             |   | 9.2                           |   | 8.3 |   | 9.7 |   |
| Amortization of intangible assets             |   | 0.2                             |   | —                        |   | 0.2 |   | 0.1 |   |
| Operating income                              |   | 0.3                             |   | 2.1                           |   | 1.9 |   | 2.7 |   |
| Interest income                               |   | 0.2                             |   | 0.1                           |   | 0.2 |   | 0.1 |   |
| Interest expense                              |   | —                          |   | —                        |   | — |   | — |   |
| Income before income taxes                    |   | 0.5                             |   | 2.2                           |   | 2.1 |   | 2.8 |   |
| Provision for income taxes                    |   | 0.2                             |   | 0.8                           |   | 0.8 |   | 1.1 |   |
| Net income                                    |   | 0.3                             | %      | 1.4                           | %      | 1.3 | % | 1.7 | % |

 

**Three Months Ended May 31, 2004 Compared toThree Months Ended May 31, 2003**

 

*Net Sales*

 

Net sales by product segment and related percent changes are asfollows:

 
|                                |   | **Three  months ended May 31,** |   |
|-------------------------------------|--------|---------------------------------|--------|
|                                |   | **(amounts  in millions)**      |   |
|                                |   | **2004**                        |   | **2003** |   | **Percent  Change** |   |
| Net sales:                          |   |                            |   |   |   |   |   |
| Secure Payment Systems              |   | $                               | 9.9    |   | $ | 10.1 |   | (2.1 | )% |
| Wireless and Connectivity Solutions |   | 4.5                             |   | 3.3 |   | 37.6 | % |
|                                |   | $                               | 14.4   |   | $ | 13.4 |   | 7.7 | % |

 

Net sales in the three months ended May 31, 2004 increased by $1.0million, or 7.7%, to $14.4 million from $13.4 million in the three months endedMay 31, 2003.  The increase in sales was primarily due to a $1.2 millionincrease in revenue from our Wireless and Connectivity print server sales androyalties, partially offset by a $0.2 million decline in sales of MICR printersand supplies and StarACH software, both in our Secure Payment Systemssegment.  Net sales were notsignificantly affected by price changes.

 

*Gross Profit*

 

Gross profit, related percent changes and percent of total sales are asfollows:

 
|         |   | **Three  months ended May 31,** |   |                                |   |
|--------------|--------|---------------------------------|--------|-------------------------------------|--------|
|         |   | **(amounts  in millions)**      |   | **Percent of  Total Sales May 31,** |   |
|         |   | **2004**                        |   | **2003**                            |   | **Percent  Change** |   | **2004** |   | **2003** |   |
| Gross profit |   | $                               | 5.7    |                                | $      | 5.2 |   | 8.9 | % | 39.3 | % | 38.8 | % |
|              |        |                                 |        |                                     |        |  |  |  |  |  |  |  |  |

 

16

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Gross profit increased in the three months ended May 31, 2004 from thethree months ended May 31, 2003, primarily due to increased sales of Wirelessand Connectivity products, partially offset by decreased sales of SecurePayment Systems products and the impairment charge of $284,000, related to ACHsoftware (see Note 4). Gross profit as a percent of sales will fluctuate basedon shifts in the mix of products sold.  Gross profit was not significantlyaffected by price changes.

 

*Selling, General and Administrative Expenses*.

 

Selling, general and administrative expenses, related percent changesand percent of total sales are as follows:

 
|                                          |   | **Three  months ended May 31,** |   |                                |       |
|-----------------------------------------------|--------|---------------------------------|--------|-------------------------------------|------------|
|                                          |   | **(amounts  in millions)**      |   | **Percent of  Total Sales May 31,** |       |
|                                          |   | **2004**                        |   | **2003**                            | ** ** | **Percent  Change** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Selling, general and administrative  expenses |   | $                               | 4.5    |                                | $          | 3.7 |   | 22.2 | % | 31.2 | % | 27.5 | % |
|                                               |        |                                 |        |                                     |            |  |  |  |  |  |  |  |  |

 

The increase in selling, general and administrative expenses wasprimarily due to increases in costs associated with implementation of the newERP system and professional fees, partially offset by cost savings fromreductions in staff and foreign currency translation gains. General andadministrative expenses in the second quarter of fiscal 2004 included $0.5million in professional fees related to audit fees, the currently proposedMerger to take TROY private and the deductible portion of TROY’s directors andofficer’s insurance policy related to the recent litigation regarding theproposed Merger described under Legal Proceedings, and $0.2 million for theimplementation of the new ERP system. General and administrative expenses in the second quarter of fiscal 2003included $0.4 million in professional fees related to the year-end audit andthe previously proposed merger to take TROY private.

 

*Research and Development Expenses*.

 

Research and development expenses, related percent changes and percentof total sales are as follows:

 
|                              |   | **Three  months ended May 31,** |   |                                |   |
|-----------------------------------|--------|---------------------------------|--------|-------------------------------------|--------|
|                              |   | **(amounts  in millions)**      |   | **Percent of  Total Sales May 31,** |   |
|                              |   | **2004**                        |   | **2003**                            |   | **Percent  Change** |   | **2004** |   | **2003** |   |
| Research and development expenses |   | $                               | 1.1    |                                | $      | 1.2 |   | (10.7 | )% | 7.6 | % | 9.2 | % |
|                                   |        |                                 |        |                                     |        |  |  |  |  |  |  |  |  |

 

Research and development expenses decreased in the three months endedMay 31, 2004 compared to the three months ended May 31, 2003, primarily due toreduced spending for Secure Payment Systems products.  The total researchand development expenses for the second quarter of fiscal 2004 included $0.6million for Secure Payment Systems and $0.5 million for Wireless and ConnectivitySolutions. We have the ability to redirect our research and developmentactivities as needed based on our product strategies and marketopportunities.  We forecast and budget research and development expensesby segment, but not by project.  The anticipated timing for thecommercialization of any of our development efforts is not currently known.

 

*Amortization of Intangible Assets. *Amortizationof intangible assets increased by $13,000 to $24,000 in the three months endedMay 31, 2004 from $11,000 in the three months ended May 31, 2004.

 

*Operating Income*. As a result of the above factors, operating income decreased by $235,000 to$43,000 in the three months ended May 31, 2004 from $278,000 in the threemonths ended May 31, 2003.  The operating income as a percentage of netsales was 0.3% in

 

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the three months ended May 31, 2004 compared to 2.1% in the threemonths ended May 31, 2003.

 

*Interest Income.* Interest income was $23,000 in each of the three months ended May 31, 2004 and2003.

 

*Interest Expense*. There was no interest expense in the three months ended May 31, 2004 comparedto $6,000 in the three months ended May 31, 2003, due to the payment of thenote payable in fiscal 2003.

 

*Income Taxes*. Income tax expense was $26,000 in the three months ended May 31, 2004 comparedto $105,000 in the three months ended May 31, 2003.  Income tax expense asa percentage of pretax income was 39.4% in the three months ended May 31, 2004compared to 35.6% in the three months ended May 31, 2003.  The increase inthe effective tax rate in fiscal 2004 compared to fiscal 2003 was primarily dueto a higher proportion in fiscal 2004 of foreign source income which has ahigher effective tax rate.

 

**Six Months Ended May 31, 2004 Compared to SixMonths Ended May 31, 2003**

 

*Net Sales*

 

Net Sales by product segment and related percent changes are asfollows:

 
|                                |   | **Six months  ended May 31,** |   |
|-------------------------------------|--------|-------------------------------|--------|
|                                |   | **(amounts  in millions)**    |   |
|                                |   | **2004**                      |   | **2003** |   | **Percent  Change** |   |
| Net sales:                          |   |                          |   |   |   |   |   |
| Secure Payment Systems              |   | $                             | 19.4   |   | $ | 20.4 |   | (5.1 | )% |
| Wireless and Connectivity Solutions |   | 8.6                           |   | 7.4 |   | 17.4 | % |
|                                |   | $                             | 28.0   |   | $ | 27.8 |   | 0.8 | % |

 

Net sales in the six months ended May 31, 2004 increased by $0.2million, or 0.8% to $28.0 million from $27.8 million in the six months endedMay 31, 2003.  The increase in sales wasprimarily due to a $1.2 million increase in revenue from our Wireless andConnectivity print server sales and royalties, partially offset by a $0.5million reduced demand for MICR printers and supplies, and a $0.5 milliondecline in revenue of StarACH software, both in our Secure Payment Systemssegment.  Net sales were notsignificantly affected by price changes.

 

*Gross Profit*

 

Gross profit, related percent changes and percent of total sales are asfollows:

 
|         |   | **Six months  ended May 31,** |   |                                |   |
|--------------|--------|-------------------------------|--------|-------------------------------------|--------|
|         |   | **(amounts  in millions)**    |   | **Percent of  Total Sales May 31,** |   |
|         |   | **2004**                      |   | **2003**                            |   | **Percent  Change** |   | **2004** |   | **2003** |   |
| Gross profit |   | $                             | 11.0   |                                | $      | 11.2 |   | (1.5 | )% | 39.3 | % | 40.2 | % |
|              |        |                               |        |                                     |        |  |  |  |  |  |  |  |  |

 

Gross profit decreased in the six months ended May 31, 2004 from the sixmonths ended May 31, 2003, primarily due to decreased sales of Secure PaymentSystems products described above and the impairment charge of $284,000 relatedto ACH software (see Note 4), partially offset by increased sales of Wirelessand Connectivity products.  Gross profitas a percent of sales will fluctuate based on shifts in the mix of productssold.  Gross profit was not significantly affected by price changes.

 

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*Selling, General and Administrative Expenses*.

 

Selling, general and administrative expenses, related percent changesand percent of total sales are as follows:

 
|                                          |   | **Six months  ended May 31,** |   |                                |   |
|-----------------------------------------------|--------|-------------------------------|--------|-------------------------------------|--------|
|                                          |   | **(amounts  in millions)**    |   | **Percent of  Total Sales May 31,** |   |
|                                          |   | **2004**                      |   | **2003**                            |   | **Percent  Change** |   | **2004** |   | **2003** |   |
| Selling, general and administrative  expenses |   | $                             | 8.1    |                                | $      | 7.7 |   | 4.9 | % | 28.9 | % | 27.7 | % |
|                                               |        |                               |        |                                     |        |  |  |  |  |  |  |  |  |

 

 The increase in selling, general and administrative expenses wasprimarily due to increases in costs associated with the implementation of thenew ERP system, partially offset by cost savings from reductions in staff,professional fees and foreign currency translation gains.  General and administrative expenses in thesix months of fiscal 2004 included $0.8 million in professional feesrelated to the year-end audit, the currently proposed Merger to take TROYprivate and the deductible portion of our director and officers insurancepolicy related to the recent litigation regarding the currently proposed Mergerdescribed under Legal Proceedings, and $0.5 million for the implementation ofthe new ERP system.  General andadministrative expenses in the six months of fiscal 2003 included $1.1 millionin professional fees related to the year-end audit and the previously proposedmerger to take TROY private.

 

*Research and Development Expenses*.

 

Research and development expenses, related percent changes and percentof total sales are as follows:

 
|                              |   | **Six months  ended May 31,** |   |                                |   |
|-----------------------------------|--------|-------------------------------|--------|-------------------------------------|--------|
|                              |   | **(amounts  in millions)**    |   | **Percent of  Total Sales May 31,** |   |
|                              |   | **2004**                      |   | **2003**                            |   | **Percent  Change** |   | **2004** |   | **2003** |   |
| Research and development expenses |   | $                             | 2.3    |                                | $      | 2.7 |   | (13.2. | )% | 8.3 | % | 9.7 | % |
|                                   |        |                               |        |                                     |        |  |  |  |  |  |  |  |  |

 

Research and development expenses decreased in the six months ended May31, 2004 compared to the six months ended May 31, 2003, primarily due toreduced spending for Secure Payment Systems products.  The total researchand development expenses for the six months of fiscal 2004 included $1.4million for Secure Payment Systems and $0.9 million for Wireless andConnectivity Solutions. We have the ability to redirect our research and developmentactivities as needed based on our product strategies and marketopportunities.  We forecast and budget research and development expensesby segment, but not by project.  The anticipated timing for thecommercialization of any of our development efforts is not currently known.

 

*Amortization of Intangible Assets. *Amortizationof intangible assets increased by $29,000 to $51,000 in the six months endedMay 31, 2004 from $22,000 in the six months ended May 31, 2004.

 

*Operating Income*. As a result of the above factors, operating income decreased by $213,000 to$533,000 in the six months ended May 31, 2004 from $746,000 in the six monthsended May 31, 2003.  The operating income as a percentage of net sales was1.9% in the six months ended May 31, 2004 compared to 2.7% in the six monthsended May 31, 2003.

 

*Interest Income.* Interest income increased by $27,000 to $53,000 in the six months ended May 31,2004 from $26,000 in the six months ended May 31, 2003.  This increase was the result of increases inour investment in available-for-sale securities.

 

*Interest Expense*. There was no interest expense in the six months ended May 31, 2004 compared to$8,000 in the six months ended May 31, 2003, due to the payment of the notepayable in fiscal 2003.

 

*Income Taxes*. Income tax expense was $226,000 in the six months ended May 31, 2004 comparedto $292,000 in the six months ended May 31, 2003.  Income tax expense as apercentage of pretax income was 38.6% in the six months ended May 31, 2004compared to 38.2% in the six months ended May 31, 2003.  The increase inthe effective tax rate in fiscal 2004 compared to fiscal

 

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2003 was primarily due to a higher proportion in fiscal 2004 of foreignsource income which has a higher effective tax rate.

 

**Liquidity and Capital Resources**

 

Cash flows provided by operating activities were $1.3 million in thesix months ended May 31, 2004 compared to $48,000 provided by operatingactivities in the six months ended May 31, 2003.  This increase in cashflows provided was primarily due to delayed payments to vendors in fiscal 2004partially offset by increased accounts receivable and accrued expenses. The cash provided in fiscal 2003 was primarily due to collections of accounts receivableoffset by increases in inventories.

 

Cash flows used in investing activities were $0.4 million in the sixmonths ended May 31, 2004 compared to $0.2 million in the six months ended May31, 2003.  Cash flows used included capital expenditures of $0.4 millionin fiscal 2004 and $0.6 million in fiscal 2003, partially offset by $0.5million in maturities of available-for-sale securities.

 

Cash flows used in financing activities were $8,000 in the six monthsended May 31, 2004 compared to cash flows used in financing activities of$26,000 in the six months ended May 31, 2003.  The decrease in cash usedin financing activities primarily resulted from the payment of the note payablein fiscal 2003, partially offset by the purchase of treasury stock in fiscal2004.

 

We have a $5.0 million line-of-credit agreement with ComericaBank.  As of May 31, 2004, there were no borrowings outstanding againstthe line of credit.  Borrowings under the line of credit bear interest atthe lesser of the bank’s reference rate (4.00% at May 31, 2004) less 0.25% orthe bank’s LIBOR rate (1.11% at May 31, 2004) plus 2% and are limited to 80% ofeligible accounts receivable and 50% of eligible inventories if totalliabilities to tangible effective net worth is greater than two to one. No formula is required if total liabilities to tangible effective net worth isless than two to one. In connection with the line-of-credit agreement, we havea $650,000 standby letter-of-credit sub-limit, of which approximately $80,000was outstanding at May 31, 2004.  This line of credit is secured bysubstantially all of our assets.  Our borrowing arrangement requires us tocomply with certain financial covenants and other restrictions, including ourability to pay dividends and as of May 31, 2004 we were in compliance withthose covenants. As of May 31, 2004, we had approximately $4.9 million inavailability under the line of credit.  The line-of-credit borrowings aredue on demand. The agreement may be terminated by either party.

 

We have completed a commitment letter with Comerica Bank in connectionwith the proposed Merger described above under Recent Developments.  This commitment will increase our currentline of credit from $5.0 million to $7.0 million and is subject to customaryconditions, including the negotiation, execution and delivery of definitivedocumentation.  As of May 31, 2004 wehave not executed definitive documents. Execution of the loan documents is anticipated at or around theeffective time of the proposed Merger.

 

We believe that existing cash balances of $2.6 million, our investmentsof $8.0 million, cash generated by operating activities, and funds availableunder our credit facility will be sufficient to finance our operatingactivities for at least the next 12 months, which will include capitalexpenditures of approximately $0.5 million.  To the extent that the fundsgenerated from these sources are insufficient to finance our operatingactivities, we would need to raise additional funds through public or privatefinancing.  We cannot assure you that additional financing, if required,will be available on terms favorable to us, or at all.

 

In March 2001, TROY established a stock repurchase program underwhich TROY’s common stock, with an aggregate market value up to $4.0 million,may be acquired in the open market.  As of May 31, 2004, TROY hadpurchased approximately 334,293 shares of common stock in the open market underthis stock repurchase program, at an average price of $3.63 per share.  InFebruary 2004, TROY retired 331,493 shares purchased under theprogram.  Approximately $2.8 million remains available for future commonstock repurchases.

 

**Critical Accounting Policies and Estimates**

 

*Application of Critical Accounting Policies*

 

Critical accounting policies are defined as those that are the mostimportant to the accurate portrayal of our financial condition and results ofoperations. Critical accounting policies require management’s subjectivejudgment and may produce materially different results under differentassumptions and conditions. Our operations are affected by numerous factorsincluding continued demand for printed documents, development and marketacceptance of wireless products, changes in technologies and new laws andgovernment regulations and policies.  We cannot predict what impact, ifany, the occurrence of these or other events might have on our operations.

 

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Significant estimates and assumptions made by management are used for,but not limited to, the allowance for doubtful accounts, the reserve for slowmoving or obsolete inventories, the carrying value and fair value of long-livedand intangible assets and the realizability of deferred tax assets. Thefollowing are our critical accounting policies:

 

*Inventories*

 

We value inventories at the lower of cost or market on a first-in,first-out basis.  We use a standard cost system for purposes ofdetermining cost.  The standards are adjusted periodically to ensure theyapproximate actual costs.  We include materials, labor and manufacturingoverhead in the cost of inventories.  We write down the carrying value ofour inventory to market value based upon assumptions about future demand andmarket conditions.  We compare current inventory levels on a product basisto our current sales forecasts in order to assess our inventory balance. Our sales forecasts are based on economic conditions and trends (both currentand projected), anticipated customer demand, expected future products and otherassumptions.  Our estimates may differ from actual results due to thequality, quantity and mix of products in inventory, customer preferences andeconomic conditions and as a result, additional write-downs may be required.

 

*Capitalization of software development costs*

 

Costs incurred in the research, design and development of software forsale to others as a separate product or embedded in a product and sold as partof the product as a whole are charged to expense until technologicalfeasibility is established.  Thereafter, software development costs arecapitalized until the products are offered for sale, and amortized to productcost of sales on a straight-line basis over the lesser of five years or theestimated economic lives of the respective products, beginning when the productsare offered for sale. At each balance sheet date, we compare the unamortizedcapitalized costs to the net realizable value of that product. The netrealizable value is the estimated future gross revenues from that productreduced by the estimated future costs of completing and disposing of thatproduct, including the costs of performing maintenance and customer supportrequired to satisfy our responsibility set forth at the time of sale. Fordeveloped software components of a product or process marketed as an integralpart of that product or process and not sold separately, we evaluate netrealizable value of that component with the total system.  We determinenet realizable value considering many of the same factors we use inestablishing reserves for estimated obsolete or excess inventory.

 

*Long-lived and intangible assets*

 

Depreciation and amortization of our long-lived assets is providedusing the straight-line method over their estimated useful lives. Changes incircumstances such as the passage of new laws or changes in regulations,technological advances, changes to our business model or changes in the capitalstrategy could result in the actual useful lives differing from initialestimates. In those cases where we determine that the useful life of along-lived asset should be revised, we will depreciate the net book value inexcess of the estimated residual value over its revised remaining useful life.Factors such as changes in the planned use of equipment, customer attrition,contractual amendments or mandated regulatory requirements could result inshortened useful lives.

 

We periodically review the value of our long-lived tangible and ouramortizing intangible assets to determine if impairment has occurred bycomparing the carrying value of the long-lived assets with the lowest level ofidentifiable future net undiscounted cash flows expected to result from the useof the assets, including cash flows from disposition.  As discussed inNote 14 to the consolidated financial statements in our annual report on Form10-K for the fiscal year ended November 30, 2003, we recorded animpairment loss on certain long-lived assets during fiscal year 2001 based onan evaluation of projected operating income, cash flows and business prospects.In addition, we determined other long-lived assets were not impaired. In makingthese determinations, the assumptions used by management about future cashflows are critical.  If these expected cash flows are not realized, futureadditional impairment losses may be recorded.

 

*Goodwill and Other Intangible Assets*

 

We adopted Statement of Financial Accounting Standards (SFAS)No. 142*Goodwill and Other IntangibleAssets* effective December 1, 2002 and performed our initialtransitional impairment test as of that date. The provisions of SFASNo. 142 require that we allocate our goodwill to our various reportingunits, determine the carrying value of those businesses, and estimate the fairvalue of the reporting units so that a two-step goodwill impairment test can beperformed. Our reporting units represent components of our

 

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operating segments, which are the same as the reportable segments,identified in Note 11.  In the firststep of the goodwill impairment test, the fair value of each reporting unit iscompared to its carrying value. If the fair value exceeds the carrying value,goodwill is not impaired and no further testing is performed. If the carryingvalue exceeds the fair value, then the second step must be performed, and theimplied fair value of the reporting unit’s goodwill must be determined andcompared to the carrying value of the goodwill for the reporting unit. If thecarrying value of a reporting unit’s goodwill exceeds its implied fair value,then an impairment loss equal to the difference is recorded. For the year endedNovember 30, 2003, no impairment loss was recognized.  Our annualimpairment testing date is the beginning of the fiscal fourth quarter, which isSeptember 1.

 

*Evaluation of long-lived and intangibleassets*

 

For long-lived assets, other than goodwill, Financial AccountingStandards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.144,*Accounting for the Impairment orDisposal of Long-Lived Assets*, requires the evaluation for impairmentwhenever events or changes in circumstances have indicated that an asset maynot be recoverable. Long-lived assets evaluated for impairment are grouped withother assets to the lowest level for which identifiable cash flows are largelyindependent of the cash flows of other groups of assets and liabilities. If thesum of the projected undiscounted cash flows (excluding interest charges) isless than the carrying value of the assets, the assets will be written down tothe estimated fair value, and the loss recognized in income from continuingoperations in the period in which the determination is made. Management hasdetermined that no impairment of long-lived assets existed at November 30,2003.  In the second quarter of fiscal2004, management evaluated the long-lived intangible assets for impairmentusing the methodology described in SFAS No. 144, and determined that the assetrepresenting the capitalized software development costs for ACH software wasimpaired.  As a result, the unamortizedamount of $284,000 at April 30, 2004 was written off in the secondquarter.

 

*Revenue recognition*

 

We recognize revenue from the sale of our check printing equipment andsupplies and print servers to end users, distributors, original equipmentmanufacturers (OEM) and resellers when the price is fixed and determinable, theproduct is shipped and the title is transferred to the buyer, with economicsubstance, net of an allowance for estimated returns, as long as no significantpost-delivery obligations exist and collection of the resulting receivable isprobable and not contingent on resale of the product. Revenue from equipmentmaintenance contracts on check printing equipment is recorded as deferredincome when billed and is recognized straight-line over the term of thecontract.  We provide for estimated reserves based upon our historicalrates of returns and allowances.  Actual returns in any future period areinherently uncertain and thus may differ from our estimates.  We accruefor warranty expense at the time revenue is recognized and maintain a warrantyaccrual for estimated future warranty obligations based upon the relationshipbetween historical and anticipated warranty costs and sales volumes.  Tothe extent we experience increased warranty claim activity or increased costsassociated with servicing those claims, our warranty accrual will increaseresulting in decreased gross profit.

 

We recognize revenue from software arrangements of our StarACHTMsoftware in accordance with Statement of Position (“SOP”) 97-2,*Software Revenue Recognition* as amendedby SOP 98-9,*Modification of SOP 97-2 withRespect to Certain Transactions*. Revenue is recognized whenpersuasive evidence of an arrangement exists and delivery has occurred,provided the fee is fixed or determinable, collectibility is probable and thearrangement does not require significant customization or modification of thesoftware.  For arrangements where the software requires significantcustomization or modification, we recognize revenue for the software licenseand consulting services portion of the arrangement using the completed contractmethod of accounting under SOP 81-1. Contracts are considered complete uponcustomer acceptance.  Maintenance revenue for the StarACHTM software isrecognized ratably over the term of the maintenance contract, typically 12months.

 

Revenue from software license agreements with OEMs for print serverswhereby we provide ongoing support over the term of the contract is recognizedwhen the licensed software is incorporated into the OEMs’ products.

 

*Allowance for doubtful accounts*

 

We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. The amount of the reserve is based on historical experience and our analysis ofthe accounts receivable outstanding.  If the

 

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financial condition of our customers were to deteriorate, resulting inan impairment of their ability to make payments, additional allowances may berequired which would result in an additional expense in the period suchdetermination was made.

 

*Off-balance sheet financings and liabilities*

 

Other than lease commitments and legal contingencies incurred in thenormal course of business, we do not have any off-balance sheet financingarrangements or liabilities.  We do not have any majority-ownedsubsidiaries or any interests in, or relationships with, any materialspecial-purpose entities that are not included in the consolidated financial statements,except for a related party lease arrangement.

 

*Comprehensive Income*

 

Management has determined that the functional currency of its foreignsubsidiary located in Canada is the local currency, while the functionalcurrency of its foreign subsidiary located in Germany is the U.S. dollar.Assets and liabilities of our foreign subsidiary whose local currency is thefunctional currency are translated into U.S. dollars at the period-end exchangerates. Income and expenses are translated at the average exchange rate for theperiod and the resulting translation adjustments are accumulated as a separatecomponent of stockholders’ equity, which totaled $10,000 and $33,000 at May 31,2004 and November 30, 2003, respectively. The German subsidiary’s financialstatements are remeasured at month-end exchange rates for monetary assets andliabilities, and historical exchange rates for non-monetary assets andliabilities and equity. Income and expenses are translated at the averageexchange rate for the period, and translation adjustments are included inincome for foreign entities whose functional currency is the U.S. dollar.Foreign currency gains and losses from transactions denominated in other thanrespective local currencies are included in income.

 

*Income taxes*

 

Deferred taxes are provided on a liability method whereby deferred taxassets are recognized for deductible temporary differences, and operating lossand tax credit carry forwards and deferred tax liabilities are recognized fortaxable temporary differences.  Temporary differences are the differencesbetween the reported amounts of assets and liabilities and their taxbases.  Deferred tax assets are reduced by a valuation allowance when itis determined to be more likely than not that some portion or all of thedeferred tax assets will not be realized. In evaluating the need for avaluation allowance, we consider future taxable income and prudent and feasibletax planning strategies. We have placed substantial reliance on our currentprojections of future taxable income.  We re-assess our projections oftaxable income on a quarterly basis.  If it is determined that we wouldnot be able to realize all or part of our deferred tax assets in the future,which would include our failure to materially meet our projections of taxableincome, an adjustment to the carrying value of the deferred tax assets would becharged to income in the period in which such determination was made and mayaffect our annual effective income tax rate.

 

We currently believe the deferred tax assets are more likely than notto be realized based on current expectations of future earnings and availabletax planning strategies.  Deferred tax assets and liabilities are adjustedfor the effects of changes in tax laws and rates on the date of enactment.

 

*Stock-based compensation*

 

As allowed by Statement of Financial Accounting Standards (SFAS) No.123, we have elected to continue to account for our employee stock-basedcompensation plan using the intrinsic value method in accordance with AccountingPrinciples Board (APB) Opinion No. 25,*Accounting for Stock Issued to Employees, and related Interpretations*,which does not require compensation to be recorded if the consideration to bereceived is at least equal to the fair value of the common stock to be receivedat the measurement date. Non-employee stock-based transactions are accountedfor under the requirements of SFAS No. 123,*Accounting for Stock-Based Compensation*, which requirescompensation to be recorded based on the fair value of the securities issued orthe services received, whichever is more reliably measurable.

 

**Recent Accounting Pronouncements**

 

In May 2003 FASB issued Statement of Financial Accounting Standards(SFAS) No. 150,*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*,which requires that certain financial instruments previously presented

 

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as equity or temporary equity be presented as liabilities.  Suchinstruments include mandatory redeemable preferred and common stock, andcertain options and warrants.  SFAS No.150 is effective for financialinstruments issued, entered into or modified after May 31, 2003 and isgenerally effective at the beginning of the first interim period beginningafter June 15, 2003.  The adoption of SFAS No.150 is not expected tohave a material effect on the Company’s financial position or results of itsoperations.

 

In 2003, the Financial Accounting Standards Board issued FASBInterpretation No. 46 (FIN 46),*Consolidation of Variable Interest Entities, an Interpretation of AccountingResearch Bulletin No. 51*, as revised. Prior to FIN 46, acompany generally included another entity in the company’s financial statementsonly if it controlled the entity through ownership of the majority votinginterests.  FIN 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  We have adopted FIN 46effective with the quarter ending May 31, 2004, and we have determined that wedo not have any variable interest entities that are required to be consolidatedin our financial statements.

 

**CERTAIN IMPORTANT FACTORS**

 

There are several important factors that could cause our actual resultsto differ materially from those we anticipate or those reflected in any of ourforward-looking statements.  These factors, and their impact on thesuccess of our operations and our ability to achieve our goals, include, butare not limited to, those set forth below.

 

**Our business depends on the continued demandfor printed documents, including financial documents.**

 

Because we provide solutions that allow enterprises to distribute andprint information, our business depends in large part on the continued demandfor printed documents.  Demand for these solutions could decline ifbusinesses and organizations move toward “paperless” environments and reducetheir dependence on printed documents.  Demand for printed financialdocuments may be reduced as a result of competition from alternate financialdocument delivery or payment methods, such as electronic banking, electroniccommerce, on-line services and other electronic media.  We cannot assureyou that changes in the business environment or competition from alternatefinancial document delivery or payment methods will not significantly erode thedemand for our products and cause our business to suffer.

 

**Although we have re-engineered certain of ourwired connectivity products in a manner that we believe will extend theiruseful life, there can be no assurance that this will be the case.**

 

Although we have re-engineered certain of our wired connectivityproducts in a manner that we believe will extend their useful lives, there canbe no assurance that this will be the case.  Should these changes not extendthe useful life of these products, we anticipate that sales of these productswill begin to decline, in which case it would be necessary for us to offsetthis potential decline through increased sales of other products.  Thereis no assurance that we will be successful in achieving increased sales inother products.

 

**The success of our wireless solutions dependson our ability to develop and introduce on a timely basis new products forexisting and emerging wireless communications markets and the ability of theseproducts to gain market acceptance.**

 

The development of new wireless networking products is highly complex,and we may experience delays in developing and introducing new products on atimely basis.  Due to the intensely competitive nature of the wirelessmarket, any delay in the

commercial availability of new products could materially and adverselyaffect our business.  In addition, if we are unable to develop or obtainaccess to emerging wireless networking technologies as they become available,or are unable to design, develop and introduce on a timely basis products basedon these emerging technologies, our future operating results would bematerially and adversely affected.  To date, our wireless solutions havenot gained market acceptance or had any meaningful commercial impact, and therecan be no assurance that our wireless solutions will ever gain marketacceptance or have a commercial impact.  In addition, there can be noassurance that our wireless products will be based on the wireless standardsthat are ultimately adopted by the marketplace.

 

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**Technology in our industry evolves rapidly,and we must continue to enhance existing products and develop new products orour business will suffer.**

 

Rapid technological advances, obsolescence and large fluctuations indemand and changing industry standards characterize the markets for our currentproducts.  Our existing and development-stage products may easily becomeobsolete if our competitors introduce newer or better technologies or ifindustry standards change.  To be successful, we must continually enhanceour existing products and develop and introduce other secure payment systemproducts and wireless and connectivity products.  If we fail to adequatelyanticipate or respond to changing technological developments and standards orcustomer requirements, or if we are significantly delayed in developing andintroducing products, our business will suffer.  In addition, our successin this rapidly changing environment depends on our ability to appropriatelyrefocus our management attention and other resources on the emergingtechnologies and standards that will ultimately gain market acceptance.

 

**We face significant competition that maynegatively impact our revenues, gross margins and market share.**

 

We face increased competition in developing and selling secure paymentsystems as well as our wireless and connectivity solutions.  Many of ourcompetitors in this market have substantially greater financial, development,marketing and personnel resources than we have.  We cannot assure you thatwe will be able to compete successfully against our current or futurecompetitors.  Increased competition may result in price reductions, lowergross margins and loss of market share.

 

**We maintain strategic supply, OEM andmarketing arrangements, and termination of these relationships could adverselyaffect our revenues and earnings.**

 

We maintain and depend on strategic relationships with a number ofcompanies, including Certegy, HP, IBM, Novell, and Standard Register. These relationships include supply, OEM, marketing and service arrangementswhich are important to our business.  Certain of these relationships arenot covered by written agreements and could be terminated at any time.  Ifour relationship with any of these companies were to end, our revenues andearnings could fall.  We cannot assure you that we will be able tomaintain our strategic relationships with these companies.

 

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

 

We sell a significant amount of our products to customers outside theUnited States.  International sales accounted for 22.4% of our net salesin the six months ended May 31, 2004 and represented 22.8% of our net sales inthe six months ended May 31, 2003.  We expect that shipments tointernational customers will continue to account for a material portion of ournet sales.  Sales outside the United States involve the following risks,among others:

 

•                  foreigngovernments may impose tariffs, quotas and taxes;

 

•                  political andeconomic instability may reduce demand for our products;

 

•                  restrictions onthe export or import of technology may reduce or eliminate our ability to sellin certain markets; and

 

•                  potentiallylimited intellectual property protection may cause us to refrain from sellingin certain markets.

 

Because we denominate some of our international sales in U.S. dollars,currency fluctuations could also cause our products to become less affordableor less price-competitive than those of foreign manufacturers.  We cannotassure you that these factors will not have a material adverse effect on ourinternational sales.  Any adverse impact on our international sales wouldaffect our results of operations and would cause our business to suffer. In addition, currency fluctuations could result in transaction or translationgains or losses which could have an effect on our net sales and profits.

 

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**Our quarterly operating results fluctuate asa result of many factors.**

 

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

 

•                  the mix ofproducts and services sold in the quarter;

 

•                  life-cyclestages of the products sold in the quarter;

 

•                  the availabilityand cost of components and materials;

 

•                  costs andbenefits of new product and service introductions; and

 

•                  customer order andshipment timing.

 

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

 

**Patrick J. Dirk and his family membersbeneficially own approximately 67% of our common stock and this concentrationof ownership allows them to control all matters requiring stockholder approval,could delay or prevent a change in control of TROY and limits the tradingvolume for our shares.**

 

Patrick J. Dirk and his family members beneficially own approximately67% of our outstanding common stock. As a result, Mr. Dirk and his familymembers are able to control all matters requiring stockholder approval,including election of directors, and could delay or prevent a change in controlof TROY.  In addition, because of the significant percentage ofoutstanding shares beneficially owned by Mr. Dirk and his family members andthe fact that they have not historically traded their shares to any significantextent, the trading volume for shares of our common stock has been, andcontinues to be, limited.  As a result, many stockholders may not be ableto sell their shares without a significant impact on the market price of ourcommon stock.

 

**We may not be able to adequately protect orenforce our intellectual property rights or to protect ourselves againstinfringement claims of others.**

 

We cannot be certain that the steps we have taken to protect ourintellectual property rights will be adequate or that third parties will notinfringe or misappropriate our proprietary rights.  Any such infringementor misappropriation could have a material adverse effect on our futurefinancial results.  We also cannot be certain that we have not infringedthe proprietary rights of others.  Any such infringement could cause thirdparties to bring claims against us, resulting in significant costs, possibledamages and substantial uncertainty.

 

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

 

We are significantly dependent upon Patrick J. Dirk, our Chairman andChief Executive Officer, and our other executive officers.  There could bea material adverse effect on our business if we lose the services of Mr. Dirkor any other executive officer.

 

**The impact of the litigation associated withthe Merger and the costs associated with the proposed Merger could have anegative financial impact on TROY.**

 

As described under Legal Proceedings, following the announcement of theproposed Merger, several parties filed purported class action complaints in theCalifornia Superior Court for Orange County. If these actions are successful in enjoining the Merger, or the Liedtkeaction is successful in obtaining damages, it could have a material adverseeffect on our business, financial position, or results of operation.  In addition, the costs associated withdefending these actions and completing the Merger could have a negativefinancial impact on TROY.

 

**Compliance with government regulations maycause us to incur unforeseen expenses.**

 

Our MICR printer and imaging supplies manufacturing operations aresubject to a number of federal, state and local laws and regulations. These regulations include laws and regulations promulgated by the EnvironmentalProtection Agency and similar state agencies regarding storing, shipping,disposing, discharging and manufacturing hazardous materials and hazardous andnon-hazardous waste.  Although we believe that our operations materiallycomply with all current laws and regulations, we cannot assure you that theseregulations will not change.  We also cannot assure you that unforeseenenvironmental incidents will not occur, or that past contamination ornon-compliance with environmental laws will not be discovered on our current orformer properties.  Any of these events could result in significantexpense or require changes in our operations, which could materially andadversely affect our business.

 

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**ITEM 3****.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

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

 

We do not utilize derivative financial instruments.  Accordingly,our exposure to market risk is through our foreign currency transactions andthrough our bank debt which bears interest at variable rates.   We do not hedge our exposure to foreign currency fluctuations. Rather, wemonitor our foreign currency exposure on a monthly basis.  Principalforeign currencies are the Euro and the Canadian Dollar.  The bank debt isa revolving line of credit.  Borrowings under the line of credit bearinterest at the lesser of the bank’s reference rate (4.00 % at May 31, 2004)less 0.25% or the bank’s LIBOR rate (1.11 % at May 31, 2004) plus 2% and arelimited to 80% of eligible accounts receivable and 50% of May 31, 2004, therewere no amounts outstanding under the line of credit agreement and,accordingly, a sustained increase in the reference rate of 1% would not causeour annual interest expense to change.

 

**ITEM 4****. CONTROLS AND PROCEDURES**

 

**(a) Evaluation of disclosure controls andprocedures.** We maintain “disclosure controls andprocedures,” as such term is defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”), that are designed to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized, and reported withinthe time periods specified in Securities and Exchange Commission rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognized that disclosure controls and procedures, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the disclosure controls and procedures are met.Additionally, in designing disclosure controls and procedures, our managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible disclosure controls and procedures. The design of anydisclosure controls and procedures also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.  In the first quarter of fiscal 2004, webegan the implementation of a new ERP system.  Although this new ERPsystem has not yet been fully implemented, we expect that, once fully implemented,it will improve our overall disclosure controls and procedures.

 

  Based on their evaluation as of the end of the period covered bythis Quarterly Report on Form 10-Q, our Chief Executive Officer and ChiefFinancial Officer have concluded that, subject to the limitations noted above,our disclosure controls and procedures were effective to ensure that materialinformation relating to TROY is made known to them by others, particularlyduring the period in which this Quarterly Report on Form 10-Q was beingprepared.

 

**  (b) Changes in internal controls.**There was no change in our internal control over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) identified in connection withthe evaluation described in Item 4(a) above that occurred during our lastfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting. In the firstfiscal quarter of 2004, we began the implementation of a new ERP system. Although this new ERP system has not yet been fully implemented, we expectthat, once fully implemented, it will improve our internal controls overfinancial reporting.

 

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**PART II****:  OTHER INFORMATION**

 

**ITEM 1 - LEGALPROCEEDINGS**

 

On November 21, 2002, Tom Lloyd filed an action in the SuperiorCourt of the State of California in and for Orange County against TROY and itsdirectors, alleging that defendants breached their fiduciary duties inconnection with the previous merger by attempting to provide the Dirk familywith preferential treatment in connection with their efforts to complete a saleof TROY. The complaint sought to enjoin an acquisition of TROY by the Dirkfamily, as well as attorneys’ fees. Following termination of the previousmerger Agreement, the plaintiff filed a motion for dismissal of the action andaward of attorney’s fees and expenses of $387,250.  TROY filed a motion insupport of the plaintiff’s motion for dismissal of the action and in oppositionto plaintiff’s motion for fees.  On March 4, 2004 the court issued aruling granting the motion for dismissal with prejudice, and granting themotion for attorney’s fees of $175,000. On April 30, 2004, TROY filed anotice of appeal. TROY has accrued an estimate of expenses to be incurred inconnection with this litigation in fiscal 2003 in excess of the deductibleamount, which was recorded as an expense in fiscal 2002.

 

Following the announcement of the proposed Merger, Osmium Partners LLC,Ralph Hamer, Roy Liedtke, and Tilson Growth Fund, LP, respectively, filedpurported class action complaints in the California Superior Court for OrangeCounty against TROY and our directors. The Liedtke complaint also names Dirk, Inc. In all four actions, plaintiffsallege that defendants breached their fiduciary duties in connection with theMerger by attempting to provide the Dirk family with preferential treatment inconnection with their efforts to complete a sale of TROY. Plaintiffs in allfour actions seek declaratory relief, an order enjoining the acquisition, andattorneys’ fees.  The Liedtke complaintalso seeks damages.  TROY and ourdirectors have not yet been served with the Liedtke and Tilson Growth Fundcomplaints.  Osmium Partners LLC hasserved discovery requests, but discovery has not commenced in the otheractions.  No trial date has been set inany of these actions.  Managementbelieves that the complaints are without merit, and intends to defend themvigorously.  If these actions aresuccessful in enjoining the transaction, or the Liedtke action is successful inobtaining damages, it could have a material adverse effect on our business,financial position, or results of operation. Currently, the amount of such an adverse effect cannot be estimated.

 

**ITEM 4 - SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

Our Annual Meeting of Stockholders was held on March 29,2004.  The following individuals were elected at the Annual Meeting asDirectors of TROY to serve until the next annual meeting or until theirrespective successors are elected and qualified.  Shares voted in favor ofthese Directors and shares withheld were as follows:

 
| **Director**      |   | **Shares For** |   | **Shares  Withheld** |   |
|-------------------|--------|----------------|--------|----------------------|--------|
|              |   |           |   |                 |   |
| Patrick J. Dirk   |   | 9,766,409      |   | 479,146              |   |
| Brian P. Dirk     |   | 9,766,409      |   | 479,146              |   |
| Gene A. Bier      |   | 10,078,481     |   | 166,874              |   |
| Stephen G. Holmes |   | 10,078,481     |   | 166,874              |   |
| Lambert Gerhart   |   | 10,078,481     |   | 166,874              |   |

 

**ITEM 5 - OTHERINFORMATION**

 

As disclosed on our report on Form 8-K filed March 26, 2004, asamended on Form 8 K/A filed April 7, 2004, on March 22, 2004, theAudit Committee of our Board of Directors approved a change in our independentaccountants for the fiscal year ending November 30, 2004.  The Board of Directors ratified the AuditCommittee’s dismissal of McGladrey & Pullen, LLP and the selection of BDOSeidman, LLP as our independent accounts.

 

As disclosed in our Form 8-K filed June 18, 2004, on June 16,2004, the Audit Committee of our Board of Directors approved a change in ourindependent accountants. The Committee selected Corbin & Company LLP toreplace BDO Seidman LLP, who resigned effective June 15, 2004.

 

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**ITEM 6****- EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits.

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                         |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                    |
| 2.1                 |   | Agreement and Plan of Merger, dated May 26,2004, by and between TROY  Group, Inc. and Dirk, Inc. (incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K filed on May 27, 2004). |
|                |   |                                                                                                                                                                                                                    |
| 31.1                |   | Rule 13a-14(a) Certification of Chief Executive Officer.                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                    |
| 31.2                |   | Rule 13a-14(a) Certification of Chief Financial Officer.                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                    |
| 32.1                |   | Certification of the Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                           |
|                |   |                                                                                                                                                                                                                    |
| 32.2                |   | Certification of the Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                           |

 

(b)                                 Reportson Form 8-K

 

On March 3, 2004 we filed a Current Report on Form 8-K datedFebruary 23, 2004 under Item 12, furnishing the transcript of ourconference call held on February 23, 2004.

 

We filed a Current Report on Form 8-K on March 26, 2004, asamended on Form 8-K/A filed on April 7, 2004, under Item 4, regarding theAudit Committee of our Board of Directors’ approval of a change in ourindependent accountants for the fiscal year ending November 30, 2004 fromMcGladrey & Pullen, LLP to BDO Seidman, LLP.

 

On April 20, 2004 we filed a Current Report on Form 8-K datedApril 19, 2004 furnishing under Item 12, our press release announcing ourpreliminary financial results for the first quarter ended February 29,2004.

 

On May 17, 2004 we filed a Current Report on Form 8-K dated May 13,2004 furnishing under Item 12, our press release announcing our final financialresults and the filing of our Form 10-Q for the first quarter endedFebruary 29, 2004.

 

On May 27, 2004 we filed a Current Report on Form 8-K dated May 26,2004 under Item 5, regarding a press release announcing that we had enteredinto an Agreement and Plan of Merger, dated as of May 26, 2004 with Dirk, Inc.,a company controlled by Patrick Dirk, the founder of TROY, and his familymembers.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 
|               | TROY GROUP, INC.                                              |
|--------------------|---------------------------------------------------------------|
|               |                                                          |
|               |                                                          |
| July 15, 2004 | /s/ Patrick J. Dirk                                           |
|               | Patrick J. Dirk                                               |
|               | Chairman, President and Chief Executive Officer               |
|               |                                                          |
| July 15, 2004 | /s/ James W. Klingler                                         |
|               | James W. Klingler                                             |
|               | Vice President-Finance, Treasurer and Chief Financial Officer |

 

 

**EXHIBIT INDEX**

 
| **Exhibit********Number** |   | **Description  of Document**                                                                                                                                                                                             |
|---------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |   |                                                                                                                                                                                                                     |
| 2.1                       |   | Agreement and Plan of Merger, dated May 26, 2004, by and between TROY  Group, Inc. and Dirk, Inc. (incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K filed on May 27, 2004). |
|                      |   |                                                                                                                                                                                                                     |
| 31.1                      |   | Rule 13a-14(a) Certification of Chief Executive Officer.                                                                                                                                                                 |
|                      |   |                                                                                                                                                                                                                     |
| 31.2                      |   | Rule 13a-14(a) Certification of Chief Financial Officer.                                                                                                                                                                 |
|                      |   |                                                                                                                                                                                                                     |
| 32.1                      |   | Certification of the Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                            |
|                      |   |                                                                                                                                                                                                                     |
| 32.2                      |   | Certification of the Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                            |

 

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