** **

**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 August 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   ý   No   o

 

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 October 14, 2004, 10,639,877 shares of the Registrant’s CommonStock were outstanding.

 

 

----

 

**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 at  August 31, 2004 (unaudited) and November 30, 2003                       |   |
|                                    |                                                                                                                   |   |
|                                    | Condensed Consolidated Statements of Income  for the Three and Nine Months ended August 31, 2004  and 2003 (unaudited) |   |
|                                    |                                                                                                                   |   |
|                                    | Condensed Consolidated Statements of Cash  Flows for the Nine Months ended August 31, 2004 and  2003 (unaudited)       |   |
|                                    |                                                                                                                   |   |
|                                    | Condensed Consolidated Statement of  Stockholders’ Equity for the Nine Months ended August 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 5.                                 | Other Information                                                                                                      |   |
|                                    |                                                                                                                   |   |
| Item  6.                                | Exhibits  and Reports on Form 8-K                                                                                      |   |
|                                    |                                                                                                                   |   |
| **SIGNATURE**                           |                                                                                                                   |
|                                    |                                                                                                                   |   |
| **EXHIBIT INDEX**                       |                                                                                                                   |

 

2

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**PART I:  FINANCIAL INFORMATION**

 

**ITEM1 - FINANCIAL STATEMENTS**

 

**TROY GROUP, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

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

 
| ** **                                                                                                                          | ** ** | **August 31,  2004** | ** ** | **November 30,  2003 (a)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|---------------------------------|------------|
| ** **                                                                                                                          | ** ** | **(Unaudited)**      | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                          |       |                 |       |                            |       |
| Current assets:                                                                                                                     |       |                 |       |                            |       |
| Cash and cash equivalents                                                                                                           |       | $                    | 4,215      |                            | $          | 1,727 |   |
| Investment in available-for-sale securities                                                                                         |       | 6,754                |       | 8,000                           |       |
| Accounts receivable, less allowance for  doubtful accounts $351 in 2004; $393 in 2003                                               |       | 7,421                |       | 8,419                           |       |
| Inventories, net                                                                                                                    |       | 5,826                |       | 4,891                           |       |
| Prepaid expenses and other                                                                                                          |       | 1,129                |       | 1,414                           |       |
| Deferred tax assets                                                                                                                 |       | 2,789                |       | 2,789                           |       |
| Total current assets                                                                                                                |       | 28,134               |       | 27,240                          |       |
| Equipment and leasehold improvements, net                                                                                           |       | 2,942                |       | 3,213                           |       |
| Goodwill                                                                                                                            |       | 281                  |       | 281                             |       |
| Receivable from stockholders                                                                                                        |       | 1,903                |       | 1,903                           |       |
| Deferred tax assets                                                                                                                 |       | 1,191                |       | 1,330                           |       |
| Other assets                                                                                                                        |       | 619                  |       | 993                             |       |
| Total assets                                                                                                                        |       | $                    | 35,070     |                            | $          | 34,960 |   |
|                                                                                                                                |       |                 |       |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                      |       |                 |       |                            |       |
| Current liabilities:                                                                                                                |       |                 |       |                            |       |
| Accounts payable                                                                                                                    |       | $                    | 2,105      |                            | $          | 2,172 |   |
| Accrued expenses                                                                                                                    |       | 3,744                |       | 4,322                           |       |
| Deferred revenue                                                                                                                    |       | 1,965                |       | 1,807                           |       |
| Total current liabilities                                                                                                           |       | 7,814                |       | 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                                                                                              |       | 34                   |       | 33                              |       |
| Retained earnings                                                                                                                   |       | 7,202                |       | 6,598                           |       |
|                                                                                                                                |       | 27,264               |       | 27,863                          |       |
| Less cost of treasury stock, 2,800 shares  in 2004; 331,493 shares in 2003                                                          |       | (8                   | )          | (1,204                          | )          |
| Total stockholders’ equity                                                                                                     |       | 27,256               |       | 26,659                          |       |
| Total liabilities and stockholders’ equity                                                                                     |       | $                    | 35,070     |                            | $          | 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 STATEMENTSOF INCOME**

**(Unaudited)**

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

 
| ** **                             | ** ** | **Three Months Ended  August 31,** | ** ** | **Nine Months Ended  August 31,** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                   |       |                               |       |                              |       |   |   |   |   |
| Net sales                              |       | $                                  | 13,208     |                              | $          | 14,671 |   | $ | 41,248 |   | $ | 42,474 |   |
| Cost of goods sold                     |       | 7,871                              |       | 9,636                             |       | 24,899 |   | 26,267 |   |
| Gross profit                           |       | 5,337                              |       | 5,035                             |       | 16,349 |   | 16,207 |   |
|                                   |       |                               |       |                              |       |   |   |   |   |
| Operating expenses:                    |       |                               |       |                              |       |   |   |   |   |
| Selling, general and administrative    |       | 3,819                              |       | 3,590                             |       | 11,909 |   | 11,302 |   |
| Research and development               |       | 1,146                              |       | 1,265                             |       | 3,482 |   | 3,957 |   |
| Amortization of intangible assets      |       | 18                                 |       | 11                                |       | 69 |   | 33 |   |
| Operating income                       |       | 354                                |       | 169                               |       | 889 |   | 915 |   |
|                                   |       |                               |       |                              |       |   |   |   |   |
| Interest income                        |       | 39                                 |       | 13                                |       | 93 |   | 39 |   |
| Interest expense                       |       | —                             |       | (1                                | )          | (2 | ) | (9 | ) |
|                                   |       |                               |       |                              |       |   |   |   |   |
| Income before income taxes             |       | 393                                |       | 181                               |       | 980 |   | 945 |   |
| Provision for income taxes             |       | 150                                |       | 74                                |       | 376 |   | 366 |   |
| Net income                             |       | $                                  | 243        |                              | $          | 107 |   | $ | 604 |   | $ | 579 |   |
|                                   |       |                               |       |                              |       |   |   |   |   |
| Net income per share:                  |       |                               |       |                              |       |   |   |   |   |
| Basic                                  |       | $                                  | .02        |                              | $          | .01 |   | $ | .06 |   | $ | .05 |   |
| Diluted                                |       | $                                  | .02        |                              | $          | .01 |   | $ | .06 |   | $ | .05 |   |
|                                   |       |                               |       |                              |       |   |   |   |   |
| Shares used in per share computations: |       |                               |       |                              |       |   |   |   |   |
| Basic                                  |       | 10,640                             |       | 10,653                            |       | 10,641 |   | 10,651 |   |
| Diluted                                |       | 10,655                             |       | 10,653                            |       | 10,648 |   | 10,651 |   |

 

See Notes to Condensed Interim ConsolidatedFinancial Statements.

 

4

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**TROY GROUP, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  August 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                          | ** ** | **2003** | ** ** |
|                                                                               |       |                              |       |   |   |
| **Cash flows from operating activities:**                                          |       |                              |       |   |   |
| Net income                                                                         |       | $                                 | 604        |   | $ | 579 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                      |       | 799                               |       | 889 |   |
| Impairment of long-lived assets                                                    |       | 284                               |       | — |   |
| Provision for (recovery of) doubtful  accounts                                     |       | (42                               | )          | 130 |   |
| Loss on disposal of furniture                                                      |       | —                            |       | 99 |   |
| Changes in working capital components:                                             |       |                              |       |   |   |
| (Increase) decrease in:                                                            |       |                              |       |   |   |
| Accounts receivable                                                                |       | 1,040                             |       | 1,316 |   |
| Income tax refund receivable                                                       |       | —                            |       | 1,076 |   |
| Inventories                                                                        |       | (935                              | )          | 209 |   |
| Prepaid expenses and other                                                         |       | 285                               |       | (284 | ) |
| Deferred taxes                                                                     |       | 139                               |       | — |   |
| Increase (decrease) in:                                                            |       |                              |       |   |   |
| Accounts payable                                                                   |       | (67                               | )          | (1,842 | ) |
| Accrued expenses                                                                   |       | (578                              | )          | 784 |   |
| Deferred revenue                                                                   |       | 158                               |       | (240 | ) |
| Net cash provided by operating activities                                          |       | 1,687                             |       | 2,716 |   |
|                                                                               |       |                              |       |   |   |
| **Cash flows from investing activities:**                                          |       |                              |       |   |   |
| Purchase of equipment and leasehold  improvements                                  |       | (389                              | )          | (936 | ) |
| Maturities of available-for-sale securities                                        |       | 1,246                             |       | 497 |   |
| Increase in other assets, net                                                      |       | (49                               | )          | 46 |   |
| Net cash provided by (used in) investing  activities                               |       | 808                               |       | (393 | ) |
|                                                                               |       |                              |       |   |   |
| **Cash flows from financing activities:**                                          |       |                              |       |   |   |
| Payments on notes payable                                                          |       | —                            |       | (53 | ) |
| Proceeds from issuance of common stock                                             |       | —                            |       | 9 |   |
| Purchase of treasury stock                                                         |       | (8                                | )          | — |   |
| Net cash used in financing activities                                              |       | (8                                | )          | (44 | ) |
|                                                                               |       |                              |       |   |   |
| **Effect of foreign currency translation**                                         |       | 1                                 |       | — |   |
|                                                                               |       |                              |       |   |   |
| **Net increase in cash and cash equivalents**                                      |       | 2,488                             |       | 2,279 |   |
| **Cash and cash equivalents, beginning of  period**                                |       | 1,727                             |       | 6,615 |   |
| **Cash and cash equivalents, end of period**                                       |       | $                                 | 4,215      |   | $ | 8,894 |   |

 

See Notes to Condensed Interim ConsolidatedFinancial Statements.

 

5

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**TROY GROUP, INC.**

**CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**(Unaudited)**

**(in thousands exceptshare amounts)**

 
| ** **                                           | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** **          | **Accumulated  Other  Comprehensive  Income** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total  Stockholders’  Equity** | ** ** | **Comprehensive  Income (Loss)** | ** ** |
|------------------------------------------------------|------------|----------------|------------|-------------|------------|------------|---------------------|-----------------------------------------------|----------------|------------|------------|------------|------------|------------|------------|---------------------------------------|------------|----------------------------------|------------|
| **Common  Stock**                                    | ** ** | **Additional** | ** ** | ** **  | ** ** | ** ** | **Treasury  Stock** | ** **                                    |
| **Number**                                           | ** ** | ** **     | ** ** | **Paid-in** | ** ** | ** ** | **Retained**        | ** **                                    | **Number**     | ** ** | ** ** | ** ** |
| **of  Shares**                                       | ** ** | **Amount**     | ** ** | **Capital** | ** ** | ** ** | **Earnings**        | ** **                                    | **of  Shares** | ** ** | **Amount** | ** ** |
|                                                 |       |           |       |        |       |       |                |                                          |           |       |       |       |       |       |       |                                  |       |                             |       |
| 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 |       | —         |       | —      |       | —     |                | 1                                             |           | —     |       | —     |       | —     |       | 1                                     |       | 1                                |       |
|                                                 |       |           |       |        |       |       |                |                                          |           |       |       |       |       |       |       |                                  |       |                             |       |
| Net income                                           |       | —         |       | —      |       | —     |                | —                                        |           | 604        |       | —     |       | —     |       | 604                                   |       | 604                              |       |
| Balance, August  31, 2004                            |       | 10,642,677     |       | $           | 107        |       | $                   | 19,921                                        |           | $          | 34         |       | $          | 7,202      |       | 2,800                                 |       | $                                | (8         | ) | $ | 27,256 |   | $ | 605 |   |

 

**See Notes to Condensed Interim ConsolidatedFinancial Statements**

 

6

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**TROY GROUP, INC.**

**NOTES TO CONDENSED INTERIM CONSOLIDATED**

**FINANCIAL STATEMENTS**

(unaudited)

 

**Note 1.****  Basis of Presentation**

 

The accompanying unaudited consolidated financial statements of TROYGroup, Inc. (the “Company”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X.  Accordingly, they do not include allof the information and footnotes required by accounting principles generallyaccepted in the United States of America 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 ninemonths ended August 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 nine-month periods endedAugust 31, 2004 and 2003 (amounts in thousands, except per share data):

 
| ** **                                                                                                                                 | ** ** | **Three months ended  August 31,** | ** ** | **Nine months ended  August 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income applicable to common  stockholders:                                                                                             |       |                               |       |                              |       |   |   |   |   |
| As reported                                                                                                                                |       | $                                  | 243        |                              | $          | 107 |   | $ | 604 |   | $ | 579 |   |
| Less total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of related tax effects |       | (119                               | )          | (99                               | )          | (451 | ) | (301 | ) |
| Pro forma                                                                                                                                  |       | $                                  | 124        |                              | $          | 8 |   | $ | 153 |   | $ | 278 |   |
|                                                                                                                                       |       |                               |       |                              |       |   |   |   |   |
| Net income per share applicable to common  stockholders, basic and diluted:                                                                |       |                               |       |                              |       |   |   |   |   |
| As reported                                                                                                                                |       | $                                  | .02        |                              | $          | .01 |   | $ | .06 |   | $ | .05 |   |
| Pro forma                                                                                                                                  |       | $                                  | .01        |                              | $          | — |   | $ | .01 |   | $ | .03 |   |

 

**Recent Accounting Pronouncements**

 

In May 2003 the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 150,*Accounting for Certain Financial*

 

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.150did not have an 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, anInterpretation of Accounting Research Bulletin No. 51*, asrevised. Prior to FIN 46, a company generally included another entity in thecompany’s financial statements only if it controlled the entity throughownership of the majority voting interests.  FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of theentity if the equity investors in the entity do not have the characteristics ofa controlling financial interest or do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties.  The Companyadopted FIN 46 effective with the quarter ending May 31, 2004, and hasdetermined it does not have any variable interest entities that are required tobe consolidated in its financial statements.

 

**Note 2.****  Inventories**

 

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

 
| ** **                                        | ** ** | **August 31, 2004** | ** ** | **November 30, 2003** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**     | ** ** | ** **                 | ** ** |
| Raw materials                                     |       | $                   | 2,914      |                       | $          | 4,671 |   |
| Work-in-process                                   |       | 1,039               |       | 401                        |       |
| Finished goods                                    |       | 4,189               |       | 2,264                      |       |
| Reserve for slow moving and obsolete  inventories |       | (2,316              | )          | (2,445                     | )          |
| Total                                             |       | $                   | 5,826      |                       | $          | 4,891 |   |

 

**Note 3.****  Other Assets**

 

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

 
| ** **                                                                           | ** ** | **August 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 $285 and 2003 $236            |       | 107                 |       | 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                               |       | 509                 |       | 460                        |       |
|                                                                                 |       | $                   | 619        |                       | $          | 993 |   |

 

**Note 4.****  Goodwill and Intangible Assets**

 

The Company adopted SFAS No. 142,*Goodwill and Other Intangible Assets,*  effectiveDecember 1, 2002 and performed the initial transitional impairment test asof that date. The provisions of SFAS No. 142 require that the Companyallocate its goodwill to its various reporting units, determine the carryingvalue of those businesses, and estimate the fair value of the reporting unitsso that a two-step goodwill impairment test can be performed. The Company’sreporting units represent components of its operating segments, which are thesame as the reportable segments, identified in Note 11. In the first stepof 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 ended November 30, 2003, no impairmentloss was recognized. However, futuregoodwill impairment tests

 

8

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could result in a charge to earnings. TheCompany will continue to evaluate goodwill on an annual basis as of thebeginning of the fourth fiscal quarter, and whenever events and changes incircumstances 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 andAugust 31, 2004 are as follows (amounts in thousands):

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

 

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

 
| ** **                          | ** ** | **August 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                 |       | (285                          | )          | 107 |   | 392 |   | (236 | ) | 156 |   |
| Purchased Software                  |       | 133                 |       | (133                          | )          | — |   | 133 |   | (120 | ) | 13 |   |
|                                |       |                |       |                          |       |   |   |   |   |   |   |   |   |
| Total amortizable intangible assets |       | $                   | 550        |                          | $          | (440 | ) | $ | 110 |   | $ | 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-livedassets evaluated for impairment are grouped with other assets to the lowestlevel for which identifiable cash flows are largely independent of the cashflows 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$18,000 and $11,000 for each of the three-month periods and $69,000 and $33,000for each of the nine-month periods ended August 31, 2004 and 2003,respectively.

 

Estimated future amortization expense related to purchasedintangible assets at August 31, 2004 is as follows:

 
| **Fiscal year:** | ** ** | **(In thousands)** | ** ** |
|------------------|------------|--------------------|------------|
| 2004 (3 months)  |       | $                  | 24         |   |
| 2005             |       | 75                 |       |
| 2006             |       | 11                 |       |
| Total            |       | $                  | 110        |   |

 

**Note 5.****Line of Credit**

 

The Company has a $5.0 million line-of-credit agreement with ComericaBank.  As of August 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 (4.50 % at August 31, 2004) less 0.25%or the bank’s LIBOR rate (2.00 % at August 31, 2004) plus 2% and are limited to80% of eligible accounts receivable and 50% of eligible inventories if totalliabilities to tangible effective net

 

9

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worth is greater than two to one.  Noformula 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 August 31, 2004.  This line ofcredit is secured by substantially all of the Company’s assets.  Theborrowing arrangement requires the Company to comply with certain financialcovenants and other restrictions, including its ability to pay dividends, andas of August 31, 2004 the Company was in compliance with those covenants. As ofAugust 31, 2004, the Company had approximately $4.9 million in availabilityunder the line of credit.  The line-of-credit borrowings are due ondemand. The agreement may be terminated by either party at any time.

 

**Note 6.****  Stock Option and Stock Warrant Plans**

 

During the nine months ended August 31, 2004, the Company granted40,000 stock options to employees and a director. The following is a summary oftotal outstanding options and stock warrants at August 31, 2004:

 
| **Range of  Exercise Prices** | ** **            | **Options and Warrants Outstanding** | ** **                             | ** ** | ** **                                          |
|-------------------------------|-----------------------|--------------------------------------|----------------------------------------|------------|-----------------------------------------------------|
| ** **                    | **Number of  Shares** | ** **                           | **Weighted - Average  Exercise Price** | ** ** | **Weighted - Average  Remaining  Contractual Life** | ** ** | **Options and Warrants Exercisable** | ** ** |
| **Number of**                 | ** **            | **Weighted - Average**               |
| **Shares**                    | ** **            | **Exercise Price**                   |
| $ 2.85 - $ 4.51     |                  | 617,666                              |                                   | $          | 3.88                                                |   | 4.43 |   | 403,082 |   | $ | 3.88 |   |
| $ 6.63 - $ 8.75     |                  | 460,000                              |                                   | 7.32       |                                                | 4.72 |   | 441,163 |   | 7.30 |   |
| $13.16 - $14.25               |                  | 15,000                               |                                   | 13.52      |                                                | 5.26 |   | 9,998 |   | 13.52 |   |
| $ 2.85 - $14.25          |                  | 1,092,666                            |                                   | $          | 5.46                                                |   | 4.62 |   | 854,243 |   | $ | 5.76 |   |
|                               |                       |                                      |                                        |            |                                                     |  |  |  |  |  |  |  |  |  |

 

At August 31, 2004, there were 1,714,000 shares remaining available forgrant under the Company’s stock option plan.

 

**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  August 31,** | ** ** | **Nine months ended  August 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                   |       |                               |       |                              |       |   |   |   |   |
| Numerator for basic and diluted net income  per share: |       |                               |       |                              |       |   |   |   |   |
| Net income                                             |       | $                                  | 243        |                              | $          | 107 |   | $ | 604 |   | $ | 579 |   |
|                                                   |       |                               |       |                              |       |   |   |   |   |
| Denominator for basic net income per share             |       |                               |       |                              |       |   |   |   |   |
| Weighted-average shares outstanding                    |       | 10,640                             |       | 10,653                            |       | 10,641 |   | 10,651 |   |
| Effect of employee stock options and  warrants         |       | 15                                 |       | —                            |       | 7 |   | — |   |
| Denominator for diluted net income per  share          |       | 10,655                             |       | 10,653                            |       | 10,648 |   | 10,651 |   |
|                                                   |       |                               |       |                              |       |   |   |   |   |
| Net income per share:                                  |       |                               |       |                              |       |   |   |   |   |
| Basic                                                  |       | $                                  | .02        |                              | $          | .01 |   | $ | .06 |   | $ | .05 |   |
| Diluted                                                |       | $                                  | .02        |                              | $          | .01 |   | $ | .06 |   | $ | .05 |   |

 

**Note 8.****  Contractual Obligations and CommercialCommitments**

 

The Company has the following minimum non-cancelable contractualobligations and commercial commitments (amounts in thousands):

 

10

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| ** **                         | ** ** | **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 on ourNovember 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 August 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 theadvances and 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 ninemonths ended August 31, 2004 and 2003 were: $7,967,000 and $7,268,000,respectively.  Net payable balances to this vendor as of August 31, 2004and November 30, 2003 were: $197,000 and $149,000, respectively.

 

**Note 10.****Major Customers**

 

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

 

**Note 11.****  Segment Information and GeographicalInformation**

 

*Segment Information*

 

The following tables summarize net sales and net income by the Company’soperating segments, Secure Payment Systems and Wireless and ConnectivitySolutions, for the three months and nine months ended August 31, 2004 and 2003(amounts in thousands):

 
| ** **                          | ** ** | **Three months ended  August 31,** | ** ** | **Nine months ended  August 31,** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **(unaudited)**                    | ** ** | **(unaudited)**                   | ** ** |
| ** **                          | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                |       |                               |       |                              |       |   |   |   |   |
| Net Sales:                          |       |                               |       |                              |       |   |   |   |   |
| Secure Payment Systems              |       | $                                  | 9,976      |                              | $          | 10,819 |   | $ | 29,371 |   | $ | 31,257 |   |
| Wireless and Connectivity Solutions |       | 3,232                              |       | 3,852                             |       | 11,877 |   | 11,217 |   |
|                                |       | $                                  | 13,208     |                              | $          | 14,671 |   | $ | 41,248 |   | $ | 42,474 |   |
|                                |       |                               |       |                              |       |   |   |   |   |
| Net Income:                         |       |                               |       |                              |       |   |   |   |   |
| Secure Payment Systems              |       | $                                  | 553        |                              | 707        |   | 812 |   | 840 |   |
| Wireless and Connectivity Solutions |       | (310                               | )          | (600                              | )          | (208 | ) | (261 | ) |
|                                |       | $                                  | 243        |                              | $          | 107 |   | $ | 604 |   | $ | 579 |   |

 

11

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| ** **                          | ** ** | **August 31, 2004** | ** ** | **November 30, 2003** | ** ** |
|-------------------------------------|------------|---------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **(unaudited)**     | ** ** | ** **                 | ** ** |
| Segment Assets:                     |       |                |       |                       |       |
| Secure Payment Systems              |       | $                   | 30,089     |                       | $          | 29,083 |   |
| Wireless and Connectivity Solutions |       | 10,917              |       | 11,281                     |       |
|                                |       | $                   | 41,006     |                       | $          | 40,364 |   |

 

The following schedule is presented to reconcile August 31, 2004and November 30, 2003 segment assets to the amounts reported in theCompany’s consolidated financial statements (amounts in thousands).

 
| ** **                          | ** ** | **August 31, 2004** | ** ** | **November 30, 2003** | ** ** |
|-------------------------------------|------------|---------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **(unaudited)**     | ** ** | ** **                 | ** ** |
| Total assets of reportable segments |       | $                   | 41,006     |                       | $          | 40,364 |   |
| Inter-segment receivables           |       | (5,702              | )          | (5,170                     | )          |
| Investment in subsidiaries          |       | (234                | )          | (234                       | )          |
| Consolidated assets                 |       | $                   | 35,070     |                       | $          | 34,960 |   |

 

*Geographical Information (amounts inthousands)*

 
| ** **          | ** ** | **Three months ended  August 31,** | ** ** | **Nine months ended  August 31,** | ** ** |
|---------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | **(unaudited)**                    | ** ** | **(unaudited)**                   | ** ** |
| ** **          | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                |       |                               |       |                              |       |   |   |   |   |
| Net Sales:          |       |                               |       |                              |       |   |   |   |   |
| United States       |       | $                                  | 10,643     |                              | $          | 11,667 |   | $ | 33,010 |   | $ | 33,575 |   |
| All Other Countries |       | 2,565                              |       | 3,004                             |       | 8,238 |   | 8,899 |   |
|                |       | $                                  | 13,208     |                              | $          | 14,671 |   | $ | 41,248 |   | $ | 42,474 |   |

 

**Note 12.****  Cash Flow Information**

 

Supplemental disclosure of cash flow information (amounts inthousands):

 
| ** **                                       | ** ** | **Nine months ended  August 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**                   | ** ** |
| ** **                                       | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| Cash paid during the period for:                 |       |                              |       |   |   |
| Interest                                         |       | $                                 | 2          |   | $ | 8 |   |
| Income taxes                                     |       | $                                 | 191        |   | $ | 513 |   |
| 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 portionor all of the deferred tax assets will not be realized. In evaluating the needfor a valuation allowance, the Company considers future taxable income andprudent and feasible tax planning strategies. The Company has placedsubstantial

 

12

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reliance on its current projections offuture taxable income.  The Company re-assesses its projections of taxableincome on a quarterly basis.  If it is determined that the Company wouldnot be able to realize all or part of its deferred tax assets in the future,which would include the Company’s failure to materially meet its projections oftaxable income, an adjustment to the carrying value of the deferred tax assetswould be charged to income in the period in which such determination was madeand 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):

 
| ** **       | ** ** | **August 31,  2004** | ** ** | **November 30,  2003** | ** ** |
|------------------|------------|----------------------|------------|-----------------------------|------------|
|             |       |                 |       |                        |       |
| Current assets   |       | $                    | 2,789      |                        | $          | 2,789 |   |
| Long-term assets |       | 1,191                |       | 1,330                       |       |
|             |       | $                    | 3,980      |                        | $          | 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 (Mergerco), pursuant to which Mr.Dirk and his family will acquire the outstanding shares of TROY common stockthat they do not already own.  TROYexpects the Merger to close in November 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 October 7, 2004, we filed a DefinitiveProxy Statement on Schedule 14A and Amendment No.4 to Schedule 13E-3 inconnection with the proposed Merger.

 

**Note15.****  Litigation**

 

In connectionwith the Prior Merger Proposal, on November 21, 2002, Tom Lloyd filed an actionin the Superior Court of the State of California in and for Orange Countyagainst TROY and its directors, alleging that defendants breached theirfiduciary duties in connection with the Prior Merger Proposal by attempting toprovide the Dirk family with preferential treatment in connection with theirefforts to complete a sale of TROY. The complaint sought to enjoin anacquisition of TROY by the Dirk family, as well as attorneys’ fees. Followingtermination of the Prior Merger Proposal, the plaintiff filed a motion fordismissal of the action and award of attorney’s fees and expenses of$387,250.  TROY filed a motion in supportof the plaintiff’s motion for dismissal of the action and in opposition toplaintiff’s motion for fees.  On March 4,2004 the court issued a ruling granting the motion for dismissal withprejudice, and granting the motion for attorney’s fees of $175,000. On April30, 2004, TROY filed a notice of appeal. TROY has accrued an estimate ofexpenses to be incurred in connection with this litigation in fiscal 2003 inexcess of the deductible amount, which was recorded as an expense in fiscal2002.

 

Following theannouncement of the merger, Osmium Partners LLC (“Osmium”), Ralph Hamer (“Hamer”),Roy Liedtkie (“Liedtkie”), Tilson Growth Fund, L.P. (“Tilson”), and Ray Stanley(“Stanley”) filed purported class action complaints in the California SuperiorCourt for Orange County against TROY and our directors.  In all five actions plaintiffs allege thatdefendants breached their fiduciary duties in connection with the merger byattempting to provide the Dirk family with preferential treatment in connectionwith their efforts to complete a sale of TROY. Plaintiffs in all five actions seek declaratory relief, an orderenjoining the acquisition, and attorneys’ fees. The Liedtkie complaint also names Mergerco and seeks damages.  Pursuant to a stipulated order, Osmium,Hamer, Liedtkie and Tilson have been consolidated, and these four plaintiffshave adopted the allegations of the Tilson complaint.  On September 13, 2004 defendants filed ademurrer to the Tilson complaint, and on September 21, they filed a demurrer tothe Stanley complaint.  On September 17,Osmium and Stanley filed a motion for class certification.  On September 23, 2004, Liedtkie submitted astipulation and proposed Order dismissing his action with prejudice.  That stipulation is subject to Courtapproval.  Discovery has commenced, butno trial date has been set in any of these actions.  If these actions are successful in enjoining thetransaction, it could have a material adverse effect on our business, financialposition, or results of operations. Currently, the amount of such an adverse effect cannot be estimated.

 

13

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On September 7,2004, TROY, Mergerco, and the Dirk Family Trust commenced an action againstWestar Capital LLC (“Westar”) in the United States District Court for theCentral District of California, for violations of the Williams Act, tortiousinterference with contract, tortious interference with prospective economicadvantage, and unfair business practices. The complaint alleges in this regard that Westar’s purported offers topurchase all of the outstanding stock of TROY are nothing more than shamsdesigned to disrupt the market for TROY common stock and the proposed mergerbetween TROY and Mergerco.  The complaintseeks damages of an unspecified amount as well as injunctive relief.  Westar has moved to dismiss the complaint,and set a hearing date of October 25.

 

**Note16.****  Guarantees and Indemnities**

 

*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 notlimited to, TROY’s indemnification of its officers and directors to the maximumextent under the laws of the state of Delaware, the indemnification of itslessors for certain claims arising from the use of the facilities, and theindemnification of its bank for certain claims arising from the bank’s grantsof credit to TROY.  Such indemnificationobligations may not be subject to maximum loss clauses.  Historically, payments, if any, or if made orrequired related to these indemnifications 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, its warranty accrual will increase resulting in decreased grossprofit.  The standard warranty period forTROY’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 OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis should be read in conjunctionwith our Consolidated Financial Statements and related Notes included in thisreport.  This report contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995.  Thestatements contained in this report that are not historical in nature,particularly those that utilize terminology such as “may,” “will,” “should,” “expects,”“anticipates,” “estimates,” “believes” or “plans,” or comparableterminology, are forward-looking statements based on current expectations andassumptions. Such forward lookingstatements include, but are not limited to, statements regarding the proposedmerger with Dirk, Inc., our ability to finance our operating activities, ourcritical accounting policies and recent accounting pronouncements,international sales, compliance with laws and regulations, benefits of our ERPsystem, our current litigation and 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 the Mergerto close in November 2004.  The Merger issubject to approval by TROY stockholders as required under applicable statelaw, to completion of financing arrangements necessary to accomplish theMerger, and to certain other closing conditions.  On October 7, 2004, we filed a DefinitiveProxy Statement on Schedule 14A and Amendment No. 4 to Schedule 13E-3in connection 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 firstnine 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 income expressed as apercentage of net sales:

 
| ** **                                    | ** ** | **Three Months Ended  August 31,** | ** ** | **Nine Months Ended  August 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                          |       |                               |       |                              |       |   |   |   |   |
| Net sales                                     |       | 100.0                              | %          | 100.0                             | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |       | 59.6                               |       | 65.7                              |       | 60.4 |   | 61.8 |   |
| Gross profit                                  |       | 40.4                               |       | 34.3                              |       | 39.6 |   | 38.2 |   |
| Selling, general and administrative  expenses |       | 28.9                               |       | 24.5                              |       | 28.9 |   | 26.6 |   |
| Research and development expenses             |       | 8.7                                |       | 8.6                               |       | 8.4 |   | 9.3 |   |
| Amortization of intangible assets             |       | 0.1                                |       | 0.1                               |       | 0.2 |   | 0.1 |   |
| Operating income                              |       | 2.7                                |       | 1.1                               |       | 2.2 |   | 2.2 |   |
| Interest income                               |       | 0.3                                |       | 0.1                               |       | 0.2 |   | 0.1 |   |
| Interest expense                              |       | —                             |       | —                            |       | — |   | — |   |
| Income before income taxes                    |       | 3.0                                |       | 1.2                               |       | 2.4 |   | 2.3 |   |
| Provision for income taxes                    |       | 1.2                                |       | 0.5                               |       | .9 |   | 0.9 |   |
| Net income                                    |       | 1.8                                | %          | 0.7                               | %          | 1.5 | % | 1.4 | % |

 

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

 

*Net Sales*

 

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

 
| ** **                          | ** ** | **Three months ended  August 31,** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **(amounts in millions)**          | ** ** |
| ** **                          | ** ** | **2004**                           | ** ** | **2003** | ** ** | **Percent  Change** | ** ** |
| Net sales:                          |       |                               |       |   |   |   |   |
| Secure Payment Systems              |       | $                                  | 10.0       |   | $ | 10.8 |   | (7.4 | )% |
| Wireless and Connectivity Solutions |       | 3.2                                |       | 3.9 |   | (17.9 | )% |
|                                |       | $                                  | 13.2       |   | $ | 14.7 |   | (10.0 | )% |
|                                     |            |                                    |            |  |  |  |  |  |  |  |

 

Net sales in the three months ended August 31, 2004 decreased by $1.5million, or 10.0%, to $13.2 million from $14.7 million in the three monthsended August 31, 2003.  The decrease in sales was primarily due to a $0.8million decrease in revenue from MICR printers and supplies and StarACHsoftware, both in our Secure Payment Systems segment and a $0.7 million declinein sales of our Wireless and Connectivity print server sales and royalties. Thedecline in Secure Payment Systems products was primarily due to increasedcompetition and an overall decline in check printing. The decline in Wirelessand Connectivity products was primarily due to timing of orders and increasedcompetition.  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  August 31,** | ** ** | ** **                 | ** ** | ** **  | ** ** |
|--------------|------------|------------------------------------|------------|----------------------------|------------|-------------|------------|
| ** **   | ** ** | **(amounts in millions)**          | ** ** | **Percent of Total Sales** | ** ** |
| ** **   | ** ** | ** **                         | ** ** | ** **                 | ** ** | **Percent** | ** ** | **August 31,** | ** ** |
| ** **   | ** ** | **2004**                           | ** ** | **2003**                   | ** ** | **Change**  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross profit |       | $                                  | 5.3        |                       | $          | 5.0         |       | 6.0 | % | 40.4 | % | 34.3 | % |
|              |            |                                    |            |                            |            |             |            |  |  |  |  |  |  |

 

Gross profit increased in the three months ended August 31, 2004 fromthe three months ended August 31, 2003, primarily due to increased gross profiton Wireless and Connectivity products, partially offset by decreased grossprofit on Secure Payment Systems.  Grossprofit on Wireless and Connectivity products in 2003 was reduced by a $0.9increase in the inventory reserve. Gross profit on Secure Payment Systemsdeclined in 2004 due to lower revenue. Gross profit as a percent

 

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of sales will fluctuate based on shifts inthe mix of products sold .  Gross profitwas not significantly affected 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  August 31,** | ** ** | ** **                 | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **(amounts in millions)**          | ** ** | **Percent of Total Sales** | ** ** |
| ** **                                    | ** ** | ** **                         | ** ** | ** **                 | ** ** | **Percent** | ** ** | **August 31,** | ** ** |
| ** **                                    | ** ** | **2004**                           | ** ** | **2003**                   | ** ** | **Change**  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Selling, general and administrative  expenses |       | $                                  | 3.8        |                       | $          | 3.6         |       | 6.4 | % | 28.9 | % | 24.5 | % |
|                                               |            |                                    |            |                            |            |             |            |  |  |  |  |  |  |

 

The increase in selling, general and administrative expenses wasprimarily due to increases in costs associated with professional fees,partially offset by cost savings from reductions in staff and foreign currencytranslation gains. General and administrative expenses in the third quarter offiscal 2004 included $1.2 million in professional fees related to the currentlyproposed Merger to take TROY private and $0.3 million reduction in bad debtexpense. General and administrative expenses in the third quarter of fiscal2003 included $0.5 million in professional fees related to the year-end auditand the 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  August 31,** | ** ** | ** **                 | ** ** | ** **  | ** ** |
|-----------------------------------|------------|------------------------------------|------------|----------------------------|------------|-------------|------------|
| ** **                        | ** ** | **(amounts in millions)**          | ** ** | **Percent of Total Sales** | ** ** |
| ** **                        | ** ** | ** **                         | ** ** | ** **                 | ** ** | **Percent** | ** ** | **August 31,** | ** ** |
| ** **                        | ** ** | **2004**                           | ** ** | **2003**                   | ** ** | **Change**  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Research and development expenses |       | $                                  | 1.1        |                       | $          | 1.3         |       | (9.4 | )% | 8.7 | % | 8.6 | % |
|                                   |            |                                    |            |                            |            |             |            |  |  |  |  |  |  |

 

Research and development expenses decreased in the three months endedAugust 31, 2004 compared to the three months ended August 31, 2003, primarilydue to reduced spending for Secure Payment Systems products.  The total research and development expenses for the third quarterof fiscal 2004 included $0.6 million for Secure Payment Systems and $0.5millionfor Wireless and Connectivity Solutions. We have the ability to redirectour research and development activities as needed based on our productstrategies and market opportunities.  We forecast and budget research anddevelopment expenses by segment, but not by project.  The anticipatedtiming for the commercialization of any of our development efforts is notcurrently known.

 

*Amortization of Intangible Assets.** *Amortization of intangible assetsincreased by $7,000 to $18,000 in the three months ended August 31, 2004 from$11,000 in the three months ended August 31, 2004.

 

*Operating Income*. As a result of the above factors, operating income increased by $0.2 million to$0.4 million in the three months ended August 31, 2004 from $0.2 million in thethree months ended August 31, 2003.  The operating income as a percentageof net sales was 2.7% in the three months ended August 31, 2004 compared to1.2% in the three months ended August 31, 2003.

 

*Interest Income.* Interest income was $39,000 in the three months ended August 31, 2004 and$13,000 in the three months ended August 31, 2003.

 

*Interest Expense*. There was no interest expense in the three months ended August 31, 2004compared to $1,000 in the three months ended August 31, 2003, due to thepayment of the note payable in fiscal 2003.

 

*Income Taxes*. Income tax expense was $0.2 million in the three months ended August 31, 2004compared to $0.1 million in the three months ended August 31, 2003. Income tax expense as a percentage of pretax income was 38.2% in the threemonths ended August 31, 2004 compared to 40.9% in the three months ended August31, 2003.  The decrease in the effective tax rate in fiscal 2004 comparedto fiscal 2003 was primarily due to a higher proportion in fiscal 2003 offoreign source income which has a higher effective tax rate.

 

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**Nine Months Ended August 31, 2004 Compared toNine Months Ended August 31, 2003**

 

*Net Sales*

 

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

 
| ** **                          | ** ** | **Nine months ended August 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **(amounts in millions)**        | ** ** |
| ** **                          | ** ** | **2004**                         | ** ** | **2003** | ** ** | **Percent  Change** | ** ** |
| Net sales:                          |       |                             |       |   |   |   |   |
| Secure Payment Systems              |       | $                                | 29.3       |   | $ | 31.3 |   | (6.4 | )% |
| Wireless and Connectivity Solutions |       | 11.9                             |       | 11.2 |   | 6.3 | % |
|                                |       | $                                | 41.2       |   | $ | 42.5 |   | (2.9 | )% |

 

Net sales in the nine months ended August 31, 2004 decreased by $1.3million or 2.9% to $41.2million from $42.5 million in the nine months endedAugust 31, 2003.  The decrease in saleswas primarily due to a $1.2 million decrease in revenue from MICR printers andsupplies and a $0.8 million decrease in revenue from StarACH software, both inour Secure Payment Systems segment partially offset by $0.7 million increase inrevenue from Wireless and Connectivity print server sales and royalties. Thedecline in Secure Payment Systems products was primarily due to increasedcompetition and an overall decline in check printing. The increase in Wirelessand Connectivity was primarily due to large orders received in the first halfof 2004. Net sales were not significantly affected by price changes.

 

*Gross Profit*

 

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

 
| ** **   | ** ** | **Nine months ended  August 31,** | ** ** | ** **                 | ** ** |
|--------------|------------|-----------------------------------|------------|----------------------------|------------|
| ** **   | ** ** | **(amounts in millions)**         | ** ** | **Percent of Total Sales** | ** ** |
| ** **   | ** ** | ** **                        | ** ** | ** **                 | ** ** | **Percent** | ** ** | **August 31,** | ** ** |
| ** **   | ** ** | **2004**                          | ** ** | **2003**                   | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross profit |       | $                                 | 16.3       |                       | $          | 16.2 |   | 0.9 | % | 39.6 | % | 38.2 | % |   |
|              |            |                                   |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

Gross profit increased in the nine months ended August 31, 2004 fromthe nine months ended August 31, 2003, primarily due to increased sales andmargins on Wireless and Connectivity products largely offset by decreased salesof Secure Payment Systems products described above and the impairment charge of$0.3 million related to ACH software (see Note 4).  Gross profit on Wireless and Connectivity productsin 2003 was reduced by a $0.9 million increase in the inventory reserve. Grossprofit as a percent of sales will fluctuate based on shifts in the mix ofproducts sold.  Gross profit was not significantly affected by pricechanges.

 

*Selling, General and Administrative Expenses*.

 

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

 
| ** **                                    | ** ** | **Nine months ended  August 31,** | ** ** | ** **                 | ** ** |        |
|-----------------------------------------------|------------|-----------------------------------|------------|----------------------------|------------|-------------|
| ** **                                    | ** ** | **(amounts in millions)**         | ** ** | **Percent of Total Sales** | ** ** |        |
| ** **                                    | ** ** | ** **                        | ** ** | ** **                 | ** ** | **Percent** | ** ** | **August 31,** | ** ** |   |
| ** **                                    | ** ** | **2004**                          | ** ** | **2003**                   | ** ** | **Change**  | ** ** | **2004** | ** ** | **2003** | ** ** |   |
| Selling, general and administrative  expenses |       | $                                 | 11.9       |                       | $          | 11.3        |   | 5.4 | % | 28.9 | % | 26.6 | % |
|                                               |            |                                   |            |                            |            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in selling, general and administrative expenses wasprimarily due to increases in professional fees.  General and administrative expenses in thenine months of fiscal 2004 included $2.7 million in professional feesrelated to the 2003 year-end audit, the currently proposed Merger to take TROYprivate, the deductible portion of our director and officers insurance policyrelated to the recent litigation regarding the currently proposed Mergerdescribed under Legal Proceedings, and the

 

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implementation of our new ERP system.  General and administrative expenses in thenine months of fiscal 2003 included $1.5 million in professional fees relatedto the year-end audit and the 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:

 
| ** **                        | ** ** | **Nine  months ended  August 31,** | ** ** | ** **                  | ** ** |
|-----------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(amounts  in millions)**         | ** ** | **Percent  of Total Sales** | ** ** |
| ** **                        | ** ** | ** **                         | ** ** | ** **                  | ** ** | **Percent** | ** ** | **August  31,** | ** ** |
| ** **                        | ** ** | **2004**                           | ** ** | **2003**                    | ** ** | **Change** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Research and development expenses |       | $                                  | 3.5        |                        | $          | 4.0 |   | (12.0 | )% | 8.4 | % | 9.3 | % |
|                                   |            |                                    |            |                             |            |  |  |  |  |  |  |  |  |

 

Research and development expenses decreased in the nine months endedAugust 31, 2004 compared to the nine months ended August 31, 2003, primarilydue to reduced spending for Secure Payment Systems products.  The total research and development expenses for the nine months offiscal 2004 included $2.1 million for Secure Payment Systems and $1.4 millionfor Wireless and Connectivity Solutions. We have the ability to redirectour research and development activities as needed based on our productstrategies and market opportunities.  We forecast and budget research anddevelopment expenses by segment, but not by project.  The anticipatedtiming for the commercialization of any of our development efforts is notcurrently known.

 

*Amortization of Intangible Assets.** *Amortization of intangible assetsincreased by $36,000 to $69,000 in the nine months ended August 31, 2004 from$33,000 in the nine months ended August 31, 2004.

 

*Operating Income*. As a result of the above factors, operating income was unchanged at $0.9 millionin the nine months ended August 31, 2004 and August 31, 2003.  Operatingincome as a percentage of net sales was unchanged at 2.2% in the nine monthsended August 31, 2004 and August 31, 2003.

 

*Interest Income.* Interest income increased by $54,000 to $93,000 in the nine months ended August31, 2004 from $39,000 in the nine months ended August 31, 2003.  This increase was the result of increases inour investment in available-for-sale securities.

 

*Interest Expense*.  Interest expense was $2,000 in the ninemonths ended August 31, 2004 compared to $9,000 in the nine months ended August31, 2003, due to the payment of the note payable in fiscal 2003.

 

*Income Taxes*. Income tax expense was $0.4 million in the nine months ended August 31, 2004and August 31, 2003.  Income tax expense as a percentage of pretax incomewas 38.2% in the nine months ended August 31, 2004 compared to 38.7% in thenine months ended August 31, 2003.  The decrease in the effective tax ratein fiscal 2004 compared to fiscal 2003 was primarily due to a higher proportionin fiscal 2003 of foreign source income which has a higher effective tax rate.

 

**Liquidityand Capital Resources**

 

Cash flows provided byoperating activities were $1.7 million in the nine months ended August 31, 2004compared to $2.7 million provided by operating activities in the nine monthsended August 31, 2003.  This decrease in cash flows provided by operatingactivities was primarily due to a tax refund in 2003.  Cash flows provided by operating activitiesin 2004 included reductions in accounts receivable offset by increases ininventory and decreases in accrued expenses.  Cash flows provided byoperating activities in fiscal 2003 included income tax refunds, collections ofaccounts receivable, and increases in accrued expenses partially offset bydecreases in accounts payable.

 

Cash flows provided byinvesting activities were $0.8 million in the nine months ended August 31, 2004compared to $0.4 million used in investing activities in the nine months endedAugust 31, 2003.  Cash flows used included capital expenditures of $0.4million in fiscal 2004 and $0.9 million in fiscal 2003, offset by $1.2 millionin maturities of available-for-sale securities during 2004 and $0.5 million in2003.

 

Cash flows used in financing activitieswere $8,000 in the nine months ended August 31, 2004 compared to cash flowsused in financing activities of $44,000 in the nine months ended August 31,2003.  The decrease in cash used in financing activities primarilyresulted from the payment of the note payable in fiscal 2003,

 

We have a $5.0 millionline-of-credit agreement with Comerica Bank.  As of August 31, 2004, therewere no borrowings

 

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outstandingagainst the line of credit.  Borrowings under the line of credit bearinterest at the lesser of the bank’s reference rate (4.50% at August 31, 2004)less 0.25% or the bank’s LIBOR rate (2.00% at August 31, 2004) plus 2% and arelimited to 80% of eligible accounts receivable and 50% of eligible inventoriesif total liabilities to tangible effective net worth is greater than two toone.  No formula is required if total liabilities to tangible effectivenet worth is less than two to one. In connection with the line-of-creditagreement, we have a $650,000 standby letter-of-credit sub-limit, of whichapproximately $80,000 was outstanding at August 31, 2004.  This line ofcredit is secured by substantially all of our assets.  Our borrowingarrangement requires us to comply with certain financial covenants and otherrestrictions, including our ability to pay dividends and as of August 31, 2004we were in compliance with those covenants. As of August 31, 2004, we hadapproximately $4.9 million in availability under the line of credit.  Theline-of-credit borrowings are due on demand. The agreement may be terminated byeither 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 August 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 $4.2 million, our investmentsof $6.8 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 other forms offinancing.  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 August 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.

 

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. The followingare our critical accounting policies:

 

*Inventories*

 

We value inventories at the lower of cost or market determined on afirst-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.

 

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*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 theproducts are offered for sale. At each balance sheet date, we compare theunamortized capitalized costs to the net realizable value of that product. Thenet realizable 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 other 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.

 

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 aregrouped with other assets to the lowest level for which identifiable cash flowsare largely independent of the cash flows of other groups of assets andliabilities. If the sum of the projected undiscounted cash flows (excludinginterest charges) is less than the carrying value of the assets, the assetswill be written down to the estimated fair value, and the loss recognized inincome from continuing operations in the period in which the determination ismade. Management has determined that no impairment of long-lived assets existedat November 30, 2003.  In the secondquarter of fiscal 2004, management evaluated the long-lived intangible assetsfor impairment using the methodology described in SFAS No. 144, and determinedthat the asset representing the capitalized software development costs for ACHsoftware was impaired.  As a result, theunamortized amount of $284,000 at April 30, 2004 was written off in thesecond quarter.

 

*Goodwill*

 

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 operating segments,which are the same as the reportable segments, identified in Note 11.  In the first step of the goodwill impairmenttest, the fair value of each reporting unit is compared to its carrying value.If the fair value exceeds the carrying value, goodwill is not impaired and nofurther testing is performed. If the carrying value exceeds the fair value,then the second step must be performed, and the implied fair value of thereporting unit’s goodwill must be determined and compared to the carrying valueof the goodwill for the reporting unit. If the carrying value of a reportingunit’s goodwill exceeds its implied fair value, then an impairment loss equalto the difference is recorded. For the year ended November 30, 2003, noimpairment loss was recognized.  Our annual impairment testing date is thebeginning of the fiscal fourth quarter, which is September 1.

 

*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

 

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significant post-delivery obligations existand collection of the resulting receivable is probable and not contingent onresale of the product. Revenue from equipment maintenance contracts on checkprinting equipment is recorded as deferred income when billed and is recognizedstraight-line over the term of the contract.  We provide for estimatedreserves based upon our historical rates of returns and allowances. Actual returns in any future period are inherently uncertain and thus maydiffer from our estimates.  We accrue for warranty expense at the timerevenue is recognized and maintain a warranty accrual for estimated futurewarranty obligations based upon the relationship between historical andanticipated warranty costs and sales volumes.  To the extent we experienceincreased warranty claim activity or increased costs associated with servicingthose claims, our warranty accrual will increase resulting in decreased grossprofit.

 

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 financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required which would result in anadditional expense in the period such determination 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 financialstatements, 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 $34,000 and $33,000 at August31, 2004 and November 30, 2003, respectively. The German subsidiary’sfinancial statements are remeasured at month-end exchange rates for monetaryassets and liabilities, and historical exchange rates for non-monetary assetsand liabilities 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 portionor all of the deferred tax assets will not be realized. In evaluating the needfor a valuation allowance, we consider future taxable income and prudent andfeasible tax planning strategies. We have placed substantial reliance on ourcurrent projections of future taxable income.  We re-assess ourprojections of taxable income on a quarterly basis.  If it is determined

 

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that we would not be able to realize all or part of our deferred taxassets in the future, which would include our failure to materially meet ourprojections of taxable income, an adjustment to the carrying value of thedeferred tax assets would be charged to income in the period in which suchdetermination was made and may affect 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 withAccounting Principles 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 asequity or temporary equity be presented as liabilities.  Such instrumentsinclude mandatory redeemable preferred and common stock, and certain optionsand warrants.  SFAS No.150 is effective for financial instruments issued,entered into or modified after May 31, 2003 and is generally effective at thebeginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No.150 is not expected to have a material effect on theCompany’s financial position or results of its operations.

 

In 2003, the Financial Accounting Standards Board issued FASBInterpretation No. 46 (FIN 46),*Consolidation of Variable Interest Entities, anInterpretation of Accounting Research Bulletin No. 51*, asrevised. Prior to FIN 46, a company generally included another entity in thecompany’s financial statements only if it controlled the entity throughownership of the majority voting interests.  FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of theentity if the equity investors in the entity do not have the characteristics ofa controlling financial interest or do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties.  We have adoptedFIN 46 effective with the quarter ending May 31, 2004, and we have determinedthat we do not have any variable interest entities that are required to beconsolidated in 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 notextend the useful life of these

 

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products, we anticipate that sales of theseproducts will begin to decline, in which case it would be necessary for us tooffset this potential decline through increased sales of other products. There is no assurance that we will be successful in achieving increased salesin other 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 productscould materially and adversely affect our business.  In addition, if weare unable to develop or obtain access to emerging wireless networkingtechnologies as they become available, or are unable to design, develop andintroduce on a timely basis products based on these emerging technologies, ourfuture operating results would be materially and adversely affected.  Todate, our wireless solutions have not gained market acceptance or had anymeaningful commercial impact, and there can be no assurance that our wirelesssolutions will ever gain market acceptance or have a commercial impact. In addition, there can be no assurance that our wireless products will be basedon the wireless standards that are ultimately adopted by the marketplace.

 

**Technologyin our industry evolves rapidly, and we must continue to enhance existingproducts and develop new products or our 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 20.0% of our net salesin the nine months ended August 31, 2004 and represented 21.0% of our net salesin the nine months ended August 31, 2003.  We expect that shipments tointernational customers will continue to account for a material portion of our netsales.  Sales outside the United States involve the following risks, amongothers:

 

•      foreign governments may impose tariffs, quotas and taxes;

 

•      political andeconomic instability may reduce demand for our products;

 

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•      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.

 

**Ourquarterly operating results fluctuate as a 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-cycle stagesof the products sold in the quarter;

 

•      the availabilityand cost of components and materials;

 

•      costs andbenefits of new product and service introductions; and

 

•      customer orderand shipment 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,which 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 future financialresults.  We also cannot be certain that we have not infringed theproprietary 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 with the Merger and the costsassociated with the proposed Merger could have a negative financial impact onTROY.**

 

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

 

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Merger, or the action is successful in obtaining damages, it could havea material adverse effect on our business, financial position, or results ofoperation.  In addition, the costsassociated with defending these actions and completing the Merger could have anegative financial 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 foreigncurrency fluctuations. Rather, we monitor our foreign currency exposure on amonthly basis.  Principal foreign currencies are the Euro and the CanadianDollar.  The bank debt is a revolving line of credit.  Borrowingsunder the line of credit bear interest at the lesser of the bank’s referencerate (4.50 % at August 31, 2004) less 0.25% or the bank’s LIBOR rate (2.00 % atAugust 31, 2004) plus 2% and are limited to 80% of eligible accounts receivableand 50% inventory .  As of August 31,2004, there were 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)  Evaluationof disclosure controls and procedures.** We maintain “disclosurecontrols and procedures,” as such term is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”), that are designed toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in Securities and ExchangeCommission rules and forms and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating our disclosure controls and procedures,management recognized that disclosure controls and procedures, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the disclosure controls and procedures aremet. Additionally, in designing disclosure controls and procedures, ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures. Thedesign of any disclosure controls and procedures also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.  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 fullyimplemented, it will improve our overall disclosure controls and procedures.

 

Based on their evaluation as of the end of the period covered by thisQuarterly Report on Form 10-Q, our Chief Executive Officer and Chief FinancialOfficer have concluded that, subject to the limitations noted above, ourdisclosure 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)  Changesin internal controls.** There was no change in ourinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) identified in connection with the evaluation described inItem 4(a) above that occurred during our last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting. In the first fiscal quarter of 2004, we beganthe implementation of a new ERP system.  Although this new ERP system hasnot yet been fully implemented, we expect that, once fully implemented, it willimprove our internal controls over financial reporting.

 

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**PARTII:  OTHER INFORMATION**

 

**ITEM1 - LEGAL PROCEEDINGS**

 

In connectionwith the Prior Merger Proposal, on November 21, 2002, Tom Lloyd filed an actionin the Superior Court of the State of California in and for Orange Countyagainst TROY and its directors, alleging that defendants breached theirfiduciary duties in connection with the Prior Merger Proposal by attempting toprovide the Dirk family with preferential treatment in connection with theirefforts to complete a sale of TROY. The complaint sought to enjoin anacquisition of TROY by the Dirk family, as well as attorneys’ fees. Followingtermination of the Prior Merger Proposal, the plaintiff filed a motion fordismissal of the action and award of attorney’s fees and expenses of$387,250.  TROY filed a motion in supportof the plaintiff’s motion for dismissal of the action and in opposition toplaintiff’s motion for fees.  On March 4,2004 the court issued a ruling granting the motion for dismissal withprejudice, and granting the motion for attorney’s fees of $175,000. On April30, 2004, TROY filed a notice of appeal. TROY has accrued an estimate ofexpenses to be incurred in connection with this litigation in fiscal 2003 inexcess of the deductible amount, which was recorded as an expense in fiscal2002.

 

Following theannouncement of the merger, Osmium Partners LLC (“Osmium”), Ralph Hamer (“Hamer”),Roy Liedtkie (“Liedtkie”), Tilson Growth Fund, L.P. (“Tilson”), and Ray Stanley(“Stanley”) filed purported class action complaints in the California SuperiorCourt for Orange County against TROY and our directors.  In all five actions plaintiffs allege thatdefendants breached their fiduciary duties in connection with the merger byattempting to provide the Dirk family with preferential treatment in connectionwith their efforts to complete a sale of TROY. Plaintiffs in all five actions seek declaratory relief, an orderenjoining the acquisition, and attorneys’ fees. The Liedtkie complaint also names Mergerco and seeks damages.  Pursuant to a stipulated order, Osmium,Hamer, Liedtkie and Tilson have been consolidated, and these four plaintiffshave adopted the allegations of the Tilson complaint.  On September 13, 2004 defendants filed ademurrer to the Tilson complaint, and on September 21, they filed a demurrer tothe Stanley complaint.  On September 17,Osmium and Stanley filed a motion for class certification.  On September 23, 2004, Liedtkie submitted astipulation and proposed Order dismissing his action with prejudice.  That stipulation is subject to Courtapproval.  Discovery has commenced, butno trial date has been set in any of these actions.  If these actions are successful in enjoiningthe transaction, it could have a material adverse effect on our business,financial position, or results of operations. Currently, the amount of such an adverse effect cannot be estimated.

 

On September7, 2004, TROY, Mergerco, and the Dirk Family Trust commenced an action againstWestar Capital LLC (“Westar”) in the United States District Court for theCentral District of California, for violations of the Williams Act, tortiousinterference with contract, tortious interference with prospective economicadvantage, and unfair business practices. The complaint alleges in this regard that Westar’s purported offers topurchase all of the outstanding stock of TROY are nothing more than shamsdesigned to disrupt the market for TROY common stock and the proposed mergerbetween TROY and Mergerco.  The complaintseeks damages of an unspecified amount as well as injunctive relief.  Westar has moved to dismiss the complaint,and set a hearing date of October 25.

 

**ITEM5 - OTHER INFORMATION**

 

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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**ITEM6 - EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                              |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                         |
| 2.1                |       | First Amendment of the Agreement and Plan of Merger, dated October 5,  2004, by and between  TROY Group, Inc. and Dirk, Inc. |
|               |       |                                                                                                                         |
| 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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**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.                                  |
|-----------------------|---------------------------------------------------|
|                  |                                              |
|                  |                                              |
| October 15, 2004 | /s/ Patrick J. Dirk                               |
|                  | Patrick J. Dirk                                   |
|                  | Chairman, President and Chief Executive Officer   |
|                  |                                              |
| October 15, 2004 | /s/ Dennis C. Fairchild                           |
|                  | Dennis C. Fairchild                               |
|                  | Senior Vice President and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                  |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                         |
| 2.1                 |       | First Amendmant of the Agreement and Plan of Merger, dated October 5,  2004, by and between TROY  Group, Inc. and Dirk, Inc. |
|                |       |                                                                                                                         |
| 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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