• On April 30, 2008, we consummated the transactions contemplated by that certain Asset Purchase Agreement, dated as of January 9, 2008, between KMC and Peerless, pursuant to which we sold substantially all of our IP to KMC, transferred to KMC thirty eight (38) of our employees, licensed the IP back from KMC on a nonexclusive, worldwide, perpetual and royalty free basis subject to certain restrictions, entered into a sublease pursuant to which we are subleasing to a subsidiary of KMC 16,409 square feet of office space at our executive offices for a period of forty (40) months at a monthly rent equal to the allocable portion of the rent and common charges payable by us under our lease for the property, and terminated substantially all of our existing agreements with KMC. As consideration for the sale, KMC assumed certain of our liabilities, and paid us approximately $37.0 million, less a holdback amount of $4.0 million relating to potential indemnification obligations. The cash proceeds generated from the KMC transaction will position us to continue executing our strategic plan.

• At the end of our first quarter we recorded a restructuring charge of approximately $1.1 million for reductions in staffing and excess operating leases.

• On February 22, 2008, the Company entered into an Asset Purchase Agreement to acquire substantially all of the assets of Prism, a provider of print and document-management software products. On May 28, 2008, we terminated the agreement. Our obligations to complete the transactions contemplated by the agreement were subject to various closing conditions which were not satisfied. Pursuant to the terms of the agreement, we had the right to terminate the agreement. No termination fee is payable by us as a result of the termination of the agreement, however, expenses associated with the transaction of approximately $0.3 million were charged to operations in the first quarter of fiscal 2009.

• In 1999, we entered into a PostScript Software Development License and Sublicense Agreement, or the Adobe License Agreement, with Adobe Systems Incorporation, or Adobe, that expanded the application and integration of our respective technologies. The Adobe License Agreement is set to expire on June 30, 2008, and we do not expect that this agreement will be renewed. The Adobe License Agreement provides that there is a period of twelve to eighteen months following the expiration of the agreement by which we continue to license and provide services to our existing OEM customers. We are currently negotiating changes to the terms of this contract which govern the obligations and rights of both parties for the operating period subsequent to the expiration date of the agreement.

Our inability to implement our strategic plan, develop and offer products, and manage expansion in the aforementioned marketplaces, as well as the declining sales trend of our existing licenses, downward price pressure on our existing technologies, uncertainty surrounding third party license revenue sharing agreements, downward price pressure on OEM products and the anticipated consolidation of the number of OEMs in the marketplace, may have a material adverse effect on our business and financial results.

General
We generate revenue from our OEMs through the sale of imaging solutions in either turnkey or software development kit, or SDK, form. Historically, demand by OEMs, for turnkey solutions had exceeded demand for SDK solutions. However, beginning in fiscal year 2000, we experienced a shift in demand away from turnkey solutions towards demand for SDKs, particularly for our mature monochrome solutions.
Our product licensing revenues are comprised of both recurring per unit and block licensing revenues and development licensing fees for source code or SDKs. Licensing revenues are derived from per unit fees paid periodically by our OEM customers upon manufacturing and subsequent commercial shipment of products incorporating our technology. Licensing revenues are also derived from arrangements in which we enable third party technology, such as solutions from Adobe or Novell, Inc., or Novell, to be used with our OEM partners' products. Block licenses are per-unit licenses in large volume quantities to an OEM for products either in or about to enter into distribution into the marketplace. Payment schedules for block licenses are negotiable and payment terms are often dependent on the size of the block and other terms and conditions of the block license being acquired. Typically, payments are made in either one lump sum or over a period of four or more quarters.
Revenue received for block licenses is recognized in accordance with SOP 97-2, which requires that revenue be recognized after the following conditions have been met: (1) delivery has occurred;(2) fees have been determined and are fixed;
(3) collection of fees is probable; and (4) and evidence of an arrangement exists. For block licenses that have a significant portion of the payments due within twelve months, revenue is generally recognized at the time the block license becomes effective assuming all other revenue recognition criteria have been met. We also have engineering services revenues that are derived primarily from adapting our software and supporting electronics to specific OEM requirements. Our maintenance revenues are derived from software maintenance agreements. Maintenance revenues currently constitute a small portion of total revenue. Historically, a limited number of customers have provided a substantial portion of our revenues. Therefore, the availability and successful closing of new contracts, or modifications and additions to existing contracts with these customers may materially impact our financial position and results of operations from quarter to quarter. The document imaging industry is rapidly changing. Historically, most electronic imaging products in the office environment have been stand-alone, monochrome machines, which were dedicated to a single print, copy, fax or scan function. Today's imaging products combine printer, fax and scan functions in single color MFP or AiO devices. These rapid changes in technology and end-user requirements have created new opportunities and challenges for digital document product manufacturers. These challenges include customer expectations for higher performance products at lower prices as well as the desire and ability of product manufacturers to develop more and more technology in-house. The opportunities include the increasing demand for AiO products, high quality color imaging and document solution software applications. Our strategic initiatives are centered on these opportunities. The strategy calls for aligning our cost structure with our current and projected revenue streams through a business rationalization plan, maximizing the value of our licensed back technologies and expanding our business through mergers and/or acquisitions into high-growth segments of the digital content management industry. Liquidity and Capital Resources
Compared to January 31, 2008, total assets at April 30, 2008 increased 75% to $58.2 million and stockholders' equity increased 59% to $44.1 million, primarily the result of the net income generated principally by the sale to KMC. Our cash and investment portfolio at April 30, 2008 was $55.8 million, an increase of 141% from $23.1 million as of January 31, 2008, and the ratio of current assets to current liabilities was 4.5:1, which is a decrease from the 6.7:1 ratio as of January 31, 2008. The decrease was primarily the result of the decrease in the deferred tax asset and the increase in income taxes payable in the first quarter. Our operations used $0.3 million in cash during the three months ended April 30, 2008, compared to $0.7 million in cash provided by operations during the quarter ended April 30, 2007.
During the three months ended April 30, 2008, $32.7 million in cash was generated by our investing activities, mainly due to the KMC transaction. We have not historically purchased, nor does it expect to purchase in the future, derivative instruments or enter into hedging transactions.
At April 30, 2008, our principal source of liquidity, cash and cash equivalents was $55.8 million; an increase of $32.7 million from January 31, 2008. We do not have a credit facility. We may require additional long-term capital to finance working capital requirements.

On April 30, 2008, we consummated the transactions contemplated by that certain Asset Purchase Agreement, dated as of January 9, 2008, between KMC and Peerless, pursuant to which we sold substantially all of our IP to KMC, transferred to KMC thirty eight (38) of our employees, licensed the IP back from KMC on a nonexclusive, worldwide, perpetual and royalty free basis subject to certain restrictions, entered into a sublease pursuant to which we are subleasing to a subsidiary of KMC 16,409 square feet of office space at our executive offices for a period of forty (40) months at a monthly rent equal to the allocable portion of the rent and common charges payable by us under our lease for the property, and terminated substantially all of our existing agreements with KMC. As consideration for the sale, KMC assumed certain of our liabilities, and paid us approximately $37.0 million, less a holdback amount of $4.0 million relating to potential indemnification obligations. The cash proceeds generated from the KMC transaction will position us to continue executing our strategic plan. A certain portion of the net proceeds from the KMC transaction will be used for general corporate purposes, including satisfying our working capital needs and paying our remaining liabilities as they come due, relating to the assets that we retain following the consummation of this transaction, including our rights under our sublicenses with Adobe and Novell and our customized intellectual property.
In addition to the net proceeds that we received from the KMC transaction, as a result of the KMC transaction our operating costs and selling, general and administrative expenses will significantly decrease, freeing up additional capital which will permit us to pursue our long term goal of providing new growth opportunities and a diversified revenue base. We intend to aggressively seek acquisitions and new ventures, leveraged by our current OEM relationships, talent base and the infusion of capital resulting from this transaction. Our long term strategy includes diversifying our business to better ensure growth and profitability and maximizing our strengths in the following traditional core areas: imaging, Adobe PostScript™, networking and hardware intellectual property. Specifically, we plan to focus on the area of solution software applications and the AiO market place. We intend to acquire or invest in existing business enterprises to accomplish this goal. In addition, we have formed a subsidiary to investigate and explore potential opportunities in the AiO market with new technologies. We have authorized a budget of $2.6 million to initiate the subsidiary. Because this subsidiary is in the very early stages of market analysis, it has not yet entered into any agreements in the AiO market and we can provide no assurances that it will do so or will ultimately be successful even if any such agreement is consummated. Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of Operations" addresses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that they believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
We account for our software revenues in accordance with Statement of Position, or SOP, 97-2, "Software Revenue Recognition", as amended by SOP 98-9, Staff Accounting Bulletin No. 104, "Revenue Recognition", and Emerging Issues Task Force 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Over the past several years, we entered into block license agreements that represent unit licenses for products that will be licensed over a period of time. In accordance with SOP 97-2, revenue is recognized when the following attributes have been met: 1) an agreement exists between us and the OEM selling product utilizing our intellectual property and/or a third party's intellectual property for which we are an authorized licensor; 2) delivery and acceptance of the intellectual property has occurred; 3) the fees associated with the sale are fixed and determinable; and 4) collection of the fees are probable. Under our accounting policies, fees are fixed and determinable if 90% of the fees are to be collected within a twelve-month period, in accordance with SOP 97-2. If more than 10% of the payments of fees extend beyond a twelve-month period, they are recognized as revenues when they are due for payment, in accordance with SOP 97-2.
For fees on multiple element arrangements, values are allocated among the elements based on vendor specific objective evidence of fair value, VSOE. We generally establish VSOE based upon the price charged when the same elements are sold separately. When VSOE exists for all undelivered elements, but not for the delivered elements, revenue is recognized using the "residual method" as prescribed by SOP 98-9. If VSOE does not exist for the undelivered elements, all revenue for the arrangement is deferred until the earlier of the point at which such VSOE does exist for the undelivered elements or all elements of the arrangement have been delivered, unless the only undelivered element is a service in which revenue from the delivered element is recognized over the service period.
We recognize revenues for certain of our engineering services projects on a percentage-of-completion basis, in accordance with Accounting Research Bulletin 45, "Long-Term Construction-Type Contracts", and SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The estimates to complete the projects are determined by the individual project-engineering manager responsible for the oversight of the individual projects. The estimates are made at the end of each accounting period and are subject to unforeseen circumstances that can increase or decrease the hours necessary to complete the efforts. For fiscal year 2008, we reported no engineering services revenues on a percentage-of-completion basis.

We provide an accrual for estimated product licensing costs owed to third party vendors whose technology is included in the products sold by us. The accrual is impacted by estimates of the mix of products shipped under certain of our block license agreements. The estimates are based on historical data and available information as provided by our customers concerning projected shipments. Should actual shipments under these agreements vary from these estimates, adjustments to the estimated accruals for product licensing costs may be required. Such adjustments have historically been within management's expectations. However, product licensing cost increased by $0.4 million during the third quarter of fiscal 2007 as a result of a change in estimate reported by one of our OEM customers, decreased by $0.3 million in the fourth quarter of fiscal 2008 as a result of the settlement of differences arising from a third party licensing agreement review and increased by $2.4 million in the first quarter of fiscal 2009 resulting from the KMC transaction.
As of April 30, 2008, we had tax credit carry-forwards available to reduce future income tax liabilities of approximately $6.8 million which begin to expire in fiscal year 2011. The realization of these assets is based upon management's estimates of future taxable income. We have provided a valuation allowance for the remaining of our net deferred tax assets, primarily foreign tax credits, because of the uncertainty with respect to our ability to generate future taxable income to realize the deferred tax assets. With a change in management's assessment of the uncertainty, the valuation allowance will be adjusted accordingly.
We grant credit terms in the normal course of business to our customers. We continuously monitor collections and payments from our customers and maintain allowances for doubtful accounts for estimated losses resulting from the inability of any customers to make required payments. Estimated losses are based primarily on specifically identified customer collection issues. If the financial condition of any of our customers, or the economy as a whole, were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Actual results have historically been consistent with management's estimates.
Our recurring product licensing revenues are dependent, in part, on the timing and accuracy of product sales reports received from our OEM customers. These reports are provided only on a calendar quarter basis and, in any event, are subject to delay and potential revision by the OEM. Therefore, we are required to estimate all of the recurring product licensing revenues for the last month of each fiscal quarter and to further estimate all of our quarterly revenues from an OEM when the report from such OEM is not received in a timely manner. In the event we are unable to estimate such revenues accurately prior to reporting financial results, we may be required to adjust revenues in subsequent periods. Actual results have historically been consistent with management's estimates. On February 1, 2006, we adopted SFAS No. 123(R) using the modified-prospective transition method. Under this method, prior period results are not restated. Compensation cost recognized subsequent to adoption includes: (i) compensation cost for all share-based payments granted prior to, but unvested as of January 31, 2006, based on the grant date fair value, which is determined in accordance with the original provision of SFAS No. 123 using a Black-Scholes option pricing model, and (ii) compensation cost for all share-based payments granted subsequent to February 1, 2006, based on the grant-date fair value, which is determined in accordance with the provisions of SFAS No. 123(R) using a Black-Scholes option pricing model to estimate the grant date fair value of share-based awards.
We use our actual stock trading history as a basis to calculate the expected volatility assumption to value stock options. The expected dividend yield is based on Peerless' practice of not paying dividends. The risk-free rate of return is based on the yield of U.S. Treasury Strips with terms equal to the expected life of the option as of the grant date. The expected life in years is based on historical actual stock option exercise experience.
SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If actual forfeitures vary from our estimates, we will recognize the difference in compensation cost in the period the actual forfeitures occur.
Upon adoption of SFAS 123(R), we changed our method of attributing the value of stock-based compensation expense from the multiple-option (i.e. accelerated) approach to the single-option (i.e. straight-line) method. Compensation expense for share-based awards granted through January 31, 2006 will continue to be subject to the accelerated multiple-option method, while compensation expense for share-based awards granted on or after February 1, 2006 will be recognized using a straight-line, or single-option method. We recognize these compensation costs over the service period of the award, which is generally the options vesting term of four years.
On February 1, 2007, we adopted FIN 48. See "Item 1. Financial Statements - Note
7. Income Taxes" for further information.

Results of Operations
Comparison of Quarters Ended April 30, 2008 and 2007

                                                Percentage of          Percentage
                                               Total Revenues            Change
                                                Three Months          Three Months
                                                    Ended                Ended
                                                  April 30,            April 30,
                                               2008        2007      2008 vs. 2007
      Statements of Operations Data:
      Revenues:
      Product licensing                            23 %       44 %              (64 )%
      Engineering services and maintenance         77         56                 (6 )
      Hardware sales                                -          -                  -

      Total revenues                              100        100                (32 )

      Cost of revenues:
      Product licensing                            83         16                254
      Engineering services and maintenance         43         38                (22 )
      Hardware sales                                -          -                  -

      Total cost of revenues                      126         54                 61

      Gross margin                                (26 )       46               (139 )

      Operating expenses:
      Research and development                     29         24                (18 )
      Sales and marketing                          21         13                 11
      General and administrative                  112         32                142
      Gain on sale                             (1,018 )        -                100
      Restructuring expense                        34          -                100

      Total operating expenses                   (822 )       69               (918 )

      Income (loss) from operations               796        (22 )            2,555
      Other income (expense), net                   5          5                (18 )

      Income (loss) before income taxes           801        (17 )            3,237
      Provision for income taxes                  326          -                  *

      Net income (loss)                           475 %     (17) %            1,952 %

* Percentage not meaningful

Net Income
Our net income in the first quarter of fiscal year 2009 was $15.4 million, or $0.87 per basic share and $0.84 per diluted share, compared to a net loss of $0.8 million, or $0.05 per basis share and $0.05 per diluted share, in the first quarter of fiscal year 2008.
Revenues
Consolidated revenues were $3.2 million for the first quarter of fiscal year 2009, compared to $4.7 million for the first quarter of fiscal year 2008. Licensing revenues decreased $1.3 million in the first quarter of fiscal year 2009 due primarily to a decrease in block licensing revenue resulting from a decline in the demand for our technologies and services. Engineering services and maintenance revenues decreased $0.2 million, primarily as a result of increased competition for business on a global basis. Cost of Revenues
Total cost of revenues were $4.1 million in the first quarter of fiscal year 2009, compared to $2.5 million in the first quarter of fiscal year 2008. Product licensing costs increased $1.9 million in the period primarily due to the KMC transaction and the resulting mix of technologies available to be delivered against existing block licenses with KMC. Engineering services and maintenance costs in the first quarter of fiscal year 2009 decreased $0.4 million compared to the first quarter of fiscal 2008 mainly due to fewer employees.

Gross Margin
Our gross margin decreased to (26)% in the first quarter of fiscal year 2009 compared with 46% in the first quarter of fiscal year 2008. The decrease in fiscal year 2009 was due primarily to less product licensing revenue and the additional product licensing cost incurred in connection with the KMC transaction.
Operating Expenses
Total operating expenses for the first quarter of fiscal year 2009 decreased 918% to $(26.6) million, compared with $3.3 million for the same period one year ago due mainly to the KMC transaction.
• Research and development expenses decreased 18% to $0.9 million in the first quarter of fiscal year 2009 from $1.1 million in the comparable quarter of fiscal year 2008. The decrease in staffing that has occurred over the last fiscal year is the primary reason for decline in research and development expense.

• Sales and marketing expenses increased 11% to $0.7 million in the first . . .