Highlights

Following the sale of the Company's assets to KMC in April 2008, staffing has been reduced to a total of 9 employees. Currently, we maintain an organization that is capable of meeting the requirements of our customers, evaluating our corporate strategy and meeting the obligations of a public company.

Certain funds payable from KMC to the Company in connection with such sale of assets were placed in escrow. In May 2009, the Company negotiated the early release of the escrow funds. The Company received a sum of approximately $3.8 million net of discount payable to KMC on May 29, 2009, and recorded a gain associated with the release of funds as of July 31, 2009.

Consolidated revenues for the three months ended July 31, 2009 decreased $1.2 million, or 36%, to $2.1 million as compared with $3.3 million for the three months ended July 31, 2008. Year-to-date net sales decreased $3.6 million, or 55% to $3.0 million for the six months ended July 31, 2009 as compared to $6.6 million for the six months ended July 31, 2008. These overall decreases in revenues were primarily attributable to the sale of the Company's intellectual property to KMC, and declines in the demand for (a) our technologies, (b) third party technologies we are licensed to sell, and (c) the requirement for traditional engineering services.

We held 1,180,873 shares of common stock of Highbury Financial, Inc. ("Highbury") and warrants to acquire 1,525,241 shares of Highbury common stock recorded at fair value of approximately $5.4 million as of July 31, 2009.

Our inability to implement our acquisition plan as well as the declining sales trend of our existing licenses, downward price pressure on the technologies we license, uncertainty surrounding third party license revenue sharing agreements, downward price pressure on original equipment manufacturer ("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 continue to generate revenue from our OEMs through the licensing of imaging solutions. Our product licensing revenues are comprised of both recurring per unit and block licensing revenues and development licensing fees for source code or software development kits ("SDK"). Licensing revenues are derived from per unit fees paid periodically by our OEM customers upon manufacturing and subsequent commercial shipment of products incorporating the technology which we license. Licensing revenues are also derived from arrangements in which we enable third party technology, such as solutions from Adobe Systems Inc. ("Adobe") 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 fewer 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 technology we license has addressed the worldwide market for printers (21-69 pages per minute) and multifunction printers ("MFP") (21-110 pages per minute). This market has been consolidating, and the demand for the technology offered by us declined throughout fiscal years 2009 and 2008.

The document imaging industry has changed. Lower cost of development and production overseas increasing complexity of imaging requirements has resulted in us not being able to effectively compete in this environment. As a result, we sold our intellectual property and transferred 38 of our engineers and support personnel to KMC. Although as a part of the transaction we have retained the right, subject to certain restrictions, to continue licensing and supporting the imaging technology that we had previously developed and to continue to license third party imaging technologies. We are currently pursuing other potential investment opportunities. The strategy calls for aligning our cost structure with our current and projected revenue streams, maximizing the value of our licensed back technologies and expanding our business through investment opportunities.

Our contract with Adobe expires on March 31, 2010. We have had discussions with them to either extend the contract or enter into a different agreement with them. Our discussions have not resulted in an agreement. In order to maximize the value of our Intellectual Property and relationships with our clients, we are exploring how to transition our customer base that currently utilizes Adobe technology to another technology provider. There are no assurances that we will be able to extend our agreement with Adobe or that we will be successful in transitioning our customer base to another provider.

Liquidity and Capital Resources

Our total assets at July 31, 2009 were $51.8 million, an increase of 0.4% from $51.6 million as of January 31, 2009. The stockholders' equity at July 31, 2009 was $49.2 million, an increase of 10.6% from $44.5 million as of January 31, 2009, primarily the result of the net income generated by the restructuring of one of our license agreements, the release of escrow funds received from KMC in May 2009 and unrealized gain from the purchases of marketable securities. Our cash and investment portfolio at July 31, 2009 was $47.6 million, an increase of 6.5% from $44.7 million as of January 31, 2009, and the ratio of current assets to current liabilities was 27.1:1, which is an increase from the 9.2:1 ratio as of January 31, 2009. The increase was primarily the result of the reduction to accrued licensing cost for which the reduced amount has been disbursed in the current quarter and a reversal for technologies licensed by the Company to a customer due to an agreement amending a third party technology license agreement. Our operations used $0.8 million in cash reflecting $1.3 million increase in receivables during the three months ended July 31, 2009, compared to $1.1 million in cash used by operations during the quarter ended July 31, 2008.

During the six months ended July 31, 2009, we invested our excess cash in money market funds and in Highbury securities. These investments generated $216,000, mainly due to interest income and dividends. We have not historically purchased, nor do we expect to purchase in the future, derivative instruments or enter into hedging transactions.

At July 31, 2009, our principal source of liquidity, cash and cash equivalents was $42.1 million; a decrease of $2.6 million from January 31, 2009. The decrease is primarily due to the investment in marketable securities which has a cost basis of $3.2 million. The Company in the current quarter purchased marketable securities traded publicly over the counter. As of July 31, 2009, the Company owned 1,180,873 and 1,525,241 of Highbury common stock and warrants, respectively. Each warrant gives the Company the right to purchase one share of Highbury common stock at $5.00 per share. We do not have a credit facility and may require additional long-term capital to finance any acquisition, merger or other transaction we may determine to pursue.

Critical Accounting Policies

We describe our significant accounting policies in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended January 31, 2009. There has been no change in our significant accounting policies since the end of fiscal 2009.

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

Results of Operations

Comparison of Quarters Ended July 31, 2009 and 2008

                                              Percentage of            Percentage of
                                              Total Revenues           Total Revenues
                                               Three Months             Three Months
                                              Ended July 31,           Ended July 31,
                                             2009         2008         2009 vs. 2008
 Revenues:
 Product licensing                                92 %       93 %                  (37 ) %
 Engineering services and maintenance              8          7                    (26 )
 Total revenues                                  100        100                    (37 )
 Cost of revenues:
 Product licensing                                32         46                    (57 )
 Engineering services and maintenance              3          3                    (40 )
 Total cost of revenues                           35         50                    (55 )
 Gross margin                                     65         50                    (18 )

 Research and development                          -         11                   (100 )
 Sales and marketing                               8         12                    (60 )
 General and administrative                       41         59                    (56 )
 (Gain) Loss on sale of operating assets        (177 )        0               (125,400 )
 Restructuring                                     -          3                   (100 )
                                                (128 )       86                   (195 )
 Income (loss) from operations                   193        (36 )                 (444 )
 Other income, net                                 5          9                    (68 )
 Income (loss) before income taxes               198        (26 )                 (579 )
 Provision (benefit) for income taxes            104        (11 )                 (711 )
 Net income (loss)                                94 %      (15 ) %               (487 ) %

Net Income

Our net income in the second quarter of fiscal year 2010 was $2.0 million, or $0.12 per basic and diluted share, compared to a net loss of $(0.5) million, or $(0.03) per basic share and diluted share, in the second quarter of fiscal year 2009.

Revenues

Consolidated revenues were $2.1 million for the second quarter of fiscal year 2010, compared to $3.3 million for the second quarter of fiscal year 2009. Engineering services and maintenance revenues were $0.2 million, for the second quarter of fiscal year 2010 and 2009.

Cost of Revenues

Total cost of revenues was $0.7 million in the second quarter of fiscal year 2010, compared to $1.7 million in the second quarter of fiscal year 2009. Product licensing costs decreased $0.9 million in the period primarily due to the lower mix of products being sold for which we pay license fees to third party. Engineering services and maintenance costs in the second quarter of fiscal year 2010 remained consistent compared to the second quarter of fiscal 2009.

Gross Margin

Our gross margin increased to 65% in the second quarter of fiscal year 2010 compared with 50% in the second quarter of fiscal year 2009. The increase was primarily the result of lower cost of product licensing revenues compared to last year's second quarter which is discussed above.

Operating Expenses

Total operating expenses (excluding the gain associated with its KMC sale of assets for the second quarter of fiscal 2010) decreased 66% to $1.0 million, compared with $2.9 million for the same period one year ago.

• Research and development expenses decreased 100% to $0 in the second quarter of fiscal year 2010 from $0.4 million in the comparable quarter of fiscal year 2009. The decrease was attributable to the transfer of engineers to KMC and the discontinuance of the product development efforts subsequent to the KMC transaction.

• Sales and marketing expenses decreased 60% to $0.2 million in the second quarter of fiscal year 2010 from $0.4 million in the comparable quarter of fiscal year 2009. The decrease was due to the reduction of staffing which was no longer required in the sale of current product offerings.

• General and administrative expenses decreased 56% to $0.9 million in the second quarter of fiscal year 2010 from $2.0 million in the comparable quarter of fiscal year 2009. The decrease was due to lower staffing levels and a lower level of professional fees which were expended in support of the restructuring.

Income Taxes

Our $2.2 million tax provision for the second quarter of fiscal 2010 was primarily due to the gain associated with the amended third party license agreement. Our tax provision for the second quarter of fiscal year 2009 was primarily due to the KMC transaction.

Comparison of Quarters Ended July 31, 2009 and 2008

                                                Percentage of         Percentage of
                                               Total Revenues         Total Revenues
                                                 Six Months             Six Months
                                               Ended July 31,         Ended July 31,
                                               2009        2008       2009 vs. 2008
   Revenues:
   Product licensing                               89 %       59 %                (30 ) %
   Engineering services and maintenance            11         41                  (88 )
   Total revenues                                 100        100                  (54 )
   Cost of revenues:
   Product licensing                              (56 )       65                 (140 )
   Engineering services and maintenance             5         23                  (90 )
   Total cost of revenues                         (51 )       87                 (127 )
   Gross margin                                   151         13                  452

   Research and development                         -         20                 (100 )
   Sales and marketing                             12         16                  (66 )
   General and administrative                      48         85                  (74 )
   (Gain) Loss on sale of operating assets       (125 )     (501 )                (89 )
   Restructuring                                    -         18                 (100 )
                                                  (65 )     (361 )                (92 )
   Income (loss) from operations                  216        373                  (73 )
   Other income, net                                7          8                  (56 )
   Income (loss) before income taxes              223        381                  (73 )
   Provision (benefit) for income taxes           107        155                  (68 )
   Net income (loss)                              116 %      226 %                (76 ) %

Net Income

Our net income in the first six months of fiscal year 2010 was $3.5 million, or $0.21 per basic and diluted share, compared to a net income of $15.0 million, or $0.84 per basic share and $0.81 per diluted share, in the first six months of fiscal year 2009.

Revenues

Consolidated revenues were $3.0 million for the first six months of fiscal year 2010, compared to $6.6 million for the first six months of fiscal year 2009. Licensing revenues decreased $1.1 million in the first six months of fiscal year 2010 due primarily to a decrease in block licensing revenue resulting from a decline in the demand for the technologies we license. Engineering services and maintenance revenues decreased $2.3 million, primarily as a result of the sale to KMC at the end of the first quarter of fiscal year 2009.

Cost of Revenues

Total cost of revenues was $(1.5) million in the first six months of fiscal year 2010, compared to $5.7 million in the first six months of fiscal year 2009. Product licensing costs decreased $5.9 million in the current six month period primarily as a result of a reversal of accrued licensing costs for technologies licensed by the Company to a customer due to an agreement amending a third party technology license agreement and the $2.4 million of additional product licensing costs associated with the restructured license agreements with KMC recorded during the quarter ended April 30, 2008. Engineering services and maintenance costs in the first six months of fiscal year 2010 were $0.1 million, compared to $1.5 million in the first six months of fiscal year 2009. The decrease was the result of the transfer of engineering resources to KMC with the resultant decrease in services revenues and costs.

Gross Margin

Our gross margin increased to 151% for the first six months of fiscal year 2010 compared with 13% in the first six months of fiscal year 2009. The increase was primarily the result of lower cost of product licensing revenues which is discussed above.

Operating Expenses

Total operating expenses (excluding the gain associated with its KMC sale of assets, escrow payment and reversal of accrued liability in the first six months of fiscal year 2010) decreased 80% to $1.8 million, compared with $9.2 million in the first six months of fiscal year 2009.

• Research and development expenses decreased 100% to $0 in the first six months of fiscal year 2010 from $1.3 million in the first six months of fiscal year 2009. The decrease was attributable to the transfer of engineers to KMC and the discontinuance of the product development efforts subsequent to the KMC transaction.

• Sales and marketing expenses decreased 66% to $0.4 million in the first six months of fiscal year 2010 from $1.1 million in the first six months of fiscal year 2009. The decrease was due to the reduction of staffing which was no longer required in the sale of current product offerings.

• General and administrative expenses decreased 74% to $1.4 million in the first six months of fiscal year 2010 from $5.6 million in the first six months of fiscal year 2009. The decrease was due to lower staffing levels and a lower level of professional fees which were expended in support of the restructuring.

Income Taxes

Our effective income tax rate was 47.8% for the six months ended July 31, 2009 compared to 41.1% for the six months ended July 31, 2008. The increase in the effective income tax rate is primarily due to the KMC transaction in fiscal year 2009.