The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes thereto which appear elsewhere herein. Except for the historical financial information, many of the matters discussed in this Item 2 may be considered "forward-looking" statements that reflect our plans, estimates and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the "Cautionary Note regarding Forward-Looking Statements," elsewhere herein and in other filings made with the Securities and Exchange Commission (the "SEC").

Overview

We are a provider of computing technologies and software applications and related services for the video solutions market and the high-performance, real-time market. Our business is comprised of two segments for financial reporting purposes: products and services. We provide products and services for each of these markets.

Our video solutions products consist of hardware and/or software as well as integration services, sold primarily to broadband companies that provide interactive, digital services for the delivery of video. Our real-time products consist of real-time operating systems and software development tools combined, in most cases, with off-the-shelf hardware and services sold to a wide variety of companies seeking high-performance, real-time computer solutions. We provide sales and support from offices and subsidiaries throughout North America, Europe, and Asia.

We are implementing our strategy to sell our video solutions, including our media data and advertising solutions, to the internet and mobile device markets. We believe this strategy may have a positive impact on our business; however, we cannot assure the success or timing of this initiative. We expect to continue to review and realign our cost structure as needed, balanced with investing in the business.

Application of Critical Accounting Estimates

The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. For a complete description of our critical accounting policies, please refer to the "Application of Critical Accounting Policies" in our most recent Annual Report on Form 10-K for the year ended June 30, 2009 filed with the SEC on August 28, 2009.

As described in footnote 1 of the financial statements, in September, 2009 the FASB issued accounting guidance pertaining to revenue arrangements with multiple deliverables, and accounting guidance on all tangible products containing both software and non-software components that function together to deliver the product's essential functionality. Once adopted, these accounting standards may result in changes to our critical accounting estimates pertaining to revenue recognition.

                             Results of Operations

The three months ended September 30, 2009 compared to the three months ended
September 30, 2008


                                      Three Months Ended
                                         September 30,
                                                                   $            %
     (Dollars in Thousands)            2009          2008        Change      Change
Product revenues                    $    6,682     $ 12,049     $ (5,367 )     (44.5 %)
Service revenues                         6,068        6,286         (218 )      (3.5 %)
Total revenues                          12,750       18,335       (5,585 )     (30.5 %)

Product cost of sales                    2,890        5,635       (2,745 )     (48.7 %)
Service cost of sales                    2,121        2,418         (297 )     (12.3 %)
Total cost of sales                      5,011        8,053       (3,042 )     (37.8 %)

Product gross margin                     3,792        6,414       (2,622 )     (40.9 %)
Service gross margin                     3,947        3,868           79         2.0 %
Total gross margin                       7,739       10,282       (2,543 )     (24.7 %)

Operating expenses:
Sales and marketing                      3,805        3,568          237         6.6 %
Research and development                 3,100        3,839         (739 )     (19.2 %)
General and administrative               1,917        2,323         (406 )     (17.5 %)
Total operating expenses                 8,822        9,730         (908 )      (9.3 %)

Operating (loss) income                 (1,083 )        552       (1,635 )     NM    (1)

Interest (expense) income - net             (2 )         82          (84 )     NM    (1)
Other income (expense) - net               100         (291 )        391       NM    (1)

(Loss) income before income taxes         (985 )        343       (1,328 )     NM    (1)

Provision for income taxes                  30          250         (220 )     NM    (1)

Net (loss) income                   $   (1,015 )   $     93     $ (1,108 )     NM    (1)

(1) NM denotes percentage is not meaningful

Product Revenue. Total product revenue for the three months ended September 30, 2009 was $6.7 million, a decrease of approximately $5.4 million, or 44.5%, from approximately $12.0 million for the three months ended September 30, 2008. The decrease in product revenue resulted from a $6.5 million, or 77.4%, decrease in video product sales during the three months ended September 30, 2009, compared to the same period in the prior year. Video product sales decreased by $6.1 million in the United States due to significant reductions in purchases from our two largest customers. We believe that the decreasing volume of video product sales is primarily due to the impact of the economic downturn and the pace at which our broadband customers implement, upgrade or replace video technology. The recent trend of declining video product sales may continue as a result of the sustained economic downturn. Fluctuation in video revenue is often due to the fact that we have a small number of customers making periodic large purchases that account for a significant percentage of revenue.

Partially offsetting the decline in video product revenue, revenue from our real-time products increased by $1.1 million, or 30.4%, during the three months ended September 30, 2009, compared to the same period in the prior year, primarily due to increasing real-time product sales in the United States during the current period. Real-time product sales increased by $1.2 million in the United States primarily due to the sale of first generation, legacy, Aegis system spares during the three months ended September 30, 2009, compared to the same period in the prior year. While real-time product revenues increased during the current three month period, compared to the same period in the prior year, the impact of the economic downturn on our customers may impact our real-time product sales in future periods.

Service Revenue. Total service revenue for the three months ended September 30, 2009 was $6.1 million, a decrease of $0.2 million, or 3.5%, from $6.3 million for the three months ended September 30, 2008. The decrease in service revenue was due to the $0.3 million, or 7.8%, decrease in service revenue related to video products. Video service revenue decreased due to lower installation revenue in the three months ended September 30, 2009, compared to the same period in the prior year. Lower installation service revenue was attributable to the recent trend of lower system sales volume, from which installation service revenue is often derived, and from the timing of installation services.

Service revenues related to real-time product sales remained relatively flat during the three months ended September 30, 2009, compared to the same period in the prior year. However, we have experienced a steady decline in real-time service revenues over the past few years, as our legacy products have been removed from service and, to a lesser extent, from customers purchasing our new products that produce less service revenue. We expect real-time service revenues to ultimately decline further, partially offset by newer system service, as legacy systems continue to be removed from service.

Product Gross Margin. Product gross margin was $3.8 million for the three months ended September 30, 2009, a decrease of approximately $2.6 million, or 40.9%, from approximately $6.4 million for the three months ended September 30, 2008. Product gross margin as a percentage of product revenue increased to 56.7% in the three months ended September 30, 2009 from 53.2% in the three months ended September 30, 2008. Product margins decreased in terms of dollars due to lower product revenue during the three months ended September 30, 2009, compared to the same period of the prior year. Product gross margins, as a percentage of product revenue, increased primarily because higher margin real-time legacy system sales accounted for a greater portion of total product revenue during the three months ended September 30, 2009, compared to the same period in the prior year.

Service Gross Margin. The gross margin on service revenue increased to 65.0% of service revenue in the three months ended September 30, 2009 from 61.5% of service revenue in the three months ended September 30, 2008. The increase in service margins as a percentage of service revenue was primarily due to the $0.3 million reduction in service costs during the three months ended September 30, 2009, compared to the same period in the prior year. Decreasing service costs resulted from decreasing headcount and severance costs, as we have focused on managing costs of the infrastructure that is necessary to fulfill service and support provided for our products. We expect to maintain similar or slightly lower service margins as we continue to manage costs related to our maintenance and support infrastructure.

Sales and Marketing. Sales and marketing expenses increased approximately $0.2 million, or 6.6% to $3.8 million in the three months ended September 30, 2009 from $3.6 million in the three months ended September 30, 2008. Sales and marketing expense increased primarily because we incurred $0.2 million of additional costs to support channel partner sales and other business development opportunities during the three months ended September 30, 2009, compared to the same period in the prior year. Also, we incurred $0.1 million of additional severance costs as a result of changes to our sales group during the three months ended September 30, 2009. Partially offsetting these increases in costs, we incurred $0.1 million less in incentive compensation primarily due to lower revenue in the three months ended September 30, 2009, compared to the same period in the prior year. We anticipate that our sales and marketing expenses may increase in the upcoming fiscal year as we implement our strategy to sell our video solutions to the internet and mobile device markets, as well as increase our effort to sell through new channels.

Research and Development. Research and development expenses decreased approximately $0.7 million, or 19.2%, to approximately $3.1 million in the three months ended September 30, 2009 from $3.8 million in the three months ended September 30, 2008. Decreasing research and development expenses were primarily attributable to a $0.7 million reduction of research and development related salaries, benefits and other employee related costs, resulting from headcount reductions, as part of our effort to reduce operating expenses. We anticipate that our research and development expenses may increase this fiscal year as we implement our strategy to develop video solutions for the internet and mobile device markets.

General and Administrative. General and administrative expenses decreased approximately $0.4 million, or 17.5%, to approximately $1.9 million in the three months ended September 30, 2009 from $2.3 million in the three months ended September 30, 2008. General and administrative expense decreased primarily because we incurred $0.2 million less in consulting fees, primarily attributable to prior year strategic planning costs. Additionally, we were able to reduce our accounting costs by $0.1 million and insurance costs by $0.1 million during the three months ended September 30, 2009, compared to the same period in the prior year.

Other (Expense) Income - net. During the three months ended September 30, 2009, we incurred approximately $0.1 million of realized currency translation gains. These gains resulted from the increasing value of the Japanese yen and euro during three months ended September 30, 2009 and the resulting impact on foreign currency transactions by our subsidiaries for which the Japanese yen and euro are the functional currency. During the three months ended September 30, 2008, we incurred approximately $0.3 million of realized currency translation losses. These losses resulted from the decline in the value of the euro during the three months ended September 30, 2008, and the resulting impact foreign currency transactions by our subsidiaries for which the euro is the functional currency.

Provision for Income Taxes. We recorded an income tax expense for our domestic and foreign subsidiaries of less than $0.1 million in the three months ended September 30, 2009, compared to tax expense $0.3 million for our domestic and foreign subsidiaries in the three months ended September 30, 2008. We have significant net operating loss carryforwards available to offset taxable income in the United States and in many of the foreign locations in which we operate. However, during the three months ended September 30, 2008 our subsidiaries in Japan and the United Kingdom, which have no remaining net operating loss carryforwards to offset taxable income, generated taxable income. During the three months ended September 30, 2009, our subsidiary in Japan did not generate taxable income, resulting in a lower total tax provision during the three months ended September 30, 2009 compared to the same period in the prior year.

Net (Loss) Income. The net loss for the three months ended September 30, 2009 was ($1.0) million or ($0.12) per basic and diluted share, compared to net income for the three months ended September 30, 2008 of $0.1 million, or $0.01 per basic and diluted share.

Liquidity and Capital Resources

Our liquidity is dependent on many factors, including sales volume, operating results and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things:

· the impact of the global economic recession on our business and our customers;

· the rate of growth or decline, if any, of video solutions market expansions and the pace that broadband companies implement, upgrade or replace video technology;

· the rate of growth or decline, if any, of deployment of our real-time operating systems and tools;

· the actual versus anticipated decline in revenue from maintenance and product sales of real-time proprietary systems;

· our ability to manage expenses consistent with the rate of growth or decline in our markets;

· the success of our strategy to sell our solutions to the internet and mobile video markets;

· our ability to implement our strategy to develop and sell solutions to the internet and mobile device markets;

· ongoing cost control actions and expenses, including capital expenditures;

· the margins on our product sales;

· our ability to leverage the potential of our media data management to serve advanced advertising and other related data initiatives;

· our ability to raise additional capital, if necessary;

· our ability to obtain additional or replacement bank financing, if necessary;

· our ability to meet the covenants contained in our Credit Agreement;

· timing of product shipments, which typically occur during the last month of the quarter;

· our reliance on a small customer base (2 of our video customers accounted for 37% of our revenue in fiscal year 2009, and three customers accounted for 37% of our revenue in fiscal year 2010 first quarter ended September 30, 2009);

· the percentage of sales derived from outside the United States where there are generally longer accounts receivable collection cycles; and

· the number of countries in which we operate, which may require maintenance of minimum cash levels in each country and, in certain cases, may restrict the repatriation of cash, such as maintained levels of capital.

Uses and Sources of Cash

We used $1.0 million of cash from operating activities during the three months ended September 30, 2009 compared to using $2.2 million of cash during the three months ended September 30, 2008. Operating cash outflow during the three months ended September 30, 2009 was primarily attributable to payment of prior year bonuses, and the timing of payroll payments and inventory purchases during the period. Prior period operating cash outflow was primarily attributable to the timing of accounts receivable collection and the payment of prior year payables and accruals during the period.

We invested $1.1 million in property, plant and equipment during the three months ended September 30, 2009 compared to $0.6 million during the three months ended September 30, 2008. Capital additions during three months ended September 30, 2009 were primarily related to development and testing equipment required to implement our strategy to develop and sell solutions to the internet and mobile device markets. Capital additions during the three months ended September 30, 2008 related primarily to demonstration systems and product development and testing equipment related to our traditional markets. We expect capital additions to continue at a similar or slightly lower level during the remainder of this fiscal year.

We have a Credit Agreement with Silicon Valley Bank (the "Credit Agreement") that provides for a $10,000,000 revolving credit line (the "Revolver") with a borrowing base dependent upon our outstanding North American accounts receivable and a maturity date of December 31, 2010. The interest amount is based upon the amount advanced and the rate varies based upon our accounts receivable and the amount of cash in excess of debt. The Credit Agreement establishes a minimum interest rate so that interest on outstanding principle is calculated as prime plus 0.50% whereby, for purposes of the Credit Agreement, "prime" is the greater of (a) Silicon Valley Bank's most recently announced "prime" rate," and (b) 4.00%. The interest rate on the Revolver was 4.50% as of September 30, 2009. The outstanding principal amount plus all accrued but unpaid interest is payable in full at the expiration of the credit facility on December 31, 2010. Based on the borrowing formula and our financial position as of September 30, 2009, approximately $7,176,000 was available to us under the Revolver. As of September 30, 2009, $949,000 was drawn under the Revolver, resulting in approximately $6,227,000 of remaining available funds under the Revolver.

In addition, the Credit Agreement contains certain financial covenants, including a required adjusted quick ratio (the ratio of cash and accounts receivable to current liabilities (less the current portion of deferred revenue)) of at least 1.25 to 1.00 and a minimum tangible net worth of at least $10,585,000, as of September 30, 2009. The Credit Agreement also contains customary restrictive covenants concerning our operations. As of September 30, 2009, we were in compliance with these covenants as our adjusted quick ratio was 3.85 to 1.00 and our tangible net worth was $28,008,000.

At September 30, 2009, we had working capital (current assets less current liabilities) of $28.6 million, including cash and cash equivalents of approximately $27.2 million, and had no material commitments for capital expenditures, compared to working capital of $29.7 million at June 30, 2009, including cash and cash equivalents of approximately $29.1 million. Based upon our existing cash balances, historical cash usage, available credit facility, and anticipated operating cash flow in the current fiscal year, we believe that existing cash balances will be sufficient to meet our anticipated working capital and capital expenditure requirements for the next twelve months.

Off-Balance Sheet Arrangements

We enter into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers that often require us to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to our products. We evaluate estimated losses for such indemnifications under ASC 460-20 and ASC 460-10-25. We consider factors such as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any material liabilities related to such indemnifications in our financial statements.

Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments are disclosed in our Annual Report on Form 10-K for the year ended June 30, 2009. There have been no material changes to our contractual obligations and commercial commitments during the three months ended September 30, 2009.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made or incorporated by reference in this quarterly report may constitute "forward-looking statements" within the meaning of the federal securities laws. When used or incorporated by reference in this release, the words "believes," "expects," "estimates," "anticipates," and similar expressions, are intended to identify forward-looking statements. Statements regarding future events and developments, our future performance, market share, and new market growth, as well as our expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of our forward-looking statements in this report include, but are not limited to, the impact of our new video strategy on our business, anticipated reduced product revenue due to the economic downturn, maintaining similar service margins, our expected cash position, the impact of interest rate changes and fluctuation in currency exchange rates, our sufficiency of cash, the impact of litigation, and our trend of declining real-time service revenue. These statements are based on beliefs and assumptions of our management, which are based on currently available information. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. The risks and uncertainties which could affect our financial condition or results of operations include, without limitation: delays or cancellations of customer orders; changes in product demand; economic conditions; our ability to satisfy the financial covenants in the credit agreement; various inventory risks due to changes in market conditions; uncertainties relating to the development and ownership of intellectual property; uncertainties relating to our ability and the ability of other companies to enforce their intellectual property rights; the pricing and availability of equipment, materials and inventories; the concentration of our customers; failure to effectively manage change; delays in testing and introductions of new products; rapid technology changes; system errors or failures; reliance on a limited number of suppliers and failure of components provided by those suppliers; uncertainties associated with international business activities, including foreign regulations, trade controls, taxes, and currency fluctuations; the impact of competition on the pricing of video products; failure to effectively service the installed base; the entry of new well-capitalized competitors into our markets; the success of new video solutions and real-time products; the success of our relationships with Alcatel-Lucent; capital spending patterns by a limited customer base and in light of the current negative macro-economic environment; privacy concerns over data collection; and the availability of debt or equity financing to support our liquidity needs if cash flow does not improve.

Other important risk factors are discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Our forward-looking statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.