General

In this section, we discuss our consolidated financial statements for the periods indicated, 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, including those related to product returns, bad debts, inventories, revenue recognition, investments, intangible assets, income taxes, financing, operations, warranty obligations, restructuring costs, healthcare costs and retirement benefits, forecasts of future results, contingency plans, cash requirements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors. These include, but are not limited to, pricing pressures, customer requirements, supply issues, manufacturing performance, product development and general market conditions that are believed to be 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. Results for the periods reported herein are not necessarily indicative of results that may be expected in future periods.

Overview

We operate in a worldwide TV market that continues to be persistently price competitive, and where customer demand for purchases of new graphics systems, products and services remains subdued. While our customers are experiencing some degree of recovery in their advertising revenues, they continue to emphasize cost containment and this is reflected in their capital spending.

The overall economic recovery is still tenuous, and our professional media customers continue to face fiscal challenges. These customers are in the process of transforming their businesses to address new opportunities and threats. To help our customers transition their business models we have developed workflow solutions for them that we believe will bring cost advantages over traditional processes. These solutions are designed to help our media clients do more with less. By leveraging our Cloud-based technologies to deliver low-cost, scalable, collaborative applications and services, we aim to help our customers transform their high fixed-cost business models to lower, variable and more flexible cost models. We have no intention of

diminishing our product business. Rather, we are finding that adoption of our service offerings results in new product and systems sales and vice versa.

From time to time, management may selectively pursue strategic acquisition opportunities that we believe will provide effective means to broaden our product lines, expand our market coverage or provide other synergistic benefits.

Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net sales. Revenues for the year ended December 31, 2012 were $30.2 million, a decrease of $1.4 million, or 4%, from the $31.6 million reported in the year ended December 31, 2011. Of these amounts, North American revenues were $21.2 million in the year ended December 31, 2012 as compared to $24.3 million in the year ended December 31, 2011. Revenues derived from other international regions were $9.0 million in the year ended December 31, 2012 as compared to $7.3 million in the year ended December 31, 2011.

Revenues, by type, are as follows (in thousands):

% of % of
2012 Total 2011 Total

Product  $21,674   72% $23,877   76%
Services   8,548   28%   7,710   24%
         $30,222       $31,587

We have experienced a decrease in our product revenue stream as a result of delays in spending as broadcasters emphasize cost control and reschedule their capital expenditures. This decline was experienced in North America and overall in Europe where the economy has stalled. However, the effect of the slow economy in Europe was offset by a major installation we performed at a U.K. customer that, in total, accounted for the flat revenue level year over year. We experienced revenue growth in our Asian and Latin American markets from several major program upgrades.

Our services revenues have grown 11% in 2012 as compared to 2011. This growth is primarily attributable to increased sales of software and hardware maintenance contracts for our broadcast graphics products, training and commissioning, and increases in revenue from our Axis World Graphics services.

Gross profit. Gross margins for the years ended December 31, 2012 and 2011 were 69% and 70%, respectively. The decline in the gross margin percentage of 1% in 2012 as compared to the prior year, is attributable to product mix, primarily the decline in product revenues. Absent this effect, we have been able to obtain reasonable and consistent pricing for our materials.

Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses are as follows (in thousands):

                             Years Ended
                            December 31,
                              2012    2011
Sales and marketing        $13,008 $12,537
General and administrative   4,201   4,750

The increase in sales and marketing expenses in 2012, compared to 2011, is due to additional compensation and related direct costs of increasing our senior sales, marketing and support staff. As planned, we made strategic hires in key sales positions and expanded our sales and marketing efforts overseas. In addition, key positions were filled in professional services as we increased our emphasis on services that complement our products business.

The general and administrative ("G&A") expenses for 2011 include higher legal and lawsuit settlement costs of approximately $0.3 million relating to a lawsuit that was settled in 2011. In addition, 2011 includes recruiting and executive search costs of $0.1 million and compensation related costs of $0.1 million for an executive position that was vacated. Since these costs did not recur in 2012, we experienced a decline in our 2012 G&A expenses as compared to 2011.

Research and development expenses. Research and development ("R&D") expenses increased to $7.4 million in the year ended December 31, 2012 compared to $6.8 million in the year ended December 31, 2011. The majority of the increase in R&D spending in the year resulted from the efforts associated with a new version of Axis World Graphics, the integration of Axis with our graphics products and systems and other planned product introductions.

Interest expense. Interest expense declined slightly in the year ended December 31, 2012 as compared to 2011. This decrease was attributable to lower outstanding balances on our term loans. In May 2012, we made the final payment on our initial term loan that was originated in 2009. In the following months, there were no borrowings outstanding until the fourth quarter of 2012 when two advances were made on a new term loan resulting in interest expense of $5 thousand.

Other income, net. The components of other income, net are as follows (in thousands):

                                  2012   2011
Foreign exchange transaction gain   $13    $16
Other                                 2      -
                                    $15    $16

We continue to be exposed to foreign currency and exchange risk in the normal course of business due to our revenues that are negotiated in British Pounds Sterling. However, we believe that this risk is not material to our near-term financial position or results of operations.

Income tax expense, net. In the years ended December 31, 2012 and 2011 we recorded income tax expense of $18.5 million and $2.3 million, respectively. Included in each year was an increase to our valuation allowance for deferred taxes of $19.5 million and $2.7 million in 2012 and 2011, respectively. Accounting standards require that we continually assess the likelihood that our deferred taxes will be realizable. In making such assessments, all available evidence, both positive and negative, must be considered in determining whether it is more likely than not that the deferred tax assets will be realized. Significant weight is given to evidence that can be objectively verified. In the third quarter of 2011, it was determined, based on management's estimate of book income and the uncertainty of the timing of future taxable income, that it was more likely than not that we would not realize a portion of our net operating loss carryforwards that were scheduled to expire at the end of 2012, and recorded a valuation allowance against our deferred tax assets and recorded a corresponding charge to results of operations of $2.7 million.

In 2012, using the same standard, we considered the fact that we incurred another loss in fiscal 2012, in addition to the consecutive losses in recent preceding fiscal years. Also in 2012, approximately $7.5 million of federal net operating losses expired unutilized. These negative factors, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance was required. Accordingly, we concluded that a full valuation allowance was required and a charge to results of operations of $19.5 million was recorded. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation will be adjusted accordingly.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

We have elected not to report our results of operations for the fiscal year ended December 31, 2010, or to include a discussion of our results of operations for such period compared to 2011, in reliance upon Instruction 1 to Item 303(a) of Regulation S-K. Investors are urged to read our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for this information.

Liquidity and Capital Resources

Sources and Uses of Funds

At December 31, 2012, we had cash and cash equivalents on hand of $2.5 million and working capital of $3.7 million. In 2012, we used approximately $1.7 million in net cash for operations. This was primarily caused by the net loss incurred.

Also, during the year ended December 31, 2012, we made contributions to our pension plan totaling $0.89 million, including a $0.39 million contribution in order to exceed an 80% funding level, measured at January 1, 2012. Based on current assumptions, we expect to make contributions to our pension plan of $0.3 million over the next twelve months as required under ERISA. Our pension plan assets were valued at $5.3 million and $4.1 million at December 31, 2012 and December 31, 2011, respectively. Our investment strategy remains the same and we

believe that the pension plan's assets are more than adequate to meet pension plan obligations for the next twelve months.

In August 2012, we entered into a loan modification agreement and amended our loan and security agreement (the "Credit Facility") with Silicon Valley Bank ("SVB") to extend the term of the Credit Facility to August 12, 2013, to increase the revolving line of credit (the "Revolving Line") from $1.5 million to $3.0 million, and to add a term loan facility that could be used to purchase equipment up to $1.0 million (the "Term Loan"). At December 31, 2012, available borrowings under the Revolving Line were approximately $2.7 million but no borrowings were outstanding. Advances under the Term Loan were available to be drawn until December 31, 2012 in minimum amounts of $0.25 million. During the fourth quarter of 2012, we took two advances of $0.35 million each from the Term Loan and the balance outstanding at December 31, 2012 was $0.68 million. The Term Loan bears interest at Prime +2.25% (6.25% at December 31, 2012) and principal and interest will be repaid over thirty months.

Pursuant to the Credit Facility, we were required to maintain financial covenants based on an adjusted quick ratio ("AQR") of at least 1.2 to 1.0, measured at each calendar month-end, and minimum tangible net worth of $18.5 million, increased by 60% of the sum of the gross proceeds received by us from any sale of our equity or incurrence of subordinated debt and any positive quarterly net income earned, measured at quarter-end (both as defined in the Credit Facility). Due to the significant charge of $19.5 million taken in the fourth quarter of 2012 to increase the valuation allowance for deferred tax assets, we failed the tangible net worth covenant at December 31, 2012, and obtained a waiver from SVB. Additionally, in March 2013 we entered into a loan modification agreement and amended our loan and security agreement (the "Revised Credit Facility") with SVB to modify a financial covenant and decrease the Revolving Line amount. The existing expiration date of the facility remained at August 12, 2013. The same as the Credit Facility, the Revolving Line bears interest at a floating annual rate equal to Silicon Valley Bank's prime rate ("Prime") +1.75%, and the AQR financial covenant remains at 1.2x. The tangible net worth covenant was replaced by a maximum EBITDA loss/profitability covenant (tested at end of each quarter) effective with the first quarter of 2013. The Revolving Line was reduced from $3 million to $2 million, and available borrowings under the Revolving Line was changed from 80% of eligible accounts receivable to 80% of eligible accounts receivable less the amount of principal outstanding under the Term Loan. Additionally, if the Company's AQR falls below 1.5x at any month-end during the remaining term of the facility, then any borrowings under the Revolving Line will be repaid by SVB applying collections from the Company's SVB collateral account (for receipts by wire) and SVB lockbox account (for receipts by check) to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, the Company will maintain a static loan balance and all collections will be deposited into the Company's operating account. As is usual and customary in such lending agreements, the agreements also contain certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The lending agreement also restricts our ability to pay dividends without the bank's consent.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

Our contractual obligations as of December 31, 2012 were as follows (in thousands):

                                      Payments Due by Period
                                Less Than   One to     Three to  More Than
Contractual Obligations  Total  One Year  Three Years Five Years Five Years

Operating lease         $ 4,700    $  689     $ 1,382    $ 1,433    $ 1,196
obligations
Pension obligations (1)   4,151       278       3,873
Purchase commitments      2,331     2,331
for inventory
Commitment for hosting    2,619       616       1,849        154
services
Term Loan (2)               677       280         397
Capital lease                44        20          24
obligations
Total                   $14,522   $ 4,214     $ 7,525    $ 1,587    $ 1,196

(1) Lower than expected investment performance could accelerate or increase the amount of payment of required contributions in future years.
(2) If an event of default were to occur, that is not cured, the bank could demand repayment.

Liquidity

We have been holding our position during recent recessionary periods by improving our technology and investing in sales and marketing personnel both domestically and abroad. We believe that our media company customers are beginning to realize increases in their revenues, mainly due to political advertising and the recovery in several core advertising segments, most notably automotive, that favorably impacts their capital expenditure budgets.

The overall economic recovery is still tenuous, however. Our future growth and success will depend to a significant degree on our ability to generate sales of cost-effective workflow solutions in our existing and new markets. We operate in a rapidly changing environment and must remain responsive to changes as they occur. In the event that revenues are significantly below forecasted revenues, we believe we have the ability to reduce or delay discretionary expenditures, including capital purchases, and reduce headcount, so that we will have sufficient cash resources. However, there can be no assurance that we will be able to adjust our costs in sufficient time to respond to revenue and cash shortfalls, should that occur.

Our long-term success will depend on our ability to achieve and sustain profitable operating results and our ability to raise additional capital on acceptable terms should such additional capital be required. In the event that we are unable to achieve expected goals of profitability or raise sufficient additional capital, if needed, we may have to scale back or eliminate certain parts of our operations.

We believe that cash on hand, net cash to be generated in the business, and availability of funding under our credit facility, will be sufficient to meet our cash needs for at least the next 12 months if we are able to achieve our planned results of operations and retain the availability of credit under our Credit Facility.

If these sources of funds are not sufficient, we may need to reduce, delay or terminate our existing or planned products and services. We may also need to raise additional funds through one or more capital financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing shareholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or products, or grant licenses on terms that are not favorable to us.

There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate development activities for one or more of our products or services; or delay, limit, reduce or terminate our sales and marketing capabilities or other activities that may be necessary to commercialize one or more of our products or services.

Common Stock in our 401(k) Plan

We have a 401(k) plan for U.S. employees into which we make discretionary matching contributions. The discretionary matching contribution is currently two thirds of the first 6% of qualifying compensation up to the IRS limits for tax-deferred employee contributions. We have the option of making the matching contribution in cash or through the issuance of Company stock. During 2012 and 2011, we issued 233 thousand and 130 thousand shares, respectively, of common stock in connection with the Company match for our 401(k) plan in lieu of an aggregate cash match of $288 thousand and $265 thousand, respectively. A participant in the 401(k) plan has 15 investment choices.

Impact of Inflation and Changing Prices

Although we cannot accurately determine the precise effect of inflation, we believe that it has not significantly impacted our revenues or increased the costs of salaries, benefits and general and administrative expenses. We attempt to pass on increased costs and expenses by developing more useful and cost-effective products for our customers that can be sold at more favorable profit margins.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 1 of our consolidated financial statements included in this Annual Report under the caption "Item 8 - Financial Statements and Supplementary Data."

Critical Accounting Policies and Estimates

Management believes the following critical accounting policies, among others, comprise the more significant judgments and estimates used in the preparation of our consolidated financial statements. These critical accounting policies and estimates have been discussed with our Audit Committee and the Audit Committee has reviewed the disclosures relating to such matters.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, title has transferred, product payment is not contingent upon installation or other service obligations, the price is fixed and determinable, and collectability is reasonably assured. This condition is normally met when the product has been delivered or upon performance of services. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met.

We also enter into arrangements that contain multiple elements such as equipment, installation and service. For multiple-element arrangements, revenue is recognized based on an allocation of the total amount of the arrangement to each deliverable based on fair value. Fair value is determined using vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE or TPE is available. BESP must be determined in a manner that is consistent with that used to determine the price to sell the specific elements on a standalone basis. Our best estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels, gross margin objectives, competitor pricing pressures and other factors contemplated in negotiating the arrangement with the customer.

Revenue from training, commissioning and services is recognized upon the performance of services. We also provide one year maintenance contracts with certain equipment sales and defer a portion of the revenue from the equipment sale based on the relative fair value as determined above. Multiple year maintenance contracts are also offered. Deferred maintenance revenue is recognized ratably, on a straight line basis over the contract period, generally one to three years.

In connection with our on-line web-based solutions, we recognize revenue on a monthly basis for use of our subscription based products. We recognize set-up or other up-front fees, if any, ratably over the longer of the contract or the expected customer relationship period, generally one to three years.

Approximately 35% of 2012 consolidated revenues were made to third-party dealers, independent representatives and system integrators (collectively, dealers). We recognize revenue from sales to dealers when the product is shipped and all other revenue recognition criteria are met.

Allowances for Doubtful Accounts, Inventory and Warranties

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and/or the deferral of revenue may be required.

We write-down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Technology changes and market conditions may render some of our products obsolete and additional inventory write-downs may be required. If actual, future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability may be required.

Self Insurance

We are self-insured for healthcare costs up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported ("IBNR") claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators. This estimation process is subjective, and to the extent that future actual results differ from original estimates, adjustments to recorded accruals may be necessary.

Income Taxes

We account for income taxes under an asset and liability approach, which recognizes deferred tax assets and liabilities based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.

We recognize tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. A tax benefit occurs when the actual tax benefit realized by us upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that we had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, we follow the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and other tax attributes.

We recognize the financial statement impact of tax provisions, taken or expected . . .